Market Power in Emissions Trading and Renewable Energy Policy

Abstract

Policies for reducing greenhouse gas emissions, e.g., cap-and-trade (C&T) as emissions permits trading and renewable portfolio standards (RPS) as renewable energy policies, have recently been introduced in various countries. In this study, we examine market equilibria under C&T and RPS in a bi-level optimization framework. For the lower level, generation of outputs of renewable and non-renewable sectors and electricity prices are decided by maximizing their profits. For the upper level, the policy maker chooses optimal policy level in an attempt to maximize the social welfare. Our results indicate that C&T is the best scheme for both increasing social welfare and reducing greenhouse gas emissions.