Short run effects of carbon policy on U.S. electricity markets

Abstract

This paper presents estimates of short run impacts of a carbon price on the electricity industry using a cost-minimizing mathematical model of the U.S. market. Prices of $25 and $50 per ton of carbon dioxide equivalent emissions cause electricity emissions reductions of 17% and 22% from present levels, respectively. This suggests significant electricity sector emissions reductions can be achieved quickly from a modest carbon tax, and diminishing reductions occur when increasing from $25 to $50. The model captures short run effects via operational changes at existing U.S. power plants, mostly by switching production from coal to natural gas. A state-level analysis yields the following conclusions: (1) states which reduce the most emissions are high coal-consumers in the Mid-Atlantic and Midwest regions, (2) 15 states increase emissions after carbon policy because they increase natural gas consumption to offset coal consumption decreases in neighboring states, and (3) a flat per-capita rebate of tax revenue leads to wealth transfers across states.