On the impact of CO 2 emission-trading on power generation emissions E.J.L. Chappin ⁎, G.P.J. Dijkema Delft University of Technology, Department of Technology, Policy and Management Jaffalaan 5, 2628 BX Delft, the Netherlands, PO Box 5015, 2600 GA Delft, the Netherlands article info abstract Article history: Received 18 December 2007 Received in revised form 8 August 2008 Accepted 10 August 2008 Under the Kyoto Protocol, governments agreed on and accepted CO 2 reduction targets in order to counter climate change. In Europe one of the main policy instruments to meet the agreed reduction targets is CO 2 emission-trading (CET), which was implemented as of January 2005. In this system, companies active in specific sectors must be in the possession of CO 2 emission rights to an amount equal to their CO 2 emission. In Europe, electricity generation accounts for one-third of CO 2 emissions. Since the power generation sector, has been liberalized, reregulated and privatized in the last decade, around Europe autonomous companies determine the sectors’ CO 2 emission. Short-term they adjust their operation, long-term they decide on (dis) investment in power generation facilities and technology selection. An agent-based model is presented to elucidate the effect of CET on the decisions of power companies in an oligopolistic market. Simulations over an extensive scenario-space show that there CET does have an impact. A long-term portfolio shift towards less-CO 2 intensive power generation is observed. However, the effect of CET is relatively small and materializes late. The absolute emissions from power generation rise under most scenarios. This corresponds to the dominant character of current capacity expansion planned in the Netherlands (50%) and in Germany (68%), where companies have announced many new coal based power plants. Coal is the most CO 2 intensive option available and it seems surprising that even after the introduction of CET these capacity expansion plans indicate a preference for coal. Apparently in power generation the economic effect of CO 2 emission-trading is not sufficient to outweigh the economic incentives to choose for coal. © 2008 Elsevier Inc. All rights reserved. Keywords: Agent based model Carbon emission-trading Power production 1. Introduction Under the Kyoto Protocol, governments agreed on and accepted CO 2 reduction targets in order to counter climate change [1]. In Europe one of the main policy instruments to meet these reduction targets is CO 2 emission-trading (CET), which was implemented as of January 2005 [Directive 2003/87/EG; [2]. In this system, companies active in specific sectors must be in the possession of CO 2 emission rights that equals the amount of CO 2 emitted [3]. Any surplus can be sold; any deficit must be compensated for by acquiring rights. Effectively, by economic pricing of CO 2 emission the external effects are partly internalized to the economy. By limiting the total amount of rights – the cap – the EU and its Member States must make sure a suitable price of rights is formed and that trade amongst the parties involved emerges. The magnitude of the CO 2 cap determines the scarcity of rights. A major argument to introduce tradable emission rights, instead of, for instance, taxes, has been that “the invisible hand” of the market would lead to emission reduction by those who can achieve reduction at the lowest cost [4-7]. In Europe, electricity generation accounts for one-third of CO 2 emissions; in the Netherlands this is more than 50% of the sectors under CET [8]. It may thus be seen the power sector is pivotal to CET. In the past decade this sector has been liberalized, regulated and privatized in the last decade. Today power generation is separated fromelectricity transport and retail and supply. Technological Forecasting & Social Change 76 (2009) 358–370 ⁎ Corresponding author. E-mail address: e.j.l.chappin@tudelft.nl (E.J.L. Chappin). 0040-1625/$ – see front matter © 2008 Elsevier Inc. All rights reserved. doi:10.1016/j.techfore.2008.08.004 Contents lists available at ScienceDirect Technological Forecasting & Social Change