The emission trading system is one of the recent controlling tools for the greenhouse gases (GHG) emission. This policy was made in order to decrease the amount of emission from pollutant industries. One of the most challenging subject in this criteria is the mechanism of allowance allocation. The grandfathering and the allowance auction are two common approaches to allocate allowances to generation companies in electricity market. In grandfathering approach, the allocation is based on the historical output of generation units. Output-based and emission based allocation are two common methods for free allowance allocation in grandfathering approach. The auction is another mechanism that production units participate to buy enough allowances. In this paper, the emission market is modeled to investigate the interaction of the two market simultaneously. To model the behavior of the generation units in the presence of emission market, the Cournot model for electricity market and the allowance supply function for emission market is utilized. Furthermore, the impact of emission allowance auction, the approaches of allocating emission allowances to power plants and allowance trading in emission market on the profitability of production units in the electricity market is investigated.

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