Power System Decarbonization: A Comparison Between Carbon Taxes and Forcing Coal Power Plant Retirements

Abstract

The U.S. power system faces a 2035 decarbonization target, though the exact pathway to the target remains unclear. Policy instruments, like carbon taxes and forcing coal plants to retire through various mechanisms, could help achieve the target. It is critical to analyze and compare decarbonization policies as different policies lead to different costs, emissions pathways, and political challenges. In this paper, we explore the ramifications of adopting alternative decarbonization policies. We assume a particular carbon tax to be the benchmark policy and compare it to alternative carbon tax and forced coal retirement policies in terms of emissions and costs. We use a power system dispatch model that co-optimizes unit commitment, energy, and frequency regulation capacity to simulate system evolution over multiple years, including retirements and renewables/storage expansion, under each policy. Our case study highlights the trade-offs between policies. We find that, counter-intuitively, higher carbon taxes do not always achieve lower emissions due to the complexity of dispatch, resulting profits and retirements, and the addition of renewables/storage. In contrast, forced coal retirements result in lower power system costs but higher emissions than the benchmark policy, with a large range of possible outcomes across different retirement cases.