Association for Public Policy Analysis & Management

Nationwide climate policy targeting the power sector may lead to dramatic changes to Indiana’s electricity generation system because Indiana relies heavily on coal as its primary source for electricity generation and because coal is much more carbon-intensive than other fossil fuels. In the possible event that Indiana will have to act on carbon mitigation driven by a national climate policy in the future, it is important for state policymakers to understand the costs and efficacy of alternative strategies. In addition, assessing the impacts of the policy alternatives on Indiana serves as guidance for the national policy design process regarding the subnational impacts.

A linear-programming optimization model was created based on the MARKAL energy system model framework in order to analyze the impact of alternative climate policies on the state of Indiana. This model is named IN-MARKAL and is built based on comprehensive research into Indiana’s energy-economic system, including primary resource supply, energy conversion sectors and end-use sectors.

Alternative scenarios explored in this study include a base case scenario; six renewable portfolio standard (RPS) scenarios, including two without trading in renewable energy credits (RECs) and four with REC trading at various costs; three carbon tax scenarios; and two emission rate-based carbon cap scenarios. The results of the model show that an RPS is a very cost effective option among policy tools examined to achieve substantial emissions reductions for the power sector of Indiana, but it may also lead to a generation mix that is dominated by coal and wind, and thus may raise reliability concerns. A carbon tax appears to be the least cost-effective tool to reduce carbon emissions for Indiana based on the tax trajectories modeled. The emission cap is effective for realizing deep carbon reductions with moderate cost and leads to a diverse generation portfolio for Indiana; but the interim goal for Indiana specified in the current EPA proposal may not be achievable, resulting in a huge increase in marginal cost of electricity during the policy phase-in, rather than the smooth electricity cost trajectory observed in some other scenarios.

The results from scenario analysis indicated that the increment to the discounted marginal cost of electricity for the RPS scenarios relative to the case where no policy is imposed is in the range of 4%-12% by 2019 in real terms; and those for carbon tax scenarios and emission-rate cap scenarios are in the range of 7%-56% and 23%-32% respectively. For the 2007-2036 period, the average rise of the discounted marginal cost of electricity for RPS scenarios relative to the base case where no policy is imposed is in the range of 2%-11%; and those for carbon tax scenarios and emission-rate cap scenarios are in the range of 8%-42% and 7%-10% respectively.

This analysis provides insights into carbon mitigation from an economic perspective focusing on Indiana – a state with a coal-intensive generation fleet. Future work will focus on issues such as reliability concerns as well as additional alternatives for achieving a low carbon electricity generation system with reasonable costs.