Short-run economic–environmental impacts of carbon tax on bulk electric systems

Abstract

This paper investigates the short-run impact of the carbon tax imposition on the equilibrium of the wholesale oligopoly electricity market and the level of carbon emission. In this regard, a game-theoretic framework is devised to analyze the oligopolistic competition of the transmission-constrained generating units under a carbon tax. The independent system operator (ISO) utilizes a double-sided auction design to settle power transactions. The government imposes a carbon tax on power suppliers. The strategic bidding behavior of a generating unit is formulated as a bi-level programming (BLP) problem and then it is transformed into a mathematical problem with equilibrium constraints (MPEC). The non-cooperative game theory is employed to determine the equilibrium of generating units’ strategic interaction. The IEEE 9-bus test system is used to examine the economic–environmental effects of a carbon tax in an imperfectly competitive wholesale electricity market. Simulation results show that levy a carbon tax on the generation side results in higher equilibrium price and lower consumption that negatively affects social welfare. Accordingly, carbon taxes effectively abate system-wide carbon dioxide emissions. Though, the physical system (transmission congestion along with heterogeneity in generation technologies) may affect the competitive position of generating units and increases carbon emissions in some areas.