The Impact of Climate Policy on Fossil Fuel Consumption: Evidence from the Regional Greenhouse Gas Initiative (RGGI)

Abstract

Climate policies such as a carbon tax or a cap-and-trade program are increasingly being used to reduce emissions. In the United States, the Regional Greenhouse Gas Initiative (RGGI) is a cap-and-trade program to reduce emissions. In this paper, I use detailed state-level data to estimate the impact of RGGI on coal and natural gas consumption in the electric-power industry. I find that the program directly caused coal and natural gas phase-out within regulated states. Specifically, the program decreases coal and natural gas consumption for electricity generation by 73% and 31%, respectively, within regulated states. However, in nearby, un-regulated states I find an increase in natural-gas consumption of 259% and a decrease in coal consumption of 7%. As a result, annually the program reduced carbon dioxide emissions by 4.3 million tons in regulated states, but the program also increased carbon dioxide emissions by 3.2 million tons in unregulated states. I also find that the program decreased the efficiency of coal-fired and gas-fired plants which reduces the program’s effectiveness for lowering emissions. Nonetheless, in aggregate, the program reduced carbon dioxide emissions by 1.1 million tons per year.