Short Run Effects of Carbon Policy on U.S. Electricity Markets

• Main Author: Steve Dahlke
• Format: Article
• Language: English
• Published: MDPI AG 2019-06-01
• Series: Energies
• Subjects: energy economics; energy policy; electricity markets; climate change; carbon tax
• Online Access: https://www.mdpi.com/1996-1073/12/11/2150

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.