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Regulating CO2 in electricity markets: sources or consumers?

The regulation of greenhouse gas emissions from the electricity sector within a cap-and-trade system poses significant policy questions on where to locate the point of compliance. Electricity markets often cross national or other regulatory boundaries, so that electricity generated within the boundary may comply with expectations but imported electricity may not. The question addressed in this article is where to locate the point of compliance in the electricity sector—where in the supply chain linking fuel suppliers to generators to the transmission system to retail load-serving entities should the obligation for measurement and compliance be placed? This problem is examined in the specific context of California's legislative requirements and particular energy markets, with the implications of the different policy options explored. The conclusion offered is that one particular approach to regulating the electricity sector—the ‘first-seller approach’—would be best for California. The alternative ‘load-based approach’ has had a head start in the policy process but would undermine an economy-wide market-based emissions trading programme.