Emissions trading impact on the power industry with application to the Iberian Electricity Market

The purpose of this paper is to evaluate not only the impact of CO
₂
emissions trading on the Iberian electricity market (IBELM) power industry, but also the likelihood for the reduction in the electricity sector emissions. A simulator for electricity and carbon markets (SIMEC) was developed for that purpose. Given the system power plants characteristics, demand data and CO
₂
allowance prices, SIMEC computes the electricity market clearing price, power generation by technology, CO
₂
emissions and power industry profits. A rise in electricity prices is expected when CO
₂
constraints are in place with a sharp increase in off-peak hours, when normally coal power plants clear the market. Increases in electricity prices are evaluated for different scenarios of allowance prices. Producers that do not face carbon liabilities or facing less carbon liabilities than the market clearing technology will have a positive effect on profits. Moreover, due to the fact that fuel switching takes place only for higher CO
₂
allowance prices than the EU 2005 emissions trading market prices, a global reduction in the Iberian power industry emissions is not likely to occur.