Market Power and Instrument Choice in Climate Policy
CRREP working paper serie 2017-04
46 Pages Posted: 22 May 2018
Date Written: March 01, 2017
This paper compares a clean energy standard (CES) and a carbon tax (CT), using theory and quantitative experiments. A two-stage duopolistic competition in the electricity sector between a polluting plant and its non-polluting rival anchors the model underlying these experiments. The CT induces both plants to contribute to clean electricity, whereas the CES only incentivizes the non-polluting plant. Ultimately, what matters for the ranking of these instruments is the size of the pre-existing competitive gap between the two rival plants. When this gap is sufficiently small, the CES becomes the more cost-effective instrument, irrespective of the pre-specified emissions reduction target.
Keywords: Electricity, Cost-effectiveness, Duopoly, Innovation, Quantitative analysis.
JEL Classification: H20; H32; L13; L51
Suggested Citation: Suggested Citation