Impacts of carbon emissions allowance limitations on carbon price with power generation rights trading in China

Abstract

Carbon pricing is a crucial mechanism for achieving carbon peaking and carbon neutrality through the carbon trading market. Recently, the price of carbon emissions allowances in China's national carbon market has shown a gradual upward trend. The limitations on carbon emissions allowances have also become increasingly stringent. Power generators, which primarily rely on thermal power generation, have a substantial demand for carbon emissions allowances. The rising prices and stricter carbon emissions constraints have increased operational costs. Therefore, exploring the carbon pricing mechanism under more stringent carbon emissions allowance constraints is vital. It encourages thermal power generators to engage in carbon trading and reduce carbon emissions. This paper focuses on an energy trading platform supply chain comprising three power generators, one energy trading platform, and one power retailer. We consider stringent carbon emissions constraints and power generation rights trading. Through the analysis of three scenarios, the study explores optimal pricing decisions for carbon emissions allowances to facilitate carbon emission reduction and promote renewable energy generation and consumption. The findings indicate that, under certain conditions (i.e., the carbon quotas allocation coefficient b1∈[0.73,0.8]), scenario 3, which excludes generation rights trading, yields the highest optimal carbon price. The energy trading platform can adjust various commissions to influence the carbon price, as well as the price and quantity of generation rights trading. Introducing power generation rights trading proves beneficial in reducing carbon emissions (nearly 400 tons less than that in scenario 3 without generation rights trading, when the realized total power demand is around 8600 MWh) and fostering renewable power generation and consumption (the actual renewable power consumption weight is 3% higher than that without generation rights trading). When considering generation rights trading, the high-emission generator and renewable power generator achieve the highest power profits, while for the low-emission generator, the profit in this case is the second best among these scenarios. Moreover, by decreasing the coefficient of carbon quotas allocation and increasing the reduction rate simultaneously, the carbon cost will pass through to the electricity price more sufficiently (e.g., when b1=0.76, the pass-through rate increases from 0.5015 to 0.7984), particularly within a specific range of the carbon quotas allocation coefficient.