Institute of the Environment and Sustainability

We analyze how the size of the policy jurisdiction affects policy choice for the goal of reducingcarbon dioxide (CO2) emissions from electric power generation. We compare three policies, a CO2 tax, a clean energy standard (CES) and a renewable portfolio standard (RPS). For emissions reduction targets achievable under all three policies, a CO2 tax is the most cost-effective policy, while an RPS is the least cost-effective. However, when the policy region does not cover the entire market, an RPS can achieve larger reductions in CO2 emissions than can a CES or CO2 tax. The smaller the policy region, the larger the difference between the maximum emissions reduction achievable by an RPS and that achievable by a CES or CO2 tax. For a sufficiently small policy region, only a renewables-based policy reduces global emissions.This provides one rationale for small jurisdictions to prefer a renewables-based policy over a pollution-based policy.