Federal Policies for Renewable Electricity: Impacts and Interactions

Abstract

Three types of policies that are prominent in the federal debate over addressing greenhouse gas emissions in the United States are a cap-and-trade program (CTP) on emissions, a renewable portfolio standard (RPS) for electricity production, and tax credits for renewable electricity producers. Each of these policies would have different consequences, and combinations of these policies could induce interactions yielding a whole that is not the sum of its parts. This paper utilizes the Haiku electricity market model to evaluate the economic and technology outcomes, climate benefits, and cost-effectiveness of three such policies and all possible combinations of the policies. A central finding is that the carbon dioxide (CO2) emissions reductions from CTP can be significantly greater than those from the other policies, even for similar levels of renewable electricity production, since of the three policies, CTP is the only one that distinguishes electricity generated by coal and natural gas. It follows that CTP is the most cost-effective among these approaches at reducing CO2 emissions. An alternative compliance payment mechanism in an RPS program could substantially affect renewables penetration, and the electricity price effects of the policies hinge partly on the regulatory structure of electricity markets, which varies across the country.

Keywords: Renewable Portfolio Standard, Renewable Energy Credits, Cap-and-Trade, Climate Policy

JEL Classification: Q42, Q54, Q58