Carbon-Driven Incentive Mechanism for Renewable Power-to-Ammonia Production in Coupled Carbon and Ammonia Markets

Abstract

Renewable power-to-ammonia (ReP2A) production offers a promising pathway to decarbonize the power, transport and, chemical sectors, yet its competitiveness remains limited by high costs and fragmented carbon-policy frameworks. In particular, a unified mechanism that links ReP2A producers with fossil-based gray ammonia (GA) competitors in carbon and ammonia markets, while coordinating incentives among renewable generation, hydrogen production, and ammonia synthesis stakeholders in the ReP2A process chain, is still lacking. To address this gap, this paper proposes a hierarchical carbon-driven incentive mechanism (PCIM) that integrates carbon policy with multi-energy market interactions. A two-layer trading framework is developed, where ReP2A and GA compete in carbon allowance (CA) and ammonia markets (outer layer), while electricity and hydrogen transactions coordinate the ReP2A chain (inner layer). The resulting interactions are modeled as a hierarchical equilibrium, where the inner layer is reformulated as a tractable equivalent optimization problem, and the outer layer is solved as a mixed-integer linear program (MILP) derived from Karush-Kuhn-Tucker conditions. Based on equilibrium analysis, the carbon-related revenue of ReP2A is quantified, and a CA allocation mechanism (PCAM) is proposed to ensure individually rationality among stakeholders. Results show that the proposed mechanism reduces carbon emissions by 12.9% with only a 1.8% decrease in sector-wide revenue. Moreover, carbon pricing under the proposed framework redistributes profits between green and gray ammonia without reducing total welfare, and the PCAM further enhances stakeholders' willingness to participate in ReP2A production.