Studying the impact of carbon tax and emission trading system on electricity market

Abstract

To achieve the goal of stabilizing carbon dioxide at acceptable levels under the Paris agreement, it is essential to control carbon emissions by implementing regulatory interventions. Carbon tax and emission trading system (ETS) are two effective tools to regulate carbon emissions. Various studies have investigated both methods, yet few have considered the impact of these two policies on the electricity market and social welfare. The purpose of this paper is to fill in the gap, namely to quantify the influence of the carbon tax and ETS using the baseline-and-credit method on the electricity market. In addition, an optimal hybrid policy that combines both carbon tax and ETS is developed. Our case studies demonstrate that carbon tax, ETS, and the hybrid carbon policy can achieve the goal of reducing carbon emission and increasing social welfare. For hybrid policy, the carbon tax rate and the emission marginal cost of allowance in ETS are optimized properly to maximize social welfare.