Influence of emissions trading scheme on market clearing and prices

Abstract – The paper proposes a market clearing for-mulation that accounts for the emissions constraints and Emissions Trading Scheme. This mechanism is introduced to facilitate CO2 emissions management though a market mechanism that gives generators an opportunity to buy and sell CO2 allowances on the market. The power outputs of generators are bounded by the amount of CO2 emissions that they are allowed to produce over time, and therefore it is becoming more important for generating units to decide on when and how much to produce, as well as to investi-gate how to manage allocated CO2 permissions in the most economic way. The proposed method includes costs of buying and selling of CO2 allowance in the market clearing procedure, and thus permits analysis on how emission caps and emission market prices can influence a market out-come. The method is illustrated on a 5-unit system, and the given examples compare a base-case that all generators have sufficient allowances, with cases when generators are faced with the necessity to buy them at the market