Carbon in the Classroom: Lessons from a Simulation of California's Electricity Market Under a Stringent Cap-and-Trade System

To better understand how a cap-and-trade market might function under high-carbon-price conditions, the authors ran a simulation called the ‘Electricity Strategy Game’ created by Severin Borenstein and James Bushnell. Among its most startling observations: higher carbon prices were favorable to all of the generation portfolios. From a policy perspective, this result reinforces the observations of others that free allocations of carbon allowances should be minimized, as they constitute a largely unnecessary direct transfer from taxpayers to generators.