CARBON PRICING AS A LONG-RUN INVESTMENT SIGNAL FOR GRID INFRASTRUCTURE: STORAGE, TRANSMISSION, AND FIRM CAPACITY UNDER HIGH RENEWABLE PENETRATION

Abstract

Carbon pricing is widely regarded as the most economically efficient instrument for internalizing the external costs of emissions, yet its effectiveness as a long-run investment signal for grid infrastructure under high renewable penetration remains contested. This paper examines whether carbon pricing can induce optimal investment in storage, transmission, and firm low-carbon capacity in electricity systems characterized by high shares of wind and solar generation. Building on evidence that renewable penetration suppresses wholesale prices and intensifies missing-money dynamics (Winkler et al., 2016; Newbery, 2016), and that renewable cannibalization reduces market value without sufficient carbon pricing (Liebensteiner & Naumann, 2022), we develop a dynamic capacity expansion framework integrating generation, storage, transmission, and firm resources. Consistent with deep decarbonization modeling (Sepulveda et al., 2018; Levin et al., 2023), results show that high and credible carbon price trajectories substantially increase investment in firm low-carbon capacity and reduce system costs. Carbon pricing enhances storage value by widening price spreads, but long-duration storage remains sensitive to cost thresholds (Sepulveda et al., 2021) and revenue design (Staffell & Rustomji, 2016; Mays, 2021). Transmission expansion becomes more economically attractive as carbon pricing amplifies spatial cost differentials, though regulatory coordination remains critical (Schaber et al., 2012; Wang et al., 2023). We find that carbon pricing is necessary but not sufficient for optimal infrastructure deployment. Complementary mechanisms including capacity remuneration and long-term contracts significantly enhance investment stability and reliability outcomes (Grubb & Newbery, 2018; Fabra, 2023). The results suggest that durable carbon price trajectories must be embedded within broader market design reforms to function as credible long-run capital allocation signals in high-renewable electricity systems.