Distribution of U.S. Generators’ Ongoing Operating Costs vs. CO2 Emissions Rates, Gas Price of $2.89/mmBtu
Economists have long believed that putting a price on carbon is the most efficient way to reduce emissions from electricity generation. But a new study from Harris Public Policy’s Ryan Kellogg and University of California-Berkeley’s Severin Borenstein calls this belief into question. Kellogg and Borenstein analyze the pros and cons of three approaches: carbon prices, clean electricity standards and clean energy tax credits.
One problem with clean electricity standards and clean energy tax credits is that they promote clean generation but without discriminating against whether the displaced fossil generation is really dirty (coal) or just fairly dirty (gas). Carbon pricing, on the other hand, is really good at targeting the dirtiest coal plants first—that’s efficient. But does this distinction matter in practice? The study found that it likely leads to only small differences in emissions and efficiency between the policies. Here’s why. Clean electricity standards and clean energy tax credits push out dirty plants in the order of highest to lowest private ongoing operating cost, regardless of emissions rates. But if ongoing operating costs are highly correlated with emissions rates, then a clean electricity standard and clean energy tax credits will take out of commission the same dirty plants that carbon pricing would.
It turns out that private ongoing operating costs are really correlated with emissions rates. The chart shows U.S. generators’ costs and emissions rates using pre-pandemic 2019 data. The correlation between ongoing operating cost and emissions rates is +0.66. This means a clean electricity standard and clean energy tax credits will take out dirty coal plants before efficient natural gas combined cycle units—just like carbon pricing would. In fact, the study finds that emissions during a transition to nearly 100 percent clean generation would be just 2 percent larger using a clean electricity standard than under carbon pricing. The authors warn that this high correlation between ongoing operating costs and emissions can be undone if natural gas prices are high and coal prices stay low. But in a decarbonization scenario, they suspect such a price outcome would be unlikely.
Bottom line: It is not clear that carbon pricing has large efficiency benefits over alternative market-based approaches for achieving deep decarbonization of the grid. A clean electricity standard or clean energy tax credits may be just as efficient, or even better.