Emissions reduction and wholesale electricity price targeting using an output-based mechanism

Higher electricity prices following the introduction of an emissions abatement policy are generally considered a foregone conclusion, with complementary schemes or tax cuts often proposed to deal with their economic and political consequences. Rather than considering these price rises as an inevitable consequence of an emissions abatement policy, we demonstrate how wholesale electricity prices can be targeted while simultaneously placing a price on emissions. This is accomplished by implementing an output-based allocation mechanism which penalises or rewards generators based on their emissions intensity with respect to a sectoral baseline. A systematic modelling framework is presented that can be used to calibrate parameters for this scheme in order to achieve given environmental and economic objectives. Topological considerations and network constraints are captured within this framework, along with strategic interactions between a policy maker seeking to implement the scheme, and market operator responsible for dispatching generators. This highly generalisable framework is then implemented using data for the Australian system, and demonstrates how a price on emissions can be established while simultaneously minimising disruptions to average wholesale electricity prices.