General Equilibrium Impacts of a Federal Clean Energy Standard

52 Pages Posted: 25 Jan 2014 Last revised: 13 Nov 2014

See all articles by Lawrence H. Goulder

Lawrence H. Goulder

Stanford University - Department of Economics; National Bureau of Economic Research (NBER); Resources for the Future

Marc A. C. Hafstead

Stanford University

Roberton C. Williams

University of Maryland - Department of Agricultural & Resource Economics; National Bureau of Economic Research (NBER); Resources for the Future

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Date Written: January 2014

Abstract

Economists have tended to view cap and trade (or, more generally, emissions pricing) as more cost-effective than a clean energy standard (CES) for the purpose of reducing greenhouse gas emissions associated with electricity generation. This stems in part from the finding that, in terms of cost-effectiveness, a CES relies too much on emissions abatement through the channel of fuel-switching and too little on the channel of reduced electricity demand.Recent research reveals, however, that the CES has an advantage over cap and trade in a different dimension. In a realistic economy with prior taxes on factors of production, the adverse "tax-interaction effect" is smaller under the CES than under the equivalent cap-and-trade program. This raises the possibility that the CES might not suffer an overall disadvantage relative to cap and trade on cost-effectiveness grounds.This paper employs analytical and numerical general equilibrium models to assess the relative cost-effectiveness of the CES and an electricity-sector cap-and-trade program. These models reveal that a well-designed CES can be more cost-effective than cap and trade when relatively minor reductions in emissions are called for. Numerical simulations indicate that the cost-effectiveness of the CES is sensitive to what is deemed "clean" electricity. To achieve maximal cost-effectiveness, the CES must offer significant credit to electricity generated from natural gas.

Suggested Citation

Goulder, Lawrence H. and Hafstead, Marc A. C. and Williams, Roberton C., General Equilibrium Impacts of a Federal Clean Energy Standard (January 2014). NBER Working Paper No. w19847, Available at SSRN: https://ssrn.com/abstract=2384304

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Marc A. C. Hafstead

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Roberton C. Williams

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