Emission Responses To Carbon Pricing In Electricity Markets With Intertemporal Constraints

The Regional Greenhouse Gas Initiative (RGGI) regulates CO2 emissions from the power sector in the northeastern states of the U.S. Its effectiveness has been criticized due to the low CO2 allowance price and limited price variation, especially in the early years. Using a model that accounts for intertemporal constraints, this paper studies how firms react to weak CO2 emission regulations. The results show that the RGGI policy has helped decrease the total CO2 emissions by at least 4.73%. An additional $1/ton increase in permit price reduces the total CO2 emissions by 1.85%. CO2 can be reduced by 23.50% if carbon is priced at $15/ton. Slight evidence of fuel switching from coal to natural gas is found