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Equilibrium models for the carbon leakage problem

Author

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  • Oggioni, Giorgia

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))

  • Smeers, Yves

    (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)
    ---)

Abstract

Carbon leakage in this pape ris the phenomenon whereby Electricity Intensive Industries subject to harsh environmental standards move their activity or part of it to more environmentally lenient regions. Carbon leakage has been mentioned as a possible outcome of the EU Emission Trading Scheme. Different studies are underway to assess the reality of the phenomenon and to devise policies to mitigate its possible impact. One remedy, proposed by the Energy Intensive Industries is to combine free emission allowances with a pricing of electricity whereby energy emissions and transmission costs are bundled and sold on an average cost basis. The paper attempts to model this proposal. We cast the problem in a spatial model of the power sector where generators can develop new capacities, the transmission system is organized on a flowgate basis, emission allowances are auctioned, except possibly for industries, and traded. The consumer market is decomposed in two segments. Industries purchase electricity according to some form of average cost price, the rest of the market is supplied at marginal cost. These equilibrium models are non convex. We present the models and discuss their properties. Companion papers report policy implications.

Suggested Citation

  • Oggioni, Giorgia & Smeers, Yves, 2008. "Equilibrium models for the carbon leakage problem," LIDAM Discussion Papers CORE 2008076, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2008076
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp2008.html
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    Cited by:

    1. Giorgia Oggioni & Yves Smeers, 2009. "Evaluating the impact of average cost based contracts on the industrial sector in the European emission trading scheme," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 17(2), pages 181-217, June.

    More about this item

    Keywords

    carbon leakage; emission trading scheme; electricity; energy policies; equilibrum; complementarity.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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