Market Clearing and Utilization🔗

The Market and Utilization sector uses a market clearing theory to balance supply and demand given costs, prices, and assumed market attributes. Market prices depend on the demand/supply imbalance. They also depend on the cost of energy production by existing capacity, which depends on technological cost improvements, and resource constraints and overheating of capacity, all described in Supply.

Market Clearing of Fuels🔗

The market clearing of fuels captures the supply/demand/price of each fuel at the extraction level, i.e., minemouth (coal), crude (oil), wellhead (natural gas), and feedstock (bioenergy). The production supply of fuels is a logistic function of the ratio of the market price to variable cost relative to the initial market price to variable cost; when that ratio equals 1, the utilization of production capacity is at the normal utilization of 0.8. The demand for fuels is the sum of the demand for each carrier. The indicated price of fuels is a function of the current price, the demand/supply imbalance, and the unit cost of production of existing capacity. The actual price is the indicated price lagged over the price adjustment time (0.5 years). The price of each fuel for each carrier that uses it is the market price of the extracted fuel increased by a carrier and end use specific markup value, plus the net of any taxes and subsidies. The price for the industry end use is also explicitly determined for the capacity with CCS.

The demand for each fuel for direct use (nonelectric and nonhydrogen) consumption is the product of the long term demand and its utilization, which is a linear function of price relative to the reference price; the response of utilization to price is given by the (negative) sensitivity. For industry, that demand is determined explicitly end use capacity using CCS and that not using CCS. The former is the product of utilization with CCS and the capacity using CCS equipment, determined by the CCS capacity and the utilization of that CCS capacity, all defined in Carbon Capture and Storage (CCS). The latter is the product of utilization without CCS and the capacity not using CCS equipment.

The demand for each fuel for electricity generation is determined in the market clearing for electricity. The actual production of fuels for direct use consumption for energy and feedstocks, power generation, and hydrogen production is constrained by the production of extracted fuels from their market clearing.

Market Clearing of Electricity🔗

The market clearing for electricity is comparable to that for fuels. However, for electricity, the utilities aggregate the production from all sources and charge a single price to the consumer. Furthermore, the busbar price reflects the revenue of the utilities; the market price of electricity adds the transmission and distribution (T&D) costs to that. The consumer pays the T&D costs, defaulted to $0.02/kWh, to the utility regardless of the electricity generator. T&D costs are not subject to the learning or breakthroughs; they are assumed to remain constant throughout the simulation (see EIA 2017 and Fares & King 2016). The generator's unit revenue may also be increased according to qualifying credits, explained below in Clean Electricity Standards, and by any applicable CCS subsidies. The busbar price relative to the variable cost of each production source determines the utilization of production capacity. As described for direct fuel use carriers for industry, for the primary fuels with potential CCS, utilization is determined explicitly for revenue and costs with and without CCS. The production of electricity by each fuel is the sum of the production with and without CCS. The former is the product of energy utilization with CCS and the capacity using CCS equipment, determined by the CCS capacity and the utilization of that CCS capacity, all defined in CCS. The latter is the product of utilization without CCS and the capacity not using CCS equipment.

The market price of electricity determines the utilization of the end use demand capital. The demand for electricity is the product of the long term demand and its utilization; electricity required for direct air capture, carbon capture and storage, and hydrogen production are added. The indicated busbar price is a function of the current busbar price, the demand/supply imbalance, and the average unit cost of production of existing capacity, weighted by the production of each electricity source. The actual price is the indicated price lagged over the price adjustment time (0.5 years).

Market Clearing of Hydrogen🔗

The market clearing for hydrogen parallels that for electricity. However, there are two distinct market clearings for hydrogen, one for energy and the other for use as a feedstock. As explained in Hydrogen Supply Choice, the main difference is that, due to the inefficiencies in producing hydrogen with fuels, they would only be considered for use as an energy carrier if the associated emissions were abated by CCS. On the contrary, hydrogen as a feedstock needs hydrogen molecules as an input to certain chemical processes (e.g., producing ammonia NH3 for fertilizer production) and therefore the unabated fuels are often chosen as the most attractive sources. Another complexity with hydrogen production is that it can be used to store variable renewable energy for electricity. Hydrogen for this purpose is not included in the market clearing because it is not traded on the market; rather, the hydrogen produced for it is subtracted from the total produced for energy and VRE storage.

Moreover, hydrogen for VRE storage preferentially relies on the electric grid and dedicated renewable sources. Electricity from the grid that is used to produce hydrogen factors into the Market Clearing of Electricity. Convention differentiates the sources of hydrogen by color.

Tax and Subsidy Adjustments to Costs🔗

En-ROADS represents existing global energy taxes and subsidies as fuel-specific adjustments to the cost of energy supply. These parameters reflect representative global averages derived from multiple empirical sources and are intended for system-level modelling rather than precise national accounting. Taxes and subsidies are represented as percentages of the cost of energy production and reflect policy instruments applied along the energy supply chain, including both producer and consumer support mechanisms. The model includes only direct effects on energy attractiveness, such as direct government transfers, tax expenditures, or price-gap consumer support. Broader implicit subsidies—for example the underpricing of climate damages or local air pollution—are excluded from these estimates. This approach is consistent with the methodology used in the Fossil Fuel Subsidy Tracker, a joint initiative of the OECD and the International Institute for Sustainable Development, which reports explicit fossil fuel subsidies but does not include implicit post-tax subsidies as reported in IMF estimates.

Fossil Fuel Subsidies🔗

Estimates of fossil fuel subsidies are based on the Fossil Fuel Subsidy Tracker dataset (IISD & OECD, 2024). To construct globally representative parameters for the model, two adjustments are applied. First, subsidies to fossil-fuel-based electricity consumption are allocated across coal, oil, and natural gas according to each fuel’s share of electricity generation. Second, to avoid distortions from the exceptionally high subsidy levels recorded in 2022–2023 during the global energy crisis following the invasion of Ukraine, the model uses an average over the period 2010–2021, excluding the unusually elevated values observed. Using this approach yields representative subsidy rates of approximately 30% of production cost for coal, 20% for oil, and 30% for natural gas.

Fossil Fuel Taxes🔗

Direct taxation of coal and natural gas is limited at the global level (IMF, 2014; OECD, 2019). Major consuming countries such as China, India, and Russia impose little or no excise taxation on these fuels, while countries that do levy meaningful taxes typically represent a relatively small share of global consumption. In addition, where such taxes exist they are often accompanied by exemptions, particularly for electricity generation or industrial use. As a result, the global weighted-average direct tax burden on coal and natural gas is assumed to be effectively zero in the model. Electricity taxes are not allocated across fuels because these charges are typically general consumer-side fiscal measures rather than taxes applied directly to power generation technologies.

Oil is the main exception. Oil products used in road transport are widely subject to excise taxation in many countries. Global oil tax estimates are derived primarily from the OECD Taxing Energy Use database (OECD, 2019), which reports effective fuel taxation rates across both OECD and major non-OECD economies. A weighted average of observed road fuel taxes across countries is calculated and then adjusted to account for lower taxation in countries not included in the dataset and in sectors other than road transport, such as aviation, shipping, and industry. This approach yields an estimated global average oil tax of approximately 4.0 USD/GJ (2021 USD), corresponding to roughly 35% of the cost of oil production in the model calibration.

Renewable Energy🔗

Renewable electricity receives significant public financial support in many countries. Estimates of renewable subsidies are derived from global data compiled by the International Institute for Sustainable Development. In 2023, G20 governments provided at least USD 168 billion in public financial support for renewable power (IISD, 2024). With approximately 7,400 TWh of renewable electricity generation across G20 countries, this corresponds to an average subsidy of roughly 0.02 USD/kWh. Because G20 countries account for approximately 84% of global electricity generation and about 95% of renewable energy subsidies (IISD, 2024), this value is used as a representative global estimate. When compared with the marginal cost of renewable electricity in En-ROADS, this level of support corresponds to roughly 25% of generation cost.

Renewable energy is rarely subject to excise taxation and is commonly exempted from environmental levies; the global tax rate for renewables is therefore assumed to be zero.

Nuclear Energy🔗

Subsidies to nuclear power are difficult to estimate because support is often provided through project-specific mechanisms such as loan guarantees, government credit support, liability transfers, and regulated asset base financing. Several studies provide representative ranges. Koplow (2009) reports nuclear subsidies at a minimum of 32% of the industrial price of nuclear electricity, while Taylor (2020) estimates global nuclear subsidies in 2017 to be in the USD 21–165 billion range. Given global nuclear generation of roughly 2,500 TWh in that year and the levelized cost of nuclear-based electricity of about USD 122/MWh in En-ROADS, these estimates imply subsidies ranging from roughly 7% to 54% of generation cost, with a midpoint around 30%. The En-ROADS model therefore adopts an representative subsidy rate of 30% of nuclear generation cost.

Nuclear-specific taxes are not a significant component of nuclear energy economics and are assumed to be zero at the global level; where they have existed, such taxes have generally been small or have since been discontinued (World Nuclear Association, 2023).

Bioenergy🔗

Global subsidies for bioenergy are estimated at approximately USD 58 billion in 2017, including around USD 38 billion for biofuels and USD 20 billion for biomass used in electricity generation (Taylor, 2020). Global bioenergy supply is approximately 50 EJ of primary energy in 2017 in En-ROADS, implying an average subsidy of about 1.2 USD/GJ. Using the model’s endogenous estimate of 8.8 USD/GJ for bioenergy production cost, this corresponds to roughly 15% of cost. Because bioenergy markets are highly heterogeneous and significant portions of bioenergy consumption occur outside formal markets, this value should be interpreted as a broad representative estimate.

Bioenergy is typically tax-preferred rather than taxed in most jurisdictions, and no major economy imposes a significant net tax burden on biofuels or biomass electricity. The effective global tax rate on bioenergy is therefore assumed to be zero.

Summary of Baseline Tax and Subsidy Assumptions🔗

The resulting baseline parameters implemented in the model are summarized below.

These values represent global averages and are subject to significant uncertainty due to aggregation across countries, sectors, and policy mechanisms.

Carbon Tax🔗

A carbon tax on fuels reduce the margin and profit of that source. Carbon taxes, which depend on the fuel's carbon density and fuel losses, increase the variable costs of that fuel. For fuel-generated electricity, the adjustment to the cost of fuel also depends on the thermal efficiency of that source. The increase in cost with a carbon tax can be partially offset with the net of CCS costs minus incentives.

Clean Electricity Standards🔗

Besides taxes and subsidies, market-driven credits or certificates are another mechanism to drive electricity to achieve target standards. En-ROADS allows the user to choose the sources to be counted as qualifying, the target percent of qualifying sources of electricity produced, the duration over which to achieve the target, and the base cost of the credits or certificates. The costs of buying certificates and potential fines for not reaching the standard are paid for by all sources, whereas only qualifying sources reap the revenue.

Model Structure🔗

Model Equations🔗