Dynamic model of CO2 reduction policies: Another step towards a cleaner generation expansion

Abstract

Cap-and-trade mechanisms and emission taxes are becoming increasingly widespread CO2 reduction policies in liberalized electricity markets. To set the design parameters of a CO2 reduction mechanism, analytical optimization frameworks are a commonly used tools by policy makers. However, such frameworks can suffer from issues related to emerging dynamic behaviors in electricity markets. This paper focuses on the relation between the parameter settings of CO2 reduction policies and dynamics of the electricity market. The authors present an analytical framework based on the system dynamics modeling that improves the understanding of the relation between the quantified impacts of CO2 reduction policies and parameter settings. The framework is based on the insight that the quantified impacts of CO2 reduction policies are attributed to the policy design, delays and mutual interactions inherent in the electricity market. The framework addresses both the quantified impacts and the rationale behind dynamic behaviors in the electricity market after implementing CO2 reduction policies. The framework is based on a causal loop diagram, illustrating the causal relation between different components within a system of electricity market. It offers policy makers a tool to assess the interactions between policy parameters and the structure of the electricity market. The framework is simulated under a power system using different scenarios of CO2 reduction policies and illustrates possible quantification of cleaner production, outperforming the base case scenario up to 63% CO2 reduction.