Regulating Greenhouse Gases from Coal Power Plants under the Clean Air Act

The Clean Air Act has assumed the central role in US climate policy, directing the development of regulations governing greenhouse gas emissions from existing coal-fired power plants. This paper uses a model of power plant operation and efficiency investments to compare the cost-effectiveness of alternative policies to reduce greenhouse gas emissions from coal plants. We empirically estimate the key model parameters from a data set of the operation of coal-fired generating units over 25 years. We find that a 10% increase in coal prices causes a 0.1%–0.4% improvement in efficiency (electricity production per ton of coal), which is broadly consistent with engineering assessments of the cost of improving efficiency. We also find that coal prices have a significant effect on utilization. Using the estimates to compare alternative policies, we find performance standards are less efficient than a tax because they cause greater utilization.