Nash equilibria for coupling of CO2 allowances and electricity markets*

Abstract

In this note, we analyze Nash equilibria between electricity producers selling their production on an electricity market and buying CO2 emission allowances on an auction carbon market. The producers’ strategies integrate the coupling of the two markets via the cost functions of the electricity production. We set out clear Nash equilibria that can be used to compute equilibrium prices on both markets as well as the related electricity produced and CO2 emissions released.