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CEIC-08-02

"Short Run Effects of a Price on Carbon Dioxide Emissions from U.S. Electric Generators"
Adam Newcomer, Seth A. Blumsack, Jay Apt, Lester B. Lave, and M. Granger Morgan

Abstract:
The price of delivered electricity will rise if generators have to pay for carbon dioxide emissions through an implicit or explicit mechanism. There are two main effects that a substantial price on CO2 emissions would have in the short run (before the generation fleet changes significantly). First, consumers would react to increased price by buying less, described by their price elasticity of demand. Second, a price on CO2 emissions would change the order in which existing generators are economically dispatched, depending on their carbon dioxide emissions and marginal fuel prices. Both the price increase and dispatch changes depend on the mix of generation technologies and fuels in the region available for dispatch, although the consumer response to higher prices is the dominant effect. We estimate that the instantaneous imposition of a price of $35 per metric ton on CO2 emissions would lead to a 10% reduction in CO2 emissions in PJM and MISO at a price elasticity of -0.1. Reductions in ERCOT would be about one-third as large. Thus, a price on CO2 emissions that has been shown in earlier work to stimulate investment in new generation technology also provides significant CO2 reductions before new technology is deployed at large scale.

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