Carbon pricing, clean energy standards and zero emission subsidies on the path to net zero

We categorize the primary incentive-based mechanisms under consideration for addressing greenhouse gas emissions — pricing carbon, intensity standards, and subsidizing clean energy — and compare their market outcomes under similar expansions of clean electricity generation. While pricing emissions gives strong incentives to first eliminate generation with the highest social cost, a clean energy standard incentivizes earliest phaseout of the most privately costly generation. We show that the importance of this distinction depends on the correlation between private costs and emissions rates, and we estimate this correlation for US electricity generation and fuel prices as of 2019. The emissions difference between a carbon tax and clean energy standard that phases out fossil fuel generation over the same timeframe may actually be quite small, though it depends on fossil fuel prices during the phaseout. We also discuss how each of these policy options is likely to impact electricity prices and quantity demanded, highlighting that large pre-existing markups of retail prices over generation costs are likely to considerably weaken or even reverse the usual assumed efficiency advantage of carbon pricing policies over alternatives.