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

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.