An Electricity Trading System with Tradable Green Certificates and CO2 Emission Allowances

Abstract

Combinations of various policy instruments to deal with the threat of climate change are used throughout the world. The aim of this article is to investigate an electricity market with two di¤erent policy instruments, Tradable Green Certi cates (TGCs) and CO2 emission allowances (an Emission Trading System, ETS). We analyze both the short- and long-run effects of a domestic market and a market with trade. We find that increasing the TGC quota obligation will decrease the electricity produced using non-renewable sources as well as the long-run total production of electricity. For the electricity produced using renewable energy sources, an increase in the quota obligation leads to increased production in almost all cases, with assumptions based on historical data. The impacts of the ETS price on the electricity production are negative for all electricity production, which is surprising. This means that the combination of ETS and TGCs gives unexpected and unwanted results for the electricity production using renewable sources, since an increase in the ETS price leads to a decrease in this production.