Carbon trading's impact on California's real-time electricity market prices

What is the extent of a real-time electricity market's pass-through of the marginal cost of CO₂ emissions due to a cap-and-trade (C&T) program? This is an important policy question, as an incomplete pass-through would suggest the program's limited effectiveness in achieving efficient pricing of electricity. To answer the question, we perform a regression analysis of California's electricity market data for a 65-month period of 01/01/2011–05/31/2016. Based on this newly constructed large sample, we find that the California Independent System Operator's real-time market prices contain a CO₂ premium that closely tracks the marginal cost of CO₂ emissions of California's natural-gas-fired generation units, which are often at margin that determines the power prices. While the CO₂ premium provides much needed incentives for renewable energy development, it does little to improve the incentive for natural-gas-fired generation investment in California. Hence, procurement of dispatchable generation capacity via long-term contracts continues to be useful for the state to meet the mandatory criteria for resource adequacy and system reliability. Copyright © 2018 Elsevier Ltd. All rights reserved.