Over the last 15 years, an increasing number of electricity industries has replaced vertical integration with markets as the main method of organizing production. Electrical energy is traded in many European and US markets, while the USA also has markets for generating capacity. US generators can reduce the cost of complying with environmental regulations by trading emissions of sulphur dioxide, while Europe has just started a carbon-dioxide emissions-trading scheme. This article discusses the way in which these markets put economic principles into practice. In particular, it shows that several different market designs can provide theoretically equivalent incentives for generators to build capacity, and that emissions trading may have unexpected impacts upon electricity prices. Copyright 2005, Oxford University Press.
