Facilitating Environmental Initiatives While Maintaining Efficient Markets and Electric System Reliability Final Project Report

We use an alternating-current model of the power network in northeastern North America to predict the effects of several different incentive-based carbon dioxide regulations. We use all of the kinds of flow equations and constraints that govern the actual system. To our knowledge, this report is the first to analyze an environmental policy using an alternating-current model of a power network. This report makes three contributions to the environmental and energy economics literature. The first is to demonstrate and further develop the use of alternating current modeling. The second is to compare the predictions of an alternating-current model with those of a direct-current approximation of the same model and with an unlimited-transmission model of the same region. This comparison is a test of whether our more complex modeling is warranted. The third contribution is to predict the effects of different incentive-based carbon dioxide emission regulations on emissions and total variable cost. Among other scenarios, we simulate a U.S.-only regulation, a Canada-only regulation, the Regional Greenhouse Gas Initiative ("RGGI") in the presence of a drought, the effects of exempting smaller generators from a carbon dioxide regulation (as done in RGGI), and the interaction of incentive-based carbon dioxide and sulfur dioxide regulations. We have not previously seen any of these examined in the literature. In addition, we consider the impact of long-run demand response that can mitigate the impact of regulation by reducing demand for electricity.