Promoting Energy Affordability Using State Climate Policy

States can lead on climate policy while shielding households from the affordability impacts of rising policy uncertainties.Energy affordability is a concern to households across the country. Buchsbaum and Kahn-Lang (2025) summarize data from the US Energy Information Administration to illustrate that national average real electricity prices have risen over the past four years after nearly two decades of flat or decreasing real prices. Inflationary pressure in the electricity sector is especially salient with the rapid expansion of data centers and an anticipated increase in electricity demand resulting from electrification of other sectors (Robertson and Palmer 2025). The concern about energy affordability has been turbocharged in light of changes in federal regulations withdrawing support for clean energy investments.This issue brief considers an opportunity for state governments to respond to this challenge by enhancing electricity affordability for households and concurrently boosting environmental outcomes. Investments in renewable energy and energy efficiency would reduce electricity costs. With the loss of federal support for these investments, we explore the potential introduction of a price on carbon dioxide (CO2) emissions in the electricity sector at the state level, via a cap or limit on power sector emissions sources, and coupling that price with a policy to direct program revenues to reduce residential electricity rates (Meng and Prasad 2025). An example of this approach is embodied in recently proposed legislation in Pennsylvania (House Bill 503), which would introduce an electricity-sector carbon market and direct 70 percent of the auction proceeds to paying rebates to electric ratepayers, calculated on a per-kilowatt-hour basis. In California, under the state’s existing carbon market, residential electricity and natural gas customers receive an equal per-customer-account payment every six months. Recent research considers revising this program to direct proceeds to reduce volumetric electricity prices (Meng and Prasad 2025). The scenario examines the implementation of the policy in eight leadership states that have previously pursued clean energy policies such as renewable portfolio standards but do not currently have carbon pricing in place. Electricity-sector emissions are already subject to carbon pricing in the 10 currently participating Northeast and mid-Atlantic states Regional Greenhouse Gas Initiative (with two other observer states) and in California and Washington. Oregon has a regulatory cap on emissions. We model an electricity-sector carbon price implemented through an emissions cap in Arizona, Colorado, New Mexico, Illinois, Michigan, Minnesota, Wisconsin, and North Carolina.