Environmental policies and their effects on utility planning and operations

We present a taxonomy and analysis of public policies that address the environmental impacts of power production. The paper consists of two parts. The first is a classification of policy options, including command-and-control regulations, emission caps, taxes, marketable permits, emission adders, and environmental performance standards along with a review of recent developments. Examples are drawn from U.S. institutions, but the principles involved apply to environmental regulation in any nation. In the second part, we explore how various policies can affect a utility's choice from among emission dispatch, fuel switching, and resource options. Some policies yield inefficient outcomes: i.e., strategies for which there exist alternatives that would result in both lower emissions and costs. Other policies are more likely to motivate the utility to choose efficient strategies, which generally involve a mix of DSM, investments in clean capacity, and emissions dispatch. Some policies which appear to be very different, such as emission allowances, taxes, and environmental performance standards, can yield similar—and efficient—outcomes.