General Equilibrium Impacts of a Federal Clean Energy Standard

Lawrence H. Goulder, Marc Hafstead and Roberton Williams

No 19847, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Economists have tended to view cap and trade (or, more generally, emissions pricing) as more cost-effective than a clean energy standard (CES) for the purpose of reducing greenhouse gas emissions associated with electricity generation. This stems in part from the finding that, in terms of cost-effectiveness, a CES relies too much on emissions abatement through the channel of fuel-switching and too little on the channel of reduced electricity demand. Recent research reveals, however, that the CES has an advantage over cap and trade in a different dimension. In a realistic economy with prior taxes on factors of production, the adverse "tax-interaction effect" is smaller under the CES than under the equivalent cap-and-trade program. This raises the possibility that the CES might not suffer an overall disadvantage relative to cap and trade on cost-effectiveness grounds. This paper employs analytical and numerical general equilibrium models to assess the relative cost-effectiveness of the CES and an electricity-sector cap-and-trade program. These models reveal that a well-designed CES can be more cost-effective than cap and trade 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.

JEL-codes: H23 Q54 Q58 (search for similar items in EconPapers)
Date: 2014-01
New Economics Papers: this item is included in nep-ene and nep-env
Note: EEE PE
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Citations: View citations in EconPapers (15)

Published as Lawrence H. Goulder & Marc A. C. Hafstead & Roberton C. Williams III, 2016. "General Equilibrium Impacts of a Federal Clean Energy Standard," American Economic Journal: Economic Policy, American Economic Association, vol. 8(2), pages 186-218, May.

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Journal Article: General Equilibrium Impacts of a Federal Clean Energy Standard (2016)
Working Paper: General Equilibrium Impacts of a Federal Clean Energy Standard (2014)
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