As part of its most recent Annual Energy Outlook, the U.S. Energy Information Administration (EIA) conducted three alternative policy cases on how carbon fees affect emissions from fossil fuel consumption. In the short term, even relatively modest carbon fees reduce carbon dioxide (CO2) emissions, especially in the electric power sector where natural gas and renewables displace coal. However, once the emissions level associated with coal consumption in the power sector has been achieved, the remaining fossil fuel emissions from natural gas and petroleum consumption are harder to reduce.

EIA’s three carbon fee cases start with $15, $25, and $35 per metric ton (mt) of CO2, beginning in 2021. The fees rise by 5% per year in real dollar terms through 2050. Adding carbon fees increases the costs of certain forms of energy and reduces total consumer disposable income in the economy. In these cases, returning these revenues to consumers partially offsets the loss in disposable income.

All three carbon fee cases share a similar pattern in which energy-related CO2 emissions decline in the near term before leveling off in the late 2030s. In all but the $35 Carbon Fee case, CO2 emissions begin to rise, even as the carbon fees continue to increase.

One of the fastest drivers of change in CO2 emissions occurs in the electric power sector because of accelerated coal-fired generating capacity retirements. In the AEO2020 Reference case, which reflects current laws and regulations, EIA forecasts that almost no coal-fired capacity will retire between 2025 and 2050. In the carbon fee cases, coal-fired capacity retirements continue during that period. In the $35 Carbon Fee case, 15 gigawatts (GW) of coal-fired capacity remains in the United States in 2050—a significant decrease from the 229 GW operating at the end of 2019. Coal is the most carbon-intensive fossil fuel, emitting about 95 kilograms (kg) of CO2 for each million British thermal units (MMBtu) combusted.

Consumption of natural gas, the least carbon-intensive fossil fuel (emitting about 53 kg CO2/MMBtu), increases in the power sector in the near term because natural gas-fired electricity generation replaces coal-fired generation. However, later in the projection period, natural gas loses U.S. electric power generation market share to renewables. Electricity generation from nuclear power also increases in the carbon fee cases, compared with the Reference case, because fewer nuclear plants retire than in the Reference case.

Petroleum is the least responsive fossil fuel to carbon fees. Transportation and industrial uses for petroleum—sectors that accounted for 95% of petroleum consumption in 2019—have few substitutes. Most petroleum fuels have a carbon intensity between that of coal and natural gas: for example, motor gasoline has a carbon intensity of 71 kg CO2/MMBtu.

Principal contributor: Perry Lindstrom