Table of Contents. 1 Introduction. 2 Models. 3 Numerical Examples. 4 Summary & Conclusions

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2 Table of Contents 1 Introduction 2 Models 3 Numerical Examples 4 Summary & Conclusions

3 Introduction

4 Cap & Trade Policieis Common tools to control for GHG and other pollutants (e.g., EU ETS, RGGI, California AB32) Fixed number of emissions allowances (cap) is allocated to pollution sources These sources need to hold sufficient emissions allowances to cover their emissions Emissions permits can be traded (i.e., buy or sell) in the secondary market (trade)

5 Motivation Traditional Mass-based C&T

6 Motivation Cap & Trade Policies: Mass-based Mass-based policy q dirty E dirty + q clean E clean F

7 Motivation US EPA Clean Power Plan Performance-based C&T CPP is a new federal-level policy introduced by the US EPA to cut CO2 emissions from existing fossil fuel-fired units by 32% below 2005 level by State-specific goals are determined by emission performance rates for two groups electric generating units (i.e., fossil fuel-fired units natural gas-red combined cycle units), technology mix, and anticipated electricity production. States are allowed to decide 1) a performance-based or a tradition mass-based policy and 2) participate in a joint C&T program.

8 Motivation US EPA Clean Power Plan Target by States (% reduction related to the baseline)

9 Motivation US EPA Clean Power Plan Performance-based C&T

10 Motivation Cap & Trade Policies: Performance-based policies Performance-based policy: q dirty E dirty +q clean E clean q dirty +q clean F

11 Motivation Cap & Trade Policies: Mass-based vs. Performance-based policies (con t) How to satisfy a policy? Mass-based policy: credits and emission reduction. Performance-based policy: credits, emission reduction and increase q clean Revenue implications? Mass-based policy: producers or consumers bear the costs Performance-based policy: revenue neutral Market power implications? Under a mass-based policy strategic withholding of clean energy increases the tradable permit prices Similar to an RPS, strategic withholding of clean energy in a performance-baed policy directly limits dirty energy production

12 Related Work Research on C&T Policies Market-based versus command-and-control mechanisms (Stavins, 1995; Parry et al. 1997) Unlike a tax, polluters decisions under a tradable permits scheme affects the permit price (Mansur, 2003) Tax increases the risk faced by a gas-fired plant (Green, 2008) US Clean Power Plan offers states a choice between mass- and performance-based standards The latter involves a cross-subsidy (similar to a RPS) from dirty to clean sources, which changes the merit order (Bushnell et al., 2014; Tanaka and Chen, 2013; Siddiqui et al., 2016) A comparison of mass- and performance-based standards (Fischer, 2003)

13 Contribution Research Objective and Findings Compare social surplus outcomes of optimal performance-based policy to a mass-based policy while subjecting to same total emissions e.g., state-by-state, restrictive state-bay-state, regional Results indicate when all firms are with a positive output, the resulting allowance prices under the regional C&T are equal to that of the state-by-state policy when subject to an equal performance standard. A state-by-state policy could outperform a regional C&T with a higher social surplus under some mild conditions, i.e., positive output and permit prices. Mass-based policy remains most efficient (first-best).

14 Models

15 Models Mass-based Policy: Model Formulation (1) Maximize g 0 sw MP (g) (1) s.t. e(g) 0 (λ), (2) State-by-State Optimal Performance-based Policy Maximize f 0 h in(g) 0 (β in), i, n, (3) t l(g) 0 (µ l ), l, (4) t l (g) 0 (µ l ), l. (5) sw SP (g) (6) s.t. Eq. (2), Maximize g 0 sw SP (g) (7) s.t. r m(g, f m) 0 (ρ m), m, (8) Eqs. (3) (5).

16 Models Model Formulation (2) Restrictive State-by-State Optimal Performance-based Policy RSP: Maximize f 0 sw RSP (g) (9) s.t. Eq. (2), Maximize g 0 sw RSP (g) (10) s.t. r m(g, f m) 0 (ρ m), m, (11) f m = f n (φ m), m n, (12) Eqs. (3) (5).

17 Models Model Formulation (3) Regional Performance-based Optimal Policy RP: Maximize f 0 sw RP (g) (13) s.t. Eq. (2), Maximize g 0 sw RP (g) (14) s.t. r(g, f) 0 (ρ), (15) f m = f n (φ m), m n, (16) Eqs. (3) (5).

18 Outcomes Proposition Analytical Results Assume interior solutions g > 0. Then, ρ 1 = ρ 2 =... = ρ N holds for SP and RSP. Proposition Assume interior solutions g > 0. Also assume ρ > 0 (i.e., positive CO 2 prices). Then, sw RP = sw RSP. Proposition Assume interior solutions g > 0. Also assume ρ > 0 (i.e., positive CO 2 prices). Then, sw SP sw RP. Proposition sw MP sw SP.

19 Numerical Examples

20 Three-node Network B A Independent System Operator (ISO) C

21 Results Preliminary Results Social surplus ranking 2 : sw MP sw SP > sw RP = sw RSP Both producers and consumers are benefit from optimal SP sw MP gains is from producer surplus and permit proceedings 2 government retains the permit rent through auctions

22 Summary & Conclusions

23 Conclusions Summary & Conclusions Analytical outcomes suggest: 1) If g > 0: ρ 1 = ρ 2 =... = ρ N holds for SP and RSP. if further that ρ > 0 (i.e., positive CO 2 prices). sw RP = sw RSP, and sw SP sw RP. 2) sw MP sw SP. Allow each state design its own performance-based policy (SP) might lead to a better outcome than a regional performance-based policy A Mass-based policy remains to be most efficient when each policy is subject to same level of aggregate emissions. A performance-based policy, either (restrictive) state-by-state, or regional ones, like RPS (renewable portfolio standards), will be less efficient if pollution emission is policy concern.

24 Conclusions Thank you! Yihsu Chen, Ph.D. Department of Technology Management University of California Santa Cruz Santa Cruz, CA, USA