Emissions Trading, Point-of-Regulation and Facility Siting Choices in the Electric Markets

This paper examines the effects of emissions trading on firms’ capacity siting choices in the electric sector, considering three programs that are different by their point-of-regulation: source-, load and first-jurisdictional-deliverer approaches. We model each program by assuming electricity sales are through bilateral contracts, and analyze the solutions properties and economic and emissions implications. We have three central findings in this paper. First, when electricity sales in both directions (i.e., in-state to out-of-state and vice verse) are subject to an emissions cap, three programs will produce identical siting distribution. Second, the emissions leakage in the long-run could be lower than in the short-run case in which capacity expansion is not allowed. This is so because in the long-run power producers may opt for clean technologies in fear of the emission costs under a cap-and-trade program. Third, if compared to pure source-based program in which the import sales are not subject to an emissions cap, more pollution-intensive facilities are expected to build in uncapped states, where the regulation is less stringent. Our findings are therefore consistent with some empirical evidence of pollution haven hypothesis.