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Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan

Author

Listed:
  • James B. Bushnell
  • Stephen P. Holland
  • Jonathan E. Hughes
  • Christopher R. Knittel

Abstract

Flexibility in environmental regulations can lead to reduced costs if it allows additional abatement from lower cost sources or if policy tailoring and experimentation across states increases regulatory efficiency. The EPA's 2014 Clean Power Plan, which implements greenhouse gas regulation of power plants under the Clean Air Act, allows substantial regulatory flexibility. The Clean Power Plan sets state-level 2030 goals for emissions rates (in lbs CO2 per MWh) with substantial variation in the goals across states. The Clean Power Plan allows states considerable flexibility in attaining these goals. In particular, states can choose whether to implement the rate standards goals or equivalent mass-based goals (i.e., emissions cap and trade, CAT). Moreover, states can choose whether or not to join with other states in implementing their goals. We analyze incentives to adopt inefficient rate standards versus efficient CAT standards using both analytical and simulation models. We have five main results. First, we theoretically show that industry supply can be efficient under both CAT regulation and rate-based regulation. However, under rate-based standards the carbon price must equal the social cost of carbon and the rate standard must be equal across all the states. Second, we illustrate important differences in the incentives of a unified coalition of states and the incentives of a single state. Third, our simulation results show that when states fail to coordinate on a policy, the merit order can be ``scrambled'' quite dramatically leading to significant inefficiencies. Fourth, the Nash equilibrium of a game between coastal and inland western states is an inefficient policy for consumers and an uncoordinated policy for generators. Finally, we show that how new plants are treated under the Clean Power Plan has large effects on the scale and location of entry.

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  • James B. Bushnell & Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel, 2015. "Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan," NBER Working Papers 21259, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21259
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    References listed on IDEAS

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    Cited by:

    1. Fankhauser, Samuel & Jotzo, Frank, 2017. "Economic growth and development with low-carbon energy," LSE Research Online Documents on Economics 86850, London School of Economics and Political Science, LSE Library.
    2. Tatyana Deryugina & Alexander MacKay & Julian Reif, 2020. "The Long-Run Dynamics of Electricity Demand: Evidence from Municipal Aggregation," American Economic Journal: Applied Economics, American Economic Association, vol. 12(1), pages 86-114, January.
    3. Ibanez, Marcela & Blackman, Allen, 2015. "Environmental and Economic Impacts of Growing Certified Organic Coffee in Colombia," Discussion Papers dp-15-02, Resources For the Future.
    4. Palmer, Karen & Paul, Anthony, 2015. "A Primer on Comprehensive Policy Options for States to Comply with the Clean Power Plan," Discussion Papers dp-15-15, Resources For the Future.
    5. Siddiqui, Afzal S. & Tanaka, Makoto & Chen, Yihsu, 2019. "Sustainable transmission planning in imperfectly competitive electricity industries: Balancing economic and environmental outcomes," European Journal of Operational Research, Elsevier, vol. 275(1), pages 208-223.
    6. Jeffrey C. Peters & Thomas W. Hertel, 2017. "Achieving the Clean Power Plan 2030 CO2 Target with the New Normal in Natural Gas Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    7. James B. Bushnell & Stephen P. Holland & Jonathan E. Hughes & Christopher R. Knittel, 2017. "Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan," American Economic Journal: Economic Policy, American Economic Association, vol. 9(2), pages 57-90, May.
    8. Brown, Marilyn A. & Kim, Gyungwon & Smith, Alexander M. & Southworth, Katie, 2017. "Exploring the impact of energy efficiency as a carbon mitigation strategy in the U.S," Energy Policy, Elsevier, vol. 109(C), pages 249-259.
    9. David M. Newbery & David M. Reiner & Robert A. Ritz, 2018. "When is a carbon price floor desirable?," Working Papers EPRG 1816, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    10. Burnett, J. Wesley & Kiesling, L. Lynne, 2019. "Power plant heat-rate efficiency as a regulatory mechanism: Implications for emission rates and levels," Energy Policy, Elsevier, vol. 134(C).
    11. Don Fullerton & Daniel H. Karney, 2018. "Potential State‐Level Carbon Revenue Under The Clean Power Plan," Contemporary Economic Policy, Western Economic Association International, vol. 36(1), pages 149-166, January.
    12. Bento, Antonio M. & Garg, Teevrat & Kaffine, Daniel, 2018. "Emissions reductions or green booms? General equilibrium effects of a renewable portfolio standard," Journal of Environmental Economics and Management, Elsevier, vol. 90(C), pages 78-100.
    13. Dallas Burtraw & Karen Palmer & Anthony Paul & Sophie Pan, 2015. "A Proximate Mirror: Greenhouse Gas Rules and Strategic Behavior Under the US Clean Air Act," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 62(2), pages 217-241, October.
    14. Zhang, Duan & Chen, Yihsu & Tanaka, Makoto, 2018. "On the effectiveness of tradable performance-based standards," Energy Economics, Elsevier, vol. 74(C), pages 456-469.
    15. Mar Reguant, 2018. "The Efficiency and Sectoral Distributional Implications of Large-Scale Renewable Policies," NBER Working Papers 24398, National Bureau of Economic Research, Inc.
    16. Palmer, Karen & Burtraw, Dallas & Paul, Anthony & Yin, Hang, 2017. "Using Production Incentives to Avoid Emissions Leakage," Energy Economics, Elsevier, vol. 68(S1), pages 45-56.
    17. Todd D. Gerarden & W. Spencer Reeder & James H. Stock, 2020. "Federal Coal Program Reform, the Clean Power Plan, and the Interaction of Upstream and Downstream Climate Policies," American Economic Journal: Economic Policy, American Economic Association, vol. 12(1), pages 167-199, February.
    18. Jonathon M. Becker, 2020. "Tradable performance standards in a dynamic context," Working Papers 2020-03, Colorado School of Mines, Division of Economics and Business.
    19. Xenophon, Aleksis Kazubiernis & Hill, David John, 2020. "Adaptive mechanisms to refund emissions payments," Applied Energy, Elsevier, vol. 278(C).
    20. Wang, Ge & Zhang, Qi & Su, Bin & Shen, Bo & Li, Yan & Li, Zhengjun, 2021. "Coordination of tradable carbon emission permits market and renewable electricity certificates market in China," Energy Economics, Elsevier, vol. 93(C).
    21. Harrison Fell & Daniel Kaffine & Daniel Steinberg, 2017. "Energy Efficiency and Emissions Intensity Standards," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(S1), pages 201-226.
    22. Fell, Harrison & Maniloff, Peter, 2018. "Leakage in regional environmental policy: The case of the regional greenhouse gas initiative," Journal of Environmental Economics and Management, Elsevier, vol. 87(C), pages 1-23.
    23. Svetlana V. Bekareva & Ekaterina N. Meltenisova & J. G. Abo Gsysa, 2017. "Evaluation of the Role of Renewables Consumption on Economic Growth of the U.S. Regions," International Journal of Energy Economics and Policy, Econjournals, vol. 7(2), pages 160-171.
    24. Kyle E. Binder & James W. Mjelde, 2018. "Projecting impacts of carbon dioxide emission reductions in the US electric power sector: evidence from a data-rich approach," Climatic Change, Springer, vol. 151(2), pages 143-155, November.

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    More about this item

    JEL classification:

    • L5 - Industrial Organization - - Regulation and Industrial Policy
    • L9 - Industrial Organization - - Industry Studies: Transportation and Utilities
    • 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

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