The price of delivered electricity will rise if generators have to pay for
carbon dioxide emissions through an implicit or explicit mechanism. There
are two main effects that a substantial price on CO2 emissions would have
in the short run (before the generation fleet changes significantly).
First, consumers would react to increased price by buying less, described
by their price elasticity of demand. Second, a price on CO2 emissions
would change the order in which existing generators are economically
dispatched, depending on their carbon dioxide emissions and marginal fuel
prices. Both the price increase and dispatch changes depend on the mix of
generation technologies and fuels in the region available for dispatch,
although the consumer response to higher prices is the dominant effect. We
estimate that the instantaneous imposition of a price of $35 per metric
ton on CO2 emissions would lead to a 10% reduction in CO2 emissions in PJM
and MISO at a price elasticity of -0.1. Reductions in ERCOT would be about
one-third as large. Thus, a price on CO2 emissions that has been shown in
earlier work to stimulate investment in new generation technology also
provides significant CO2 reductions before new technology is deployed at
large scale.
