Identifying Operation Equilibrium in Integrated Electricity, Natural Gas, and Carbon-Emission Markets

TL;DR

This paper introduces a novel regional carbon market operator and a formulation to identify the operational equilibrium of integrated electricity, natural gas, and carbon markets, enhancing decarbonization strategies.

Contribution

It proposes a centralized carbon market operator and a new equilibrium formulation for interconnected energy markets, improving emission mitigation over traditional cap-and-trade systems.

Findings

The equilibrium approach is more flexible and effective in reducing emissions.

Simulation shows improved mitigation compared to cap-and-trade.

The model captures interactions among electricity, gas, and carbon markets.

Abstract

The decarbonization of the power sector plays a pivotal role in economy-wide decarbonization to set the world on track to limit warming to 1.5{\deg}C by 2050. Carbon emission markets can play a significant role in this transition by putting a price on carbon and giving electricity producers an incentive to reduce their emissions. In this paper, we study the operational equilibrium of an integrated regional/jurisdictional energy system that comprises an electricity market, a natural gas market, and a carbon emission market. We first propose the novel role of a regional carbon market operator (CMO). Different than the conventional cap-and-trade carbon trading mechanism, the proposed CMO manages carbon allowance trading in a centralized jurisdictional carbon emission market. We then develop the formulation to identify the operational equilibrium of the electricity, natural gas, and carbon emission markets based on their interactions. The proposed equilibrium can be obtained by solving the Karush-Kuhn-Tucker (KKT) conditions of all three operational models simultaneously. Simulation results demonstrate that the proposed approach is more flexible, consistent, and effective in mitigating carbon emissions compared with the cap-and-trade mechanism.