How Regional Policies Reduce Carbon Emissions in Electricity Markets: Fuel Switching or Emission Leakage

There are many concerns that regional carbon programs reduce emissions through emission leakage instead of through fuel switching. We use individual firm-level data to investigate the mechanisms of how the Regional Greenhouse Gas Initiative (RGGI) reduces CO emissions and quantify emission leakage. We find that the RGGI program reduced CO emissions by 13.43% of the total emissions from 2009 to 2017 in the RGGI area, among which only 14.35% of the emissions reduction is due to fuel switching from coal to natural gas. From 43.11% (the lower bound) to 85.65% (the upper bound) of the emissions reduction in the RGGI-regulated states are leaked into unregulated areas. We also find that policy-induced fuel switching and fuel price-induced fuel switching increase natural gas heat percentage (natural gas heat input relative to natural gas and coal heat input) in the regulated area by 2.98% and 5.17%, respectively.