Pricing carbon in the U.S.: A model-based analysis of power-sector-only approaches

One proposed climate policy is a “power-sector-only” approach that would focus exclusively on controlling carbon dioxide emissions from electricity generation. This paper uses an intertemporal computable general equilibrium model of the world economy called G-Cubed to compare a power-sector-only climate policy with two alternative economy-wide measures that either: (1) place the same price on carbon or (2) achieve the same cumulative emissions reduction as the program limited to the power sector. We find that the power-sector-only approach requires a carbon price to electric utilities that is almost twice the economy-wide carbon price that would achieve the same cumulative emissions. In addition, we find that the power-sector-only policy does not produce offsetting increases in emissions in other sectors or other countries. Rather, we find that domestic carbon emissions outside the power sector fall slightly relative to baseline as higher electricity prices slow overall economic activity. Global emissions leakage is negligible as the price of oil in other currencies changes little. All three policies reduce investment in the capital-intensive energy sector, which lowers imports of durable goods and strengthens the U.S. terms of trade.