Do Power Markets Promote Decarbonization? Evidence from State Level Data in the United States

Since the mid-1990s the changing electricity generation technology mix has been associated with electricity sector carbon dioxide emissions that are 32 percent lower than their 2005 levels. What role have wholesale power markets played in enabling this decarbonization? We examine this question using annual state-level data for 1990 to 2020. The institutional complexity of the history of wholesale power markets and regulatory restructuring informs our block treatment window difference-in-differences empirical strategy, in which we compare generation in restructured states to different control states across different time periods. Our results suggest that lower-carbon generating sources appear to be built in greater numbers in wholesale markets relative to the control states up to 2012, largely but not entirely due to the substitution of natural gas for other fossil fuel generation, namely coal. In more recent years, restructured states and control states look more similar in their generation mix. Our event study results support this conclusion. JEL Classification: L51, Economics of Regulation; L94, Electric Utilities; Q35, Hydrocarbon Resources; Q48, Energy: Government Policy; Q53, Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling