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Pollution and the Price of Power

Abstract:
This study analyses the un-priced environmental harm caused by generating electricity from fossil fuels in the ECAR control region south of the Great Lakes in 2004 and again in 2015 when the recent Clean Air Interstate Rule will have its full effect. Using existing damage values, we estimate wholesale electricity under-pricing for coal-fired plants at about $40 per MWh in 2004, almost as much again as the $45/MWh actual price. Averaging across all fuels, the price of electricity was more than $30/MWh too low. The under-pricing will still be $18/MWh for coal plants and $15 for all generation sources in 2015, a decade after CAIR was adopted. Recognizing this environmental price now could reduce pollution levels, increase energy conservation and lead to wiser choices of new generation technology.

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Energy Specializations: Electricity – Markets and Prices ; Energy and the Environment – Climate Change and Greenhouse Gases; Energy and the Environment – Air Emissions (other than greenhouse gases); Energy and the Environment – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
Q54 - Climate; Natural Disasters and Their Management; Global Warming
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Air pollution, electricity, emissions trading, electricity price, CAIR

DOI: 10.5547/ISSN0195-6574-EJ-Vol29-No2-5


Published in Volume 29, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.