No. 2023-17 - The Economics of Coal Phaseouts

Abstract:

Fossil fuels are the world’s greatest source of greenhouse gas emissions and must be curtailed to achieve temperature targets. Technology-specific mitigation policies such as coal phaseouts may be required for reasons including limited success with carbon pricing, administrative ease, high salience, and ability to tackle a range of environmental and social externalities. Coal investors and communities that rely on mining may resist policies that increase costs such as direct taxation. Instead, compensation for early closure may be a more politically feasible route, especially given concerns around achieving a just transition. Compensation decided via a negotiated approach suffers from asymmetric information. Competitive auctions can help discover efficient compensation payments and order of closure. However, successful auctions require considering: 1. additionality and interaction with existing climate policies, 2. dynamic incentives, and 3. system-wide effects and security of supply. In the absence of being able to implement an auction, strengthened incentives for scrappage and repurposing of assets could be options.