“U.S. Carbon Pricing and Coal Power Plant Productivity” (Job Market Paper)
Do producers innovate in response to a carbon price? Innovation importantly brings down the cost of compliance with environmental policy over time. Economic theory suggests firms will innovate to reduce the cost of carbon-intensive inputs when they face a carbon price. However, I find that coal power plants in the US Regional Greenhouse Gas Initiative (RGGI) have become significantly less efficient since the beginning of the cap-and-trade program, reflecting a deficit of innovative improvements to plants expected by academic and industry sources. Using econometric decomposition and harnessing the data on the US electricity sector in a new way to craft important operational variables, I find that RGGI coal plant owners accepted the efficiency penalty that mechanically comes with operating at low output rates. This is novel microeconomic evidence that firms may substitute non-innovative for innovative means of reducing costs when faced with an input price shock. I also provide evidence that RGGI coal plant owners have not made investments in efficiency-improving capital as expected; analytical results suggest this may be due to plant owners foreseeing a decline in production. Regarding policy, I find a 4.56% carbon emissions rebound effect among RGGI plants, as their decline in efficiency constrained their ability to reduce emissions through output. This implies a needed adjustment to emissions reductions expected from a given carbon tax. Results also indicate that current US federal climate policy, the Affordable Clean Energy Rule, which requires efficiency improvements from coal-fired power plants, imposes a particularly costly form of emissions abatement on the electricity sector.
“What do we lose by picking winners? The role of technology-specific clean energy incentives in induced innovation”
Technology-specific clean energy subsidies, when combined with a carbon price, can incur static costs. This “policy overlap” problem occurs when subsidies dictate that expensive forms of carbon abatement be used, relative to the suite of technologies that would be deployed under a carbon price. Do these subsidies also incur dynamic costs in the form of re-directing innovation away from cost-effective technology? This paper answers this question with a simple analytical model and a simulation calibrated to the EU electricity sector. I examine the role of output subsidies for clean energy on innovation in the form of learning-by-doing and R&D investment. I look at two important cases: the exogenous carbon price (carbon tax) case and the endogenous carbon price (cap-and-trade) case. Results from the analytical model indicate that innovation follows production shifts incentivized by clean energy subsidies, under the condition that there are positive marginal returns to innovation in additional production. This points to subsidies having the potential to re-direct innovation, in addition to altering pollution abatement technology used in the near-term. When the carbon price is endogenous, as in a cap-and-trade system, innovation directed toward reducing emissions of dirty fuels falls unambiguously, due to the sensitivity of the carbon price to emissions abatement achieved by subsidized renewables. I further explore the extent to which the positive marginal returns condition is true and the magnitude of the drop in innovation toward dirty fuels with a simulation that is the first, to my knowledge, to include the important feature of exogenous technical change. Simulation results are forthcoming.