Author: Brittany L. Tarufelli

Publisher:

Published: 2019

Total Pages: 188

ISBN-13: 9781085602976

Goods markets are designed and regulated at a sub-global level. Although it’s typical to assume one set of market clearing rules across regulated and unregulated regions, trade occurs across a patchwork of sub-global market designs. Not accounting for this heterogeneity in market design can lead to unanticipated outcomes from sub-global regulations, as correcting for one market failure–such as a negative externality from carbon emissions–can lead to another market failure from the market design itself when trade occurs across differing market designs. The anatomy of this second-best problem is considered in the context of U.S. electricity markets, as market clearing mechanisms vary by region, and they imperfectly overlap with state-level climate policies such as carbon prices and renewables subsidies. In Chapter I, I present a review of the theoretical and empirical literature on electricity market design and its interaction with regional climate policies. In the wholesale electricity sector, market design drives both the extent of the forward contract market and the competitiveness of the spot market, which can induce strategic behavior and affect both market and regional climate policy outcomes. Assessing climate policy outcomes under only the assumption of a centralized market design, as is customary in the literature, belies the complexity of electricity market design, which varies regionally. As there is currently an agenda to link regional electricity markets, there is also a need to study how strategic behavior across differing market designs affects emissions when regional climate policies are imposed. In Chapter II, I develop a two-stage model of oligopolistic electricity production to determine if strategic behavior in forward contract and spot markets across differing electricity market designs increases or decreases emissions leakage from regional climate policies. I find that under uncertainty from demand and renewable resource shocks, centralized market designs generally reduce market power through arbitraging away price risk between forward and spot markets. However, under an asymmetric carbon cap and trade program, resulting emissions leakage is decreased by bilateral markets, which act as a structural backstop to emissions leakage. Emissions leakage increases when bilateral markets trade with, or are integrated with centralized markets, potentially reducing the efficacy of regional climate policies. In Chapter III, I study the interaction between sub-global climate policy and sub-global design of goods markets using an example of market expansion from wholesale electricity markets–the Western Energy Imbalance Market (EIM) in California. Using a difference-in-differences and triple-differences framework with matching to account for self-selection, I investigate how the EIM affects emissions leakage from California’s carbon cap and trade program. I find that the EIM caused a modest increase in emissions leakage into participating regions outside California, despite the relatively small trading volumes. The results have implications for ongoing efforts to expand competitive wholesale electricity markets across regions with differing climate policies. The results of this dissertation are informative for sub-global climate policy when trade in goods markets occurs across regions with different market clearing rules. Specifically, reduced transactions costs in trade between regulated and unregulated regions may tend to exacerbate emissions leakage. These results are informative in the context of continuing changes in wholesale electricity markets, including potential market expansions and continued integration of regional electricity markets across the U.S. and the European Union.