How Market Power Can Suppress the Effect of Carbon Policies in Wholesale Electricity Markets

抄録

Market power and unpriced carbon externalities are two failures that are common to wholesale electricity markets. We use a case study that is based on Japan’s wholesale electricity market to examine the impacts of addressing the former. Specifically, we compare Pigouvian taxes on carbon emissions and a renewable portfolio standard, which is an alternative indirect policy measure that is used commonly to reduce carbon emissions. We find that the benefits of Pigouvian taxes in reducing carbon emissions can be suppressed if market power is not addressed. This effect depends upon market structure, though. For the case of Japan’s electricity sector, this effect of market power is due to the industry being highly asymmetric. Carbon pricing increases the cost of carbon-intensive electricity-generation technologies. Lower-carbon generation technologies are held by firms with market power, which have incentives to withhold their capacity from the market to increase wholesale prices and their profits. As such, carbon pricing can result in high prices but muted carbon-emissions reductions. These impacts of carbon pricing are not observed if the wholesale electricity market is perfectly competitive.