The Costs and Consequences of Clean Air Act Regulation of CO2 from Power Plants

US climate policy is unfolding under the Clean Air Act. Mobile source and construction permitting regulations are in place. Most important, the US Environmental Protection Agency (EPA) and the states will determine the form and stringency of the regulations for existing power plants. It is widely believed that flexible approaches could be suggested in EPA guidelines or proposed by states. Various approaches would create an implicit price on emitting greenhouse gases and create valuable assets that would be distributed differently among electricity producers, consumers, and the government. We compare a tradable performance standard with three variations on cap-and-trade policies that would distribute the asset value in different ways. Keeping the value within the electricity sector by distributing it to fossil-fueled producers or consumers or spending on energy efficiency has smaller effects on average electricity prices than a revenue-raising policy. These approaches impose greater social cost, but comparable net benefits in the sector. Classification-JEL: Q54, Q58