The Californian emissions trading system and electricity market : influence of market structures and market regulation on the carbon market ; case study report

This report analyses the influence of the Cap and Trade (CaT) system and the electricity market in California along two main questions: How do CaT design features affect the environmental effectiveness of the system and the quality of the carbon price signal? How do electricity market design features affect the carbon price induced abatement in the power sector? Based on publicly availabledata and expert interviews, we derive four main findings on the impact of the electricity market structure on the quality of the California Carbon Allowances (CCA) price.First, the capacity mix impacts the role of the CCA price for the electricity sector. Due to the large share of gas capacities and the very small share of coal plants, carbon reduction in the electricity sector can only be achieved by decreasing output or investing in carbon-free technologies. Second, complementary policies affect the marginal abatement cost (MAC) in the electricity sector and indirectly also the carbon price. Thus, the CCA price only reflects the MAC conditional on all the complementary policies. Third, the redistribution of large shares of the carbon revenue to consumers, as so-called California Climate Credits, increases the political acceptance of the system. Finally, the CaT system should currently not be seen as the major climate policy instrument in the Californian electricity sector. The broad mix of other policies buffer the carbon price and make the total costs for the transformation less transparent. Yet, this might change in the future when reduction targets become more stringent.This case study is part of the project “Influence of market structures and market regulation on the carbon market” that aims to investigate the interdependencies between carbon and energy markets in Europe, California, China, South Korea, and Mexico.