Interactions of Transportation Carbon Pricing with the Electricity Market in the TCI Region

• A modest carbon price in TCI can be expected to have nearly unobservable effects on the electricity sector because the change in electricity demand will remain a small portion of total electricity demand. Companion policies that involve use of carbon pricing revenues will yield additional increases in electricity demand from the transportation sector.
• In contrast, the electricity sector could influence outcomes in the transportation sector importantly through electricity rate reform and strategic infrastructure investments for greater electric vehicle adoption.
• If carbon pricing in transportation and electricity were linked the overall cost effectiveness of carbon pricing in the region would be improved but it would yield substantially less revenue for investments in transportation.

Twelve northeast and mid-Atlantic states and the District of Columbia are participating in the Transportation Climate Initiative (TCI), a regional transportation effort to coordinate investment in cleaner transportation and infrastructure. [1] One expected element of the program is a price on carbon emissions from transportation, which could yield billions of dollars for investment.

This issue brief examines how the introduction of a carbon price through a cap-and-trade program in the transportation sector might affect the electricity sector. One way it might affect the electricity sector is if TCI accelerates the adoption of electric vehicles. The demand for electricity to charge those vehicles could affect decisions about investment and operation in the electricity sector, its environmental outcomes, and prices. Further, the electricity sector in this region is already subject to carbon pricing through the Regional Greenhouse Gas Initiative (RGGI) cap-and-trade program. [2] Consequently, a second way TCI could affect the electricity sector is if it led to an increase in the demand for emissions allowances in the RGGI market, which would push up the RGGI allowance price. We examine these issues using the Haiku model of the electricity sector in the RGGI region.

Our conclusions are:

• A modest carbon price in TCI can be expected to have nearly unobservable effects on the electricity sector. The change in demand for electricity for personal transportation due to a carbon price in TCI will remain a small portion of total electricity demand over the next decade. However, companion policies including infrastructure investments and electric vehicle incentives enabled by carbon price revenue would likely augment the effect of carbon pricing.
• In contrast, the electricity sector could influence outcomes in the transportation sector importantly through electricity rate reform and strategic infrastructure investments for greater electric vehicle adoption. This strategy could accelerate the introduction of renewable energy, and amplify the emissions reductions in the region.
• If carbon pricing in transportation and electricity were linked the overall cost effectiveness of carbon pricing in the region would be improved, but almost all reductions would occur in the electricity sector not the transportation sector and there would be substantially less revenue for investments in transportation.
• If a linked program were constrained to achieve the same emissions reductions in the aggregate, we find the allowance price would remain at the RGGI price floor.

We emphasize that TCI policies will impact the transportation sector through more than just the incremental changes in driving behavior due to a carbon price, and in fact these changes could be more important than the influence of a carbon price alone. Our purpose, however, is not to evaluate the impact of TCI on the transportation sector but instead to evaluate its impact on the electricity sector. In this context, we expect the results to be generally accurate and robust to more detailed analysis of TCI.

[1] The participating states include Maine, New Hampshire, Vermont, Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Pennsylvania, Delaware, Maryland and Virginia, along with the District of Columbia.

[2] RGGI largely overlaps the TCI region. Virginia has issued a final regulation to join RGGI. Governor Wulf of Pennsylvania has issued an executive order directing the state Department of Environmental Protection to begin a process that would culminate in the state joining RGGI.