Deep Decarbonization of the Electricity Sector: The Interplay of Carbon Pricing and Complementary Policies

This article examines the role of carbon pricing mechanisms—specifically, carbon taxes and Emissions Trading Systems (ETS)—in driving deep decarbonization in the electricity sector. While carbon pricing effectively alters the merit order of power generation and incentivizes short-term fuel switching from coal to lower-carbon alternatives, relying solely on price signals is insufficient for achieving net-zero targets. The analysis highlights that pricing mechanisms must navigate challenges such as price volatility, carbon lock-in, and adverse distributional impacts on consumers. Furthermore, standalone pricing often fails to spur the capital-intensive investments in firm low-carbon resources required to maintain long-term grid reliability. To address these distinct market failures, the study underscores the necessity of a comprehensive policy portfolio. Integrating carbon pricing with complementary measures—including targeted technology subsidies, energy efficiency standards, revenue recycling, and infrastructure investments—provides the most robust, equitable, and cost-effective pathway for the structural transformation of the power sector.