A Preliminary Study of Leakage in Cap-and-Trade Markets

Carbon leakage is the displacement of carbon dioxide emissions from capped region to uncapped region due to zonal restrictions on CO<inf xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">2</inf> emissions. A group of states in the United States have taken collaborative measures to control the greenhouse gas (GHG) emissions. The efforts by the western and the eastern states are called the Western Regional Climate Action Initiative and Regional Greenhouse Gas Initiative (RGGI), respectively. RGGI is the collaboration by 10 states in the northeast United States targeted at regional CO<inf xmlns:mml="http://www.w3.org/1998/Math/MathML" xmlns:xlink="http://www.w3.org/1999/xlink">2</inf> emissions. In this paper, emissions constraints are introduced, and the manifestation of leakage is monitored. The relative CO2 leakage concerning the load pattern is also investigated. It is noted that emissions reduction in a specific zone does not necessarily lead to a decline in global emissions due to the presence of leakage. To address this, both Output-based and Fuel-based updating methods are employed to mitigate leakage. Moreover, the impact of the penalty price on leakage reduction is examined.