A comparison of different carbon taxes on utilization of natural gas

Abstract

In the U.S., natural gas combined cycles (NGCC) are replacing coal generators as the inframarginal providers of electricity due to low natural gas prices and the environmental advantages of NGCC compared to coal. In this research, we show that a carbon tax in the U.S. would lead to increased utilization of NGCC as a substitute for coal generation, lowering energy sector carbon emissions that contribute to climate change. This approach contributes to Sustainable Development Goal 13 on climate action while also gradually transitioning the U.S. energy sector to cleaner energy sources. Through the use of fixed-effects regression and counterfactual calculations, we analyze data from 2003 to 2017 to evaluate the impact of a carbon tax ranging from $10-$250/ton of carbon dioxide emissions. We estimate that a $220 per ton of CO2 emitted carbon tax would be necessary to reach a 75 percent NGCC utilization target, but the largest marginal increase in NGCC utilization comes from a carbon tax of $10-$50/ton CO2 emitted. A $50 carbon tax would initially reduce electricity sector carbon emissions approximately 10% per year without requiring new NGCC capacity in the short term.