Economic and Emissions Implications of Load-Based, Source-Based, and First-Seller Emissions Trading Programs Under California AB32

In response to Assembly Bill 32, the state of California considered three types of carbon emissions trading programs for the electric power sector: load-based, source-based, and first-seller. They differed in terms of their point of regulation and in whether in-state-to-out-of-state and out-of-state-to-in-state electricity sales are regulated. In this paper, we formulate a market equilibrium model for each of the three approaches, considering power markets, transmission limitations, and emissions trading, and making the simplifying assumption of pure bilateral markets. We analyze the properties of their solutions and show the equivalence of load-based, first-seller, and source-based approaches when in-state-to-out-of-state sales are regulated under the cap. A numeric example illustrates the emissions and economic implications of the models. In the simulated cases, “leakage” eliminates most of the emissions reductions that the regulations attempt to impose. Furthermore, “contract reshuffling” occurs to such an extent that all the apparent emissions reductions resulting from changes in sources of imported power are illusory. In reality, the three systems would not be equivalent because there will also be pool-type markets, and the three systems provide different incentives for participating in those markets. However, the equivalence results under our simplifying assumptions show that load-based trading has no inherent advantage compared to other systems in terms of costs to consumers, contrary to claims elsewhere.