Short run effects of carbon policy on U.S. electricity markets

This paper presents estimates of short run impacts of a carbon price on the electricity industry using a cost-minimizing mathematical model of the U.S. market. Prices of 25 and 50 dollars per ton of carbon dioxide equivalent emissions cause electricity emissions reductions of 17% and 22% from present levels, respectively. This suggests significant electricity sector emissions reductions can be achieved quickly from a modest carbon tax. Short run effects refer to operational changes at existing U.S. power plants, mostly by switching production from coal plants to natural gas plants. The results do not include long run emissions reductions related to 1) new investments and retirements of electricity production assets, and 2) demand response as regulated electricity suppliers pass cost changes to retail customers. A state-level analysis of the results leads to the following conclusions: 1) most emissions reductions come from high coal-consuming states in the Mid-Atlantic and Midwest regions, 2) fifteen states increase emissions because their natural gas consumption offsets coal consumption in neighboring states, and 3) a flat per-capita rebate of tax revenue leads to wealth transfers across states.