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Does a regional greenhouse gas policy make sense? A case study of carbon leakage and emissions spillover

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  • Chen, Yihsu

Abstract

The Regional Greenhouse Gas Initiative (RGGI) is a state-level effort by ten northeast states in the U.S. to control CO2 emissions from the electric sector. The approach adopted by RGGI is a regional cap-and-trade program, which sets a maximal annual amount of regional CO2 emissions that can be emitted from the electric sector. However, incoherence of the geographic scope of the regional electricity market is expected to produce two undesirable consequences: CO2 leakage and NOx and SO2 emissions spillover. This paper addresses these two issues using transmission-constrained electricity market models. The results show that although larger CO2 leakage is associated with higher allowance prices, it is negatively related to CO2 prices if measured in percentage terms. On the other hand, SO2 and NOx emissions spillover increase in commensurate with CO2 allowance prices. Demand elasticity attenuates the effect of emissions trading on leakage and emissions spillover. This highlights the difficulties of designing a regional or local climate policy.

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  • 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.
    • Handle: RePEc:eee:eneeco:v:31:y:2009:i:5:p:667-675
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    7. James B. Bushnell & Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel, 2017. "Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 57-90, May.
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    10. Lee, Kangil & Melstrom, Richard T., 2018. "Evidence of increased electricity influx following the regional greenhouse gas initiative," Energy Economics, Elsevier, vol. 76(C), pages 127-135.
    11. Sauma, Enzo, 2012. "The impact of transmission constraints on the emissions leakage under cap-and-trade program," Energy Policy, Elsevier, vol. 51(C), pages 164-171.
    12. Billette de Villemeur, Etienne & Pineau, Pierre-Olivier, 2012. "Regulation and electricity market integration: When trade introduces inefficiencies," Energy Economics, Elsevier, vol. 34(2), pages 529-535.
    13. Zhang, Duan & Chen, Yihsu & Tanaka, Makoto, 2018. "On the effectiveness of tradable performance-based standards," Energy Economics, Elsevier, vol. 74(C), pages 456-469.
    14. 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).
    15. Gabriel Diaz & Francisco D. Muñoz & Rodrigo Moreno, 2020. "Equilibrium Analysis of a Tax on Carbon Emissions with Pass-through Restrictions and Side-payment Rules," The Energy Journal, , vol. 41(2), pages 93-122, March.
    16. Yang, Yi, 2018. "Improving estimates of subnational commodity flows in LCA for policy support: A US case study," Energy Policy, Elsevier, vol. 118(C), pages 312-316.
    17. 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).
    18. Li, Yan & Feng, Tian-tian & Liu, Li-li & Zhang, Meng-xi, 2023. "How do the electricity market and carbon market interact and achieve integrated development?--A bibliometric-based review," Energy, Elsevier, vol. 265(C).
    19. Palmer, Karen & Burtraw, Dallas & Paul, Anthony, 2009. "Allowance Allocation in a CO2 Emissions Cap-and-Trade Program for the Electricity Sector in California," RFF Working Paper Series dp-09-41, Resources for the Future.
    20. 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).
    21. Višković, Verena & Chen, Yihsu & Siddiqui, Afzal S., 2017. "Implications of the EU Emissions Trading System for the South-East Europe Regional Electricity Market," Energy Economics, Elsevier, vol. 65(C), pages 251-261.
    22. Bushnell, James & Chen, Yihsu & Zaragoza-Watkins, Matthew, 2014. "Downstream regulation of CO2 emissions in California's electricity sector," Energy Policy, Elsevier, vol. 64(C), pages 313-323.
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    24. 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.

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    Emissions trading Electric market CO2 leakage;

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