Monday, April 27, 2009

The risks of "cap and trade"

When discussions arise about Climate Change, and the possibility that carbon dioxide and the other greenhouse gases are responsible for the rise in global temperatures, one prevailing argument is that “we cannot afford to take the risk of the AGW argument being right, without doing something.” However, in that discussion, there is rarely any mention of possible negative consequences to mitigating against increased levels of carbon dioxide in the atmosphere. The only positions mentioned are frequently the projections of dramatic rises in sea levels, the promise of worse storms, droughts and climate conditions and other projected severe costs of inaction. The costs of the actions themselves are not addressed, and the implications are that the world will be a better place if some of the current trends in Climate Change are, if nothing further, stopped from progressing further.

But there are costs to the required changes in lifestyle that a reduction in carbon dioxide production will require, and those potential impacts are rarely spelled out to the public, or to the politicians who must enact the legislation to put new laws in place. However politicians, particularly in those districts that are likely to be impacted by the changes in regulations, are already showing some sensitivity to the potential negative aspects of “cap and trade” and so it might be worth exploring the topic in a little more depth.

The Energy Summit in Columbia last week allowed some of the utility companies to spell out the levels of cost that will be incurred if cap and trade legislation is enacted, based on a projected cost for the allowance to generate a ton of carbon dioxide. But they largely built their discussion around the price of that portion of the electricity that they will still be allowed to generate. A cap and trade system, however, comes in two parts. The first part is to look at the overall production of carbon dioxide, say 6 billion tons/year, where the program cuts this back by, say 500 million tons a year. (This is the reduction in the capacity to produce or the “cap.”) For the sake of the following discussion I will assume that 1 ton of coal produces very roughly 3 tons of carbon dioxide to make the arithmetic easier.

The first argument of those who look at this problem of a reduced supply is to suggest that the gap can be met by improving efficiency of electrical use, and conservation. However the implementation of a cap and trade policy is not predicated on that efficiency change happening, but it will occur as a separate event. And Jevons Paradox will tell you that “improving energy efficiency increases energy consumption.” So that the savings in power required are unlikely to be realized.

Which means that if the utilities are restricted in the amount of power that they can generate with carbon-producing strategies, then they must have alternate supplies in place. Theoretically that may well be the case. The number of states that are including a “sustainable source” quotient in their mandated supplies is steadily growing. However, as Montana, for example, is discovering there may be a difference between the targets and the practical realities. As credit has become tight, available funds for new farms are becoming harder to raise, and without a perceived increase in demand, it is harder to justify a new investment in plant when the old coal plant is still producing at a relatively low cost. And without the lead time being used to produce the new energy sources that will be needed, when the time comes to flip that switch, it may not yet be connected.

The problem actually is a little worse that this. Because most of the coal-fired power plants are quite old, and while maintained to continue to produce power, they are less efficient and more polluting that the more modern plants that are planned to replace them. But with the anticipated change in regulation now that EPA has ruled on carbon dioxide , almost all the originally about 200 planned new coal-fired power plants are holding back on commitments and roughly half have cancelled or indefinitely postponed their planned construction. Thus the increased supply of power from new plants may not appear.

There are two additional thoughts to consider. The first is the proposed restriction on emissions from these new plants:
The (Waxman – Markey) proposal unabashedly bans new coal-fired electric plants. In 2009 new coal-fueled electric plants are limited to 1100 pounds of carbon dioxide per megawatt-hour (MWh) and 800 pounds after 2020. Present fossil-fuel electric plants emit the following pounds of CO2 per MWh: 2100 for coal, 1900 for oil, and 1300 for natural gas. . . . The bill that includes "security" in its title limits our plentiful secure coal supply to discharges of about one-half that allowed for oil and natural gas.
The second is that some parts of the country do not have the ability to tap into the wind and solar resources that are currently being suggested as the solution to the problem.

Productive wind is only available in a limited number of states and their regions, and similarly solar power cannot be relied on in a North-Eastern Winter. One cannot legislate an alternative technology that does not yet exist to fill in the gaps between what will be allowed from the power plants of yesterday, and the demands that a rebounding economy may place upon them. Mandating that the older suppliers of power close, before the new plants to replace them are installed will have significant consequences to the available jobs that can be supported, if the factories and industrial base begin to lose the reliability of the power sources that they have today.

Even, however, if they find some way of meeting the target for the renewable portion of their portfolio, the utilities won’t be out of the wood. Because the purchase of the allocation for the carbon dioxide they do admit will also bring additional cost. As noted at the Energy Summit a price of $50 per ton of carbon allocation would likely double electric bills in Missouri. Burning a ton of coal, that now costs $50, would raise its price to $250. While if the price per allocation ton was raised to $200 per ton (which has been suggested as being necessary to support some alternate energy choices) this would raise the cost by a factor of five (i.e. a current electric bill of $200 would rise to $1,000 per month). In much the same way as Secretary Chu recognized at the EIA Conference that increases in the cost of oil contributed to the severity of the recession, one can equally imagine that a similar effect will be felt with an equivalent rise in the cost of electricity.

The current path forward, with a hesitation in construction of new power plants holds the risk that the United States will not have the power that it needs in the future to match industrial and domestic demands. In those cases it is often industry that is the first to see the cutbacks in supply when load shedding is needed. But the resulting drop in production, and international competitiveness, may well damage or destroy the recovering economy after this recession comes to an end. That too is a risk that should be protected against.


  1. Hi Dave, interesting lines.

    I'd like to point two more issues with the strategy this US administration is outlining:

    First, it seems to ignore that Coal has an entirely different role in electricity generation relatively to Wind and/or Solar. While the later is primarily a base-load generator the former impacts mainly load-balancing. On this issue I always point out to our experience, where renewables have grown now to about one third of the electricity market. Their main impact was to reduce imports in high demand hours and Natural Gas usage, the main load-balancing resource.

    In the long run, renewables will effectively reduce the amount of fossil fuels burned to generate base-load, but this takes us to the second issue: they won't reduce the number of coal plants, but the amount of time they operate. Coal generation capacity and Coal usage are different things. And this seems the most concerning point of this strategy, it looks like something envisioned without any knowledge of the basic operational issues of electricity generation.

    The only alternatives that can fully replace Coal are Geothermal (which is limited in capacity and still maturing technologically) and Nuclear. Apart from these, total replacement of Coal can only be achieved by developing long term storage capacity in huge amounts.

    If this new policy is aimed at simply reducing Coal generation capacity without setting proper alternatives then it's energy suicide.

  2. With respect to new coal plants, the Waxman-Markey bill seems headed down a similar path to the UK, in allowing some new generation capacity to be built without carbon capture and storage but with a presumably movable deadline for retrofitting.

    One of the comments over at the Climate Progress blog says that a Carbon Storage Institute is to be set up under the Electric Power Research Institute, presumably to provide similar funding for technology development.

    What is the current state of carbon capture and storage technology?

  3. Another problem with cap and trade is the enormous amount of unproductive labor it requires.  The caps allow borrowing from future years, some uses are capped and some are not, and other complications which make compliance nightmarishly complex.  This will require armies of accountants and lawyers to hash out the details.

    Need I point out that armies of accountants and lawyers do nothing to produce food, or housing, or electronics, or the actual goods and services that people need and want?  This is a pure deadweight loss on the economy.

    If we are going to deal with carbon (and other GHG) emissions, we need something simple, straightforward and hard to game.  Something like a carbon tax.

  4. Luis,
    In Missouri the nameplate capacities of the facilities are such that you would think only 50% of the electricity would come from coal - but actually over 85% does, since coal is cheaper to use than natural gas and so it is used more consistently.

    The reality is in the allowable numbers, and remember that KingsNorth Power Station in the UK, where James Hansen went to the defense of the protestors, is a replacement facility. (And appears to be coming in too late to fill the energy gap that is developing).

    Congressman Waxman is sold on "cap and trade" since he believes that it worked perfectly in stopping acid rain (through capping SO2 levels) and he thinks a carbon tax is too vulnerable to manipulation. Being where he is, my guess is that if we see anything (and there is some doubt about that) then it will be C&T.

  5. Engineer-Poet, British Columbia, where I live, presently has a carbon tax. In the election now underway, the opposition party has shamelessly cast it as a gas tax and promised (if elected) to replace it with cap-and-trade on industry.

    If broadly applied across industry, businesses and individuals, as BC's tax is, a carbon tax makes more sense than a cap-and-trade levy on industry alone because it captures a larger proportion of the emissions. The problem, from some political perspectives, is that nobody can make a profit trading the credits.

  6. There's a lot of anger against Wall Street and its shady traders right now.  A politically-savvy administration could easily turn that "bug" into a feature.  What I fear is that even Obama is in their pocket.

    I don't like populism much, but I'm beginning to think that it may be a necessary antidote.

  7. The Canadian government appears to be following the US lead on coal fired generation, but perhaps more aggressively. Environment Minister Jim Prentice has announced the government's intention to phase out coal-fired generation, unless it has near-zero net emissions, by using cap and trade for thermal coal facilities and phasing them out as they reach the end of their economic life.

    The new regulations, scheduled for release later this year, will be unpopular in several provinces where coal dominates electricity sources. Since the governing Conservative party does not have an absolute majority in Parliament, it'll be interesting to see who else supports the bill.

  8. I begin to think that too many folk are betting on a gas bonanza that may prove to be smaller in volume and higher in price than they anticipate.