Climate Policies and the Power Sector: Challenges and Issues

Climate change is an unprecedented challenge faced by our society today. Numerous resources and policies have been devoted to controlling greenhouse gas emissions (GHGs) from the power sector and other energy-intensive sectors.

Implementation of $\mathrm{C}{\mathrm{O}}_2$ emissions policies such as emissions trading schemes (EU ETS) in the European Union and the Regional Greenhouse Gas Initiative (RGGI) in the United States has altered power-sector economics. Recent dialogues among Western U.S. states highlight the need to design policies offering companies incentives for emissions reduction.

Climate policies affect the power sector in both the short and long run. In the short run, these policies rearrange production merit order by forcing generators to take emissions costs into consideration. In the long run, they are expected to drive the generation mix toward less carbon-intensive technologies. One of the main mechanisms underlying these polices is the cap-and-trade approach, where a fixed amount of tradable emissions allowances is allocated to affected facilities, and these facilities are required to hold or buy sufficient allowances to cover their emissions.

Experience with the Clean Air Act (CAA) Title IV $\mathrm{S}{\mathrm{O}}_2$ emissions-trading program in the United States has indicated that cap-and-trade programs could be an effective means for controlling air pollution. However, the impact of $\mathrm{C}{\mathrm{O}}_2$ emissions policies on the power sector is expected to be far more profound than that of the $\mathrm{S}{\mathrm{O}}_2$ program because it affects power generation not only from coal-fired baseload units, but also from other fossil-fired units, and the costs are anticipated to be much higher.

Although the experience of emissions trading programs so far is encouraging, policy makers are still seeking answers for several challenging questions in designing emissions trading programs. In particular, while allocating allowances to incumbents and new entries by means of grandfathering is a necessary political comprise, little is known about the economic inefficiencies incurred by distorting firms’ investment incentives. Another issue is which regulatory instruments can be used to manage GHG inventory uncertainty, which presumably varies by country and sector. If the problem of inventory uncertainty is unsolved or overlooked, the policy effectiveness of the ETS, RGGI, and other trading programs might be difficult to evaluate.

In parallel with emissions trading, other energy policies that promote the use of renewable energy (e.g., renewable portfolio standard or RPS) are also expected to play an important role in combatting global warming. However, one ongoing debate among the scientific communities is to what extent the various renewable technologies are actually environmentally beneficial, if evaluated over their entire life-cycle. Another related issue is which renewable technologies can be melded into the existing power system and deliver tangible environmental benefits without impairing the system’s reliability. Finally, the Kyoto Protocol Clean Development Mechanism (CDM) provides compliance flexibility for developed countries to meet their reduction target at lower costs. However, two emerging questions are (1) how domestic renewable policies (e.g., taxes, subsidies) and $\mathrm{C}{\mathrm{O}}_2$ control policies will interact with each other under the presence of CDM projects; and (2) whether a preexisting renewable tax or subsidy will lead to underinvestment in CDM projects.

For this special issue, Implications of $\mathrm{C}{\mathrm{O}}_2$ Emissions Policies on the Electric Power Sector, the Journal of Energy Engineering selected seven high-quality papers that address a wide array of the questions concerning $\mathrm{C}{\mathrm{O}}_2$ policies and the power sector. Each paper was reviewed externally by at least two researchers in the field. These papers are further grouped into two areas.