Separate Markets for Externalities: Regional versus State-by-State Implementation of the Clean Power Plan
In the U.S., laws that are enacted at the federal level have to be implemented by individual states. In general, although a single market for the environmental externality is ideal, only separate markets may be feasible.
The difficulty of establishing a single market raises the question to what extent separate markets are good enough substitutes for a single market. This study empirically examines this question in the context of the Clean Power Plan. The goal is to compare electricity market outcomes under regional and state-by-state implementations of the CPP, and to identify the important economic mechanisms that drive their relative efficiencies.
When it comes to carbon dioxide emissions, how inefficient are separate markets versus a single market? Inefficiencies associated with separate markets are mitigated by the fact that firms owning plants across multiple markets participate in a single integrated market for electricity.