Transforming power plant dispatch: integrating environmental costs to prioritize clean energy and address climate change

The existing market structure does not adequately account for the social costs of pollution, resulting in a societal burden. To address this issue, we propose incorporating environmental factors into power plant bidding prices, using metrics like heat rates and input-output curves. This adjustment in the merit order dispatch process would prioritize low-emission technologies over high-emission plants, thereby reducing emissions and decreasing the profitability of polluting sources. A carbon tax alone falls short of achieving this shift, as it overlooks the differences between average and marginal costs. By transparently factoring in external costs and recalculating marginal costs, we can transform power plant dispatch, paving the way for a lasting transiti on to cleaner energy sources. We recommend that policymakers require power generators to disclose emission factors and input-output curves, empowering system operators to integrate environmental costs into their decision-making and support a more sustainable energy future.