Market-Based Environmental Policies in the Power Sector

Abstract

AbstractPurpose of ReviewSo-called Green New Deals aim to decarbonise the power sector via market-based instruments. Consequently, engineering-economic models for analysing the sustainable-energy transition have proliferated. This review categorises existing approaches and identifies areas for extending the state of the art.Recent FindingsWe cluster the extant literature into two groups: engineering/operational research (M1) and environmental economics (M2). While M1 focuses on the power sector’s technical and spatio-temporal aspects, M2’s emphasis is on incentives and externalities. Depending on the nature of the research question, either perspective (or both) may be suitable.SummarySince the envisaged electrification of the wider economy implies tighter coupling between formerly distinct sectors, e.g., power and heat, both M1 and M2 will have to adapt to the new paradigm in terms of methodology and application areas. Here, eliciting coordinating mechanisms, enhancing algorithms for solving hierarchical models, soft linking bottom-up and top-down models, and crafting robust environmental policy in face of uncertainty over externalities are some of the vistas for future research.