Power System Decarbonization Policies: How Good is Second-Best?


The U.S. power system faces a 2035 decarbonization target though the exact pathway to the target remains unclear. Policy instruments, like carbon taxes and forcing coal plants to retire through various mechanisms, could help achieve the target. It is critical to understand and compare the performances of these policies as adoption of any such policy could lead to significant costs, different emissions pathways, and political challenges. In this paper, we explore the ramifications of adopting a ‘‘second-best’’ decarbonization policy. Specifically, we assume a particular carbon tax to be the ‘‘optimal’’ policy and compare it to ‘‘suboptimal’’ carbon tax and forced coal retirement policies in terms of emissions and costs. We use a power system dispatch model that co-optimizes unit commitment, energy, and regulation capacity to simulate system evolution over multiple years, including retirements and renewables/storage expansion, under each policy scenario. Our case study highlights the trade-offs between ‘‘optimal’’ and ‘‘suboptimal’’ policies. We find that ‘‘suboptimal’’ carbon taxes could achieve similar emissions results because, counter-intuitively, higher carbon taxes do not always achieve more emission reductions due to the complexity of dispatch and retirements. In contrast, forced coal retirements result in lower costs but higher emissions than the ‘‘optimal’’ policy, with a large range of possible outcomes across different retirement cases.

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