Kenneth Gillingham, Yale

Will a carbon tax improve the welfare consequences of policies to promote electric vehicles? This paper explores the interactions between carbon prices and high electric vehicle adoption. We first derive conditions for a complementarity between carbon taxes and electric vehicle policies. This exploration shows that a complementarity is possible, especially under high carbon prices. But it also demonstrates that a merit-order effect can reduce the welfare benefits of high electric vehicle penetration under moderate carbon prices in some settings. We then analyze historical electricity generation data to show that this merit-order effect under moderate carbon taxes is likely to occur in several regions. Finally, we use a large-scale dynamic simulation model that includes both the power sector and transportation sector to quantify the importance of these interactions.