Simulation of Dynamic Analysis of the Interaction between the Carbon and Electricity Markets in Iran

Document Type : Original Article

Authors

1 PhD student in Economic at Shahid Bahonar University of Kerman

2 Associate Professor of Economics, Shahid Bahonar University of Kerman, Kerman, Iran

3 Professor in the Department of Economic at Shahid Bahonar University of Kerman, Kerman, Iran

4 Associate Professor in the Department of Management at Vali-e Asr University of Rafsanjan, Rafsanjan, Iran

Abstract

1. Given the dominant role of fossil fuels in the electricity generation mix of Iranian power plants, addressing pollution in the power sector has become critical. This paper investigates the dynamic relationship between the carbon and electricity markets and analyzes various scenarios to explore the interaction between these two markets.

The study employs system dynamics to simulate the research problem. The novelty of this research lies in its dynamic analysis of the interaction between Iran's carbon and electricity markets. The findings indicate that while these two markets function independently, they are strongly interconnected. The implementation of carbon quotas and auction mechanisms strengthens the link between the carbon and electricity markets, facilitating the transfer of carbon costs into electricity prices. This, in turn, leads to higher electricity prices and optimizes the supply structure. Additionally, the grandfathering method proves advantageous over the benchmark method, as it incentivizes emissions reduction and encourages the development of power plant capacity.
Changes to power plant operation schedules, particularly an increase in operational hours, result in higher electricity supply, increased electricity prices, and greater thermal power generation, which further strengthens the interaction between the carbon and electricity markets. Ultimately, strategies such as increasing carbon emission costs, revising electricity pricing to encourage optimal consumption, and creating economic incentives for renewable energy use are proposed for promoting sustainable, environmentally friendly electricity generation. Furthermore, improving the alignment of power plant operation schedules is expected to enhance the interactions between these two markets.

Keywords

Journal of Economics and Modelling
Volume 15, Issue 3 - Serial Number 59
December 2024
Pages 131-162

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