Deciphering the electricity–carbon market nexus: Challenges and prospects of electricity–carbon coupling

Abstract The power industry's carbon emissions stand out as a primary contributor to the overall carbon dioxide emissions within the energy system under the context of energy Internet. Thus, reducing emissions in the power sector has become crucial for achieving carbon neutrality. However, challenges from the electricity–carbon nexus have surfaced in effectively coordinating and integrating the carbon market with the electricity market. This paper initiates the exploration of such nexus by analysing the current status of major carbon emission trading markets on a global scale. Subsequently, it delves into a comprehensive examination of the coupling between the electricity and carbon markets across three levels: market participants, operational models and market mechanisms. Four key issues are then identified in the electricity–carbon nexus: challenges in decision‐making for market participants, discrepancies in operational timelines, the intricate design of market coupling mechanisms and the spillover effects of market risks. To tackle the above challenges in the electricity–carbon nexus, this paper takes a deep dive into two different models in understanding the nexus including econometric/statistical models and optimisation models, serving as the foundation for understanding the intricacies of electricity–carbon market coupling. This paper concludes with a detailed exploration for future roadmap and research prospects in the electricity–carbon market nexus.