Have U.S. power plants become less technically efficient? The impact of carbon emission regulation

We estimate directional distance functions to measure the impact of carbon emission regulation, the Regional Greenhouse Gas Initiative (RGGI) in particular, on U.S. power plants' technical efficiency. The model shows that the average technical efficiency scores for coal and natural gas plants are 88.70% and 83.14% respectively, indicating a very technically efficient industry. We find no evidence of technical efficiency changes due to the RGGI regime in the RGGI area. In the same area, relatively less efficient coal plants exited the market and slightly more efficient natural gas plants entered, compared to the incumbent plants. In addition, some evidence of a spillover effect is found. Using a counterfactual analysis, the RGGI regulation leads to a 1.48% decline in the average technical efficiency for coal plants within neighboring states of RGGI during 2009–2013. - Highlights: • RGGI does not lead to a change in the technical efficiency of RGGI power plants. • Less efficient coal plants exit. • Entering natural gas plants are more efficient. • RGGI has a spillover effect on neighboring coal plants.