An Experimental Comparison of Carbon Pricing Under Uncertainty in Electricity Markets

Trevor L. Davis, Mark C. Thurber and Frank A. Wolak

No 27260, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We report on an economic experiment that compares outcomes in electricity markets subject to carbon-tax and cap-and-trade policies. Under conditions of uncertainty, price-based and quantity-based policy instruments cannot be truly equivalent, so we compared three matched carbon-tax/cap-and-trade pairs with equivalent emissions targets, mean emissions, and mean carbon prices, respectively. Across these matched pairs, the cap-and-trade mechanism produced much higher wholesale electricity prices (38.5% to 52.6% higher) and lower total electricity production (2.5% to 4.0% lower) than the “equivalent” carbon tax, without any lower carbon emissions. Market participants who forecast a lower price of carbon in the cap-and-trade games ran their units more than those who forecast a higher price of carbon, which caused emissions from the dirtiest generating units (Coal and Gas Peakers) to be significantly higher (15.2% to 33.0%) than in the carbon tax games. These merit order “mistakes” in the cap-and-trade games suggest an important advantage of the carbon tax as policy: namely, that the cost of carbon can treated by firms as a known input to production.

JEL-codes: Q4 Q52 Q54 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-ene, nep-env, nep-exp and nep-reg
Note: EEE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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