Strategic Policy Choice in State-Level Regulation: The Epa's Clean Power Plan

47 Pages Posted: 15 Jun 2015 Last revised: 22 Jul 2015

See all articles by James Bushnell

James Bushnell

University of California, Davis - Departments of Economics and Agricultural Resource Economics

Stephen P. Holland

University of California, Berkeley - Energy Institute; University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics

Jonathan E. Hughes

University of Colorado at Boulder - Department of Economics

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: June 2015

Abstract

Flexibility in environmental regulations can lead to reduced costs if it allows additional abatement from lower cost sources or if policy tailoring and experimentation across states increases regulatory efficiency. The EPA's 2014 Clean Power Plan, which implements greenhouse gas regulation of power plants under the Clean Air Act, allows substantial regulatory flexibility. The Clean Power Plan sets state-level 2030 goals for emissions rates (in lbs CO2 per MWh) with substantial variation in the goals across states. The Clean Power Plan allows states considerable flexibility in attaining these goals. In particular, states can choose whether to implement the rate standards goals or equivalent mass-based goals (i.e., emissions cap and trade, CAT). Moreover, states can choose whether or not to join with other states in implementing their goals. We analyze incentives to adopt inefficient rate standards versus efficient CAT standards using both analytical and simulation models. We have five main results. First, we theoretically show that industry supply can be efficient under both CAT regulation and rate-based regulation. However, under rate-based standards the carbon price must equal the social cost of carbon and the rate standard must be equal across all the states. Second, we illustrate important differences in the incentives of a unified coalition of states and the incentives of a single state. Third, our simulation results show that when states fail to coordinate on a policy, the merit order can be ``scrambled'' quite dramatically leading to significant inefficiencies. Fourth, the Nash equilibrium of a game between coastal and inland western states is an inefficient policy for consumers and an uncoordinated policy for generators. Finally, we show that how new plants are treated under the Clean Power Plan has large effects on the scale and location of entry.

Suggested Citation

Bushnell, James and Holland, Stephen P. and Hughes, Jonathan E. and Knittel, Christopher R., Strategic Policy Choice in State-Level Regulation: The Epa's Clean Power Plan (June 2015). NBER Working Paper No. w21259. Available at SSRN: https://ssrn.com/abstract=2618647

James Bushnell (Contact Author)

University of California, Davis - Departments of Economics and Agricultural Resource Economics ( email )

United States

Stephen P. Holland

University of California, Berkeley - Energy Institute ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

University of North Carolina (UNC) at Greensboro - Bryan School of Business & Economics ( email )

401 Bryan Building
Greensboro, NC 27402-6179
United States

Jonathan E. Hughes

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States

Christopher R. Knittel

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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