Emission allowance allocation with multiple equity principles in deregulated power systems

Equity is an essential issue to consider in emission allowance allocation problems to ensure the participation of as many market participants as possible. Various equity principles have been practiced in emission allowance allocations, and some of them conflict. The main purpose of this work is to present an emission allowance allocation methodology that takes into account both individual interests and different versions of equity and makes progress toward reaching a global consensus for emission allowance allocation in deregulated power systems. We propose nine equity principles for emission allowance allocation. We combine a hierarchical system with a voting mechanism to incorporate various definitions of equity and to find a compromise solution. The voting mechanism is used for selecting equity principles for each power plant (market participant). The hierarchical system is composed of two subsystems. The upper level subsystem computes the emission allowances among all regions, while the lower level subsystem obtains the emission allowances among the power plants in each region. A test power system serves to illustrate the essential features of the proposed methodology, and the results are used to investigate the choice of equity principles of different types of power plants located in different regions. Copyright © 2010 John Wiley & Sons, Ltd.