Due to low natural gas prices and the environmental advantages of natural gas combined cycle (NGCC) compared to coal, NGCC is replacing coal generators as the inframarginal providers of electricity. However, on average, NGCCs are running only 54 percent of the time. Utilizing excess NGCC capacity further, in place of coal generation, is a short-term solution for reducing greenhouse gases.
This research evaluates the impact of a carbon tax on substitution of natural gas for coal in the electricity sector. A carbon tax would influence the economics that system operators consider when determining how much to run a power plant. Through the use of fixed effects regression and counterfactual calculations, data from 2003-2017 is analyzed to evaluate the impact of a carbon tax on NGCC utilization and carbon emissions reductions through 2026. An estimated $220/ton carbon tax would be necessary to reach a 75 percent NGCC utilization target, but the largest marginal increase in NGCC utilization comes from a carbon tax of $1-$50/ton. A $50 carbon tax would initially reduce electricity sector carbon emissions between 9-12 percent based on assumptions about future NGCC capacity expansion. The proposed carbon tax would be simpler to implement than an economy-wide tax and would still lead to significant carbon reductions in the short-run.