Retail Electricity Price Savings from Compliance Flexibility in GHG Standards for Stationary Sources

Abstract

The EPA will issue rules regulating greenhouse gas (GHG) emissions from existing steam boilers and refineries in 2012. A crucial issue affecting the scope and cost of emissions reductions will be the potential introduction of flexibility in compliance, including averaging across groups of facilities. This research investigates the role of compliance flexibility for the most important of these source categories — existing coal-fired power plants — that currently account for one-third of national emissions of carbon dioxide, the most important greenhouse gas. We find a flexible standard, calibrated to achieve the same emissions reductions as an inflexible approach, reduces the increase in electricity price by 60 percent and overall costs by two-thirds in 2020. The flexible standard also leads to substantially more investment to improve the operating efficiency of existing facilities, whereas the inflexible standard leads to substantially greater retirement of existing facilities.

Keywords: climate policy, efficiency, EPA, Clean Air Act, coal, compliance flexibility, regulation

JEL Classification: K32, Q54, Q58