A Two-Stage Emission Mismatch Penalty Game to Facilitate Carbon and Electricity Market Interaction

The electricity sector is undergoing a low carbon transition to combat the looming threats caused by climate change. Given the urgency of meeting the climate goals set by the Intergovernmental Panel on Climate Change (IPCC), the cap-and-trade carbon emission market has emerged as an instrumental tool for policy-makers to impose emission restrictions on generation companies (Gencos). In this paper, we seek to model the sophisticated interactions among the CMO-carbon market operator, ESO-electricity system operator, and Gencos in a coupled electricity and carbon market. We propose a two-stage structure in which CMO conducts a uniform price auction to allocate the gross emission allowance to each Genco in the form of hourly allowance allowances in the first stage. Then, in the next stage, ESO conducts an emission-aware economic dispatch whereas the Gencos may further adjust the hourly schedules based on the dispatch outcomes. The coupling of the carbon market and the electricity market is characterized by an emission mismatch penalty mechanism, and we develop an iterative solving algorithm to reach the equilibrium. Through numerical studies, we highlight that the proposed mechanism is effective in emission reduction and market management.