How does carbon emissions trading scheme affect emission reduction decisions of coal-fired power plants? An evolutionary game theoretic perspective

Abstract

Carbon emissions trading scheme (CETS) is widely regarded as a cost-effective marketbased regulation for carbon abatement. In the context of CETS, this study develops an evolutionary game model that incorporates two representative coal-fired power plants and a government. Our model captures the interplay of emission reduction strategies between coal-fired power plants and endogenously incorporates government regulatory decisions. We analyze the strategic decisions of coal-fired power plants by discussing the dynamics and equilibrium of the game. Our findings demonstrate that in the absence of government implementation of CETS, coal-fired power plants refrain from investing in carbon abatement. However, with the enforcement of CETS, along with sufficient penalties for excessive carbon emissions, coal-fired power plants become inclined to invest in emission reduction. Furthermore, the willingness of coal-fired power plants to invest in carbon abatement exhibits a negative relationship with both the quota and the cost of emission reduction.