Equilibrium Analysis of Carbon Emission Caps in Regional Electricity Markets

This thesis uses state-of-the-art equilibrium models to analyse the impact of cap-and-trade (C&T) systems on regional electricity markets, which span areas subject to disparate carbon-reduction policies, e.g., only one area of the market is covered by a C&T. Such markets are vulnerable to carbon leakage, i.e., emission increase in the uncapped subregion as a result of imposing a C&T in the regulated subregion. Specifically, the focus is on the South-East Europe Regional Electricity Market (SEE-REM) for which an ex ante analysis of potential leakage into the non-EU ETS part is carried out considering the interaction of (i) an emission cap and hydropower availability and (ii) an emission cap and market power. In a perfectly competitive setting, a mixed-complementarity problem calibrated to SEE-REM is implemented for various C&T emission caps in order to estimate the extent of carbon leakage. The impact of market power is next incorporated using a bi-level model that is reformulated as a mathematical program with equilibrium constraints and implemented as a mixed-integer quadratic problem for SEE-REM in order to investigate how a dominant firm’s incentives to manipulate both electricity and carbon prices affect carbon leakage. Furthermore, in a theoretical framework, a bi-level model is developed where at the upper level, the policymaker determines an optimal emission cap over a subregion of an electricity market interconnected to the uncapped subregion. The purpose of this model is to establish the basis for a second-best anti-leakage measure