A Dynamic Theoretical Model of the Tradable Permits Market in a Reshaping Electricity Industry
12 Pages Posted: 26 Feb 2004
Carefully measuring the success of permits trading in the electricity industry should account for not only the permits trading mechanism but also how the industry changes might impacts on the permits market. In our model, not only the abatement technology progress would influence the permits market price but also the entry of the non-utility generators (NUGs) that could impact the market participants' production decision and influence the permits price. If the technological progress results in a higher decrease of the pollution emission by an increase of the abatement capital, and the ratio of the marginal cost for abatement capital and the marginal emission for abatement capital below the increase of the discount rate, borrowing will take place because pollution abatement in the future is cheaper than in the present, and this will be a factor to push the permits prices down. If the quantity purchased from NUGs results in a higher decrease of the pollution emission, borrowing will take place. This is because the utility can buy more electricity quantity from NUGs in the future and the production cost is cheaper than in the present, and this will be a factor to push the permits price down.
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