Designing by Degrees: Flexibility and Cost-Effectiveness in Climate Policy

Resources for the Future Discussion Paper No. 14-05

38 Pages Posted: 4 May 2014

See all articles by Anthony C. Paul

Anthony C. Paul

Resources for the Future

Karen L. Palmer

Resources for the Future

Matt Woerman

University of Massachusetts Amherst

Date Written: February 2, 2014

Abstract

Substantially reducing carbon dioxide (CO2) emissions from electricity production will require a transformation of the resources used to produce power. This paper analyzes the economic consequences of a suite of different flexible and comprehensive policies to reduce CO2 emissions from the power sector, including a carbon tax, a tradable emissions rate performance standard, and two versions of a clean energy standard (CES). A technology-based CES can bring about substantial reductions in CO2 emissions but would neglect to harvest some economic reductions because it fails to affect decisions at three margins: emissions rate heterogeneity in the natural gas and coal generation fleets and electricity demand reductions. Natural gas emissions rate heterogeneity can be addressed by crediting clean generation based on emissions rates instead of technology. Coal emissions rate heterogeneity can be addressed by altering the policy to credit all generators instead of just a subset. Demand reductions can be harvested by removing the subsidy component of the policy and allowing retail electricity prices to rise. Harvesting emissions abatement on all three margins saves about 40 percent of the discounted cumulative economic welfare costs of a technology-based CES through 2035, although the distributional implications are different. All of the policies result in substantial increases in social welfare.

Keywords: clean energy standard, tradable performance standard, carbon tax, climate policy, electricity

JEL Classification: Q42, Q48, Q54, Q58

Suggested Citation

Paul, Anthony C. and Palmer, Karen and Woerman, Matt, Designing by Degrees: Flexibility and Cost-Effectiveness in Climate Policy (February 2, 2014). Resources for the Future Discussion Paper No. 14-05, Available at SSRN: https://ssrn.com/abstract=2432193 or http://dx.doi.org/10.2139/ssrn.2432193

Anthony C. Paul (Contact Author)

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

Matt Woerman

University of Massachusetts Amherst ( email )

Amherst, MA
United States

HOME PAGE: http://https://sites.google.com/site/mattwoerman/

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