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General Equilibrium Impacts of a Federal Clean Energy Standard
Lawrence H. Goulder, Marc Hafstead, Roberton C. Williams III
RFF Discussion Paper 14-02 | January 2014
RESEARCH TOPICS:
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, the paper indicates 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 in a realistic economy with prior taxes on factors of production, the CES distorts factor markets less because it is a smaller implicit tax on factors. This advantage more than offsets the disadvantages of the CES when relatively minor reductions in emissions are called for. Numerical simulations indicate that the cost-effectiveness of the CES is sensitive to what is deemed “clean” electricity. To achieve maximal cost-effectiveness, the CES must offer significant credit to electricity generated from natural gas.
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