Do Competitive Markets Clean Up the US Electricity Sector?: Evidence From the Southwest Power Pool

In the US, there has been a movement toward competitive electricity markets with system-operator auctions. However, the impact of such market reforms on non-market outcomes like emission rates remains unclear. We decompose how competition in wholesale electricity markets can affect carbon emission rates of electricity generating units (EGUs) through process , reallocation , and selection effects. Using event-study and difference-indifference strategies, we quantify the Day-Ahead Market’s (DAM) environmental impact in the Southwest Power Pool and assess the importance of each channel, with Pennsylvania, New Jersey, and Maryland interconnection serving as the comparison group. We find DAM reduced average carbon emission rates of EGUs by 0.033 tons per MWh, a roughly 4 percent reduction. This reduction is primarily driven by the selection effect: emission-intensive and uneconomical EGUs retire after the DAM market reform. This corresponds to an annual avoidance of 7.66 million tons of carbon dioxide emissions, worth approximately $383.4 million in avoided damages. JEL Classification: L51, L94, Q48, Q53