General Equilibrium Impacts of a Federal Clean Energy Standard
Resources for the Future Discussion Paper No. 14-02
54 Pages Posted: 3 May 2014
Date Written: February 10, 2014
Economists have tended to view emissions pricing (e.g., cap and trade or a carbon tax) as the most cost-effective approach to reducing greenhouse gas emissions. This paper offers a different view. Employing analytical and numerically solved general equilibrium models, the paper indicates plausible conditions under which a more conventional form of regulation — namely, the use of a clean energy standard (CES) — is more cost-effective. The models reveal that in a realistic economy with prior taxes on factors of production, the CES distorts factor markets less because it is a smaller implicit tax on factors. This advantage more than offsets the disadvantages of the CES 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.
Keywords: clean energy standard, intensity standard, emissions pricing, climate
JEL Classification: Q58, Q54, H23
Suggested Citation: Suggested Citation