The short-term impact on emissions and federal tax revenue of a carbon tax in the U.S. electricity sector

Abstract

Due to low natural gas prices and the environmental advantages of natural gas combined cycle (NGCC) compared to coal, NGCC is replacing coal generators as the inframarginal providers of electricity. However, on average, NGCCs are running only 54 percent of the time. Utilizing excess NGCC capacity, as a substitute for coal generation, is a short-term policy solution for reducing greenhouse gases. In this research, we evaluate the impact of a carbon tax on substitution of natural gas for coal in the U.S. electricity sector. Through fixed effects regression and counterfactual calculations, we analyze data from 2003 to 2017 to evaluate the impact of a carbon tax on NGCC utilization, carbon emissions, and federal tax revenue between 2020 and 2030. We find the highest marginal increase in NGCC utilization happens with a carbon tax priced at $10/ton. Depending on future estimated changes in natural gas capacity, a $10 carbon tax would reduce carbon emissions between 1.39 and 1.55 billion metric tons per year and generate $106.47 to $118.33 billion in net revenue. The carbon tax we propose would be simpler to implement than an economy-wide policy and would still lead to significant carbon reductions and federal tax revenue in the short-run.