A two stage cap-and-trade model with allowance re-trading and capacity investment: The case of the Chilean NDC targets. (1st June 2021)

• Record Type: Journal Article
• Authors: Amigo, Pía; Cea-Echenique, Sebastián; Feijoo, Felipe
• Is Part Of: Energy. Volume 224(2021)
• Publication Date: 2021-06-01
• Subjects: Cap-and-trade -- Emissions trading -- Mixed complementarity problem -- Incomplete markets -- Stochastic capacity investment -- NDC; Power resources -- Periodicals; Power (Mechanics) -- Periodicals; Energy consumption -- Periodicals; 333.7905
• DOI: 10.1016/j.energy.2021.120129
• Languages: English
• ISSNs: 0360-5442

Abstract

Abstract: In this work, we study an alternative approach for capping and pricing carbon emissions in electric markets: the cap-and-trade paradigm with re-trade of allowances. We model the electric market (generators and allowances' auctioneer) as a two stage stochastic capacity expansion equilibrium problem, where we allow future investment and re-trading of emission permits among generators. The model studies generation and future investments in the electric sector in two regimes of demand: deterministic and stochastic. The configuration enforces the reduction of carbon emissions by setting a carbon budget, which allows to assess the impact of green policies and pledges concerning an electric system. We use the proposed model to analyze the Chilean electric sector under a cap-and-trade paradigm as an alternative to the existing carbon tax. We show that the Chilean pledge regarding emissions reductions does not encourage a shift to greener technologies. Moreover, we characterize two strategies to comply with the renewable targets by mid-century. On the one hand, a stringent carbon budget that induces high price of carbon permits and phases out coal-based generators. On the other hand, a less stringent target which significantly encourages investment in renewable technologies, but with low remaining shares of coal-based electric generation towards 2050. Highlights: A two-stage stochastic capacity investment equilibrium model with CO2 markets. CO2 markets for allowance allocation and re-trade with endogenous prices. Current Chilean GHG intensity pledge does not drive a shift in the generation mix. E_ective carbon prices should be at least ten times larger than the Chilean tax. Strategies to comply with the renewable energy targets by mid-century.