The paper analyzes the problem of achieving a target path of emission reductions in the electricity sector, using a scheme of tradable green certificates (TGC). There are two types of generation, renewable and fossil. The latter causes the emissions. The paper also examines effects from emission regulation on construction of new renewable generation capacity. Outcomes are compared with an emission fee and a subsidy. The analytical results are simulated with a numerical model and social surplus are calculated for the different instruments. Two versions of the percentage requirement are devised for the TGC scheme. Results show that the target path of emission reductions is achievable, but incentives for new renewable generation capacity will be sub-optimal, regardless of the version of the percentage requirement. The TGC scheme is neither the most accurate nor the most cost-efficient, instrument but it does lead to a smaller reduction of social surplus than a subsidy.

The paper studies the effectiveness of a refunded emission payments (REP) scheme in achieving a specific target path of NOx-emission reductions. A REP scheme levies a charge on emissions and refunds the collected funds back to the emitting firms. REP schemes have been highlighted as a remedy to some concerns about standard emission taxes. The purpose of a REP scheme, however, is to achieve effective emission reductions. We examine two REP designs in this paper and analyze their incentives for emission mitigation at the firm level, with heterogenous firms. In the first design, refunds are given to firms based on their emission cuts. The second design gives refunds based on output shares of the emitting firms. Resultsshow that while both designs can achieve the specific target path, only refunding based on emission-reductions is cost-efficient. The two designs target different objectives and hence, provide different mitigation incentives, and result in different distributional outcomes. On the other hand, neither design raises governmental revenue, nor do they strictly adhere to the polluter-pays-principle. However, a REP scheme has qualities that should make it appealing to regulators, especially if an effective emission tax is unfeasible.

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