Graduation Year

2011

Document Type

Dissertation

Degree

Ph.D.

Degree Granting Department

Industrial and Management Systems Engineering

Major Professor

Tapas K. Das

Keywords

Carbon Trading, Electricity Markets, Emissions, Environmental Policy, Revenue Recycling

Abstract

Cap-and-trade is the most discussed CO2 emissions control scheme in the U.S. It is a market-based mechanism that has been used previously to successfully reduce the levels of SO2 and NOx emitted by power generators. Since electricity generators are responsible for about 40% of the CO2 emissions in the U.S., the implementation of CO2 cap-and-trade will have a significant impact on electric power generation systems. In particular, cap-and-trade will influence the investment decisions made by power generators. These decisions in turn, will affect electricity prices and demand. If the allowances (or emission permits) created by a cap-and-trade program are auctioned, the government will collect a significant amount of money that can be redistributed back to the electricity market participants to mitigate increases on electricity prices due to cap-and-trade and also, to increase the market share of low-emission generators.

In this dissertation, we develop two models to analyze the impact of CO2 cap-and-trade on electric power generation systems. The first model is intended to be used by power generators in a restructured market to evaluate investment decisions under different CO2 cap-and-trade programs for a given time horizon and a given forecast in demand growth. The second model is intended to aid policymakers in developing optimal CO2 revenue redistribution policies via subsidies for low-emission generators.

Through the development of these two models, our underlying objective is to provide analysis tools for policymakers and market participants so that they can make informed decisions about the design of cap-and-trade programs and about the market actions they

can take if such programs are implemented.

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