Electric rate design and greenhouse-gas emissions reduction

Public policy in the U.S. and Europe has sought to control several major pollutants from power plants through a cap-and-trade system, whereby a secondary market is established for emissions permits. The costs of these emissions permits are a variable cost of power production and are thus integrated into regional electricity markets and locational wholesale electricity prices. Exposing retail consumers to these economically efficient joint electricity and emissions prices has the potential to reduce emissions of greenhouse gases significantly in the short run, before any new investments in low-emissions generation are made. This paper reports on some ongoing research in the area of how these emissions costs ought to be passed on to consumers. Three different rate design options - real-time pricing, time-of-use pricing and flat-rate pricing are compared in terms of emissions reductions for a simulated PJM electricity market. The simulations suggest that real-time pricing is nearly equivalent to time-of-use pricing in terms of overall emissions reductions, while flat-rate pricing yields at most 30% of the emissions reductions of real-time or time-of-use pricing.