James B. Bushnell, Stephen P. Holland, Jonathan E. Hughes, and Christopher R. Knittel, "Strategic Policy Choice in State-Level Regulation: The EPA's Clean Power Plan" (Revised May 2016) (Revised in the American Economic Journal: Economic Policy, 9(2), May 2017) | Full Paper
The EPA's Clean Power Plan sets state-level 2030 goals for CO2 emission rate reductions that vary substantially across states. States can choose the regulatory mechanism they use and whether or not to join with other states in implementing their goals. We analyze incentives to adopt rate standards versus cap-and-trade with theory and simulation. We show conditions where adoption of inecient rate standards is a dominant strategy from both con- sumers' and generators' perspectives. Numerical simulations of the Western electricity system highlight incentives for uncoordi- nated policies that lower welfare and increase emissions relative to coordination.