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

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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.

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  1. EPA:

  2. EIA data:

  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

  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 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.


  15. See

  16. Please see

  17. See

  18. See

  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

  22. Power generation from petroleum is very small.


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Correspondence to Ling Huang.

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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

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Huang, L., Zhou, Y. Carbon Prices and Fuel Switching: A Quasi-experiment in Electricity Markets. Environ Resource Econ 74, 53–98 (2019).

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