The zero-emission certificates: A novel carbon dioxide-pollution reduction instrument applied to the electricity market

Today several instruments exist to decrease air pollution. The paper discusses pollution taxes, emission trading permits and green certificates applied to reduce the carbon dioxide emissions in the electricity sector. It then investigates how the different mechanisms behind these three instruments can possibly be combined. The proposed approach is to introduce the concept of zero-emission certificates (ZEC). ZEC are confirming actual emission reductions achieved by electricity producers as compared to a well-defined baseline. Producers can trade ZEC on a market to achieve least-cost efficiency in their reduction efforts. Distributors can themselves produce an additional contribution to emission-reductions by decreasing the final demand, i.e., by producing zero-emission MWh. In this way the electricity market is approached from both the supply and the demand sides. The paper uses system dynamics to validate the approach. It shows why it is in the interest of all operators to make the largest possible reduction efforts as long as they are compatible with economic efficiency.