An evolutionary game theory strategy for carbon emission reduction in the electricity market

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Abstract

We study how a government can manage a policy of environmental sustainability in a competitive electricity market. We assume that the government plays a Stackelberg game as leader, to study the evolutionary stable equilibria of the problem under this game theory paradigm. We then analyze a bimatrix coordination game to have many equilibria when no single power plant has incentives to deviate when the others reduce carbon emissions. In fact for power plants the adapted behavior is to avoid heavy tariffs, preserve the market share and minimize the environmental impact. We use the notion of quantal response equilibrium (QRE) in the case of bounded rationality to obtain a unique Nash equilibrium known as the centroid-dominant equilibrium of the game. This proposed quantitative framework can be applied by policy makers to determine incentives and tariffs to meet the environmental obligations in the electricity market.
Original languageEnglish
Article number1850008
Pages (from-to)1-20
Number of pages20
JournalInternational Game Theory Review
Volume20
Issue number4
Early online date14 Jun 2018
DOIs
Publication statusPublished - Dec 2018

Keywords

  • Bertrand game
  • centroid-dominant equilibrium
  • coordination game
  • evolutionary game theory
  • government intervention
  • quantal response equilibrium

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