Carbon Emissions Forensics in Energy Sector: Is It Worth the Effort?

Abstract

Climate policy has mostly focused on regulating power suppliers. Suppliers then reduce their greenhouse gas emissions through retrofitting pollution control devices, switching fuels, or alternating energy production processes. There is a growing interest in exploring regulating emissions from the demand side by incentivizing consumers to reduce their energy consumptions or purchase power from cleaner sources through tracking carbon content of power flow in the transmission network. This paper analyzes market outcomes under two approaches: producer-based and demand-based carbon tax. In particular, we formulate each approach as a market equilibrium model. For the consumer-based approach, we assume that a utility that procures electricity on behalf of consumers is subject to the carbon tax. For the producer-based approach, the producers will pay for their emissions. We show that the two approaches are equivalent when the program’s coverage is complete. That is, they produce the same prices, distribution of emissions and the economic rent allocation. However, when the coverage is incomplete, the consumer-based carbon tax is less effective in pricing carbon emissions owing to the fact that sales to unregulated nodes are not subject to the carbon tax. Given that the transaction cost of implementing consumer-based tax is likely to be higher, the benefit of tracking power flows in order to estimating carbon content might not be justified even with a full coverage program.