Ex-ante Evaluation of a Policy's Effect on Productivity: The Substitution and Scale Effects of Carbon Taxation on Power Plant Productivity

Abstract

I develop a general framework for ex-ante analysis of a policy's effect on productivity. I use it to study the effect of carbon taxation on power plant productivity in the United States. Carbon taxes increase the price of burning fossil fuels, potentially encouraging power plants to be more fuel efficient. Whether carbon taxes do so is ambiguous because carbon taxes also increase the overall cost of electricity production, encouraging power plants to reduce output which reduces the plant's incentive to take costly actions to be more productive. I find carbon taxation reduces fuel productivity at commonly-proposed carbon taxes.

Keywords: carbon taxation, endogenous productivity, prospective policy evaluation, electricity generation industry, the effect of carbon taxation on power plant productivity

JEL Classification: L94, H23, D24