The electricity supply system is undergoing major regulatory and technological change with significant implications for the way in which the sector will operate (including its patterns of carbon emissions) and for the policies required to ensure socially and environmentally desirable outcomes. One such change stems from the rapid emergence of viable small-scale (i.e., smaller than 500 kW) generators that are potentially competitive with grid-delivered electricity, especially in combined heat and power configurations. Such distributed energy resources (DER) may be grouped together with loads in microgrids (µGrids). These clusters could operate semi-autonomously from the established power system, or macrogrid, matching power quality and reliability more closely to local end-use requirements. The impact of a carbon tax on DER adoption by the µgrid and resulting carbon emissions is assessed here, using a combined cost approach. In general, we find that increases in the carbon tax stimulate DER adoption, with the added DER capacity being overwhelmingly from "green," or environmentally benign technologies. Furthermore, more carbon emissions abatement is possible at lower levels of carbon tax if "green" DER technologies are granted subsidies towards their turnkey costs. However, these results are sensitive to the regulatory environment, however. For example, carbon emissions abatement is greater under the tariff scenario than in one that allows the µgrid to purchase electricity from the open market.