Policy Evaluation and Production Networks: Is Carbon Pricing Reshaping the U.S. Electricity Industry? ; Dr Matthew ZARAGOZA-WATKINS (Vanderbilt University)

Abstract

How do unilateral carbon markets affect electricity producers? Estimates exist for market participants, but policy spillovers have not been well characterized. We extend the synthetic controls method to model multiple treated units with correlated outcomes and apply our approach to study the effects of California’s cap-and-trade policy (which targets emissions from in-state power plants and emissions assigned to imported consumption) on output and emissions among all fossil-fueled power plants connected to the Western electricity grid, using plants connected to the Eastern and Texas electricity grids to construct valid counterfactuals. Over the first eight years, we find the policy reduced network-wide carbon emissions by 122 MMT (5.8%) and caused precisely no change in aggregate fossil-fueled output. Our estimated change in out-of-state emissions caused by Cap and Trade is 104 MMT, which is roughly 30% of the change in emissions reported by electricity importers. Importers appear to have responded to Cap and Trade by adjusting reported trade patterns without significantly affecting production patterns, likely eroding the carbon price signal.