  The electricity sector has tended to be one of the first industries to face
technology change motivated by sustainability concerns. Whilst efficient market
designs for electricity have tended to focus upon market power concerns,
environmental externalities pose extra challenges for efficient solutions.
Thus, we show that ad hoc remedies for market power alongside administered
carbon prices are inefficient unless they are integrated. Accordingly, we
develop an incentive-based market clearing design that can include
externalities as well as market power mitigation. A feature of the solution is
that it copes with incomplete information of the system operator regarding
generation costs. It is uses a network representation of the power system and
the proposed incentive mechanism holds even with energy limited technologies
having temporal constraints, e.g., storage. The shortcomings of price caps to
mitigate market power, in the context of sustainability externalities, are
overcome under the proposed incentive mechanism.
