Electricity Sector Impacts of a Carbon Tax
K a r e n P a l m e r, A n t h o n y P a u l a n d M a t t W o e r m a n
Fiscal Reform and Climate Protection:
C o n s i d e r i n g a U . S . C a r b o n Ta x
O c t o b e r 1 8 , 2 0 11
Washingt on, DC
Carbon Taxes and Electricity
Why focus on the electricity sector?
The electricity sector is …
•
Responsible for roughly 40 percent of US CO2 emissions
•
Expected to yield 2/3 to ¾ of CO2 emissions reductions under economywide carbon pricing
Carbon taxes could be transformative for the sector
•
Will raise the cost of generation using fossil fuels, particularly coal
•
Will provide incentives to invest in cleaner generation including
renewables and carbon capture and storage
•
Could have large effects on electricity price, particularly in certain regions
•
Could reduce overall demand for electricity and provide incentives for
energy efficiency
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What do we want to know?
How a carbon tax will affect…
•
CO2 emissions from electricity generation
•
Retirement of existing generators
•
Investment in new generators
•
The mix of fuels and technologies used to produce
electricity in the future
•
Electricity prices for the nation and by region
•
Carbon tax revenues from the electricity sector
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Scenarios
It’s all relative…
Baseline
•
Based on AEO 2010 reference case
•
Includes state RPS policies and other air pollution policies
Carbon Tax (Tax)
•
$25 (real) per ton of CO2 from 2014 through 2030
Cap and Trade (CTP)
•
Same level of cumulative CO2 emissions reductions as Tax Scenario
•
100% auctioned allowances
•
Allowances bankable so allowance price (tax) rises at rate of interest (8%)
•
Think of CTP as a carbon tax that rises at the rate of interest
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CO2 Price
50
45
40
$ per short ton
35
30
25
20
15
10
5
0
2014
2019
2024
BL
Tax
CTP
2029
5
National Annual CO2 Emissions
From the electricity sector
3.0
Billion Short Tons
2.5
2.0
1.5
1.0
0.5
0.0
2010
2015
2020
BL
Tax
2025
2030
CTP
6
Cumulative CO2 Emissions
From the electricity sector
60
Billion Short Tons
50
40
30
20
10
0
2010
2015
2020
BL
Tax
2025
2030
CTP
7
Cumulative Capacity Retirement
Relative to baseline scenario
2030
2020
160
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
Tax
CTP
Steam Coal
Tax
Nat Gas
Other
CTP
8
Cumulative Investment
Relative to baseline
2030
2020
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
0
0
-10
-10
-20
-20
Tax
Steam Coal
Tax
CTP
IGCC Coal
Nat Gas
Nuclear
Wind
CTP
Biomass
Other
9
Generation Mix
2020
2020
5000
4500
4000
Billion kWh
3500
3000
2500
2000
1500
1000
500
0
BL
Tax
CTP
10
Steam Coal
IGCC Coal
Nat Gas
Nuclear
Wind
Biomass
Other
Generation Mix
2030
2030
5000
4500
4000
Billion kWh
3500
3000
2500
2000
1500
1000
500
0
BL
Steam Coal
IGCC Coal
Tax
Nat Gas
Nuclear
CTP
Wind
Biomass
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Other
National Average Electricity Price
120
$ per MWh
100
80
60
40
20
0
2010
2015
2020
BL
Tax
2025
CTP
2030
12
Regional Price Impacts: Tax
2020
13
Regional Price Impacts: CTP
2020
14
Regional Price Impacts: Tax
2030
15
Regional Price Impacts: CTP
2030
16
Government Revenues
Present discounted value
•
Carbon tax scenario yields stream of tax revenue from 2014 – 2030 with
PDV of $518 billion in 2014
•
CTP yields stream of revenue with PDV of $496 billion in 2014.
Annual tax revenues
•
Roughly $52 billion (Tax) and $50 billion (CTP) in annual revenue
•
Equals roughly 14% of total baseline utility sector revenues in 2020.
This annual revenue is equal to approximately 5 percent of the budget deficit in FY2011.
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Carbon Tax versus Cap and Trade
Or flat tax versus escalating tax
• Pass through of carbon tax in electricity prices
• higher under tax scenario in early years
• higher under CTP scenario in later years
• differs by region depending on utility regulation and
composition of generation
• Transformation of electricity generation
• More complete under CTP scenario
• Reasons to prefer an escalating carbon tax to a flat tax
• Smaller initial price shock to consumers
• Lower overall cost to economy
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Designing a Carbon Tax for Electricity
What else would we like to know?
Will state utility regulators allow tax cost pass through?
What happens if portion of tax revenues are used to ease
electricity price shock in early years?
How would electricity focused tax affect demand for other
sources of energy?
How would electricity focused tax affect economy-wide CO2
emissions?
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Contacts:
Karen Palmer
Senior Fellow
Palmer@rff.org
Anthony Paul
CCEP Center Fellow
Paul@rff.org
Matthew Woerman
Senior Research Assistant
Woerman@rff.org
Thank you.
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