The South-East Europe Regional Electricity Market (SEE-REM) comprises both EU members subject to the EU Emissions Trading System (ETS) emission cap and non-EU members exempt from it. As such, EU carbon policy has the potential to lead to carbon leakage, i.e., increased carbon emissions in non-ETS states due to a tighter ETS emission cap. Vis-à-vis perfect competition, the exercise of market power by a dominant ETS firm with a non-renewable portfolio could increase carbon leakage in the medium term by simultaneously boosting the electricity price and depressing the ETS emission-permit price. Hence, the European Commission's carbon border adjustment mechanism (CBAM) to mitigate this problem should take strategic behaviour by domestic and foreign firms into consideration.
For more insight into this topic, please see Economic and Environmental Consequences of Market Power in the South-East Europe Regional Electricity Market by Verena Viskovic, Yihsu Chen, Afzal S. Siddiqui, and Makoto Tanaka, which was published in The Energy Journal, Volume 43 Number 6.
About Afzal Siddiqui
Afzal Siddiqui is a Professor in the Department of Computer and Systems Sciences at Stockholm University. He is also an Adjunct Professor in the Department of Mathematics and Systems Analysis at Aalto University. Previously, he was Professor of Energy Economics in the Department of Statistical Science at University College London and a Visiting Professor in the Department of Decision Sciences at HEC Montréal. His research interests are in the application of operational research methods to analyse decision making under uncertainty and competition in the energy sector. Besides participation in and coordination of several research projects, he has also served as a consultant to the Energy Technologies Area of the Ernest Orlando Lawrence Berkeley National Laboratory and the Directorate-General for Communications Networks, Content and Technology (DG CONNECT) of the European Commission.