Calculating the implied value of CO2 abatement in green energy policies.
Philip Q Hanser is a principal with The Brattle Group, and Mariko Geronimo is an associate with the firm. The views in this article are theirs and not those of The Brattle Group or its clients.
Resource planning by regulators, utilities, and independent developers in the U.S. electric sector is guided by a number of regulations and initiatives, some of which are designed to attach a value to the negative externalities of harmful emissions. For some types of emissions, including CO2 in certain regions, policy-driven caps are accompanied by trading mechanisms that implicitly value the quantity of required abatement. Most states, however, have renewable portfolio standards (RPS) that address CO2 and other greenhouse gases, creating markets that assign a value to the renewable attributes of generation from certain low or zero-carbon resources. The EPA has been exploring options to create mandatory limits on CO2 emission rates, which wouldn’t create a market for CO2 abatement, but still would imply an abatement value through premiums paid to meet the requirements.
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In the past few years, recession effects have reduced demand for electricity, and therefore emissions levels across the board. Balancing abatement costs with social value gained will become more challenging in the future, particularly since the effects of abatement mechanisms and the implied willingness among customers to pay for CO2 reductions aren’t always clear.