How do governments steer energy? Taxes, credits, standards and carbon prices

Apply a carbon price, two credits and a clean-energy standard to the same wind, solar, storage and gas plan, and see what each cuts, costs and who pays

Analyst lesson A12 of Energy Systems, Step by Step: re-plan a regional grid’s wind, solar, storage and gas under a carbon price, a production credit, an investment credit and a clean-energy standard, solved as a linear program in the browser; compare the CO₂ cut, the resource cost, the money that changes hands and the side effects, with a real rule of each kind and its date.
  • Analyst · L2
  • 25 min guided · about 30 min practice
  • After A1 and lesson 12

The Plains Grid's plan for a year: four instruments, each against no policy

No policy: nothing new is built; CO₂ 4.78 Mt a year, resource cost $388.9M, wind and sun 47% of demand.

Instrument, default setting CO₂ Cut Resource cost Per tonne avoided Money that changes hands, a year
Carbon price, $30 per t 2.95 Mt 38% +$41.6M $23 per t $88.5M
Production credit, $10 per MWh 3.04 Mt 36% +$39.1M $23 per t $42.1M
Investment credit, 30% 3.07 Mt 36% +$38.4M $22 per t $39.4M (annual equivalent of $681.3M up front)
Clean-energy standard, 65% 3.16 Mt 34% +$36.3M $22 per t $136.0M (illustrative)

Per tonne avoided = the change in resource cost ÷ the CO₂ avoided, from unrounded values: at $30 per t, $41.6M ÷ 1.83 Mt = $23 per t.

Similar cuts at similar cost per tonne; the money that changes hands, and who pays it, differs. Certificate spending assumes certificates trade at the model's marginal compliance cost.

With JavaScript on, you set each instrument yourself and the solver re-plans the year in your browser.

Illustrative grid. The Plains Grid of A10, fictional: a 4,000 MW peak, 3,000 MW of wind, 600 MW of solar and gas plants with EIA's 2025 heat rates and gas price.

What may be built. Wind and solar at EIA's AEO2026 costs; a 4-hour battery at NREL's 2025 update, moved from 2024 to 2025 dollars; all at 4% real.

A year from six days. Four typical days of 2025, one per season, plus the calmest day and the day of the highest net load, each weighted by the days it stands for (EIA-930 shapes).

About 25 guided minutes in six steps. Solver: HiGHS (open source), loaded on your first solve (about 3.5 MB, once).

What you just did, as diagrams

Same lever, different hands
At the defaults each instrument cuts 34% to 38% of CO₂ for $22 to $23 per t avoided; the money that changes hands runs from $39.4M to $136.0M a year.
Per tonne avoided
The change in resource cost ÷ the CO₂ avoided, both against no policy: at $30 per t, $41.6M ÷ 1.83 Mt = $23 per t. Carbon payments are left out.
Carbon price
Raises every gas MWh's cost; gas plants pay $88.5M a year at $30 per t.
Credits
Lower the cost of new wind and solar; taxpayers pay. A $30 production credit costs $46 per t avoided, against $23 per t at $10.
Investment credit
Paid up front: $681.3M at 30%, or $39.4M a year spread over the plants' life at 4%.
Standard
Requires a clean share. If certificates trade at the marginal compliance cost, $9.39 per MWh at 65%, customers would spend $136.0M a year, wind that ran anyway included.
Real costs and transfers
The resource cost changes only with the plan; payments between groups are transfers.
Go deeper · AnalystReal costs and transfers
  • Resource cost. What the plan uses up: new plants’ capital and upkeep, and the gas burned. It changes only when the plan changes.
  • Transfers. Carbon payments, credits and certificate payments move money between groups; they add up to zero across society, so they are left out of the resource cost.
  • Who bears them in the end depends on prices and contracts: a carbon payment can reach customers’ bills, a credit can lower them. This model does not trace that.
  • Equal cuts. Compare cost per tonne avoided between instruments only at similar cuts: the cost of the next tonne rises as the cut deepens.
Go deeper · ModelerEach instrument as an edit of one LP
  • Carbon price \(\tau\) ($ per t): each gas MWh’s cost \(c_g\) ($ per MWh) becomes \(c_g + \tau\, e_g\), with \(e_g\) its CO₂ in t per MWh.
  • Production credit \(\pi\) ($ per MWh): each new wind and solar MWh used costs \(-\pi\).
  • Investment credit \(\iota\) (a share): each new plant’s annual capital cost is multiplied by \(1 - \iota\).
  • Clean-energy standard \(s\) (a share): one more rule, \(\sum_t w_t\, \mathit{clean}_t \ge s \sum_t w_t\, d_t\). Its dual, a shadow price, is the cost of one more required MWh.
  • Symbols. \(t\): an hour of the six days; \(w_t\): the days it stands for; \(\mathit{clean}_t\): wind and sun used and \(d_t\): demand, in MW over one hour, so MWh.
  • Next. M6 writes this LP out, caps CO₂ instead of pricing it, and adds a procurement rule.
Go deeperWhat this lesson leaves out
  • Demand that answers to prices: here demand is the same under every instrument.
  • How the government raises or spends the money, and the instruments' interactions when several apply at once.
  • Timing: the plan is built at once, with perfect foresight of the six days.
  • Lines inside the grid, imports and exports, and the reliability value of new plants.

Check yourself

Myth or fact? “Here, instruments that cut about the same CO₂ cost society about the same; they differ most in who pays.”

  • Myth
  • Fact
Answer

Fact, in this model. The defaults cut 34% to 38% for $22 to $23 per t avoided, while the money that changes hands runs from $39.4M to $136.0M.

Myth or fact? “A bigger production credit buys each tonne as cheaply as a small one.”

  • Myth
  • Fact
Answer

Myth. At $10 per MWh the plan avoids CO₂ at $23 per t; at $30, at $46 per t, with 1.7 TWh of wind and sun curtailed.

Myth or fact? “A clean-energy standard costs nothing, because it costs taxpayers nothing.”

  • Myth
  • Fact
Answer

Myth. At 65% the resource cost rises by $36.3M a year. If customers fund certificates at the marginal compliance cost, they spend $136.0M.

Myth or fact? “Any policy that favors clean power gets batteries built.”

  • Myth, here
  • Fact
Answer

Myth, here. No slider setting builds a battery: under these costs and six representative days, its energy-shifting savings do not cover its annual cost. Reserves and other reliability services are not valued.

A combined-cycle plant emits 0.40 t of CO₂ per MWh. By how much does a $30 carbon price raise its cost per MWh?

  • $12.00
  • $30.00
  • $75.00
  • $0.40
Answer

$12.00: $30 per t × 0.40 t per MWh. $30 forgets the rate; $75 divides by it.

Numbers, sources and what’s next

In the real world: one rule of each kind

  • Carbon price · European Union. EU Emissions Trading System.

    A cap-and-trade scheme launched in 2005: covered plants, electricity and heat generation among them, surrender one allowance per tonne of CO₂ equivalent.

    Source: European Commission, About the EU Emissions Trading System (page updated 13 May 2026), read 5 November 2026.

  • Production credit · United States, federal. Clean electricity production credit, tax code section 45Y.

    For wind and solar, Public Law 119-21 (2025) ends it for plants that begin construction after 4 July 2026 and enter service after 31 December 2027.

    Source: IRS, Notice 2025-42, Internal Revenue Bulletin 2025-36, sections 1 and 2.02, 2 September 2025; read 5 November 2026.

  • Investment credit · United States, federal. Clean electricity investment credit, tax code section 48E.

    The same law sets the same end dates for wind and solar plants.

    Source: IRS, Notice 2025-42, Internal Revenue Bulletin 2025-36, sections 1 and 2.02, 2 September 2025; read 5 November 2026.

  • Clean-energy standard · California. Renewables Portfolio Standard (a renewables-only standard).

    Senate Bill 100 (2018) raised it to 60% of retail electricity sales by 2030, from eligible renewable plants, such as wind and solar, anywhere in the Western Electricity Coordinating Council's region.

    Source: California Public Utilities Commission, Renewables Portfolio Standard (RPS) Program page, read 5 November 2026.

    For scale: Lawrence Berkeley National Laboratory counted 16 states that had adopted a 100% clean electricity standard, with data through 2023.

    Source: Barbose, U.S. State Renewables Portfolio & Clean Electricity Standards: 2024 Status Update, LBNL (August 2024), read 5 November 2026.

The model's instruments are simpler than these rules: no phase-outs, eligibility tests or trading.

Next

M6 · Putting carbon in the model: caps, prices, frontiers and procurement rules

Sources and further reading

Spotted an error, or stuck? Write to hlli@ksu.edu. Corrections are made in place and dated here.

Text licensed CC BY 4.0, code MIT: teachers and students may reuse and adapt it, with credit to Honglin Li.