Speaker: André Trindade is an Assistant Professor at the Graduate School of Economics of the Getulio Vargas Foundation (EPGE-FGV). More »
Abstract: : Are separate markets for an externality that inefficient compared to a single market? We study this question in the context of the Clean Power Plan (CPP) in the U.S. and examine the relative economic efficiency of regional versus state-by-state implementation in the Pennsylvania-New Jersey-Maryland (PJM) Interconnection. We show that the potential negative effects of having separate markets for CO2 are mitigated by the fact that firms participate in a single market for electricity, and will optimally make their investment decisions taking into account the distribution of production and CO2 prices across markets. Despite lacking the “invisible hand" of a single market for CO2, profit-maximizing firms implicitly coordinate separate markets via investment in new capacity.
Last Updated: Oct 06, 2016