Abstract
The development of climate policy in the United States mirrors international developments, with efforts to initiate a coordinated approach giving way to jurisdictions separately taking actions. The centerpiece of US policy is regulation in the electricity sector that identifies a carbon emissions rate standard (intensity standard) for each state but leaves to states the design of policies, including potentially the use of technology policies, emissions rate averaging, or cap and trade. Differences in policies among states within the same power market could promote predatory behavior resulting in a geographic shift in generation and investment in new resources. This paper examines the coordination problem using a detailed partial equilibrium model of operations and investment. We demonstrate that leading jurisdictions have available a rich set of design options that can protect them against strategic predation and, in fact, give them opportunities to proactively advance climate goals, to the economic detriment of laggards.
Highlights
The development of climate policy in the United States mirrors international developments, with efforts to initiate a coordinated approach giving way to regimes in which jurisdictions are separately taking actions with differing policy designs
We show that if states use an output-based allocation they can mimic the production incentives created under the emissions rate standard
We imagine targeted production incentives that reward utilization of specific technologies, and we show in these cases leakage can be stopped or reversed, with a decrease in total emissions compared with tradable emissions rate policies in all states
Summary
The development of climate policy in the United States mirrors international developments, with efforts to initiate a coordinated approach giving way to regimes in which jurisdictions are separately taking actions with differing policy designs. The ability of states to use targeted output-based allocation to preserve the level of operations and investment that would occur if they used the emissions rate standard means that states can consider the use of cap and trade to harvest its many administrative advantages over an emissions rate standard without suffering economic penalty Costs under these outcomes vary under different policy combinations, but in some cases are less in the cap and trade region and greater under emissions rates in the rest of the nation. This outcome demonstrates a strategic response by the cap and trade jurisdiction to a defection strategy (the choice of an emissions rate policy) by its neighbors These findings are consistent with the expectation (not shown here) that the lowest costs overall would be achieved under a coordinated approach. Burtraw et al (2012) and Linn et al (2014) show that a national standard for reducing CO2 emissions from the electricity sector can cost 70–90 % less than a traditional (nontradable) performance standard
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