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Changing baselines, shifting margins: How predicted impacts of pricing carbon in the electricity sector have evolved over time

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  • Palmer, Karen
  • Paul, Anthony
  • Keyes, Amelia

Abstract

CO2 emissions reductions from within the U.S. electricity sector can come primarily from four sources: reductions in the emissions intensity of the operating coal and natural gas fleets, shifting generation from coal to natural gas, shifting generation from fossil fuels to renewables, and reduced total generation in response to lower electricity demand. The relative importance of each of these margins depends on technology costs, fuel costs, and electricity demand growth. In this paper we explore how recent changes in actual and predicted technology costs for renewables, natural gas prices, and the rate of electricity demand growth have affected emissions from the electricity sector. We use a model to analyze how the sector would respond to a carbon tax with emphasis on the contributions of the four margins and compare with older analysis performed when technology and fuel cost projections were different. We find that a carbon tax induces a more prominent shift of generation from both coal and gas to renewables than from coal to both gas and renewables under the more recent technology and cost projections. We also show that contrary to findings from earlier analysis with higher assumed renewables costs, high natural gas prices enhance the effectiveness of CO2 taxes through greater substitution from gas to renewables. Carbon taxes are having a smaller impact on retail electricity prices in both absolute and percentage terms and thus on overall demand with the more recent projections.

Suggested Citation

  • Palmer, Karen & Paul, Anthony & Keyes, Amelia, 2018. "Changing baselines, shifting margins: How predicted impacts of pricing carbon in the electricity sector have evolved over time," Energy Economics, Elsevier, vol. 73(C), pages 371-379.
  • Handle: RePEc:eee:eneeco:v:73:y:2018:i:c:p:371-379
    DOI: 10.1016/j.eneco.2018.03.023
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    References listed on IDEAS

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    1. Burtraw, Dallas & Palmer, Karen & Paul, Anthony & Woerman, Matt, 2012. "Secular Trends, Environmental Regulation, and Electricity Markets," RFF Working Paper Series dp-12-15, Resources for the Future.
    2. Winston Harrington & Richard D. Morgenstern & Peter Nelson, 2000. "On the accuracy of regulatory cost estimates," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 19(2), pages 297-322.
    3. Ang, B.W., 2015. "LMDI decomposition approach: A guide for implementation," Energy Policy, Elsevier, vol. 86(C), pages 233-238.
    4. Anthony Paul & Karen Palmer & Matthew Woerman, 2015. "Incentives, Margins, And Cost Effectiveness In Comprehensive Climate Policy For The Power Sector," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 6(04), pages 1-27, November.
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    Citations

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    Cited by:

    1. Picciano, Paul & Aguilar, Francisco X. & Burtraw, Dallas & Mirzaee, Ashkan, 2022. "Environmental and socio-economic implications of woody biomass co-firing at coal-fired power plants," Resource and Energy Economics, Elsevier, vol. 68(C).
    2. Olimpia Neagu, 2019. "The Link between Economic Complexity and Carbon Emissions in the European Union Countries: A Model Based on the Environmental Kuznets Curve (EKC) Approach," Sustainability, MDPI, vol. 11(17), pages 1-27, August.
    3. Alexander R. Barron & Allen A. Fawcett & Marc A. C. Hafstead & James R. Mcfarland & Adele C. Morris, 2018. "Policy Insights From The Emf 32 Study On U.S. Carbon Tax Scenarios," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-47, February.
    4. Ang, B.W. & Goh, Tian, 2019. "Index decomposition analysis for comparing emission scenarios: Applications and challenges," Energy Economics, Elsevier, vol. 83(C), pages 74-87.
    5. Bistline, John E.T. & Blanford, Geoffrey J., 2020. "Value of technology in the U.S. electric power sector: Impacts of full portfolios and technological change on the costs of meeting decarbonization goals," Energy Economics, Elsevier, vol. 86(C).
    6. Woerman, Matt, 2023. "Linking carbon markets with different initial conditions," Journal of Environmental Economics and Management, Elsevier, vol. 119(C).
    7. Dahlke, Steven, 2019. "Short run effects of carbon policy on U.S. electricity markets," SocArXiv b79yu, Center for Open Science.
    8. Liu, Bingquan & Shi, Junxue & Wang, Hui & Su, Xuelin & Zhou, Peng, 2019. "Driving factors of carbon emissions in China: A joint decomposition approach based on meta-frontier," Applied Energy, Elsevier, vol. 256(C).
    9. Cleary, Kathryne & Funke, Christoph & Witkin, Steven & Shawhan, Daniel, 2021. "The Value of Advanced Energy Funding: Projected Effects of Proposed US Funding for Advanced Energy Technologies," RFF Working Paper Series 21-10, Resources for the Future.
    10. Yumeng Mao & Xuemei Li, 2023. "A Review of Research on the Impact Mechanisms of Green Development in the Transportation Industry," Sustainability, MDPI, vol. 15(23), pages 1-26, December.
    11. Steve Dahlke, 2019. "Short Run Effects of Carbon Policy on U.S. Electricity Markets," Energies, MDPI, vol. 12(11), pages 1-21, June.
    12. Keyes, Amelia & Lambert, Kathleen & Burtraw, Dallas & Buonocore, Jonathan & Levy, Jonathan & Driscoll, Charles, 2018. "Carbon Standards Examined: A Comparison of At-the-Source and Beyond-the-Source Power Plant Carbon Standards," RFF Working Paper Series 18-20, Resources for the Future.

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    More about this item

    Keywords

    Climate; Carbon tax; Electricity; Baseline;
    All these keywords.

    JEL classification:

    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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