On Market Designs for Emission Reduction - Interplay of Carbon and Power Markets

This thesis studies market designs of carbon and power markets to efficiently reduce GHG emissions. It focuses on the world's largest emissions trading system, namely the European Union Emission Trading System (EU ETS) and its interactions with European power markets. The second chapter sets up an accurate model of the recent EU ETS regulation to evaluate the cost-effectiveness of the latest EU ETS reforms, namely introducing the Market Stability Reserve with the Cancellation Mechanism and the increase in the Linear Reduction Factor. In particular, the reduced allowance supply due to the change in the LRF raises carbon prices. The third chapter discusses overlapping policies within the EU ETS, e.g., coal phase-outs in the power sector. Overlapping policies mostly do not reduce total emissions under the EU ETS, particularly not if firms are myopic. In contrast, total emissions can even increase slightly due to the new green paradox effect. The fourth chapter challenges the common assumption of time-independent marginal abatement cost (MAC) curves. MAC curves flatten in time, primarily driven by loosening investment restrictions and technological learning. Time-dependent MAC curves reduce incentives for banking and might drive carbon prices up if firms are myopic. Finally, the fifth chapter evaluates the expansion of wind power in Germany considering transmission network constraints. With nodal pricing as an efficient instrument to coordinate investments and network congestion, it quantifies the distorted investment signals of uniform prices for the siting of wind power plants. Further, the chapter finds that locational investment restrictions are more promising to counteract distorted investment incentives of uniform pricing than latitude-dependent generator components in network tariffs