Effects of a Carbon Tax and Wind Power Penetration on CO2 Emissions in Wholesale Electric Power Markets

Abstract

During the December 2009 Copenhagen Climate Change Summit, President Barack Obama committed the U.S. to a 83% reduction below 2005 levels in CO2 emissions by 2050. The U.S. Federal Government is thus currently considering several policy options to reduce CO2 emissions. In the U.S. the largest source of CO2 emissions is the electricity sector; in 2012 it was responsible for 32% of total CO2 emissions. This paper develops an empirically-based computational test bed of a wholesale electric power market to analyze how the imposition of a carbon tax and the increased penetration of wind power in such markets could impact CO2 emissions and other key outcomes, such as energy demands, energy prices, market participant profits (by fuel type), and government tax revenues. The test bed captures core features of the Midcontinent Independent System Operator (MISO), the central manager of one of the world's largest energy and operating reserve markets covering parts of fifteen U.S. states and the Canadian province of Manitoba. Another innovation of this paper is that the effects of increases in a carbon tax and wind power penetration are studied jointly. It is shown, for example, that CO2 emissions decrease from 0.23% to 6.17% as the carbon tax and the degree of wind penetration are systematically varied from a base case of zero tax and zero wind. The profits of coal- and oil-fired generation systematically decrease with increases in the carbon tax and/or increases in wind penetration, but the profits of other types of generation exhibit a more complex response. Comparisons with current MISO conditions are also given, and key policy implications are discussed.