State Policy Options to Price Carbon from Electricity in Pennsylvania

We examine carbon pricing through emissions cap and trade and renewable energy policies. A cap limits emissions and the cap declines over time. Trading of emissions allowances ensures that emissions reductions are achieved where it is least expensive to do so. Policies promoting renewable energy also achieve emissions reductions and can be pursued separately or in combination with cap and trade.We explore the design of cap and trade by focusing on the important feature of how tradable emissions allowances are initially “allocated.” One option is direct allocation to regulated entities through a method known as output-based allocation (OBA). Another option is to invest allowance proceeds in energy efficiency (EE) or to allocate to local utilities (local distribution companies) for rate relief (LDC). A third option is to make no allocation within the electricity sector, and instead direct allowance proceeds to the General Fund (No AA). We also explore the possibility of linking a cap-and-trade program in Pennsylvania with the multi-state Regional Greenhouse Gas Initiative.We conduct the analysis using a detailed model of the electricity sector and explore policy scenarios beginning in 2020 and running through 2030. We assume the emissions cap declines by 3% of 2020 levels each year, falling by 30% by 2030. Because what happens in the final year 2030 will be strongly influenced by what is expected to happen in the model after that year, and because that year is so far in the future, we focus our attention on the results for 2026. We present five main findings.