Can supply-side environmental policies that limit the extraction of fossil fuels reduce CO2 emissions? This paper studies interactions between a specific supply-side policy—a carbon surcharge on federal coal royalties—and regulation of emissions from the power sector under the Clean Air Act. Estimates from a detailed dynamic model of the power sector suggest that, absent new downstream regulation, a royalty surcharge equal to the social cost of carbon would generate three-quarters of the emissions reductions originally projected for the Clean Power Plan (CPP), with an average abatement cost roughly equal to the social cost of carbon. Were the CPP in place, the royalty surcharge would reduce emissions by reducing leakage and causing the CPP to be nonbinding in some scenarios. (JEL Q35, Q38, Q48, Q54, Q58)

We thank Matt Kotchen and Marty Weitzman for helpful discussions. This research was funded in part by Vulcan Philanthropy. Todd Gerarden acknowledges support from U.S. EPA STAR Fellowship Assistance Agreement no. FP-91769401-0. This paper has not been reviewed by the EPA and the views expressed in this paper are solely those of the authors. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w22214.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

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