As global climate change is increasingly recognized as an important problem in the United States, many state governments and regional organizations are considering the implementation of policies designed to reduce carbon dioxide (CO2) and other GHG emissions from energy production. Cap and trade is an important and potentially effective policy tool designed to curb emissions from electricity producing firms through the use of an emissions credit trading scheme. By utilizing conventional linear mathematical models, however, it has remained difficult to quantify the economic and financial impacts of credit trading. Cap and trade systems involve dynamic feedback relationships among factors such as credit prices, mitigation investments and emission rates. System dynamics modeling provides a new perspective and unique methodology that may aid in more accurate tracking and projection of the results of a cap and trade system. In this paper, a system dynamics model is designed and constructed to evaluate the behavior of multiple electricity and emissions producing firms under a simple cap and trade system. By modeling the effect of cap and trade on the price of emissions credits and abatement options, the change in financial incentives for investing in renewable energy is examined. The effect of physical constraints on renewable energy capacity and energy efficiency improvements on the results of this simulation are also analyzed. This study‟s simulation results indicate that a firm‟s renewable investment depend on the share of fossil fuels in its energy production portfolio. These results provide insightful conclusions on the use of models in policy making and help determine the effectiveness of using cap and trade policy to combat global climate change.
McFarlane, Dane. Utilizing System Dynamics Modeling for the Analysis of a Midwest Regional Carbon Cap and Trade System, June 25 2009. August 21 2009. Hubert H Humphrey Institute of Public Affairs.
in partial fulfillment of the degree requirements for the Masters of Science in Science Technology and Environmental Policy
Utilizing System Dynamics Modeling for the Analysis of a Midwest Regional Carbon Cap and Trade System.
Hubert H. Humphrey Institute of Public Affairs.
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