The Design of Carbon Taxes in Electric Power Systems and the Effects on Market Participation

Abstract

The escalating evidence of climate change caused by the release of anthropogenic greenhouse gases (GHGs) in the atmosphere is prompting many nations to act swiftly. Imposing carbon taxes to mitigate carbon dioxide (CO2) emissions from the electricity sector is amongst the commonly used methods to counteract the detrimental effects of GHGs on the environment. Regardless of how successful they are in reducing CO2 emissions, widespread adoption of carbon taxes as a policy to combat climate change has been hindered due to concerns about their competency. More specifically, environmental advocates have raised the issue that, unlike a cap-and-trade policy, levying carbon taxes does not set a ceiling on the level of emissions in the targeted sector but rather incorporates the cost of damaging the environment into the overall cost of production leading to circumstances where the level of emissions is higher than desired. Moreover, fiscal conservatives often avoid additional taxes fearing not only political ramifications but cost increases and efficiency reductions as well. Addressing these concerns would arguably advance the debate of policy selection and facilitate its implementation. Therefore, the main purpose of this dissertation is to develop frameworks that assess the viability of using a carbon tax as a driving force for reducing CO2 emissions in electric power systems and the ensuing consequences of its implementation. In this dissertation, we investigate the impacts of carbon taxes considering three different perspectives. The first being a regulating authority or a policy maker who is looking to meet a desired reduction target in CO2 emissions via a carbon tax. In this regard, we present a model that utilizes the revenue generated from the imposition of a carbon tax to incentivize low-polluting producers in the form of monetary subsidies. The developed algorithm is attractive to regulators and policy makers because it finds the optimal combined tax/subsidy policy that achieves the intended reduction in CO2 emissions. The second and third frameworks look at the effects of carbon taxes on the participation of power producers and electric vehicle (EV) aggregators, respectively, in electricity markets. Each framework is intended to take the perspective of either the supply side or the demand side in carbon regulated electricity markets. In the case of power producers, we look at the market power of those producers when levying a carbon tax and the resulting consequences of exercising that market power through strategic offering. Finally, in the case of EV aggregators, we develop a model to find the optimal charging and discharging schedules at minimum cost. We then look at how the optimal charging and discharging profiles change with the imposition of a carbon tax, and the change in carbon emissions that results from following those profiles.