California’s Cap-and-Trade Program and Emission Leakage in Electricity Markets: An Empirical Analysis

Speaker: Chiara Lo Prete, Penn State University

Date and Location

When (Date/Time)

December 6, 2017, 12:00 PM - 1:15 PM


157 Hosler Bldg.

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Host: Agricultural Economics, Sociology, and Education

Paper Abstract

California has pledged to reduce its greenhouse gas emissions to 1990 levels by 2020, and to 40% below 1990 levels by 2030. These ambitious goals are being accomplished through several complementary policies, including a multi-sector cap-and-trade program that covers 85% of the state’s GHG emissions and applies to in-state electricity generation and imports. There is concern that the cap-and-trade program may result in a reduction of electricity generation in California and an expansion of cheaper production in the rest of the Western Interconnection, which is not subject to the environmental regulation. In turn, this may lead to overall emission increases, if power generation in the unregulated region is more emission intensive than in California.

While the potential for emission leakage from regional cap-and-trade programs has often been examined ex ante, econometric estimates of leakage are less common. Our study empirically investigates the leakage effects of California’s cap-and-trade program by examining if the policy affected production and heat rates of in-state baseload thermal power plants differently than in the rest of the Western Interconnection. We apply a differences-in-differences estimator, in combination with group-specific linear trends and matching methods, to a rich plant-level dataset for the Western Electric Coordinating Council (WECC) from 2011 to 2015. We complement our regression results with the analysis of net power imports and available capacity on major transmission interfaces connecting the California ISO to the rest of the grid. Preliminary estimates from the capacity factor models suggest modest evidence of leakage, with increased utilization of coal and natural gas combined cycle plants in central WECC after the introduction of the cap-and-trade program.

 A light lunch will be provided.