Challenges in Quantifying Optimal CO2 Emissions Policy
27 Pages Posted: 9 Mar 2014 Last revised: 24 Sep 2014
Date Written: September 23, 2014
The U.S. Environmental Protection Agency released a proposed rule to limit carbon dioxide emissions from power plants on June 2, 2014. Implementing public policy without understanding its economic impacts can be costly and unproductive. This problem is paramount when a price of carbon dioxide (CO2) emissions is considered as a vehicle for abatement. Many studies have attempted to quantify the economic significance of such actions. These studies focus on levels of variables such as the amount of CO2 emissions, the cost of emissions allowances, and the broad impact of increased electricity prices, rather than on the marginal effects of policy change. This paper addresses this deficiency by utilizing a model that simulates the dispatch of electric generating units in the state of Florida and demonstrates that the incremental cost of abatement curves may fluctuate and may not be well-behaved, and that this complicates identifying an ‘optimal’ level of abatement and how it may be achieved. Agreement on the marginal costs and marginal benefits of CO2 abatement can be seen as a necessary condition for the determination of an optimal level of abatement, but not a sufficient one.
Keywords: Optimal CO2 abatement policy, Electric utilities, Climate change
JEL Classification: L94, Q54, Q58
Suggested Citation: Suggested Citation