Does California's CO₂ price affect wholesale electricity prices in the Western U.S.A.?

Chi Keung WOO, A. OLSON, Y. CHEN, J. MOORE, N. SCHLAG, A. ONG, T. HO

Research output: Contribution to journalArticlespeer-review

17 Citations (Scopus)

Abstract

Using a sample of daily market data, we quantify the effect of California's CO₂ cap-and-trade program on the wholesale electricity prices of four interconnected market hubs in the Western U.S.A.: North of Path 15 (NP15) and South of Path 15 (SP15) in California, Mid-Columbia (Mid-C) in the Pacific Northwest, and Palo Verde (PV) in the Desert Southwest. A $1/metric ton increase in California's CO₂ price is estimated to have increased the electricity prices by $0.41/MWh (p-value < 0.0001) for NP15, $0.59/MWh (p-value < 0.0001) for SP15, $0.41/MWh (p-value = 0.0056) for Mid-C, and $0.15/MWh (p-value = 0.0925) for PV. These estimates reflect: (a) the NP15 and SP15 sellers’ pricing behavior of fully including the CO₂ price in their intra-state transactions; (b) the Mid-C price's 100% pass-through of the CO₂ price in the Pacific Northwest's hydro export to California; and (c) the statutory obligation of paying the CO₂ emissions cost by California's buyers of the electricity imported from the Desert Southwest. The policy implication is that internalization of CO₂'s externality in the Western U.S.A. requires a cap-and-trade program with a regional scope that encompasses all four hubs, thereby remedying the California program's limited geographic coverage which introduces distortions in neighboring markets. Copyright © 2017 Elsevier Ltd. 
Original languageEnglish
Pages (from-to)9-19
JournalEnergy Policy
Volume110
Early online dateAug 2017
DOIs
Publication statusPublished - Nov 2017

Citation

Woo, C. K., Olson, A., Chen, Y., Moore, J., Schlag, N., Ong, A., et al. (2017). Does California's CO₂ price affect wholesale electricity prices in the Western USA? Energy Policy, 110, 9-19.

Keywords

  • Cap-and-trade program
  • CO₂ price
  • Wholesale electricity prices
  • California
  • Western U.S.A.

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