Emissions markets, power markets and market power: A study of the interactions between contemporary emissions markets and deregulated electricity markets

Chapter 1: A Monte Carlo Approach. The use of auctions to distribute tradeable property rights to firms in already heavily concentrated markets may further exacerbate the problems of market power that exist within those markets. This chapter provides a model of a two-stage emissions market modeled after a contemporary regional permit trading market in the United States, the Regional Greenhouse Gas Initiative, Inc. (RGGI). It then introduces Oligopsony 1.0, a C;Chapter 2: An Experimental Approach. How will emerging auction-based emissions markets function within the context of today's deregulated auction-based electricity markets? This chapter provides an experimental analysis of a joint energy-emissions market. The impact of market power and collusion among dominant firms is evaluated to determine the extent to which an auction-based tradeable permit market influences performance in an adjacent electricity market. The experimental treatment design controls for a variety of real-world institutional features, including variable demand, permit banking, inter-temporal (multi-round) dynamics, a tightening cap, and resale. Results suggest that the exercise of market power significantly increases electricity auction clearing prices, without significantly increasing emissions auction clearing prices, and in some cases, even significantly suppresses them. The institution of auction-based carbon markets in the already-concentrated energy sector can further strengthen the market position of dominant firms who can leverage energy-emissions market linkages to their operational advantage.;Chapter 3: Regulatory Mechanisms and Policy Approaches. Contemporary deregulated electricity markets are defined by a complex array of multi-settlement markets, with additional market-based mechanisms designed, to a large extent, to limit the exercise of market power by dominant firms. On top of the already complex nature of these markets, policymakers are also adding market-based mechanisms to curtail greenhouse gases. Key linkages exist between electricity and emissions markets that may be utilized by dominant firms. This chapter provides an analysis of three specific policy mechanisms that are utilized in contemporary markets to effectively reduce the incentive of dominant firms to exercise market power. These include convergence bidding, consignment auctions and multilevel holding accounts.