Multi-market Equilibrium Research Articles

Design and equilibrium analysis of integrated market of ISO-led carbon emissions, green certificates and electricity considering their interplay

The integrated market, comprising ISO-led (Independent System Operator) carbon emissions and green certificates, as well as the wholesale electricity market, is designed. In the integrated market, the trading and clearing mechanisms of each market are developed, and the equilibrium model for multiple markets is proposed by considering the clearing rules and trading participants of each market. At the equilibrium, from the perspective of the electricity producer, its objective is to achieve the maximum profit while the other producers' strategies remain fixed. Consequently, according to the Nash equilibrium theory, the equilibrium fitness index for multi-manufacturer and multi-market is proposed, which could reach its maximum value at equilibrium. This index is then used as the optimization objective in the PSO (particle swarm optimization) algorithm to derive the market equilibrium. Numerical studies show the effectiveness of the solution approach, and discover the influences of carbon emission quotas and renewable quotas on the multi-market equilibrium. With the equilibrium, the valuable suggestions could be provided to the regulators of carbon emissions and green certificates markets regarding the allocations of the corresponding quotas.

Determining vulnerable households and food groups sensitive to price and income increase from the perspective of food security: Evidence from Iran

Concerns about household food security of developing countries has been greatly intensified with rising food prices derives from various causes, such as market failure, climate change, political instability, the presence of poor financial institutions, and emerging challenges. It is very important, the development and evaluation of required policy responses such as income compensation policy to cope with foodstuff price increases. It is necessary to pay attention to different household groups regarding income, occupation, and urban/rural conditions in order to evaluate the effects of shocks and policies according to the different responses of households. This paper employes a multimarket equilibrium simulation model and evaluates the effect of price hikes with/without households' nominal income compensation policy on the calorie intake of different household groups. To this end, Iranian households that have suffered from severe food inflation and their nominal income compensation policy has always been the focus of government officials were investigated. First, we noticed that poor rural households with government occupations bear the brunt of ensuing the price hike of foodstuffs. Second, we found that households food security is highly reliant on the price of livestock products compared to other foodstuffs. Finally, we concluded that income compensation policy plays the role of a threat to food security for some households and a driver for others. Therefore, based on the different responses of households to foodstuff price and income increase, we recommended the design of more precise interventions in the market of foodstuff in a more targeted and efficient manner.

P2H Modeling and Operation in the Microgrid Under Coupled Electricity–Hydrogen Markets

The uncertainty and volatility of wind power have led to large-scale wind curtailment during grid connections. The adoption of power-to-hydrogen (P2H) system in a microgrid (MG) can mitigate the renewable curtailment by hydrogen conversion and storage. This paper conducts unified modeling for different types of P2H systems and considers the multi-energy trading in a hydrogen-coupled power market. The proposed bi-level equilibrium model is beneficial to minimize the energy cost of microgrids. Firstly, a microgrid operation model applied to different P2H systems including an alkaline electrolysis cell (AEC), a proton exchange membrane electrolysis cell (PEMEC), or a solid oxide electrolysis cell (SOEC) is proposed at the upper level. Secondly, an electricity market–clearing model and a hydrogen market model are constructed at the lower level. Then, the diagonalization algorithm is adopted to solve the multi-market equilibrium problem. Finally, case studies based on an IEEE 14-bus system are conducted to validate the proposed model, and the results show that the microgrid with a P2H system could gain more profits and help increase the renewable penetration.

What are the overall implications of rising demand for organic fruits and vegetables? Evidence from theory and simulations

Abstract US consumers currently eat less fruits and vegetables (FV) than recommended by dietary guidelines. Inadequate FV consumption exists alongside rapid growth in demand for organic FV. Since the viable production area of FV is finite, organic and conventional FV are linked in production while serving as substitutes in consumption. Rising purchases of organic FV may have important implications for prices and quantities consumed in the conventional FV market. In this paper, we analyze the implications of rising demand for organic FV when organic and conventional FV are linked in supply and demand. More specifically, we use a multi-market equilibrium displacement model to examine the impact of rising demand for organic produce on prices and total quantities consumed of conventional and organic FV under two scenarios: product differentiation (i.e. organic versus conventional produce) while assuming that consumers have identical preferences that can be represented by a single market demand function for each good; and product differentiation with segmented markets, which allows for two types of consumers with unique demand functions. Both scenarios were simulated with and without an offsetting shift in demand for conventional FV. Our simulation results indicate that the increasing demand for organic FV may result in decreased consumption of combined conventional and organic FV, and that the direction of changes in FV consumption may vary by consumer segment. Under the most realistic assumptions, when one segment of consumers increases its demand for organic FV, this segment's overall consumption of organic plus conventional FV falls; the other segment's overall consumption rises. We provide sensitivity analyses and discuss caveats and directions for future research.

Power generation mix evolution based on rolling horizon optimal approach: A system dynamics analysis

System dynamics is a well-established methodology to analyze the behavior of complex systems through computer simulation. Different from the traditional system dynamics, in this paper, the peak shaving and frequency control reserve constraints are incorporated into power generation mix planning to ensure system security and efficiency. However, it is an intractable task to consider this multi-market equilibrium and multi-period coupling planning problem in system dynamics. To ameliorate this inherent drawback, a novel planning model based on the rolling horizon optimal approach is proposed. First, by adding the constraints to the objective function, the Hamilton function is constructed to calculate the optimality conditions, and then the primal planning problem can be converted to a capital recovery problem. Considering the stochastic characteristics in the future market, a rolling horizon approach is adopted to update the planning information and optimize the power mix continuously. Next, an approximate gradient based on Pontryagin’s minimum principle is developed to simplify the optimal iteration processes. To demonstrate its feasibility, the sensitivity analysis suggests that the reduction of renewable energy cost and the wide allocation of flexible resources are two major factors to achieve a high-level penetration of renewable energy.

Coordination of tradable carbon emission permits market and renewable electricity certificates market in China

Abstract In order to assist the low-carbon transformation of power sector, China is planning to establish the national Tradable carbon emission permits (TEPs) market and Renewable Electricity Certificates (RECs) market under mandatory carbon caps and Renewable Portfolio Standards (RPS) targets simultaneously. How to coordinate the two markets and what the coordination effects are become key issues. In the present study, a multi-region multi-market equilibrium model considering both mechanisms was developed and applied to China as the case study. The model established the effective coordination interval between RPS targets and carbon caps in which the two markets can operate jointly. Then the coordinated markets were proved to be more economically efficient so long as the government pursues the dual goal of reducing carbon emission and promoting renewable energy in sync. Finally, the theoretical and practical advantages of market coordination compared with uncoupled operation of these markets, such as diversifying markets risk, keeping TEP/REC price at lower level, and reducing consumers' electricity purchase cost, were discussed.

Corrective regulations on renewable energy certificates trading: Pursuing an equity-efficiency trade-off

As a common policy tool for reducing the cost of achieving the Renewable Portfolio Standard (RPS) targets, Renewable Energy Certificate (REC) trade can also exacerbate distributional inequity in provincial renewable electricity consumption. In this study, two types of corrective regulations –taxation and quotas on REC importing were proposed to pursue the equity-efficient trade-off. The energy, economic, and equity impacts of these corrective regulations were analyzed by applying a multi-region multi-market equilibrium model to China as a case study. The results verified that a free trade REC market can increase distributional inequity, while both import taxation and import quotas can reduce inequity. Compared to the electricity price premium for renewable energy and voluntary green certificate prices, the social cost of implementing these corrective regulations are within the public's willingness-to-pay. Moreover, the cost curve of increasing equity using the two corrective regulations on REC trade were obtained. Import taxation is found to be more cost-efficient, and therefore it should be the prior policy choice for China's central government comparing with import quotas in designing REC trade mechanisms.

Food Security Impacts of Increasing Energy Prices on Iranian Meat Market

In accordance with the Iranian government intention toward two step forward elimination of energy subsidies policy in coming years, we focus in this study on the extent by which the corresponding raising costs will be distributed across the livestock sector and how they affected food security. For this purpose, scenario of increasing energy prices and improving productivity at vertical and horizontal meat market is applied by a multi-market equilibrium displacement model to Iranian livestock sector for next five years. Results show that changing the price of poultry and beef have the highest impacts on animal protein intake. Improving productivity could compensate decreasing of protein and calorie intakes for successive four years but not at the last year.

LAND-USE AND GREENHOUSE GAS IMPLICATIONS OF BIOFUELS: ROLE OF TECHNOLOGY AND POLICY

This paper examines the changes in land use in the U.S. likely to be induced by biofuel and climate policies and the implications of these policies for greenhouse gas (GHG) emissions over the 2007–2022 period. The policies considered here include a modified Renewable Fuel Standard (RFS) by itself as well as combined with a cellulosic biofuel tax credit or a carbon price policy. We use a dynamic, spatial, multi-market equilibrium model, Biofuel and Environmental Policy Analysis Model (BEPAM), to endogenously determine the effects of these policies on cropland allocation, food and fuel prices, and the mix of first- and second-generation biofuels. We find that the RFS could be met by diverting 6% of cropland for biofuel production and would result in corn prices increasing by 16% in 2002 relative to the business-as-usual baseline. The reduction in GHG emissions in the U.S. due to the RFS is about 2%; these domestic GHG savings can be severely eroded by emissions due to indirect land-use changes and the increase in gasoline consumption in the rest of the world. Supplementing the RFS with a carbon price policy or a cellulosic biofuel tax credit induces a switch away from corn ethanol to cellulosic biofuels and achieves the mandated level of biofuel production with a smaller adverse impact on crop prices. These supplementary policies enhance the GHG savings achieved by the RFS alone, although through different mechanisms; greater production of cellulosic biofuels with the tax credit but larger reduction in fossil fuel consumption with a carbon tax.

Stacking Low Carbon Policies on the Renewable Fuels Standard: Economic and Greenhouse Gas Implications

This paper examines the economic and GHG implications of stacking a low carbon fuel standard (LCFS) with and without a carbon price policy on the Renewable Fuel Standard (RFS). We compare the performance of various policy combinations for food and fuel prices, fuel mix and fuel consumption. We also analyze the economic costs and benefits of alternative policy combinations and their distributional effects for consumers and producers in the transportation and agricultural sector in the US. Using a dynamic, multi-market equilibrium, nonlinear mathematical programming model of the transportation and agricultural sectors, we find that combining the RFS with an LCFS policy leads to a reduction in first generation biofuels and an increase in second generation biofuels compared to the RFS alone. This policy combination also achieves greater reduction in GHG emissions even after considering offsetting market mediated effects. Imposition of a carbon price with the RFS and LCFS policy primarily induces fuel conservation and achieves larger GHG emissions reduction compared to the other policy scenarios. All of these policy combination lead to higher net economic benefits for the transportation and agricultural sectors relative to the no policy baseline because they improve the terms of trade for these sectors.

Land Use and Greenhouse Gas Implications of Biofuels: Role of Technology and Policy

This paper examines the changes in land use in the U.S. likely to be induced by biofuel and climate policies and the implications of these policies for GHG emissions over the 2007-2022 period. The policies considered here include a modified Renewable Fuel Standard (RFS) by itself as well as combined with a cellulosic biofuel tax credit or a carbon price policy. We use a dynamic, spatial, multi-market equilibrium model, Biofuel and Environmental Policy Analysis Model (BEPAM), to endogenously determine the effects of these policies on cropland allocation, food and fuel prices, and the mix of first- and second-generation biofuels. We find that the RFS could be met by diverting 6% of cropland for biofuel production and would result in corn prices increasing by 16% in 2002 relative to the business-as-usual baseline. The reduction in GHG emissions in the U.S. due to the RFS is about 2%; these domestic GHG savings can be severely eroded by emissions due to indirect land use changes and the increase in gasoline consumption in the rest of the world. Supplementing the RFS with a carbon price policy or a cellulosic biofuel tax credit induces a switch away from corn ethanol to cellulosic biofuels and achieves the mandated level of biofuel production with a smaller adverse impact on crop prices. These supplementary policies enhance the GHG savings achieved by the RFS alone, although through different mechanisms; greater production of cellulosic biofuels with the tax credit but larger reduction in fossil fuel consumption with a carbon tax.

Climate change: impacts on electricity markets in Western Europe.

This paper studies some impacts of climate change on electricity markets, focusing on three climate effects. First, demand for electricity is affected because of changes in the temperature. Second, changes in precipitation and temperature have impact on supply of hydro electric production through a shift in the inflow of water. Third, plant efficiency for thermal generation will decrease because the temperature of water used to cool equipment increases. To find the magnitude of these partial effects, as well as the overall effects, on Western European energy markets, we use the multi-market equilibrium model LIBEMOD. We find that each of the three partial effects changes the average electricity producer price by less than 2%, while the net effect is an increase of only 1%. The partial effects on total electricity supply are small, and the net effect is a decrease of 4%. The greatest effects are found for Nordic countries with a large market share for reservoir hydro. In these countries, annual production of electricity increases by 8%, reflecting more inflow of water, while net exports doubles. In addition, because of lower inflow in summer and higher in winter, the reservoir filling needed to transfer water from summer to winter is drastically reduced in the Nordic countries.Electronic supplementary materialThe online version of this article (doi:10.1007/s10584-011-0348-6) contains supplementary material, which is available to authorized users.

Equilibria in futures and spot electricity markets

We describe a model to analyze the equilibrium encompassing an electricity futures market and a number of electricity spot markets sequentially arranged along the time horizon spanned by the futures market. Profit-maximizing strategic electricity producers react to both prices and rival production changes, in both the spot and the futures markets. At each time period, the total demand is considered to depend linearly on the spot price of the considered time period, and the futures market price is assumed to equal the average spot price over the time horizon. Equilibrium conditions at each spot market are described as a function of the futures market decision variables, which in turn allows describing the equilibrium in the futures market implicitly enforcing equilibrium in each spot market. The proposed model allows deriving analytical expressions that characterize such multi-market equilibrium and that can be recast as a mixed linear complementarity problem. This model is useful to gain insight on the outcomes and characteristics of the considered multi-market equilibrium. Such insight may allow the regulator to better design the futures and spot trading floors, their rules and sequential timing. It may also allow producers to increase the effectiveness of their respective offering strategies.

Animal Identification and Tracing in the United States

We examine the impacts of adopting animal identification and tracing systems on the U.S. meat and livestock industry. Using a multimarket equilibrium displacement model, we find that a modest increase in domestic demand for beef would offset the costs of an animal identification system. Similarly, an increase in beef export demand equivalent to Japan's beef export market share prior to the 2003 U.S. discovery of bovine spongiform encephalopathy would offset animal identification system costs.

Meeting the Mandate for Biofuels: Implications for Land Use, Food and Fuel Prices

Biofuel production is being promoted through various policies such as mandates and tax credits. This paper uses a dynamic, spatial, multi-market equilibrium model, Biofuel and Environmental Policy Analysis Model (BEPAM), to estimate the effects of these policies on cropland allocation, food and fuel prices, and the mix of biofuels from corn and cellulosic feedstocks over the 2007-2022 period. We find that the biofuel mandate will increase corn price by 24%, reduce the price of gasoline by 8% in 2022, and increase social welfare by $122 B (0.7%) relative to Business As Usual scenario. The provision of volumetric tax credits that accompany the mandate significantly changes the mix of biofuels produced in favor of cellulosic biofuels and reduces the share of corn ethanol in the cumulative volume of biofuels produced from 50% to 10%. The tax credits reduce the adverse impact of the mandate alone on crop prices and decrease the price of biofuels. However, they impose a welfare cost of $79 B compared to the mandate alone. These results are found to be sensitive to the rate of growth of crop productivity, the costs of production of bioenergy crops, and the availability of marginal land for producing bioenergy crops.

The global LeChatelier Principle and multimarket equilibria

LeChatelier (Comptes Rendus 99:786, 1884) and LeChatelier (Ann Mines 13(2):157, 1888) proposed that the adjustment of a physical system to a disturbance in its equilibrium was smaller as constraints are added to the adjustment process. Samuelson (Econometrica 28:368–379, 1960) showed that this Principle applied to a stable multimarket equilibrium for the case that all commodities are gross substitutes. We note that the Principle also applies to the stable equilibria of markets for which commodities can also be gross complements as formulated by Morishima (Osaka Econ Pap 1:101–113, 1952). Further, the Morishima and gross substitute cases are the only cases to which the Principle can apply, based only upon the stability hypothesis and a specification of the gross substitute/complement relations among commodities. We show that the Milgrom and Shannon (Econometrica 62:157–180, 1994) single crossing conditions specified for monotone comparative statics can be configured appropriate to the Morishima case to give global conditions for the LeChatelier Principle to apply to a multimarket equilibrium.

The scope of the LeChatelier Principle

LeChatelier [Comptes Rendus 99 (1884) 786; Ann. Mines 13 (2) (1888) 157] showed that a physical system's “adjustment” to a disturbance to its equilibrium tended to be smaller as constraints were added to the adjustment process. Samuelson [Foundations of Economic Analysis, Harvard University Press, Cambridge, 1947] applied this result to economics in the context of the comparative statics of the actions of individual agents characterized as the solutions to optimization problems; and later (1960), extended the application of the Principle to a stable, multi-market equilibrium and the case of all commodities gross substitutes [e.g., L. Metzler, Stability of multiple markets: the hicks conditions. Econometrica 13 (1945) 277–292]. Refinements and alternative routes of derivation have appeared in the literature since then, e.g., Silberberg [The LeChatelier Principle as a corollary to a generalized envelope theorem, J. Econ. Theory 3 (1971) 146–155; A revision of comparative statics methodology in economics, or, how to do comparative statics on the back of an envelope, J. Econ. Theory 7 (1974) 159–172], Milgrom and Roberts [The LeChatelier Principle, Am. Econ. Rev. 86 (1996) 173–179], W. Suen, E. Silberberg, P. Tseng [The LeChatelier Principle: the long and the short of it, Econ. Theory 16 (2000) 471–476], and Chavas [A global analysis of constrained behavior: the LeChatelier Principle ‘in the large’, South. Econ. J. 72 (3) (2006) 627–644]. In this paper, we expand the scope of the Principle in various ways keyed to Samuelson's proposed means of testing comparative statics results (optimization, stability, and qualitative analysis). In the optimization framework, we show that the converse LeChatelier Principle also can be found in constrained optimization problems and for not initially “conjugate” sensitivities. We then show how the Principle and its converse can be found through the qualitative analysis of any linear system. In these terms, the Principle and its converse also may be found in the same system at the same time with respect to the imposition of the same constraint. Based upon this, we expand the cases for which the Principle can be found based upon the stability hypothesis.

Liberalized trade and domestic price stability. The case of rice and wheat in India

This paper analyzes the effects of liberalizing foodgrain trade on domestic price stability using a multi-market equilibrium model in which the direction of trade is determined endogenously and world prices are sensitive to the amount traded by India. Simulation results demonstrate that contrary to popular belief, freeing of trade by India leads to greater domestic price stability even though world prices are more volatile. Freeing of trade by India also leads to higher world price stability. Under liberalized trade, variable levies/subsidies are more effective in stabilizing domestic prices compared to buffer stocks. It is therefore in India's interest to argue for non-zero binding on import tariffs and export subsidies at the WTO negotiations.

Food inventory policies under liberalized trade

This paper evaluates the role of food inventories or buffer stocks in stabilizing prices of foodgrains in India when private external trade in grain is liberalized. The model adopts a multi-market equilibrium framework with the direction of trade determined endogenously. World prices are assumed to be sensitive to the amount traded by India (the ‘large country’ effect). The simulation results demonstrate that holding foodgrain inventories is an inefficient mechanism for stabilizing domestic prices under liberalized trade. Variable levies/ subsidies on trade appear to be more cost effective. Freeing of trade lowers domestic price variability even though world prices are more volatile.

Grain price stabilization in India: Evaluation of policy alternatives

Abstract Stabilization of prices is an important element of food policy in India as in most other countries — both developing and developed. However, since the magnitude of grain stocks held for this purpose as well as the costs of physical storage have become prohibitively high, there is now a need for finding cost-effective alternatives including non-interventionist and market-oriented methods for price stabilization. In this paper we consider the case of rice and wheat which are staple foodgrains in India. We make a comparison between alternative price stabilization policies including that of holding buffer stocks in terms of their impact on domestic price stability, producer and consumer welfare and government costs. A multi-market equilibrium framework is used where private storage, consumption, supply and prices of rice and wheat are determined simultaneously. Indian exports and imports are assumed to affect world prices. The alternative price stabilizing mechanisms are ranked according to both the criteria, welfare and price stability achieved. The main findings are as follows. The ranking of alternatives varies with the criterion used. Greater price stability need not necessarily imply greater welfare. The option of variable levies on private external trade turns out to be the most inexpensive and that of domestic buffer stocks the costliest in achieving price stability. Further, the efficacy of buffer stocks and subsidy to private storage in stabilizing prices is lower under free trade as compared to the case where the economy is closed to private external trade.