Carbon Pricing with an Output Subsidy under Imperfect Competition: The Case of Alberta's Restructured Electricity Market

34 Pages Posted: 8 Mar 2017

See all articles by David Brown

David Brown

University of Alberta - Department of Economics

Andrew Eckert

University of Alberta - Department of Economics

Heather Eckert

University of Alberta - Department of Economics

Date Written: January 2017

Abstract

In this paper, we examine the use of carbon pricing and an output-based subsidy in a market with imperfect competition. We consider a carbon pricing policy in Alberta’s electricity market as a case study. This policy consists of two phases. In the first phase, the carbon price is doubled with the output subsidy being based on a fraction of facility-level emission intensity. In the second phase, the carbon price will remain constant, while the output subsidy is altered to be uniform across assets and based on the emissions intensity of an efficient natural gas asset. Using a model of oligopoly competition, we simulate the shortrun impacts of the two phases on electricity prices, emissions, and unit and firm-level profitability. We find that the mechanisms by which electricity prices and emissions change in response to carbon pricing differ depending on whether the market is perfectly competitive or oligopolistic. We demonstrate that regardless of market structure, changing the basis of the output subsidy has substantially larger effects than a doubling of the carbon price. The estimated effects of carbon pricing vary as the firms’ generation portfolios change.

Keywords: Electricity, Market Power, Carbon Price, Pass-Through

JEL Classification: D43, L51, L94, Q40, Q58

Suggested Citation

Brown, David and Eckert, Andrew and Eckert, Heather, Carbon Pricing with an Output Subsidy under Imperfect Competition: The Case of Alberta's Restructured Electricity Market (January 2017). Available at SSRN: https://ssrn.com/abstract=2928821 or http://dx.doi.org/10.2139/ssrn.2928821

David Brown (Contact Author)

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Andrew Eckert

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada

Heather Eckert

University of Alberta - Department of Economics ( email )

8-14 Tory Building
Edmonton, Alberta T6G 2H4
Canada
780 492-7648 (Phone)
780 492-3300 (Fax)

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