Optimal percentage requirement and welfare comparisons in a two-country TGC system

The Tradable Green Certificate (TGC) system with a committed percentage requirement of energy production from renewable sources has become an important instrument to solve Greenhouse Gas issues and promote the sustainable energy generation. In this paper, based on the model of Aune (2012) and the framework in Currier et al. (2012), we analyze a competitive electricity market with two countries. We geometrically illustrate that under the competitive equilibrium, variations in the renewable quota generate an “equilibrium locus” corresponding to the set of green/black electricity supply and consumers' demand levels attainable across two countries. With this concept, we further derive the pricing rule for green certificates when the percentage requirement is the only policy instrument and the regulator chooses it optimally to maximize welfare along the “equilibrium locus”. By using a geometric illustration, we compare the two countries' welfare when the renewable quota is chosen optimally under the common certificate market with three different situations in particular: (i) before the introduction of a common TGC market when the renewable quota is chosen optimally; (ii) when all firms are black producers and just produce the competitive equilibrium black output; (iii) when all firms are black producers who are regulated by a CO₂ emissions standard. We find that the total welfare with the optimal renewable share under a common certificate market is always greater than situations (i) and (ii), and is also greater than situation (iii) when damages by fossil energy producers are sufficiently bounded. Our policy recommendation is that when the value of damage parameter is sufficiently small, full integration with a TGC market is welfare superior to full integration of an all fossil-fuel based market with an optimal emissions standard. The numerical example demonstrates welfare comparison results in the theoretical model.