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Carbon Pricing for US Electricity Sector Now More Effective and Less Expensive

Long-run changes in the costs of renewables and natural gas as well as technological innovation have cut the cost of emissions reductions in the US electricity sector and made carbon pricing more potent than previously thought.

As policy debates around pricing carbon dioxide (CO2) emissions have ebbed and flowed, technology has advanced and changed the economics that drive the electricity sector. Most recently, the relative fuel costs of gas and coal have shifted, costs for renewables technologies have fallen, and the growth rate of electricity demand has declined. Together these collective changes have important effects on projections of CO2 emissions in both the absence and presence of a price on carbon emissions.

Our recent analysis based on RFF’s Haiku electricity sector model shows how changes in technology affect projections of both baseline market conditions and the costs and impacts of carbon pricing. We find that projections of future CO2 emissions from the electricity sector have fallen substantially over the past several years, and that carbon taxes are having smaller projected impacts on retail electricity prices and thus on overall demand than previously projected. We also find that, whereas previous projections indicated most emissions reductions driven by a carbon tax would come from shifts from coal generation to natural gas generation, investment in renewables is now projected to play a larger role.

Declining natural gas prices and reduced growth of electricity demand are two important trends affecting the electricity sector. As gas prices have declined and electricity demand growth has slowed, projections for both have likewise declined.

Projections of Natural Gas Prices Have Declined in Response to Fracking Boom

Projections of Demand Have Declined as Actual Sales Have Fallen Short of Expectations

Following from the technology trends we have observed, projections for the generation mix of electricity have changed. Estimates suggest a diminished role for coal and increased role for natural gas and renewables, particularly wind. The next graphic below compares an old projection of electricity generation baseline predictions to more recent baseline projections, and also illustrates the impacts on electricity generation of two carbon taxes: one beginning at $25 per ton and the other beginning at $50 per ton.

New Projections Predict Much Less Coal-Fired Electricity, More from Renewables by 2030

With the new baseline, a carbon tax has a different impact. We see a greater increase in generation with wind and solar, and coal generation almost disappears under the $25 carbon tax, while in the older projections it takes a $50 carbon tax to substantially reduce coal’s role.

CO2 emissions reductions in the US electricity sector can be driven by four primary factors: reductions in the emissions intensity of the operating coal and natural gas fleets, shifting generation from coal to natural gas, shifting generation from fossil fuels to renewables, and reduced total generation in response to lower electricity demand. The following graphic shows the reductions in carbon emissions driven by carbon pricing, and the roles of those four factors in those reductions.

New Projections Show Lower Overall Emissions and Greater Reductions from Shift to Renewables by 2030

Emissions reductions in the US electricity sector are projected to be less expensive than previously thought, suggesting that emissions reduction goals can be achieved at a lower cost.

Under the new baseline, overall emissions are projected to be lower and the carbon taxes are projected to have a greater effect on emissions. Across all baseline scenarios and carbon taxes, the most important factor in emissions reductions is a shift in the generation mix, away from coal and toward natural gas and renewables. Reduced energy intensity of coal plays a larger role under the old scenarios, and more reductions come from reduced energy intensity of natural gas in the new scenarios. In the new scenarios, reduced demand for electricity plays almost no role in emissions reductions because carbon taxes have small projected impacts on electricity prices.

Takeaways

Our findings suggest that emissions reductions in the US electricity sector are projected to be less expensive than earlier analyses indicated, suggesting that emissions reduction goals can be achieved at a lower cost. An increased amount of the emissions reductions under a carbon tax come from shifts toward renewable electricity generation. 

About the Author

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Karen L. Palmer

Karen L. Palmer is a senior fellow at RFF.

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Anthony Paul

Anthony Paul is a fellow at RFF.

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Amelia Keyes

Amelia Keyes is a research asssistant at RFF.

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