A two stage cap-and-trade model with allowance re-trading and capacity investment: The case of the Chilean NDC targets

In this work, we study an alternative approach for capping and pricing carbon emissions in electric markets: the cap-and-trade paradigm with re-trade of allowances. We model the electric market (generators and allowances? auctioneer) as a two stage stochastic capacity expansion equilibrium problem, where we allow future investment and re-trading of emission permits among generators. The model studies generation and future investments in the electric sector in two regimes of demand: deterministic and stochastic. The configuration enforces the reduction of carbon emissions by setting a carbon budget, which allows to assess the impact of green policies and pledges concerning an electric system. We use the proposed model to analyze the Chilean electric sector under a cap-and-trade paradigm as an alternative to the existing carbon tax. We show that the Chilean pledge regarding emissions reductions does not encourage a shift to greener technologies. Moreover, we characterize two strategies to comply with the renewable targets by mid-century. On the one hand, a stringent carbon budget that induces high price of carbon permits and phases out coal-based generators. On the other hand, a less stringent target which significantly encourages investment in renewable technologies, but with low remaining shares of coal-based electric generation towards 2050. ? 2021 Elsevier Ltd. All rights reserved.

Automated summary

This work explores an alternative approach for capping and pricing carbon emissions in electric markets, known as the cap-and-trade paradigm with re-trade of allowances. The model studies generation and future investments in the electric sector under different demand regimes and assesses the impact of green policies and pledges. An analysis of the Chilean electric sector is used to compare the cap-and-trade paradigm with the existing carbon tax and explore strategies to comply with renewable targets by mid-century.