Can supply-side environmental policies that limit the extraction of fossil fuels reduce CO2 emissions? We study interactions between a specific supply-side policy — an environmental charge on federal coal — and demand-side emissions regulation under the Clean Power Plan (CPP). Using a detailed dynamic model of the power sector, we estimate that, absent the CPP, an environmental charge equal to the social cost of carbon would generate three-quarters of the projected CPP emissions reductions. With the CPP in place, the charge reduces emissions by reducing leakage and causing the CPP to be non-binding in some scenarios.

Emitting carbon dioxide (CO2 )—and other greenhouse gases—imposes a cost on society because it contributes to damages from climate change. This "social cost" is also known as an "externality," in that the emitter does not bear this cost. The "Social Cost of Carbon" (SCC), then, is the "marginal monetized externality value" of damages from CO2 emissions, where "marginal" refers to the next incremental unit of emissions. As damages from climate change become more evident, it becomes increasingly useful in formulating public policy (especially in connection with attendant benefit-cost analysis of that policy) to employ an SCC—that is, a numerical, non-zero value for climate damages. This paper examines the process in the U.S. government of specifying an SCC.

The authors consider the role of integrated assessment models in estimating the social cost of carbon—an estimation that is important in the formulation of U.S. climate policy.