Cross-border electricity market effects due to price caps in an emission trading system: An agent-based approach

• Published in: Energy policy 2014-08, Vol.71, p.139-158
• Main Authors: Richstein, Jörn C., Chappin, Emile J.L., de Vries, Laurens J.
• Format: Article
• Language: English
• Subjects: Agency theory; Agent-based modelling; Air pollution caused by fuel industries; Applied sciences; Auctions; Banking; Carbon dioxide; Carbon emissions; Ceilings; CO2 price caps; Consumers; Cost; Eastern Europe; Economic data; Economic theory; Electric energy; Electric utilities; Electricity; Emissions trading; Energy; Energy economics; Energy market; Energy policy; Energy prices; Energy. Thermal use of fuels; EU-ETS; European Union; Exact sciences and technology; Financing; General, economic and professional studies; General. Regulations. Norms. Economy; Great Britain; Investment; Investment policy; Investments; Marketing; Markets; Methodology. Modelling; Price ceilings; Prices; Risk; Studies; Western Europe
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2014.03.037

The recent low CO2 prices in the European Union Emission Trading Scheme (EU ETS) have triggered a discussion whether the EU ETS needs to be adjusted. We study the effects of CO2 price floors and a price ceiling on the dynamic investment pathway of two interlinked electricity markets (loosely based on Great Britain, which already has introduced a price floor, and on Central Western Europe). Using an agent-based electricity market simulation with endogenous investment and a CO2 market (including banking), we analyse the cross-border effects of national policies as well as system-wide policy options. A common, moderate CO2 auction reserve price results in a more continuous decarbonisation pathway. This reduces CO2 price volatility and the occurrence of carbon shortage price periods, as well as the average cost to consumers. A price ceiling can shield consumers from extreme price shocks. These price restrictions do not cause a large risk of an overall emissions overshoot in the long run. A national price floor lowers the cost to consumers in the other zone; the larger the zone with the price floor, the stronger the effect. Price floors that are too high lead to inefficiencies in investment choices and to higher consumer costs. •Cross-border effects of CO2 policies were investigated with an agent-based model.•The current EU ETS might cause CO2 price shocks and CO2 price volatility.•A CO2 auction reserve price does not lower welfare, but lowers CO2 price volatility.•A national CO2 price floor lowers consumer cost in the other countries.•A CO2 price ceiling does not lead to an overshoot of emissions.