State-Level Carbon Pricing Could Cut Electricity Costs and Emissions
New research shows that a state-level carbon price could substantially reduce power sector emissions while reducing household electricity costs by an average of 6 percent.
💡 What’s the story?
With the loss of federal support for renewable energy investments, researchers at Resources for the Future (RFF) are exploring ways to reduce carbon dioxide emissions and household electricity prices. A new issue brief examines one such pathway: a state-level carbon price, which caps power sector emissions and reinvests program revenue to lower electricity bills.
By modeling the policy in eight US states, the team found that such a cap-and-invest program could substantially reduce power sector emissions while reducing household electricity costs by an average of 6 percent.
📊 How do we know?
Researchers Nicholas Roy and Dallas Burtraw used RFF’s Haiku model to analyze changes in electricity prices under four policy scenarios:
- A baseline without the Inflation Reduction Act
- Full Inflation Reduction Act implementation
- State carbon pricing without the Inflation Reduction Act
- State carbon pricing without the Inflation Reduction Act, but with household rebates
They chose to model the effects of state-level carbon pricing in eight states that have previously pursued clean energy policies, but do not have a carbon pricing system in place. These states are Arizona, Colorado, Illinois, Michigan, Minnesota, New Mexico, North Carolina, and Wisconsin.
The modeling gives an estimate of electricity prices in 2030 under each policy scenario. The modeling does not reflect recent increases in electricity demand or federal efforts to keep coal plants online, which could raise electricity prices. Nor does the model represent investments that have already been made under the Inflation Reduction Act, which could lower electricity prices.
Expert Perspective
“Facing the withdrawal of federal support for clean energy, state governments can act directly to reduce air pollution and electricity affordability concerns. Cap-and-invest may be particularly successful because it provides revenues that can improve affordability or be directed to strategic investments, or both. We’ve seen it in action in a dozen Northeastern states through the Regional Greenhouse Gas Initiative, as well as on the West Coast in California and Washington State. State-level carbon pricing isn’t a pie-in-the-sky idea; it can have real benefits that some states have already realized.”
—Dallas Burtraw, RFF Senior Fellow
🏛️ How does this policy respond to federal policy?
For comparison, full implementation of the Inflation Reduction Act would have cut annual household electricity bills by an average of 3 percent ($55) in 2030 across the eight modeled states. A cap-and-invest program in these states could almost double household savings to about 6 percent ($92), on average.
Modeled savings varied by state, ranging from about $60 to about $250 per household annually. This is due to the variation in electricity prices across the country, differences in household consumption, and because of differences in the net electricity imports in these states.
Expert Perspective
“The Inflation Reduction Act directed a majority of investments to states without previous clean energy support. The eight states that we modeled face lower prices and emissions under state-level carbon pricing programs than the Inflation Reduction Act, because they were already decarbonizing their electricity grids. In the absence of federal implementation of climate policies like this, this policy serves as a prime opportunity to demonstrate what affordable and efficient decarbonization can look like when states take the lead.”
—Nicholas Roy, RFF Research Associate
➡️ What’s next?
There are several ways to invest carbon pricing revenues that benefit electricity ratepayers and the general public, other than the ratepayer rebates modeled here. States can prioritize bill relief for low-income households, investments in climate resilience, or other priorities in need of funding.
Notably, state-level carbon prices could also reduce conventional air pollutants such as nitrogen oxides and sulfur dioxide, address climate goals, and reduce electricity bills. Greater investments in renewable energy sources could also reduce electricity price volatility by reducing reliance on fossil fuels.
📚 Where can I learn more?
For more information, read the issue brief, “Promoting Energy Affordability Using State Climate Policy,” by RFF Research Associate Nicholas Roy and Senior Fellow Dallas Burtraw.
Resources for the Future (RFF) is an independent, nonprofit research institution in Washington, DC. Its mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. RFF is committed to being the most widely trusted source of research insights and policy solutions leading to a healthy environment and a thriving economy.
Unless otherwise stated, the views expressed here are those of the individual authors and may differ from those of other RFF experts, its officers, or its directors. RFF does not take positions on specific legislative proposals.
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