Carbon Prices and Fuel Switching: A Quasi-experiment in Electricity Markets

Abstract

Within the Pennsylvania-New Jersey-Maryland (PJM) electricity market, Delaware and Maryland participate in the Regional Greenhouse Gas Initiative (RGGI) but other states do not, providing a quasi-experiment setting to study the effectiveness of the RGGI program. Using a difference-indifference framework, we find that overall the RGGI program leads to 7.72 million short tons of CO 2 reduction per year in Delaware and Maryland, or about 34.36% of the average total annual emissions in these two states from 2009 to 2013. We find little evidence that utilities adjust their capacities within five years after program implementation except natural gas-only utilities. All utilities respond to the program by decreasing their heat input per capacity even including natural gas utilities. Counter-intuitively, the reduction is mainly achieved through reduction of coal and natural gas input and emission leakage instead of fuel switching from coal to natural gas or from fossil fuel (coal and natural gas) to non-fossil fuel. The results suggest that the power utilities do respond to the emission trading program with current carbon prices, but tremendous fuel switching did not occur before 2013 due to the program as it is less costly to leak the emissions under the regional regime.

Does the US regional greenhouse gas initiative affect green innovation?

“…For instance, the deployment of RGGI led to an increase in “electricity imports” from bordering states and a surge in power output and CO 2 emissions outside the RGGI states (Lee and Melstrom 2018 ). Switching manufacturing operations (or electricity import) to non-regulated jurisdictions is called emission leakage, and emission reductions are achieved primarily through this leakage (Huang and Zhou 2019 ). Thus, the firm’s management might realize that RGGI authority is contented with the current coverage and CO 2 reduction target through emission leakage, which may lead to keeping the firm away from expensive innovation attempts like green innovation.…”

“…However, various factors contribute to this so-called emissions decline. It could occur due to reduced natural gas costs, decreased demand, or increased renewable capacity (Huang and Zhou 2019 ). 2…”

Does the US Regional Greenhouse Gas Initiative Affect Green Innovation?

“…Second, Kim and Kim (2016) established that the RGGI considerably accelerates coal to gas conversion. However, this reduction in emissions is primarily attributable to decreased coal inputs and emission leakage rather than 'coal-togas fuel switching' (Huang, L. & Zhou, 2019). Third, 'energy-e ciency improvement'-RGGI raises retail electricity prices due to increased carbon costs, which reduces electricity demand (Rocha et al, 2015).…”

“…Third, 'energy-e ciency improvement'-RGGI raises retail electricity prices due to increased carbon costs, which reduces electricity demand (Rocha et al, 2015). However, energy-e ciency gains, not RGGI but energy-saving technology, were responsible for declining electricity demand (Narassimhan et al, 2018;Huang, L. & Zhou, 2019). Forth, shifting operational or production activities to non-RGGI states is also known as emission or generation leakage.…”

Teaching Energy Economics in the GCC: A Synergistic Approach between Engineering and Economics

“…For example, will bioenergy production lead to increased food prices and labor exploitation? Polices with good intentions may lead to undesired outcomes if opportunity costs are not fully recognized [14,15].…”