Skip to main content
Log in

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

  • Published:
Environmental and Resource Economics Aims and scope Submit manuscript

Abstract

Within the Pennsylvania–New Jersey–Maryland electricity market, Delaware and Maryland participate in the Regional Greenhouse Gas Initiative (RGGI) but other states do not, providing a quasi-experimental setting to study the RGGI program. Using a difference-in-difference framework, we find that, overall the RGGI program led to 6.22 million short tons of CO2 reduction per year in Delaware and Maryland, or about 19.10% of the average total potential annual emissions in these two states from 2009 to 2013. Counterintuitively however, the reduction is mainly achieved through reduction of coal inputs and emission leakage instead of fuel switching from coal to natural gas or from fossil fuel (coal and natural gas) to non-fossil fuel.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7

Similar content being viewed by others

Notes

  1. EPA: https://www.epa.gov/stationary-sources-air-pollution/electric-utility-generating-units-repealing-clean-power-plan.

  2. EIA data: http://www.eia.gov/tools/faqs/faq.cfm?id=77&t=11.

  3. These nine states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.

  4. Globally, the carbon emission trading market has been increasing in recent years. After the implementation of the European Union Emissions Trading Scheme (EU ETS), several domestic and regional initiatives, including the RGGI, emerged in developed and developing countries (Kossoy and Guigon 2012). Currently, the United States has three systems related to greenhouse gas (GHG) emission trading: the RGGI, the California, the Western Climate Initiative (which includes California and the Canadian provinces of Quebec, Ontario, and British Columbia), and the Chicago Climate Exchange (CCX). The first two are mandatory schemes, while the CCX is operated on a voluntary base. Reduction of CO2 is regulated under section 111(d) of Clean Air Act, which covers other unnamed potential pollutants. These pioneering programs can provide very helpful guidelines for future carbon markets in the U.S.

  5. Every control period lasts 3 years, and, at the end of the third year of a control period, each regulated plant is required to hold one allowance for each ton of CO2 emitted. Unused allowances do not expire and can be banked for future years. If a plant violates the rule, it needs to surrender the number of allowances equal to three times the amount of its excess emissions.

  6. For example, Ellerman and Montero (1998) find that the decline of rail rates for shipping low-sulfur coal, rather than the 1990 Clean Air Act Amendments, is the principal reason why sulfur dioxide emissions by electric utilities declined from 1985 to 1993.

  7. Per million BTU of energy, coal emits around 215 pounds, oil emits 160 pounds and natural gas emits 117 pounds of CO2.

  8. See http://www.rggi.org/market/offsets.

  9. Linn et al. (2014) find that a 10% increase in coal prices leads to a 0.1–0.4% increase in fuel efficiency, and Chan et al. (2017) find that restructuring leads to 1.4% improvement of fuel efficiency.

  10. An electric utility is the operating power generation unit, which can have multiple power plants, and a power plant can have multiple generators.

  11. In fact, fuel switching can occur even at the generator level because some generators can use multiple types of fuel. See http://www.eia.gov/tools/faqs/faq.cfm?id=65&t=3. We count a generator that can use both fuel types only once for the total capacity.

  12. In our data, some utilities are non-flexible always-staying utilities in some years and flexible always-staying utilities in other years. We categorize them as flexible always-staying utilities.

  13. Since it is the relative fuel price that matters (Cullen and Mansur 2014) we use “coal to natural gas price ratio” in all specifications.

  14. https://www.eia.gov/pub/oil_gas/natural_gas/analysis_publications/ngpipeline/ngpipelines_map.html.

  15. See https://www.iso-ne.com/about/key-stats/resource-mix/.

  16. Please see https://www.utilitydive.com/news/eia-california-iso-imports-26-of-its-electricity-from-other-states/437438/.

  17. See http://www.pjm.com/documents/reports/eia-reports.aspx.

  18. See http://www.eia.gov/electricity/monthly/.

  19. If an utility has plants in multiple states, we treat them as separate utilities, as they face distinct state-level regulation policies.

  20. If the state level fuel prices are missing, we use corresponding regional prices.

  21. According to American Electric Power (AEP), “Simple cycle natural gas plants are typically constructed in 18 to 30 months and combined cycle natural gas plants are constructed in about 36 months. These lead times are significantly less than the average for solid fuel plants (i.e. coal plants), about 72 months.” See https://www.aep.com/about/IssuesAndPositions/Generation/Technologies/NaturalGas.aspx.

  22. Power generation from petroleum is very small.

References

  • Aichele R, Felbermayr G (2015) Kyoto and carbon leakage: an empirical analysis of the carbon content of bilateral trade. Rev Econ Stat 97(1):104–115

    Article  Google Scholar 

  • Babiker HM (2005) Climate change policy, market structure and carbon leakage. J Int Econ 65(2):421–445

    Article  Google Scholar 

  • Bovenberg AL, Lawrence HG, Gurney DJ (2005) Efficiency costs of meeting industry-distributional constraints under environmental permits and taxes. RAND J Econ 36:951–971

    Google Scholar 

  • Burniaux J-M, Martins JO (2012) Carbon leakages: a general equilibrium view. Econ Theory 49(2):473–495

    Article  Google Scholar 

  • Bushnell JB, Mansur ET, Saravia C (2008) Vertical arrangements, market structure, and competition: an analysis of restructured US electricity markets. Am Econ Rev 98(1):237–266

    Article  Google Scholar 

  • CCES (2013) Leveraging natural gas to reduce greenhouse GasEmissions. Technical report. Center for Climate and Energy Solutions

  • Chan HR, Fell H, Lange I, Li S (2017) Efficiency and environmental impacts of electricity restructuring on coal-fired power plants. J Environ Econ Manag 81:1–18

    Article  Google Scholar 

  • Cullen JA, Mansur ET (2014) Inferring carbon abatementcosts in electricity markets: a revealed preference approach using the shale revolution. Technical report. National Bureau of Economic Research

  • Cullenward D, Wara M (2014) Carbon markets: effective policy? Science 344(6191):1460

    Article  Google Scholar 

  • EIA (2014) Levelized cost and levelized avoided cost of new generation resources in the annual energy outlook 2015. Technical report. U.S. Energy Information Administration

  • Ellerman AD, Montero J-P (1998) The declining trend in sulfur dioxide emissions: implications for allowance prices. J Environ Econ Manag 36:26–45

    Article  Google Scholar 

  • Ellerman AD, Joskow PL, Schmalensee R, Montero J-P, Bailey EM (2000) Markets for clean air: the US acid rain program. The Press Syndicate of the University of Cambridge, Cambridge

    Book  Google Scholar 

  • Fabra N, Toro J (2005) Price wars and collusion in the spanish electricity market. Int J Ind Org 23(3–4):155–181

    Article  Google Scholar 

  • Fell H, Manilof P (2018) Leakage in regional environmental policy: the case of the regional greenhouse gas initiative. J Environ Econ Manag 87:1–23 (Working paper)

    Article  Google Scholar 

  • Fowlie M (2010) Emissions trading, electricity restructuring, and investment in pollution abatement. Am Econ Rev 100:837–869

    Article  Google Scholar 

  • Galiani S, Gertler P, Schargrosky E (2005) Water for life: the impact of the privatization of water services. J Polit Econ 113:83–119

    Article  Google Scholar 

  • Greenstone M, Hanna R (2014) Environmental regulations, air and water pollution, and infant mortality in India. Am Econ Rev 104(10):3038–3072

    Article  Google Scholar 

  • Hart SL, Ahuja G (1996) Does it pay to be green? an empirical examination of the relationship between emission reduction and firm performance. Bus Strategy Environ 5:30–37

    Article  Google Scholar 

  • Hitaj C, Stocking A (2014) Market efficiency and the U.S. market for sulfur dioxide allowances. Working paper

  • Jha A (2015) Dynamic regulatory distortions: coal procurement at U.S power plants. Working paper

  • Joskow PL, Schmalensee R, Bailey EM (1998) The market for sulfur dioxide emissions. Am Econ Rev 88(4):669–685

    Google Scholar 

  • Kossoy A, Guigon P (2012) State and trends of the carbon market 2012. Technical report. World Bank

  • Linn J, Mastrangelo E, Burtraw D (2014) Regulating greenhouse gases from coal power plants under the clean air act. J Assoc Environ Resour Econ 1(1/2):97–134

    Google Scholar 

  • McKibbin WJ, Morris AC, Wilcoxen PJ (2014) Pricing carbon in the US: a model-based analysis of power-sector-only approaches. Resour Energy Econ 36(1):130–150

    Article  Google Scholar 

  • Murray BC, Maniloff PT (2015) Why have greenhouse emissions in RGGI states declined? an econometric attribution to economic, energy market, and policy factors. Energy Econ 51:581–589

    Article  Google Scholar 

  • NACAA (2015) Implementing EPA’s clean power plan: a menu of options. Technical report. National Association of Clean Air Agencies

  • Newell RG, Pizer WA, Raimi D (2014) Carbon market lessons and global policy outlook. Science 343:1316–1317

    Article  Google Scholar 

  • RGGI (2014). CO2 emissions from electricity generation and imports in the regional greenhouse gas initiative: 2012 monitoring report. Technical report. Regional Greenhouse Gas Initiative

  • Rubin JD (1996) A model of intertemporal emission trading, banking, and borrowing. J Environ Econ Manag 31(3):269–286

    Article  Google Scholar 

  • Smale R, Hartley M, Hepburn C, Ward J, Grubb M (2006) The impact of CO2 emissions trading on firm profits and market prices. Clim Policy 6(1):31–48

    Article  Google Scholar 

  • Stavins RN (1998) What can we learn from the grand policy experiment? lessons from SO2 allowance trading. J Econ Perspect 12(3):69–88

    Article  Google Scholar 

  • Stavins RN (2003) Chapter 9—experience with market-based environmental policy instruments. Handb Environ Econ 1:355–435

    Article  Google Scholar 

  • Sterner T (2003) Policy instruments for environmental and natural resource management. RFF Press, Washington, DC

    Google Scholar 

  • Swinton JR (1998) At what cost do we reduce pollution? shadow prices of SO2 emissions. Energy J 19:63–83

    Article  Google Scholar 

  • Wolak FA (2000) An empirical analysis of the impact of hedge contracts on bidding behavior in a competitive electricity market. Int Econ J 14(2):1–39

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Ling Huang.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendices

Appendix 1: Utilization Rates in Logged Format

See Table 10.

Table 10 Utilization rates in logged format

Appendix 2: Fifth-Order Coal-Gas Price Ratio

See Tables 11, 12 and 13.

Table 11 Natural gas-only and coal-only utilities: capacity change
Table 12 Flexible utilities: total capacity change and natural gas capacity percentage
Table 13 Utilization rates

Appendix 3: Replace Utilization Rate by Capacity Factor

See Table 14.

Table 14 Capacity factor

Appendix 4: Include Neighboring States

See Tables 15, 16 and 17.

Table 15 Natural gas-only and coal-only utilities: capacity change
Table 16 Flexible utilities: total capacity change and natural gas capacity percentage
Table 17 Utilization rates

Appendix 5: Include Utilities in New Jersey

See Tables 18, 19 and 20.

Table 18 Natural gas-only and coal-only utilities: capacity change
Table 19 Flexible utilities: total capacity change and natural gas capacity percentage
Table 20 Utilization rates

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Huang, L., Zhou, Y. Carbon Prices and Fuel Switching: A Quasi-experiment in Electricity Markets. Environ Resource Econ 74, 53–98 (2019). https://doi.org/10.1007/s10640-018-00309-4

Download citation

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10640-018-00309-4

Keywords

Navigation