General Equilibrium Impacts of a Federal Clean Energy Standard

Abstract

Economists have tended to view emissions pricing (e.g., cap and trade or a carbon tax) as the most cost-effective approach to reducing greenhouse gas emissions. This paper offers a different view. Employing analytical and numerically solved general equilibrium models, it provides plausible conditions under which a more conventional form of regulation-namely, the use of a clean energy standard (CES)-is more cost-effective. The models reveal that the CES distorts factor markets less because it is a smaller implicit tax on factors of production. This advantage more than offsets the disadvantages of the CES when minor emissions reductions are involved. (JEL H23, Q42, Q48, Q54, Q58) T here is little or no near-term prospect for any pricing of US carbon emissions (a carbon tax or tradable permits) at the federal level. But climate policy in the United States is advancing, often through a different type of instrument: intensity standards.At present, 29 states and the District of Colombia seek to control carbon emissions through a renewable portfolio standard (RPS), a form of intensity standard. An RPS imposes a floor on the share of electricity purchased by electric utilities that comes from sources deemed renewable (for example, electricity from wind farms or solar panels). It thus aims to give a boost to renewable-sourced electricity.Federal-level programs involving intensity standards have been proposed as well. Former senator Jeff Bingaman (D-NM) sponsored the Clean Energy Standard Act of 2012, which called for a nationwide Clean Energy Standard (CES). A CES is similar to an RPS, establishing a floor for the ratio of "clean" electricity (electricity whose production involves relatively low emissions) to total electricity. Typically the CES promotes a wider range of electricity sources by incorporating nuclear-generated

Pigou in the 21st Century: a tribute on the occasion of the 100th anniversary of the publication of The Economics of Welfare

“…There is already some research on the public economics of climate change that examines the fiscal properties of carbon pricing (de Mooij et al 2012 ; Edenhofer et al 2017 ; Jones et al 2013 ; Siegmeier et al 2018 ). Pigouvian taxation has also been studied in optimal taxation frameworks (for an excellent overview, see Aronsson and Sjögren 2018 ), where most attention has been given to the double dividend hypothesis (Goulder et al 2016 ) and distributional effects with respect to different incomes (e.g., Jacobs and van der Ploeg 2019 ).…”

Making the Best of New Energy Resources in the United States

“…Other initiatives to improve energy efficiency will serve to reduce emissions further. This approach to emission abatement is arguably more costly than an emission tax, though by inducing fuel switching may achieve some reductions at relatively low cost (Goulder et al 2014). However, with this approach, care is needed to prevent the marginal abatement costs diverging too much.…”

Climate Policy Transition Risk and the Macroeconomy

“…To evaluate the macroeconomic impacts of adopting a carbon price, the existing literature implicitly assumes that we begin in a state of the world where there is no anticipation of a potential future policy. This assumption is imposed in work studying the impacts of optimal carbon taxes (e.g., Nordhaus (2008), Acemoglu et al (2012), Golosov et al (2014, Barrage (2019)), studies comparing the efficiency and distributional impacts of alternative uses of carbon tax revenues (e.g., Bovenberg and Goulder (1996), Carbone et al (2013), Williams et al (2015), Fried et al (2018)), as well as studies comparing alternative policy tools -e.g., renewable energy policies, emissions standards (Goulder et al (1999), Goulder et al (2016)). However, given that forward-looking agents make investments with an understanding that a future climate policy is a real possibility, these previous analyses will misrepresent the true effects of introducing a carbon tax.…”