IDEAS home Printed from https://ideas.repec.org/a/eee/appene/v319y2022ics0306261922005530.html
   My bibliography  Save this article

A multinational carbon-credit market integrating distinct national carbon allowance strategies

Author

Listed:
  • Anjos, Miguel F.
  • Feijoo, Felipe
  • Sankaranarayanan, Sriram

Abstract

We study the potential role and advantages of a multinational carbon-credit (CC) market allowing a set of countries to procure CCs for their domestic producers. We study the interaction of such a market with renewable portfolio standards, specifically regarding whether a country’s government or its energy producers are responsible for upholding the renewable portfolio standards (RPS), and how this impacts total emissions and energy mix. Implementing uniform carbon tax policies or cross-border emission trading systems hinders individual countries’ autonomy while strictly segregated carbon markets suffer from the tragedy of the commons. We develop a model where countries can have their own policies to allocate the CCs, which may include taxes or subsidies depending upon the country’s choices. We use a special form of equilibrium programs with equilibrium constraints (EPEC) game – Nash Among Stackelberg Players (NASP) – and recent algorithmic advances to identify equilibria for these games to identify the effect of such a common CC market, and the regional governments’ individualized interests on the resulting energy production patterns and emissions. We observe that countries could retain their autonomy and have reasonable freedom to set national policy by acting as intermediaries between the CC market and the producers. We carry out a case study using historical data and projections of energy production for the US and Canada, and observe the varying effects of such a common CC market on government policy and the behavior of energy producers. Establishing a common CC market could significantly reduce global emissions without infringing on national autonomy. Such a market helps governments to motivate producers to uphold renewable standards because if the producers do not voluntarily reduce emissions, then the government could enforce the obligation through its national policies, generally leading to a revenue loss for producers.

Suggested Citation

  • Anjos, Miguel F. & Feijoo, Felipe & Sankaranarayanan, Sriram, 2022. "A multinational carbon-credit market integrating distinct national carbon allowance strategies," Applied Energy, Elsevier, vol. 319(C).
    • Handle: RePEc:eee:appene:v:319:y:2022:i:c:s0306261922005530
    DOI: 10.1016/j.apenergy.2022.119181
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0306261922005530
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.apenergy.2022.119181?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Bushnell, James & Chen, Yihsu, 2012. "Allocation and leakage in regional cap-and-trade markets for CO2," Resource and Energy Economics, Elsevier, vol. 34(4), pages 647-668.
    2. Rory Smead & Ronald L. Sandler & Patrick Forber & John Basl, 2014. "A bargaining game analysis of international climate negotiations," Nature Climate Change, Nature, vol. 4(6), pages 442-445, June.
    3. Feijoo, Felipe & Huppmann, Daniel & Sakiyama, Larissa & Siddiqui, Sauleh, 2016. "North American natural gas model: Impact of cross-border trade with Mexico," Energy, Elsevier, vol. 112(C), pages 1084-1095.
    4. David Houle & Erick Lachapelle & Mark Purdon, 2015. "Comparative Politics of Sub-Federal Cap-and-Trade: Implementing the Western Climate Initiative," Global Environmental Politics, MIT Press, vol. 15(3), pages 49-73, August.
    5. Murray, Brian C. & Maniloff, Peter T., 2015. "Why have greenhouse emissions in RGGI states declined? An econometric attribution to economic, energy market, and policy factors," Energy Economics, Elsevier, vol. 51(C), pages 581-589.
    6. Calderón, Silvia & Alvarez, Andrés Camilo & Loboguerrero, Ana María & Arango, Santiago & Calvin, Katherine & Kober, Tom & Daenzer, Kathryn & Fisher-Vanden, Karen, 2016. "Achieving CO2 reductions in Colombia: Effects of carbon taxes and abatement targets," Energy Economics, Elsevier, vol. 56(C), pages 575-586.
    7. E. Allevi & A. Gnudi & I. V. Konnov & G. Oggioni, 2018. "Decomposition method for oligopolistic competitive models with common environmental regulation," Annals of Operations Research, Springer, vol. 268(1), pages 441-467, September.
    8. Zhou, Shan & Solomon, Barry D., 2020. "Do renewable portfolio standards in the United States stunt renewable electricity development beyond mandatory targets?," Energy Policy, Elsevier, vol. 140(C).
    9. E. Allevi & G. Oggioni & R. Riccardi & M. Rocco, 2017. "An equilibrium model for the cement sector: EU-ETS analysis with power contracts," Annals of Operations Research, Springer, vol. 255(1), pages 63-93, August.
    10. Guri Bang & David G. Victor & Steinar Andresen, 2017. "California’s Cap-and-Trade System: Diffusion and Lessons," Global Environmental Politics, MIT Press, vol. 17(3), pages 12-30, August.
    11. Ferris, Michael C. & Munson, Todd S., 2000. "Complementarity problems in GAMS and the PATH solver," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 165-188, February.
    12. Rory Smead & Ronald L. Sandler & Patrick Forber & John Basl, 2014. "Addendum: A bargaining game analysis of international climate negotiations," Nature Climate Change, Nature, vol. 4(9), pages 840-840, September.
    13. An, Yunfei & Zhou, Dequn & Wang, Qunwei & Shi, Xunpeng & Taghizadeh-Hesary, Farhad, 2022. "Mitigating size bias for carbon pricing in small Asia-Pacific countries: Increasing block carbon tax," Energy Policy, Elsevier, vol. 161(C).
    14. Li, M.W. & Li, Y.P. & Huang, G.H., 2011. "An interval-fuzzy two-stage stochastic programming model for planning carbon dioxide trading under uncertainty," Energy, Elsevier, vol. 36(9), pages 5677-5689.
    15. Yi, Bo-Wen & Xu, Jin-Hua & Fan, Ying, 2019. "Coordination of policy goals between renewable portfolio standards and carbon caps: A quantitative assessment in China," Applied Energy, Elsevier, vol. 237(C), pages 25-35.
    16. Fan, Jing-Li & Wang, Jia-Xing & Hu, Jia-Wei & Wang, Yu & Zhang, Xian, 2019. "Optimization of China’s provincial renewable energy installation plan for the 13th five-year plan based on renewable portfolio standards," Applied Energy, Elsevier, vol. 254(C).
    17. Floros, Nikolaos & Vlachou, Andriana, 2005. "Energy demand and energy-related CO2 emissions in Greek manufacturing: Assessing the impact of a carbon tax," Energy Economics, Elsevier, vol. 27(3), pages 387-413, May.
    18. Qi, Tianyu & Weng, Yuyan, 2016. "Economic impacts of an international carbon market in achieving the INDC targets," Energy, Elsevier, vol. 109(C), pages 886-893.
    19. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2018. "Impact of Electricity Pricing Policies on Renewable Energy Investments and Carbon Emissions," Management Science, INFORMS, vol. 64(1), pages 131-148, January.
    20. Ellen R. K. Evers & Yoel Inbar & Irene Blanken & Linda D. Oosterwijk, 2017. "When Do People Prefer Carrots to Sticks? A Robust “Matching Effect” in Policy Evaluation," Management Science, INFORMS, vol. 63(12), pages 4261-4276, December.
    21. Egging, Ruud & Holz, Franziska & Gabriel, Steven A., 2010. "The World Gas Model," Energy, Elsevier, vol. 35(10), pages 4016-4029.
    22. S. Yu & H.-P. Weikard & X. Zhu & E. C. Ierland, 2017. "International carbon trade with constrained allowance choices: Results from the STACO model," Annals of Operations Research, Springer, vol. 255(1), pages 95-116, August.
    23. Brian C. Murray & Peter T. Maniloff & Evan M. Murray, 2015. "Why Have Greenhouse Emissions in RGGI States Declined? An Econometric Attribution to Economic, Energy Market and Policy Factors (Payne Institute Policy Brief)," Payne Institute Policy Briefs 2014-04, Colorado School of Mines, Division of Economics and Business.
    24. Wietze Lise & Jos Sijm & Benjamin Hobbs, 2010. "The Impact of the EU ETS on Prices, Profits and Emissions in the Power Sector: Simulation Results with the COMPETES EU20 Model," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 47(1), pages 23-44, September.
    25. Huppmann, Daniel & Egging, Ruud, 2014. "Market power, fuel substitution and infrastructure – A large-scale equilibrium model of global energy markets," Energy, Elsevier, vol. 75(C), pages 483-500.
    26. Jinye Zhao & Benjamin F. Hobbs & Jong-Shi Pang, 2010. "Long-Run Equilibrium Modeling of Emissions Allowance Allocation Systems in Electric Power Markets," Operations Research, INFORMS, vol. 58(3), pages 529-548, June.
    27. Yihsu Chen & Chung-Li Tseng, 2011. "Inducing Clean Technology in the Electricity Sector: Tradable Permits or Carbon Tax Policies?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 169-174.
    28. Felipe Feijoo & Gokul Iyer & Matthew Binsted & James Edmonds, 2020. "US energy system transitions under cumulative emissions budgets," Climatic Change, Springer, vol. 162(4), pages 1947-1963, October.
    29. Chen, Yihsu, 2009. "Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover," Energy Economics, Elsevier, vol. 31(5), pages 667-675, September.
    30. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2020. "Investments in Renewable and Conventional Energy: The Role of Operational Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 22(5), pages 925-941, September.
    31. Xinmin Hu & Daniel Ralph, 2007. "Using EPECs to Model Bilevel Games in Restructured Electricity Markets with Locational Prices," Operations Research, INFORMS, vol. 55(5), pages 809-827, October.
    32. Gabriel, Steven A. & Zhuang, Jifang & Egging, Ruud, 2009. "Solving stochastic complementarity problems in energy market modeling using scenario reduction," European Journal of Operational Research, Elsevier, vol. 197(3), pages 1028-1040, September.
    33. El Khatib, Sameh & Galiana, Francisco D., 2019. "Investigating emission regulation policy in the electricity sector: modeling an oligopolistic electricity market under hourly cap-and-trade," Energy Economics, Elsevier, vol. 78(C), pages 428-443.
    34. Chan, Nathan W. & Morrow, John W., 2019. "Unintended consequences of cap-and-trade? Evidence from the Regional Greenhouse Gas Initiative," Energy Economics, Elsevier, vol. 80(C), pages 411-422.
    35. Sankaranarayanan, Sriram & Feijoo, Felipe & Siddiqui, Sauleh, 2018. "Sensitivity and covariance in stochastic complementarity problems with an application to North American natural gas markets," European Journal of Operational Research, Elsevier, vol. 268(1), pages 25-36.
    36. Feijoo, Felipe & Das, Tapas K., 2014. "Design of Pareto optimal CO2 cap-and-trade policies for deregulated electricity networks," Applied Energy, Elsevier, vol. 119(C), pages 371-383.
    37. Tanaka, Makoto & Chen, Yihsu, 2012. "Market power in emissions trading: Strategically manipulating permit price through fringe firms," Applied Energy, Elsevier, vol. 96(C), pages 203-211.
    38. Tanachai Limpaitoon & Yihsu Chen & Shmuel Oren, 2011. "The impact of carbon cap and trade regulation on congested electricity market equilibrium," Journal of Regulatory Economics, Springer, vol. 40(3), pages 237-260, December.
    39. Franz Wirl, 2008. "Tragedy of the Commons in a Stochastic Game of a Stock Externality," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(1), pages 99-124, February.
    40. Mardones, Cristian & Flores, Belén, 2018. "Effectiveness of a CO2 tax on industrial emissions," Energy Economics, Elsevier, vol. 71(C), pages 370-382.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wijayasekera, Sachindra Chamode & Hewage, Kasun & Hettiaratchi, Patrick & Razi, Faran & Sadiq, Rehan, 2023. "Planning and development of waste-to-hydrogen conversion facilities: A parametric analysis," Energy, Elsevier, vol. 278(PA).
    2. Chung, Yessica C.Y. & Kunene, Noxolo & Chang, Hung-Hao, 2024. "Renewable energy certificates and firm value: Empirical evidence in Taiwan," Energy Policy, Elsevier, vol. 184(C).
    3. Xue, Zhenqian & Ma, Haoming & Wei, Yizheng & Wu, Wei & Sun, Zhe & Chai, Maojie & Zhang, Chi & Chen, Zhangxin, 2024. "Integrated technological and economic feasibility comparisons of enhanced geothermal systems associated with carbon storage," Applied Energy, Elsevier, vol. 359(C).
    4. Fujii, Hidemichi & Webb, Jeremy & Mundree, Sagadevan & Rowlings, David & Grace, Peter & Wilson, Clevo & Managi, Shunsuke, 2024. "Priority change and driving factors in the voluntary carbon offset market," MPRA Paper 120657, University Library of Munich, Germany.
    5. Daoping Chen & Haifeng Liao & Hong Tan, 2024. "Can carbon trading policy boost upgrading and optimization of industrial structure? An empirical study based on data from China," Palgrave Communications, Palgrave Macmillan, vol. 11(1), pages 1-16, December.
    6. Haijun Liu & Yang Wu & Dongqing Tan & Yi Chen & Haoran Wang, 2024. "CGAOA-AttBiGRU: A Novel Deep Learning Framework for Forecasting CO 2 Emissions," Mathematics, MDPI, vol. 12(18), pages 1-30, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Amigo, Pía & Cea-Echenique, Sebastián & Feijoo, Felipe, 2021. "A two stage cap-and-trade model with allowance re-trading and capacity investment: The case of the Chilean NDC targets," Energy, Elsevier, vol. 224(C).
    2. P'ia Amigo & Sebasti'an Cea-Echenique & Felipe Feijoo, 2020. "An Emissions Trading System to reach NDC targets in the Chilean electric sector," Papers 2005.03843, arXiv.org.
    3. Rioux, Bertrand & Galkin, Philipp & Murphy, Frederic & Feijoo, Felipe & Pierru, Axel & Malov, Artem & Li, Yan & Wu, Kang, 2019. "The economic impact of price controls on China's natural gas supply chain," Energy Economics, Elsevier, vol. 80(C), pages 394-410.
    4. Olufolajimi Oke & Daniel Huppmann & Max Marshall & Ricky Poulton & Sauleh Siddiqui, 2019. "Multimodal Transportation Flows in Energy Networks with an Application to Crude Oil Markets," Networks and Spatial Economics, Springer, vol. 19(2), pages 521-555, June.
    5. Gong, Chengzhu & Wu, Desheng & Gong, Nianjiao & Qi, Rui, 2020. "Multi-agent mixed complementary simulation of natural gas upstream market liberalization in China," Energy, Elsevier, vol. 200(C).
    6. Egging-Bratseth, Ruud & Baltensperger, Tobias & Tomasgard, Asgeir, 2020. "Solving oligopolistic equilibrium problems with convex optimization," European Journal of Operational Research, Elsevier, vol. 284(1), pages 44-52.
    7. Sadayuki, Taisuke & Arimura, Toshi H., 2021. "Do regional emission trading schemes lead to carbon leakage within firms? Evidence from Japan," Energy Economics, Elsevier, vol. 104(C).
    8. Chan, Nathan W. & Morrow, John W., 2019. "Unintended consequences of cap-and-trade? Evidence from the Regional Greenhouse Gas Initiative," Energy Economics, Elsevier, vol. 80(C), pages 411-422.
    9. Feijoo, Felipe & Das, Tapas K., 2014. "Design of Pareto optimal CO2 cap-and-trade policies for deregulated electricity networks," Applied Energy, Elsevier, vol. 119(C), pages 371-383.
    10. Yan, Jingchi, 2021. "The impact of climate policy on fossil fuel consumption: Evidence from the Regional Greenhouse Gas Initiative (RGGI)," Energy Economics, Elsevier, vol. 100(C).
    11. Devine, Mel T. & Siddiqui, Sauleh, 2023. "Strategic investment decisions in an oligopoly with a competitive fringe: An equilibrium problem with equilibrium constraints approach," European Journal of Operational Research, Elsevier, vol. 306(3), pages 1473-1494.
    12. Brown, Maxwell & Siddiqui, Sauleh & Avraam, Charalampos & Bistline, John & Decarolis, Joseph & Eshraghi, Hadi & Giarola, Sara & Hansen, Matthew & Johnston, Peter & Khanal, Saroj & Molar-Cruz, Anahi, 2021. "North American energy system responses to natural gas price shocks," Energy Policy, Elsevier, vol. 149(C).
    13. Huang, Wenyang & Wang, Huiwen & Qin, Haotong & Wei, Yigang & Chevallier, Julien, 2022. "Convolutional neural network forecasting of European Union allowances futures using a novel unconstrained transformation method," Energy Economics, Elsevier, vol. 110(C).
    14. Zhang, Yue-Jun & Cheng, Hao-Sen, 2021. "The impact mechanism of the ETS on CO2 emissions from the service sector: Evidence from Beijing and Shanghai," Technological Forecasting and Social Change, Elsevier, vol. 173(C).
    15. Feijoo, Felipe & Huppmann, Daniel & Sakiyama, Larissa & Siddiqui, Sauleh, 2016. "North American natural gas model: Impact of cross-border trade with Mexico," Energy, Elsevier, vol. 112(C), pages 1084-1095.
    16. Baltensperger, Tobias & Füchslin, Rudolf M. & Krütli, Pius & Lygeros, John, 2016. "Multiplicity of equilibria in conjectural variations models of natural gas markets," European Journal of Operational Research, Elsevier, vol. 252(2), pages 646-656.
    17. Lorenczik, Stefan & Panke, Timo, 2016. "Assessing market structures in resource markets — An empirical analysis of the market for metallurgical coal using various equilibrium models," Energy Economics, Elsevier, vol. 59(C), pages 179-187.
    18. Zhou, Yishu & Huang, Ling, 2021. "How regional policies reduce carbon emissions in electricity markets: Fuel switching or emission leakage," Energy Economics, Elsevier, vol. 97(C).
    19. Arriet, Andrea & Matis, Timothy I. & Feijoo, Felipe, 2024. "Electricity sector impacts of water taxation for natural gas supply under high renewable generation," Energy, Elsevier, vol. 294(C).
    20. Olufolajimi Oke & Daniel Huppmann & Max Marshall & Ricky Poulton & Sauleh Siddiqui, 2016. "Mitigating Environmental and Public-Safety Risks of United States Crude-by-Rail Transport," Discussion Papers of DIW Berlin 1575, DIW Berlin, German Institute for Economic Research.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:appene:v:319:y:2022:i:c:s0306261922005530. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/wps/find/journaldescription.cws_home/405891/description#description .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.