Article ID: | iaor20104773 |
Volume: | 58 |
Issue: | 3 |
Start Page Number: | 529 |
End Page Number: | 548 |
Publication Date: | May 2010 |
Journal: | Operations Research |
Authors: | Pang Jong-Shi, Hobbs Benjamin F, Zhao Jinye |
Keywords: | electricity, pollution, carbon dioxide |
Carbon dioxide allowance trading systems for electricity generators are in place in the European Union and in several U.S. states. An important question in the design of such systems is how allowances are to be initially allocated: by auction, by giving away fixed amounts (grandfathering), or by allocating based on present or recent output, investment, or other decisions. The latter system can bias investment, operations, and product pricing decisions and increase costs relative to the other systems. A nonlinear complementarity model is proposed for investigating the long-run equilibria that would result under alternative systems for power markets characterized by time-varying demand and multiple technology types. Existence of equilibria is shown under mild conditions. Solutions for simple systems show that allocating allowances to new capacity based on fuel use or generator type can yield large distortions in capacity investment, invert the operating order of power plants, and inflate consumer costs. The distortions can be smaller for tighter CO