Electricity price behavior and carbon trading: New evidence from California

Chi Keung WOO, Yihsu CHEN, Arne OLSON, Jack MOORE, Nick SCHLAG, Alison ONG, Tony S. T. HO

Research output: Contribution to journalArticle

18 Citations (Scopus)

Abstract

The incidence of climate change policy is of great interests to economists, policy makers, producers and consumers. Using the daily market data for a 65-month period of 01/01/2011–05/31/2016, this empirical paper documents that the California Independent System Operator’s day-ahead prices have a CO₂ premium approximately equal to natural-gas-fired generation’s marginal cost of CO₂ emissions. This finding prevails in the six time-of-day periods developed to match the pricing periods used by the state’s local distribution companies and the bilateral trading of wholesale electricity in the Western Interconnection, a large electricity grid serving the western portion of North America and a Mexican state. Our findings suggest that the California cap-and-trade (C&T) program is effective in internalizing CO₂ emission costs of the in-state natural-gas-fired generation. However, the program’s economic efficiency is compromised by the unintended consequence of power laundering under inter-regional trading of wholesale electricity. While the program encourages the Pacific Northwest’s hydro export that displaces California’s natural-gas-fired generation, it also induces output increases by non-California coal- and natural-gas-fired generators in the Western Interconnection. Hence, reducing the overall CO₂ emissions in the Western Interconnection requires expanding the program’s geographic scope to meaningfully address the global warming problem. Copyright © 2017 Elsevier Ltd. 
Original languageEnglish
Pages (from-to)531-543
JournalApplied Energy
Volume204
Early online dateJul 2017
DOIs
Publication statusPublished - Oct 2017

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Citation

Woo, C. K., Chen, Y., Olson, A., Moore, J., Schlag, N., Ong, A., et al. (2017). Electricity price behavior and carbon trading: New evidence from California. Applied Energy, 204, 531-543.

Keywords

  • Electricity price behavior
  • Day-ahead market
  • Carbon trading
  • CO₂ emissions cost pass-through
  • California