Carbon pricing effects on renewables: evidence from California’s electricity market

Abstract

California's electricity market is remarkable due to its distinctive regulatory framework, which incorporates a cap-and-trade system and a carbon border adjustment mechanism (CBAM). However, our understanding of the effects of these carbon pricing policies on renewables deployment in California and its neighboring states is limited. Here we show that California's cap-and-trade policy has a positive effect on renewable electricity capacity at a county level, with an additional 148.9 MW on average compared to the counterfactual scenario with no carbon pricing; this equates to a 6.71 percentage point increase in the share of statewide renewable electricity capacity. Regarding the CBAM, we show novel ex-post evidence on the effects of the CBAM on California's main trading partners in terms of new renewable capacity. We find that the CBAM positively impacts renewable capacity in California's neighboring states if their electricity exports are not already from renewable sources (Arizona and Nevada, but not Oregon, which has major exports from hydroelectric plants). A thorough discussion of complementary policies (such as the role played by Renewable Portfolio Standards) is presented and the results are robust to them. These results are relevant in terms of the effects of carbon pricing on the adoption of zero‑carbon technology.