Consilting, Navigant. Price Signals and Greenhouse Gas Reduction in the Electricity Sector . Navigant. Navigant Consulting, 2009.Abstract

    Excerpt from the Executive Summary

    Competitive electricity markets will play
    a vital role in the success of any market- based program for controlling heat-trap- ping emissions that contribute to climate change. Restructured competitive electricity markets help promote the technological in- novation and changes in consumer behav- ior required for a greenhouse gas (GHG) reduction program to be successful.

    Competitive wholesale and retail electricity markets were implemented to provide the financial incentives that encourage efficient electricity production and consumption patterns. Similarly, state and federal policy- makers are embracing“cap-and-trade”poli- cies (a.k.a the carbon market1) that rely on the same market forces and financial incen- tives to reduce GHG emissions – primar-
    ily carbon dioxide (CO2). President Barack Obama recently stated that he is interested in a cap-and-trade approach precisely be- cause he thinks the market makes decisions about these technologies better than the public sector.2 Policy supporters argue that
    a market-based approach to reducing GHG emissions will be the most cost-effective and result in more innovative approaches
    to emission reductions than other regulatory approaches. With non-utility competi- tive suppliers owning approximately 40 percent of today’s installed electric gener- ating capacity, it is therefore important to understand the complementary interaction between competitive electricity markets and market-based GHG policies.

    Celebi, Metin, and Frank Graves. VOLATILE CO2 PRICES DISCOURAGE CCS INVESTMENT . The Brattle Group. The Brattle Group, 2009. Publisher's VersionAbstract

    Climate policy proposals based on cap and trade mechanisms with tight caps will likely lead to highly volatile CO2 prices. This volatility is ignored in many studies, even though it can be expected to exceed that of natural gas and to exceed the wide ranges in CO2 price forecasts. Volatility will significantly increase investment risk, raise the cost of capital, and make it valuable to defer investments. The net result could be that CO2 price volatility becomes an impediment to the very investments that the climate policy is attempting to encourage. Compared to a carbon policy regime with more predictable carbon prices, we estimate that CO2 price volatility under current policy proposal could delay investment in low-carbon and carbon abatement technologies by 10 years or more. We propose that an effective policy to reduce this investment barrier would be a safety-valve mechanism that includes both a floor and a ceiling on CO2 prices. This would reduce volatility and protect both investors and customers from extreme carbon prices.

    Zachmann, Georg, and Christian von Hirschhausen. “First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany.” In, 2007.Abstract

    Zachmann, Georg and Christian von Hirschhausen. First Evidence of Asymmetric Cost Pass-through of EU Emissions Allowances: Examining Wholesale Electricity Prices in Germany. March 2007. Paper, 8 pages.



    This paper applies the literature on asymmetric price transmission to the emerging commodity market for EU emissions allowances (EUA). We utilize an error correction model and an autoregressive distributed lag model to measure the relationship between CO2 price changes and the development of wholesale electricity prices. Using data from the German market for electricity and EUAs, we find that the rising prices of EUAs have a stronger impact on wholesale electricity prices than falling prices -- the first empirical evidence of asymmetric cost pass-through for these new allowances.


    Sotkiewicz, Paul, and Lynne Holt. “Public Utility Commission Regulation and Cost-Effectiveness of Title IV: Lessons for CAIR.” In, 2005.Abstract


    There is growing evidence that the cost savings potential of the Title IV SO2 cap-and-trade program is not being reached. PUC regulatory treatment of compliance options appears to provide one explanation for this finding. That suggests that PUCs and utility companies should work together to develop incentive plans that will encourage cost-minimizing behavior for compliance with the EPA’s recently issued Clean Air Interstate Rule.