Federal Climate Policy Toolkit: Power Sector

Options for decarbonizing the power sector through federal climate policy include carbon pricing; clean electricity standards; renewable portfolio standards; tax credits; research, development, and demonstration; and direct regulations.

This article focuses on the tools that federal policymakers can use to reduce power sector emissions and mitigate the impacts of climate change. These tools include carbon pricing; clean electricity standards; renewable portfolio standards; tax credits; research, development, and demonstration; and direct regulations.

Emissions reductions in the power sector can come from three main sources: switching to cleaner fuels, improving the efficiency of existing power plants, and reducing electricity consumption. Future reductions in the sector likely will be achieved through a significant scale-up of renewable and zero-carbon resources, the use of carbon capture with existing fossil fuel resources, and reduced electricity demand due to efficiency improvements on the demand side. The policy options described below can be used to encourage each of these drivers of emissions reductions.

Carbon Pricing

The Basics

Carbon pricing can take the form of either a carbon tax, which places a tax on each ton of carbon dioxide (CO₂) emitted, or a cap-and-trade policy, in which total CO₂ emissions from the power sector are capped and allowances to emit are traded in a market.

Benefits

• Carbon pricing policies tend to be an economically efficient method of reducing greenhouse gas emissions, relative to other policy options for reducing emissions from electricity, because they directly target emissions.
• By increasing the cost of high-emitting power generation, carbon pricing encourages a transition away from carbon-intensive fuels in favor of lower-carbon fuels and can incentivize reductions in electricity consumption.

Challenges

• Carbon pricing can be difficult to implement politically, due to resistance to new fees and corollary increases in retail electricity prices, as electric companies typically pass costs to ratepayers.

Key Considerations

• How to use the revenues raised from the carbon price policy. Revenues could help offset the costs of the policy to consumers, either across the board or in a way that targets low-income consumers. Another option is to invest the revenues in other policy tools that further decarbonization goals, such as research and development for low-carbon technologies.
• A carbon price that targets the power sector can discourage electrification of other sectors of the economy, because electricity becomes more expensive with the policy in place. As such, special attention to newly electrified vehicles, buildings, and other loads—such as through separate, lower electricity rates for electric vehicles—could be necessary, so that the carbon price does not discourage electrification.

Past, Current, and Proposed Carbon Pricing Policies

Several carbon pricing bills have been introduced in Congress, but historically, they have gained little traction. While no federal carbon pricing policy has come to fruition, several states have regional carbon pricing policies in place for electricity. For example, the New England states and California have had regional cap-and-trade programs for emissions from electricity in place for several years with success. The New York State grid operator also recently proposed incorporating a carbon price into its wholesale energy market.

Clean Electricity Standard

The Basics

A clean electricity standard (CES) (a type of clean energy standard) is a market-based policy that requires a minimum percentage of electricity sales to come from “clean” energy resources. This percentage requirement typically increases over time until it meets a goal, such as 100 percent clean electricity sales. While the definition of “clean” can vary from policy to policy, the term typically refers to low-carbon or carbon-free attributes and is technology inclusive, meaning that any technology that meets certain emissions requirements can qualify for credits. As such, a CES can encourage the use of zero-emitting renewables, nuclear, and fossil fuel plants fitted with carbon capture.

Benefits

• Because a CES is technology neutral in its definition of “clean,” more technologies can compete to meet the standard, which lowers compliance costs relative to a more traditional Renewable Portfolio Standard (discussed below).
• A CES is structured similarly to Renewable Portfolio Standards used in most states today; therefore, a CES could be simpler to implement relative to other policy options.

Challenges

• A CES credits clean electricity instead of taxing carbon-emitting electricity, and this crediting creates incentives to increase electricity generation. Therefore, the policy does not encourage energy efficiency or conservation to the same extent as a carbon price. Thus, a carbon tax can be a more efficient policy tool, because it encourages emissions reductions from both reduced electricity consumption and cleaner electricity generation, which can lower the costs of achieving carbon goals.

Key Considerations

• How to set the federal standard, given existing state policies and existing resources. Some states, like California, already are pursuing 100 percent clean electricity portfolios, while others have not established clean energy policies and rely heavily on in-state fossil fuel resources for electricity generation. As such, a federal CES policy would have to ensure that the policy takes states’ existing resource portfolios into account when establishing targets, to avoid a scenario in which polluting states bear most of the costs of compliance, which would result in a transfer of wealth from polluting states to cleaner states.

Past, Current, and Proposed CES Policies

A few CESs have been proposed at the federal level, but none has passed. For example, Senator Tina Smith (D-MN) and then-Representative Ben Ray Luján (D-NM) cosponsored the Clean Energy Standard Act of 2019 that requires 96 percent of electricity sales to come from clean sources by 2050. RFF analysis of the bill finds that the policy would have reduced emissions from electricity by about 10 billion metric tons, or by 61 percent, between 2020 and 2035. Other proposals, including the CLEAN Future Act and the Clean Energy Innovation and Deployment Act, have been introduced as well.

While no federal CES currently exists, some states have implemented versions of a CES. Massachusetts, for example, implemented a CES in 2017 that requires 80 percent of electricity sales to come from clean energy resources by 2050.

Renewable Portfolio Standard

The Basics

A renewable portfolio standard (RPS) is a market-based policy that requires a portion of electricity sales to come from renewable energy sources, with the requirement typically increasing over time. An RPS is similar to a CES in that renewable energy generators earn renewable energy credits for every megawatt-hour of electricity generated, which can be traded.

Benefits

• RPS policies are already quite popular. Twenty-nine states and the District of Columbia have put in place a mandatory RPS, and an additional eight states have put in place a voluntary RPS. As such, the design and implementation of a federal RPS could be relatively straightforward in a substantial portion of the country.

Challenges

• An RPS policy limits compliance to renewable technologies only and does not credit other carbon-free technologies such as nuclear plants; thus, an RPS may be more costly than a CES or carbon price in reducing emissions.
• Limiting the number of technologies that comply with the policy can make it more difficult to achieve ambitious targets; thus, this type of policy is limited in its ability to significantly reduce emissions.

Key Considerations

• How to set the standard.
• How to treat existing clean resources under the policy.
• How to ensure equitable impacts among states in the transition away from fossil fuels.
• How to treat diverse regions in a federal policy, given that a federal RPS can result in higher compliance costs for regions that are further behind in their pursuit of clean energy.

Past, Current, and Proposed Renewable Portfolio Standards

As stated above, the RPS is a popular policy tool among US states. These policies vary significantly in terms of stringency; some policies have modest goals, while others require 100 percent renewable energy within the next few decades.

Some federal RPSs have been proposed. In 2019, for example, former Senator Tom Udall (D-NM) introduced a bill that would have required 50 percent of electricity generation in the United States to come from renewable sources by 2035. Thus far, no federal RPS policies have passed in Congress.

Research, Development, and Demonstration

The Basics

Funding for research, development, and demonstration (RD&D) is a form of innovation policy that can support nascent or undeveloped technologies when the private market is not sufficient. This policy tool can help new technologies reduce costs and ultimately achieve commercial operation.

Benefits

• RD&D can reduce the costs of nascent clean energy technologies and help enable a smooth transition to a decarbonized electric system.
• RD&D can lead to more clean technologies becoming commercially viable—and enable the discovery of new technologies and forms of energy, such as hydrogen—which could both improve grid operations in the future and lead to lower costs of meeting emissions goals, as more technologies compete to provide carbon-free electricity.

Challenges

• This policy option poses some risk, as RD&D may not lead to the desired technological advances and cost reductions.

Key Considerations

• RD&D funding is limited.
• Funding should be allocated wisely among promising projects, consistent with decarbonization goals.
• Research progress should be carefully monitored.
• Clear information remains unavailable about which technologies will be most successful in driving down emissions.

Past, Current, and Proposed RD&D Funding

RD&D funding has been used frequently in the past to promote several technologies, including renewables such as solar and wind that are now competitive in the market. The Energy Act of 2020, passed as part of the omnibus spending bill in December 2020, is an example of using federal RD&D spending to promote decarbonization of the grid. Some aspects of the legislation increase funding for geothermal, carbon capture and storage, direct air capture, advanced nuclear, and energy storage technologies. These technologies offer grid benefits and services unlike other resources used today; they have the potential to better support grid reliability and could reduce the costs of achieving carbon goals. These technologies can complement intermittent renewable resources to better integrate these resources into the grid, and they can enable fossil fuel plants to participate in a low-carbon future with carbon capture technology.

Tax Incentives

The Basics

The tax code can be used to promote investment in clean energy technologies. Tax credits, such as those available for wind and solar projects, can take the form of an up-front credit on an investment or a credit on energy generation from a particular resource. These types of incentives can improve the economics of renewable projects by reducing the high costs of building new power plants. Tax credits also can be used to encourage a variety of investments, including the development of low-emitting technologies and transmission investments needed to integrate renewables into the grid.

Benefits

• Tax credits have successfully encouraged investment in nascent technologies like wind and solar. Since renewable energy resources typically have very low operating costs but high up-front costs, tax credits that address these up-front costs can help a project attract financing from tax equity investors and improve the likelihood of its establishment.

Challenges

• While tax credits can be effective at encouraging investment in clean resources, they do not work directly to reduce emissions or total electricity generation. As such, they are not as efficient at reducing emissions as a carbon price or CES policy.

Key Considerations

• Whether to make tax credits technology specific or technology neutral. A technology-neutral approach could be more cost-effective relative to a technology-specific approach. However, the latter approach can promote investment in a particular technology that society might value.

Federal Energy Regulatory Commission Orders

The Basics

The Federal Energy Regulatory Commission (FERC), which regulates wholesale electricity transactions, can help enable a clean energy transition in a few ways. FERC could direct regional grid operators to account for the cost of carbon emissions in wholesale energy markets, so that the lowest-carbon resources are used first to meet electricity demand. FERC also could promote decarbonization by redesigning wholesale markets to better enable long-term investment in renewables and complementary resources such as energy storage. Lastly, FERC could take a more active role in encouraging regional transmission planning and investment, to facilitate long-distance transmission of power from wind- and solar-rich regions of the country to population centers that consume electricity.

Benefits

• Regulatory changes from FERC can complement legislative efforts and improve the efficacy of a carbon pricing policy.

Challenges

• Although FERC has signaled that the agency is open to carbon pricing, the agency still needs a state or federal policy directive before implementing carbon pricing in the markets.

Key Considerations

• Determination of FERC’s legal authority to oversee carbon pricing through tariff approval.
• How best to design wholesale markets to enable deep decarbonization of the power sector.

This article is available as a published RFF explainer titled “Federal Climate Policy 103: The Power Sector.”