Taxing Electricity Sector Carbon Emissions at Social Cost

Resources for the Future Discussion Paper 13-23-REV

33 Pages Posted: 4 May 2014

See all articles by Anthony C. Paul

Anthony C. Paul

Resources for the Future

Blair Beasley

Resources for the Future

Karen L. Palmer

Resources for the Future

Date Written: Novemer 21, 2013

Abstract

Concerns about budget deficits, tax reform, and climate change are fueling discussions about taxing carbon emissions to generate revenue and reduce greenhouse gas emissions. Imposing a carbon tax on electricity production based on the social cost of carbon (SCC) could generate between $21 and $82 billion in revenues in 2020 and would have important effects on electricity markets. The sources of emissions reductions in the sector depend on the level of the tax. A carbon tax based on lower SCC estimates reduces emissions by reducing demand and through the substitution of gas for coal, whereas taxes based on higher SCC estimates induce switching to wind and nuclear generation. The slow rate of growth of the SCC estimates means that any SCC-based carbon tax trajectory provides weaker long-run incentives for expanded renewable and nuclear generation than a cap-and-trade program that achieves an equivalent level of cumulative carbon dioxide emissions reductions. Taxing carbon at the SCC is welfare enhancing, but the SCC may not be the optimal tax rate.

Keywords: carbon tax, cap and trade, social cost of carbon, electricity, energy, climate

JEL Classification: Q58, H23, H77

Suggested Citation

Paul, Anthony C. and Beasley, Blair and Palmer, Karen, Taxing Electricity Sector Carbon Emissions at Social Cost (Novemer 21, 2013). Resources for the Future Discussion Paper 13-23-REV, Available at SSRN: https://ssrn.com/abstract=2432182 or http://dx.doi.org/10.2139/ssrn.2432182

Anthony C. Paul (Contact Author)

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Blair Beasley

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

Karen Palmer

Resources for the Future ( email )

1616 P Street, NW
Washington, DC 20036
United States

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