Market Power in the Presence of Carbon Taxes in Electricity Markets

This paper aims to investigate how strategic producers modify their offers in the day-ahead electricity market in response to the implementation of carbon taxes, and how this change would impact the level of carbon emissions. A Stackelberg game is used to model the interaction between the strategic producer and the electricity market. The Stackelberg game is formulated as a bilevel optimization in which the upper-level represents the strategic producer whose objective is to maximize its profit and the lower-level represents the day-ahead market clearing process with the objective of maximizing the social welfare. This nonlinear bilevel model is then transformed into a mixed-integer linear programming problem that can be solved using commercial tools. Numerical results from a 24-bus case study demonstrate that the strategic offers of producers will indeed be affected by the imposition of a carbon tax, and consequently, CO₂ emissions will duly change.