Do differentiated performance standards help coal? CO2 policy in the U.S. electricity sector

A salient feature of the Clean Power Plan is that it imposes higher emission rate standards on coal power plants than it does on their natural gas counterparts. In this paper, I examine the consequences of this design feature by modeling a series of tradable performance standard policies. I analyze how fuel-based standard differentiation affects compliance incentives and the regulatory burden on coal stakeholders through three key outcomes: coal usage, coal plant profits, and electricity prices. Analysis of a simple analytic model shows that differentiation, compared to a policy with a uniform standard for all fuel types, always increases coal usage, but price and profit impacts are ambiguous. To quantify these outcomes, I construct and implement a detailed simulation model of the U.S. wholesale electricity market. Simulation results suggest that differentiation increases coal usage modestly, increases coal plant profits well beyond the no-regulation level, and increases electricity prices in almost every region of the country.