Comparing Cap-and-Trade and Carbon Tax Policies in Generation Expansion Planning

Abstract

Cap-and-trade and carbon taxes are two types of environmental policies that differ in their goals and approaches but both have the potential to reduce greenhouse gas emissions and promote renewable energy. We compare the effectiveness and efficiency of these policies in the context of generation capacity expansion. Game theoretic models are used to integrate the environmental policies in a generation expansion planning framework. The most efficient tax policies and variations are obtained using the inverse equilibrium models. We compare cap-and-trade and carbon taxes with respect to five criteria: carbon price and tax, renewable energy portfolio, total energy generation, generation companies’ and grid owner’s total profit, and government revenue. Numerical experiments show the relative advantages, disadvantages, similarities, differences, and limitations of the policies.