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Emissions Trading in Forward and Spot Markets for Electricity

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  • Makoto Tanaka
  • Yihsu Chen

Abstract

Tradable allowances have received considerable attention in recent years. One emerging issue is their interaction with electricity markets. This paper extends the model of Allaz and Vila (1993) by incorporating emissions trading with forward and spot markets for electricity. We focus on the effects of strategic forward position and initial allowances allocation on the equilibrium outcomes. We find that firms with a dirty portfolio would have stronger incentives to take a long position in the forward market to raise the electricity price. Increasing the amount of allowances assigned to clean firms leads to a reduction in electricity and allowance prices.

Suggested Citation

  • Makoto Tanaka & Yihsu Chen, 2012. "Emissions Trading in Forward and Spot Markets for Electricity," The Energy Journal, , vol. 33(2), pages 195-222, April.
    • Handle: RePEc:sae:enejou:v:33:y:2012:i:2:p:195-222
    DOI: 10.5547/01956574.33.2.9
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    References listed on IDEAS

    as
    1. Maeda, Akira, 2003. "The Emergence of Market Power in Emission Rights Markets: The Role of Initial Permit Distribution," Journal of Regulatory Economics, Springer, vol. 24(3), pages 293-314, November.
    2. 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.
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