Electricity Load and Carbon Dioxide Emissions: Effects of a Carbon Price in the Short Term

Abstract

Stabilizing atmospheric carbon dioxide levels at acceptable levels will require a dramatic de-carbonization of the electric generation sector in the U.S. One increasingly discussed way to meet this policy goal is to put an explicit price on carbon emissions, either through a tax or a trading scheme. Increasing demand response has also been discussed as a way to reduce carbon emissions in the U.S. electricity industry. We examine the short-run effectiveness of a policy combining demand response with a carbon tax. Using plant-level operational data, we construct short-run cost curves for three U.S. regional electric systems, and examine the impacts on prices and carbon emissions. In the short run, a carbon tax in the range of $30 - $40 and a price elasticity of demand in the range of -0.1 to -0.2 could reduce carbon emissions in coal-intensive regions by 10% to 25%. With this same set of carbon prices, achieving a 50% reduction in emissions would require a price elasticity of demand in the range of -0.25 to -0.4. Percentage reductions of this magnitude in less carbon-intensive systems are unlikely, even with highly elastic demand and high carbon prices.