Full Separation or Full Integration? An Investigation of the Optimal Renewables Policy Employing Tradable Green Certificate Systems in Two Countries’ Electricity Markets

Abstract

Tradable green certificate (TGC) systems are increasingly used to promote renewable energy generation and mitigate greenhouse gas emissions. In this paper, we investigate the performance of the optimal renewables policy under full separation and full integration scenarios for two countries with TGCs. Our analysis suggests that under full separation, one country’s optimal renewable quota, which maximizes its own welfare, is strategically substitutional for the other country’s in a Cournot Nash equilibrium of the monopolistic market, when cross-border pollution exists. A country tends to become the “leader” in the market by using an information advantage to gain higher welfare. Using geometric illustrations we demonstrate the possibility that a potentially fully integrated electricity market under a TGC system can improve welfare for each country, when compensation between the countries is possible. From a policy point of view, this is significant in support of the demand for a convergence of national renewable policy schemes, where countries cooperate on solving cross-border environmental problems.