Electricity Sector Regulation, Carbon Pricing, and Climate Policy

In the United States, Europe, China, India, and many other parts of the world, when policymakers and others consider ways to reduce CO2 emissions to help address climate change, major attention is frequently given to the electric power sector, partly because of its standing as the first or second largest source of emissions, and partly because it frequently offers low-hanging fruit, that is, low-cost abatement opportunities.  In the most recent episode of my podcast series, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program,” I host an economist with three decades of experience studying the electricity sector, and making important contributions to the design of new institutions and appropriate regulations. 

I’m referring to Karen Palmer, a Senior Fellow at Resources for the Future in Washington, D.C., where she directs the Future of Power Initiative.  Karen continues to carry out valuable research, participate in government panels, and recently served as President of the Association of Environmental and Resource Economists.  The podcast is produced by the Harvard Environmental Economics Program.  You can listen to our complete conversation here.

Dr. Palmer, who is renowned for her research on the U.S. electric power sector, shares her insights on electricity regulation and deregulation, carbon pricing, and climate change policy.  She has spent almost 34 years at Resources for the Future (RFF), having initially been drawn to it at a time when governments were taking early steps to deregulate the electric power sector.

“I came here because the overlaps in terms of regulation in my prior research in graduate school and what happens in electricity and also to a certain extent natural gas were evident, but things were definitely changing in both natural gas and electricity sector early during my [early] time here,” she says.

In 1996, Palmer and several colleagues wrote a book titled “A Shock to the System: Restructuring America’s Electric Industry,” which served to inform policy debates then taking place about the sector’s transformation.

“As the electricity sector started to introduce more competition in terms of who was going to actually deliver electricity, it became clear that there are a lot of challenges in terms of policy and pricing and how markets function that remained open and could use some informing,” she remarks.

Turning to the present day, Palmer observes that the Biden Administration’s energy and climate policy relies primarily on subsidies to encourage the use of clean electricity and other clean power sources, but hasn’t yet given up on efforts to use other policy tools to stimulate positive change.

“The fact that they weren’t able to fully price carbon doesn’t mean that there’s not going to be efforts to address emissions from emitting sources, which aren’t really targeted under the subsidies directly,” she argues. “We have seen the proposed form of the third try at using the Clean Air Act to regulate emissions from existing and new fossil fuel generators. There’s not only the carrot, but there is a bit of a stick.”

“Going beyond the federal level … there’s a lot of activity happening in the states on both fronts, again, in terms of subsidizing clean sources of power [and] also imposing increasingly prices on power producers. As economists, we like carbon pricing because it’s efficient. We often pose this dichotomy between … we either price carbon or we subsidize clean energy. I think that’s kind of a false dichotomy, and that policies are going to build both ways from both ends,” she continues.

Finally, acknowledging the increasingly important role played by the concept of environmental justice in climate policy considerations and debates, Palmer says that policymakers must be sensitive to addressing past harms and mitigating future harms born by those least able to afford them.

“As we look to decarbonize the economy more broadly, the costs of electricity are going to play an important role in terms of people’s incentives to adopt or to do things that will likely be necessary to get rid of fossil fuel use in buildings, like adopting heat pumps and electrifying other energy end uses such as vehicles,” she says.

“Keeping electricity prices low in general or the role that electricity prices will play in general will be part of that. But also, there are important upfront costs associated with doing these things and adopting these new technologies, which really substitute more capital costs and less energy costs. Because not only are they electrified, but they’re often extremely efficient,” Karen Palmer explains. “Finding ways to make that work across the board for all types of consumers, including low-income consumers and historically disadvantaged communities, is going to be an important part of the policy puzzle.”

For this and much, much more, I encourage you to listen to this 50th episode of the Environmental Insights series, with future episodes scheduled to drop each month.  You can find a transcript of our conversation at the website of the Harvard Environmental Economics Program.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.