IDEAS home Printed from https://ideas.repec.org/a/eee/eneeco/v110y2022ics0140988322001554.html
   My bibliography  Save this article

Is the ETS an effective environmental policy? Undesired interaction between energy-mix, fuel-switch and electricity prices

Author

Listed:
  • Bersani, Alberto M.
  • Falbo, Paolo
  • Mastroeni, Loretta

Abstract

We consider the optimal energy-mix decision for the electricity sector subject to an emission trading system (ETS) under uncertain demand. Under the assumption that power producers maximize the expected profit of their sector, we show that an ETS introduces weird effects to the emission reduction target. On one hand, in terms of generation merit order, it certainly favors fuel switching between coal and gas plants. However, in the long run, the ETS hinders the expansion of renewable technology capacity, rather than promoting it. Moreover, expected emissions increase with respect to a business-as-usual scenario. Moreover, our analysis shows that under certain conditions, not unusual in real life, the equilibrium price of emission certificates is not just the expectation of a payoff for a binary option. A third value is possible. It coincides with the price that makes generation by coal- or gas-fired plants indifferent.

Suggested Citation

  • Bersani, Alberto M. & Falbo, Paolo & Mastroeni, Loretta, 2022. "Is the ETS an effective environmental policy? Undesired interaction between energy-mix, fuel-switch and electricity prices," Energy Economics, Elsevier, vol. 110(C).
    • Handle: RePEc:eee:eneeco:v:110:y:2022:i:c:s0140988322001554
    DOI: 10.1016/j.eneco.2022.105981
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0140988322001554
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.eneco.2022.105981?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. Anderson, Simon P. & Engers, Maxim, 1992. "Stackelberg versus Cournot oligopoly equilibrium," International Journal of Industrial Organization, Elsevier, vol. 10(1), pages 127-135, March.
    2. Chen, Sheng-Tung & Kuo, Hsiao-I & Chen, Chi-Chung, 2007. "The relationship between GDP and electricity consumption in 10 Asian countries," Energy Policy, Elsevier, vol. 35(4), pages 2611-2621, April.
    3. Thierry Lafay, 2010. "A linear generalization of Stackelberg’s model," Theory and Decision, Springer, vol. 69(2), pages 317-326, August.
    4. Paolo Falbo, Cristian Pelizzari, and Luca Taschini, 2019. "Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    5. François Benhmad & Jacques Percebois, 2018. "Photovoltaic and wind power feed-in impact on electricity prices: The case of Germany," Post-Print hal-01830537, HAL.
    6. Anna Cretì & Fulvio Fontini, 2019. "Economics of Electricity. Markets, Competition and Rules," Post-Print hal-02304345, HAL.
    7. Delarue, Erik & Van den Bergh, Kenneth, 2016. "Carbon mitigation in the electric power sector under cap-and-trade and renewables policies," Energy Policy, Elsevier, vol. 92(C), pages 34-44.
    8. Kirat, Djamel & Ahamada, Ibrahim, 2011. "The impact of the European Union emission trading scheme on the electricity-generation sector," Energy Economics, Elsevier, vol. 33(5), pages 995-1003, September.
    9. Johansson, Bengt, 2013. "Security aspects of future renewable energy systems–A short overview," Energy, Elsevier, vol. 61(C), pages 598-605.
    10. Ibrahim Ahamada & Djamel Kirat, 2011. "The impact of the European Union Emission Trading Scheme on electricity generation," PSE-Ecole d'économie de Paris (Postprint) hal-00629900, HAL.
    11. Ibrahim Ahamada & Djamel Kirat, 2011. "The impact of the European Union Emission Trading Scheme on electricity generation," Post-Print hal-00629900, HAL.
    12. Lehmann, Paul & Gawel, Erik, 2013. "Why should support schemes for renewable electricity complement the EU emissions trading scheme?," Energy Policy, Elsevier, vol. 52(C), pages 597-607.
    13. Carlén, Björn & Dahlqvist, Anna & Mandell, Svante & Marklund, Pelle, 2019. "EU ETS emissions under the cancellation mechanism - Effects of national measures," Energy Policy, Elsevier, vol. 129(C), pages 816-825.
    14. Benhmad, François & Percebois, Jacques, 2018. "Photovoltaic and wind power feed-in impact on electricity prices: The case of Germany," Energy Policy, Elsevier, vol. 119(C), pages 317-326.
    15. Daughety, Andrew F, 1990. "Beneficial Concentration," American Economic Review, American Economic Association, vol. 80(5), pages 1231-1237, December.
    16. Frederic Murphy & Yves Smeers, 2012. "Withholding investments in energy only markets: can contracts make a difference?," Journal of Regulatory Economics, Springer, vol. 42(2), pages 159-179, October.
    17. Hoffmann, Volker H., 2007. "EU ETS and Investment Decisions:: The Case of the German Electricity Industry," European Management Journal, Elsevier, vol. 25(6), pages 464-474, December.
    18. Paolo Falbo & Cristian Pelizzari & Luca Taschini, 2019. "Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets," The Energy Journal, , vol. 40(6), pages 41-78, November.
    19. MURPHY, Frederic & SMEERS, Yves, 2012. "Withholding investments in energy only markets: can contracts make a difference?," LIDAM Reprints CORE 2437, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    20. Veronika Grimm & Gregor Zoettl, 2013. "Investment Incentives and Electricity Spot Market Competition," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 22(4), pages 832-851, December.
    21. Frederic H. Murphy & Yves Smeers, 2005. "Generation Capacity Expansion in Imperfectly Competitive Restructured Electricity Markets," Operations Research, INFORMS, vol. 53(4), pages 646-661, August.
    22. Ibrahim Ahamada & Djamel Kirat, 2011. "The impact of the European Union Emission Trading Scheme on electricity generation," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00629900, HAL.
    23. Mahalingam, Brinda & Orman, Wafa Hakim, 2018. "GDP and energy consumption: A panel analysis of the US," Applied Energy, Elsevier, vol. 213(C), pages 208-218.
    24. Pal, Debashis & Sarkar, Jyotirmoy, 2001. "A Stackelberg Oligopoly with Nonidentical Firms," Bulletin of Economic Research, Wiley Blackwell, vol. 53(2), pages 127-134, April.
    25. Venmans, Frank, 2012. "A literature-based multi-criteria evaluation of the EU ETS," Renewable and Sustainable Energy Reviews, Elsevier, vol. 16(8), pages 5493-5510.
    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. Tianyu Luo & Hongmin Chen, 2023. "A Comparative Analysis of Separate and Joint Environmental Rights Trading Markets in China," Sustainability, MDPI, vol. 15(7), pages 1-17, March.
    2. Cinzia Bonaldo & Fulvio Fontini & Michele Moretto, 2022. "The Energy Transition and the Value of Capacity Remuneration Mechanisms," Working Papers 2022.16, Fondazione Eni Enrico Mattei.
    3. Ren, Yi-Shuai & Huynh, Toan Luu Duc & Liu, Pei-Zhi & Narayan, Seema, 2024. "Is the carbon emission trading scheme conducive to promoting energy transition? Some empirical evidence from China," Energy Economics, Elsevier, vol. 134(C).
    4. Che, Shuai & Wang, Jun, 2022. "Policy effectiveness of market-oriented energy reform: Experience from China energy-consumption permit trading scheme," Energy, Elsevier, vol. 261(PB).
    5. Lei, Pengfei & Cai, Qihai & Jiang, Fangxin, 2024. "Assessing the impact of environmental regulation on enterprise high-quality development in China: A two-tier stochastic frontier model," Energy Economics, Elsevier, vol. 133(C).
    6. Cristiano Salvagnin & Aldo Glielmo & Maria Elena De Giuli & Antonietta Mira, 2024. "Investigating the price determinants of the European Emission Trading System: a non-parametric approach," Papers 2406.05094, arXiv.org.
    7. Li Meng & Ke Wang & Taoyong Su & He He, 2022. "Carbon Emission Trading and Corporate Financing: Evidence from China," Energies, MDPI, vol. 15(14), pages 1-13, July.
    8. Mardones, Cristian, 2024. "Measuring the efficiency gains of merging carbon markets – A microsimulation for thermoelectric and industrial sources," Energy, Elsevier, vol. 290(C).

    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. Paolo Falbo & Cristian Pelizzari & Luca Taschini, 2019. "Renewables, Allowances Markets, and Capacity Expansion in Energy-Only Markets," The Energy Journal, , vol. 40(6), pages 41-78, November.
    2. Tang, Ling & Wang, Haohan & Li, Ling & Yang, Kaitong & Mi, Zhifu, 2020. "Quantitative models in emission trading system research: A literature review," Renewable and Sustainable Energy Reviews, Elsevier, vol. 132(C).
    3. Li, Y.P. & Huang, G.H. & Li, M.W., 2014. "An integrated optimization modeling approach for planning emission trading and clean-energy development under uncertainty," Renewable Energy, Elsevier, vol. 62(C), pages 31-46.
    4. Teng, Fei & Wang, Xin & Zhiqiang, LV, 2014. "Introducing the emissions trading system to China’s electricity sector: Challenges and opportunities," Energy Policy, Elsevier, vol. 75(C), pages 39-45.
    5. Abrell, Jan & Kosch, Mirjam & Rausch, Sebastian, 2022. "How effective is carbon pricing?—A machine learning approach to policy evaluation," Journal of Environmental Economics and Management, Elsevier, vol. 112(C).
    6. George Daskalakis, Lazaros Symeonidis, Raphael N. Markellos, 2015. "Electricity futures prices in an emissions constrained economy: Evidence from European power markets," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    7. Onyebuchi, V.E. & Kolios, A. & Hanak, D.P. & Biliyok, C. & Manovic, V., 2018. "A systematic review of key challenges of CO2 transport via pipelines," Renewable and Sustainable Energy Reviews, Elsevier, vol. 81(P2), pages 2563-2583.
    8. Feng Liu & Tao Lv & Yuan Meng & Xiaoran Hou & Jie Xu & Xu Deng, 2022. "Low-Carbon Transition Paths of Coal Power in China’s Provinces under the Context of the Carbon Trading Scheme," Sustainability, MDPI, vol. 14(15), pages 1-14, August.
    9. Gavard, Claire & Kirat, Djamel, 2018. "Flexibility in the market for international carbon credits and price dynamics difference with European allowances," Energy Economics, Elsevier, vol. 76(C), pages 504-518.
    10. Frieder Mokinski & Nikolas Wölfing, 2014. "The effect of regulatory scrutiny: Asymmetric cost pass-through in power wholesale and its end," Journal of Regulatory Economics, Springer, vol. 45(2), pages 175-193, April.
    11. Leroutier, Marion, 2022. "Carbon pricing and power sector decarbonization: Evidence from the UK," Journal of Environmental Economics and Management, Elsevier, vol. 111(C).
    12. Andrianesis, Panagiotis & Biskas, Pandelis & Liberopoulos, George, 2021. "Evaluating the cost of emissions in a pool-based electricity market," Applied Energy, Elsevier, vol. 298(C).
    13. Rübbelke, Dirk & Vögele, Stefan, 2013. "Effects of carbon dioxide capture and storage in Germany on European electricity exchange and welfare," Energy Policy, Elsevier, vol. 59(C), pages 582-588.
    14. Ludovic Julien & Olivier Musy & Aurélien Saïdi, 2012. "On hierarchical competition in oligopoly," Journal of Economics, Springer, vol. 107(3), pages 217-237, November.
    15. Wang, Xue-Chao & Klemeš, Jiří Jaromír & Wang, Yutao & Foley, Aoife & Huisingh, Donald & Guan, Dabo & Dong, Xiaobin & Varbanov, Petar Sabev, 2021. "Unsustainable imbalances and inequities in Carbon-Water-Energy flows across the EU27," Renewable and Sustainable Energy Reviews, Elsevier, vol. 138(C).
    16. Xie, Li & Zhou, Zhichao & Hui, Shimin, 2022. "Does environmental regulation improve the structure of power generation technology? Evidence from China's pilot policy on the carbon emissions trading market(CETM)," Technological Forecasting and Social Change, Elsevier, vol. 176(C).
    17. Hanif, Waqas & Arreola Hernandez, Jose & Mensi, Walid & Kang, Sang Hoon & Uddin, Gazi Salah & Yoon, Seong-Min, 2021. "Nonlinear dependence and connectedness between clean/renewable energy sector equity and European emission allowance prices," Energy Economics, Elsevier, vol. 101(C).
    18. Knaut, Andreas & Tode, Christian & Lindenberger, Dietmar & Malischek, Raimund & Paulus, Simon & Wagner, Johannes, 2016. "The reference forecast of the German energy transition—An outlook on electricity markets," Energy Policy, Elsevier, vol. 92(C), pages 477-491.
    19. Zhou, Fengxiu & Wang, Xiaoyu, 2022. "The carbon emissions trading scheme and green technology innovation in China: A new structural economics perspective," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 365-381.
    20. Golombek, Rolf & Kittelsen, Sverre A.C. & Rosendahl, Knut Einar, 2013. "Price and welfare effects of emission quota allocation," Energy Economics, Elsevier, vol. 36(C), pages 568-580.

    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:eneeco:v:110:y:2022:i:c:s0140988322001554. 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/locate/eneco .

    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.