Mitigating electricity supply risks through flexible quota reallocation under cross-sectoral carbon market expansion

TY - JOUR

T1 - Mitigating electricity supply risks through flexible quota reallocation under cross-sectoral carbon market expansion

AU - Li, Jingyun

AU - Wang, Zhaohua

AU - Wu, Wenqi

AU - Wang, Bo

AU - Lu, Bin

AU - Lu, Yang

AU - Zhang, Bin

AU - Yan, Xiaoqing

AU - Liu, Guangchuan

N1 - Publisher Copyright: © 2025

PY - 2026/2

Y1 - 2026/2

N2 - China hosts the world's largest carbon trading market, yet the effectiveness of market-based regulatory tools remains uncertain, as the electricity and carbon markets are not yet fully integrated. And the inclusion of other high-emission industries into China's carbon market underscores the urgent need to reassess quota allocation strategies, as the power sector may face emerging risks previously masked by stability regulatory. In this study, we evaluate regional supply risks, and associated economic losses under the current carbon quota allocation. To address the observed limitations, we propose a flexible quota reallocation mechanism designed to reduce systemic risk. Our results show that the efficiency allocation method may lead to a 53.22 % electricity supply gap and an economic loss of 7.89 %, particularly under market uncertainty with expanding sectoral coverage. In contrast, the proposed reallocation mechanism enhances electricity trading activity in 16 regions and prevents economic losses in 24 regions. We further quantify the uncertainty boundaries associated with different allocation principles to inform mechanism selection across varied scenarios. This study contributes to the broader discourse on carbon market policy design in regulated power markets.

AB - China hosts the world's largest carbon trading market, yet the effectiveness of market-based regulatory tools remains uncertain, as the electricity and carbon markets are not yet fully integrated. And the inclusion of other high-emission industries into China's carbon market underscores the urgent need to reassess quota allocation strategies, as the power sector may face emerging risks previously masked by stability regulatory. In this study, we evaluate regional supply risks, and associated economic losses under the current carbon quota allocation. To address the observed limitations, we propose a flexible quota reallocation mechanism designed to reduce systemic risk. Our results show that the efficiency allocation method may lead to a 53.22 % electricity supply gap and an economic loss of 7.89 %, particularly under market uncertainty with expanding sectoral coverage. In contrast, the proposed reallocation mechanism enhances electricity trading activity in 16 regions and prevents economic losses in 24 regions. We further quantify the uncertainty boundaries associated with different allocation principles to inform mechanism selection across varied scenarios. This study contributes to the broader discourse on carbon market policy design in regulated power markets.

KW - Carbon market

KW - Market uncertainties

KW - Power sector

KW - Quota allocation mechanism

UR - https://www.scopus.com/pages/publications/105021329499

U2 - 10.1016/j.enpol.2025.114958

DO - 10.1016/j.enpol.2025.114958

M3 - Article

AN - SCOPUS:105021329499

SN - 0301-4215

VL - 209

JO - Energy Policy

JF - Energy Policy

M1 - 114958

ER -