Optimal investment strategies for light duty vehicle and electricity generation sectors in a carbon constrained world

Greenhouse gas emission targets are becoming more stringent for both automakers and electricity generators. Meeting those targets will require technology and capacity planning strategies that are both cost efficient and environmentally conscious. With the introduction of plug‐in hybrid and electric vehicles, the light duty vehicle and electricity generation sectors become linked. To estimate the prospective advantage of cooperation in meeting those goals and enhance government policies to encourage their cooperation, we present a mathematical model that enables trade‐off analysis between the sectors if they work independently with separate emission constraints or together with a joint constraint. Under the assumption that the automakers and electricity generators can build the selected vehicle or generator capacity as needed, high level insights of cost efficient capacity planning strategies for automakers and electricity generators are provided. A key finding is that although potential savings are a small fraction (3 %) of the discounted total societal cost incurred in both sectors, cooperation can significantly reduce the incremental cost of ${\text{CO}}_2$ reduction (50 %). Additionally, if the low natural gas (NG) price observed recently continues, it will be favorable to build NG generators rather than renewable generation capacity in the early years and abandon them later to switch to renewable energy in the time horizon from 2011 to 2050.