Comparing a Clean Electricity Standard and a Carbon Tax
As the United States commits to accelerating decarbonization as part of global efforts to combat climate change, the policies it enacts will govern its chances of success. These international ambitions are balanced against domestic realities: the effect of net-zero greenhouse gas strategies on households and the broader economy. Comparing different policy options against one another in terms of specific outcomes, such as emissions abatement and financial impact on consumers, is a useful exercise for policy makers. Because US congressional proposals have focused on two potential policy routes—an economy-wide price on carbon dioxide and other greenhouse gas emissions, and a sector-by-sector approach that starts with a clean electricity standard—this report models outcomes for these scenarios.
A carbon tax and clean electricity standard (CES) are similar policies in some ways. Both have the potential to drive large emissions reductions from the US power sector and beyond. If the CES is designed to be technology-neutral with tradable credits for clean electricity generation, both policies would operate as market-based mechanisms to encourage such generation. They also differ in significant ways, and this report, part of the Carbon Tax Research Initiative at Columbia University’s Center on Global Energy Policy, uses energy system modeling to zero in on those differences to enable policy makers to better understand the advantages and drawbacks of each policy tool.
A variety of constructions even within a single tool—particularly a CES—can be employed. What type of generation is eligible for credit in a CES and how much credit each resource receives, for example, are in part products of political and policy trade-offs. For comparison purposes with an economy-wide carbon tax, this report primarily focuses on a single crediting approach that most closely resembles the incentives new and existing electric power generators could receive under a carbon tax (and is similar to the CES included in the Clean Energy Innovation and Deployment Act of 2020). And for CES comparison purposes, the authors construct a carbon tax pathway that closely approximates the annual and cumulative electric power CO2 emissions of the CES.
Given the equal emissions-reduction ambitions of the two policies modeled in this report, the greatest trade-offs come down to price increases and revenues. The carbon tax raises consumers’ electricity price more than the CES does, but also raises significant revenues that could be used, among other purposes, to offset increases in consumers’ energy-related bills. Other findings from the report include the following:
- It takes a lower carbon tax rate to get to the same CES emissions outcome when clean energy technologies are relatively cheap. Under a mid-tech-cost CES scenario, the equivalent carbon tax rate starts at $14/ton in 2024 and rises to just over $18/ton in 2030. In the low-tech-cost CES scenario, the equivalent carbon tax rate starts at $9/ton and rises to just under $12/ton in 2030. These rates are far lower than any recent carbon tax proposal in Congress because the cheapest near-term abatement opportunities reside in the electric power sector.
- The CES could drive US power sector greenhouse gas (GHG) emissions down roughly 55 percent from 2005 levels by 2025, and down 62 percent by 2030, from 2,420 million metric tons (MMT) in 2005 to roughly 920 MMT in 2030. By design for this report, electric power sector emissions with the carbon tax are the same. But because the carbon tax modeled in this report is economy-wide, it could drive total US net GHG emissions down 27 percent by 2025 relative to 2005 levels, and 30 percent by 2030, from 5,999 MMT in 2005 to roughly 4,230 MMT in 2030.
- While the two policies result in a slightly different electricity generation mix, coal sees the most significant decline in both.
- Both policies substantially reduce conventional pollutants like sulfur dioxide (SO2) and nitrogen oxides (NOx), but SO2 emissions are 23–54 percent higher and NOx emissions are 7–16 percent higher under the CES on an annual average basis than under the carbon tax, which creates explicit disincentives for coal and to a lesser extent natural gas.
- Electricity prices increase more under the carbon tax because the tax is applied to all carbon dioxide emissions from electricity generation. In contrast, once generators achieve the mandated carbon intensity standard of the CES, their remaining emissions are effectively unregulated, so no costs are associated with these remaining emissions to be passed on to consumers. A carbon tax, however, brings in revenue that can be used in a number of ways, including offsetting any increases in electricity bills.
- The higher consumer prices under the carbon tax provide a stronger incentive for conservation of electricity than is found under the CES. The model shows electric retail sales to be 1 percent lower in the carbon tax scenario.
- Overall electricity generation is 1 percent higher in the CES scenario than in the carbon tax scenario, because the policy goal of the CES is to reach a certain carbon intensity level, providing incentives to both reduce emissions (the numerator of the fraction) and increase generation (the denominator).