Tech Talk - Coal prospects

Last week was the annual Society of Mining Engineers annual meeting, this year in Salt Lake City, with the title “Leadership in Uncertain Times.” To illustrate the point it had some 6,000 members or more in attendance, as I hear and was quite successful from that point of view. However, through the grapevine I also heard that some of the mining companies are less optimistic of the future, with job offers made for this summer being withdrawn in several cases.

There is a considerable question as to the future of coal, as the title reflects, and this has as much to do with concerns over the construction or not of additional coal-fired powered stations around the world and the changing market as older plants are withdrawn from service. Some of the reason for uncertainty can be seen in the predictions from the EIA for the domestic coal market over the next year or two.

Figure 1. The decline in coal production in the United States over the past two years. (EIA)

The EIA note that last year was the first that production had fallen below 1 billion tons in the past 20 years. It does however forecast that production will increase this year by 3.9% before falling 1.5% in 2015. In both years however it will remain above that billion ton mark. I have written recently about the recent report “Warning Faulty Reporting of US Coal Reserves,” (in which the conclusion is drawn: “Rather than having a “200 year” supply of coal, there is now abundant evidence that the US is rapidly approaching the end of economically recoverable coal.“)

The two stories are, to a significant degree, discussing different topics, although the beginning of the Clean Energy report also discusses the rising price of domestic coal, and why – as it rises – so the switch to other fuels can be anticipated to continue. However, in that regard it is worth noting this other graph from the EIA.

Figure 2. Spot price of coal by basin over the past three years (EIA )

For those who forget 1 MMBtu (million Btu) is roughly equivalent to 1,000 cu ft of natural gas. The EIA also record natural gas prices and, in comparison to the coal price, that of natural gas – for equivalent energy – is considerably higher.

Figure 3. Natural gas prices (Henry Hub) (EIA )

Why then does the Clean Energy Report suggest that coal costs are going up, when as the plot above shows the spot price has been remarkably stable?

Figure 4. Cost of delivered coal in the US from 2004 – 2012. (Clean Energy)

Notice however, in this case, that the cost is for delivered coal, and the cost of that delivery is what has been going up over the past few years. (And you wonder why Warren Buffet invested in railways?

Figure 5. Changes in Railroad freight costs since 1981. (Association of American Railroads)

If you look at the plot you will see that the cost per ton-mile has increased fairly steadily over the past four years from just above 3 cents to 4 cents a ton-mile, which explains a significant part of the increased fuel costs. Railroad income has risen, since 1981, from just under $3 billion to $12 billion.

So what is the future likely to be? Well there is an additional source of income to the industry, outside of the US power plants, and that is through exports. Yet here the story is not really that different. Since 2005 the value of coal exports from the United States have tripled. This is not just a volumetric increase (which has happened with steam coal) but includes an increase from higher prices for metallurgical coal. (Powder River steam coal at 8,800 Btu sells for around $12.35, while the 13,000 Btu Northern Appalachian coal goes for $68.65 a ton. (This is one of the discriminating factors within the coal market that the Clean Energy Report fails to fully discern). Exported coal saw a steadily rising price from 2007, when it averaged $70 a ton through 2011, when it was priced at $148 a ton before falling to $118 in 2012 and to $96 in 2013. Roughly 46 million tons went to Europe in 2013, down from 51 million tons in 2012, while roughly 22 million tons went to Asia (down from almost 26 million tons). Of this about half the European and a third of the Asian coal was steam coal needed to feed coal-fired power plants.

The problem that the industry faces is that this downturn in both domestic and export demand that became evident last year is likely to continue into the next few years. In the case of Europe pressure to close coal-fired power plants continues, despite increasing concerns that the existing base is approaching a point where supply will no longer be able to meet demand. The Sunday Times carried a story this Sunday about Npower and their owner RWE, which produces 10% of the electricity in the UK, but which is writing off hundreds of millions of dollars as it devalues its current power stations, which are being closed by regulation, even as it fails to build replacements, which it is reported to find unattractive in the current political climate. Last December the NPower CEO noted that over the past year the spare capacity in the UK had fallen from 15% to 5% and if that continued this year (and there are more scheduled closures) then by next winter the reserve may be gone and the country may see the start of blackouts that will continue for some years.

In the same vein the United States is also cutting coal-fired production. An article in Motley Fool points to the trend over the next few years.

Figure 6. Projected coal fired power plant closure effects (EIA via The Motley Fool)

However this projection is possibly a little disceptive, since it does not foretell what might happen if “clean coal” can get a grip on the industry. As TMF points out:

But EIA's retirement projections may be too high. While air emissions standards will result in heavy fines, utilities may still foot the bill because of coal's relatively cheap production costs.

With natural gas prices up 50% this year to a four-year high, energy companies are scrambling to find cheaper energy. According to data compiled by Bloomber, an average natural gas plant makes $3.04 a megawatt-hour off its fuel, compared to a whopping $31.58 for coal-fired plants.

While coal might seem like a no-brainer bet, "clean coal" is far from a sure thing. Southern Company has been working hard to bring its 582 MW Kemper County, Miss., clean-coal plant online, but the $5 billion project is currently 65% over budget.

A Department of Energy report estimates that clean coal costs are roughly double that of coal, but companies like Southern Company are hoping to reinvent coal's future.

Unfortunately building new coal demand, when set against the destruction of current plant in both the US and Europe, will take some years and thus, while the future for coal might, in the long term be strong, in the shorter term one can understand why coal companies might be hesitant to hire new engineers. The reduced demand will, inter alia, lengthen to time that current supplies last, though I perhaps need to address that issue in a subsequent post.

OGPSS - Thoughts on the Precautionary Principle

As Michael Brander tells it, in his book on the Scottish Highland Regiments, the Scottish Highlands produced, between 1740 and 1815 men for some 86 Highland Regiments who travelled around the world to strengthen the British Empire. But, towards the end of that period sheep were introduced into Scotland and the great land clearances began that replaced the crofters on the estates with the occasional lone shepherd and his flocks. Thus, by the time of the Crimean War when the Duke of Sutherland tried to raise a regiment he got no volunteers. As an old man explained to him:

I am sorry for the response your Grace’s proposals are meeting here today, so near the spot where your maternal grand-mother, by giving some forty-eight hours notice, marshaled 1,500 men to pick out the 800 she required. But there is a cause for it, and a genuine cause, and, as your Grace demands to know it, I must tell you, as I see that none else is inclined in the assembly to do so. These lands are now devoted to rear dumb animals which your parents considered of far more value than men . . . . your parents, yourself and your Commissioners have desolated the glens and the straths of Sutherland where you should find hundreds, yea thousands of men to meet and respond to your call cheerfully had your parents kept faith with them. How could your Grace expect to find men where they are not?

The anecdote illustrates that are long-term consequences to policy decisions, often not fully recognized when the original decisions are made. I was reminded of the Scottish situation as I contemplate the great race to renewable energy and natural gas, and the rapid replacement being urged for coal-fired power stations and nuclear power plants. And there are some grounds for seeing an analogy to that earlier situation.

Coal and uranium are found underground and while there is a large surface mining component to mining, as these reserves are exhausted, or embargoed for environmental or other political reasons, the need, over time will move increasingly to the development of the deeper reserves. Mines, however do not spring up overnight. Just as you cannot get a baby in a month by making nine women pregnant, so the process of discovery, raising capital, permitting and development can mean that over a decade can pass before coal is produced in commercial quantitites. And that assumes that the Administration is somewhat favorable to the idea. As a candidate, now President Obama said "If someone wants to build a new coal-fired power plant they can, but it will bankrupt them because they will be charged a huge sum for all the greenhouse gas that's being emitted."

As President he appointed Dr. Stephen Chu to head the Department of Energy, an individual who has said “Coal is my worst nightmare.”. And to follow on his statement as a candidate, the President appointed Lisa Jackson to the EPA who issued a finding that greenhouse gases constitute a threat to public health and welfare, with a series of actions to reduce carbon pollution. In such a political climate it is unlikely that applications for new mines and plants will receive an accelerated resolution. (Just consider the case of decision on the Keystone Pipeline, which continues to drag on.) If there is a sudden discovered need for new coal and nuclear power plants they will not (as with the Highlanders) be there to answer that call, and nor can they be for over a decade after the call is made.

Now it is not my intention here to argue the logic of a current change to natural gas, as the large reserve within the United States becomes available and, at low cost, provides a source of energy that helps keep the nation’s industry competitive. But what I would like to do is to invoke the same Precautionary Principle that has been used as an initial basis for action on control of power plant emissions and other factors with environmental impact. (see for example principle fifteen).

The precautionary principle can be briefly stated as:

the theory that an action should be taken when a problem or threat occurs, not after harm has bee inflicted; an approach to decision-making in risk management which justifies preventive measures or policies despite scientific uncertainty about whether whether detrimental effects will occur.

There is a significant scientific question as to the long-term reliability of the production levels for oil and natural gas that is being produced from the shales of the United States, and it has been articulated well both by Art and Rune, among others at the Oil Drum.

And as China draws an increasing amount of fuel out of Turkmenistan, Iran and the Middle East, with the potential for an additional increase in the draw from Russia, there is some concern that as China buys for the long-term, that tightening supplies will begin to limit the availability of fuel for Western Europe and the United States.

With the occasional collapse of the odd wind turbine, and the difficulty in seeing how solar power can help in the blizzards and snow storms I have gone through in the last week, there is some concern over the size of the contribution that these technologies can make into the energy mix of the next decade.

In those circumstances, a wise application of the Precautionary Principle to future energy supplies, in both Europe and the United States, might suggest that sufficient legacy power systems be left in place to ensure that neither community is left short of energy in the years ahead. This is to guard against the proposed replacements being either inadequate or insufficient to meet the future need.

And yet, unfortunately this is not likely to occur. As with many arguments and tools used in political debate, once a position or an argument has been adopted it is extremely rare for it to be renounced. The consequences of current decision making rarely come back to haunt those politicians who make them, since they often occur past the current elective term and are thus of less interest to those who are more focused on the next election.

Yet longer-term events do eventually arrive, and time having passed, the day of reckoning is becoming visible. It is likely that the Bakken will peak before the end of the current Administration. Ofgem has already raised concerns over an over-reliance on imported natural gas into the UK, and warned of possible shortages by the end of 2015, and urged a diversification of supply types. The IEA recently issued a chart that shows their projections for the energy future to 2035.


Figure 1. Past and future distribution of energy demand for the different sectors of the world (IEA )

The writing is beginning to appear on the wall. And while the Precautionary Principle is aimed more at less obvious, high risk scenarios – the risks to the world of a failure in the global supply chain, or even a national one is of such a high impact that even with a lower probability of occurrence than is becoming evident, it would be wise to start looking for answers. It is likely already far too late, and the world remains replete with folk denying the existence of a problem (even as gas prices continue to rise) but it will be interesting to see how the new Secretary of Energy addresses the situation.

One impact of the cold spell

It was, perhaps, an unscripted comment but I was watching the “ABC News” with Diane Sawyer tonight, and after the story of the intense cold over the country, she turned to the reporter and asked if this was compatible with global warming. His answer was along the lines of “if it was just the United States then it might be considered to be just weather, but given that it also covers China and Europe, perhaps it is indicative of something else.”

And thus another chink in the armor surrounding discussions of climate change. It is all very well to make predictions about how warm the world is going to get, and to try and frighten politicians into changing policies on the basis of alarming predictions of the effects of global warming , but the problem comes when those predictions fail to come to pass. It is all very well for folk to state, as George Monbiot does that this is not the case.

Even their premise – that the Met Office "confidently predicted a warmer than average winter for Britain" - is wrong. Here's what it actually said:

Early indications are that it's looking like temperatures will be near or above average. But there's still a one in seven chance of a cold winter – with temperatures below average.

No confidence there, no certainty, and no single prediction.

I guess he and I don’t speak the same language, since I read the Met Office prediction as being that there is an 87% chance of a warm winter – which this surely isn’t. But when you’ve tied yourself as tightly to the global warming mantra as he has, it is going to be hard to face up to the reality that perhaps it isn’t so.

Instead we are at a point where businesses are being closed in Europe to conserve fuel.

The national grid was forced to reduce the supply to companies in the North West and East Midlands shortly after issuing its second warning in three days that the system was running out of gas. Demand in recent days has been 28 per cent above seasonal norms and is likely to increase today, when temperatures could fall to minus 22C (-8F) in some areas after what was expected to be the coldest night of the winter so far.

and in a reminder to the EPA Administrator that cold can be a killer there is the possibility of up to a million sheep being lost because of the continued cold in the Scottish Highlands.

And it is not just farm animals that suffer, again in contrast with the EPA Administrator's views, data is now available on how many folk die due to the increased cold, and why.

Last year's low temperatures saw the highest number of "excess deaths" - the number of those who perished over and above what is normal for the time of year - for nearly a decade.
The 40,000 "excess deaths" in England and Wales represented a rise of nearly 50% from the previous year. In the South East, where people were perhaps least prepared for a cold snap, deaths nearly doubled.

This is not just a theoretical debate being carried out based on computer models and controlled publication of only papers favorable to one position. But this is a real ongoing situation where those who rely on the predictions that have been made must now face the actual reality of what is happening.

Now it is true that one winter does not, alone, make the climate change story untenable. But given that there has to be a reason for this, and it is not evident in the climate models on which so much has been invested, then it is fair to ask why not? It is reasonable to ask what is causing this drop in temperature, and to question whether whatever is causing this cold has not, in the last decade, been working in the opposite sense to cause warming. And if my comment from a year ago relating the a change in attitude toward an unconditional acceptance of global warming theories is beginning to be validated, then I think that the questioning will intensify somewhat when the costs of a colder period are added up.

The problem goes beyond the immediate short-term, because the predictions for providing energy for power and heat, and the quantities of natural gas that would be required are proving inadequate in the face of the current situation. This is the “knock-on” consequence of putting too much faith in the models. There has been talk of the need to apply the Precautionary Principle, in taking steps to ensure that increases in carbon dioxide levels in the air do not lead to global warming and the consequences that are increasingly exaggerated in order to drive the debate. There has been too little talk of the precautions that should be taken if the theory is wrong and we will need more fuel rather than less. Or, in this case, more salt, since there are problems in the countries where supplies are proving inadequate.

Police in the Republic are set close a swathe of major roads over the weekend as supplies of salt to keep them open finally run out.

As the Irish government was last night accused of dismally failing to deal with the crisis, even more severe weather is forecast for the next 72 hours. Thousands of schools will not now reopen until well into next week at the earliest.

Local authorities are likely to run out of salt in just two days, raising fears that gardai may be forced to close roads.

In reality the winter will, after a while, be over, and the debate will continue. What the current weather has done, as the ABC comments illustrate, is to break the mind set that unquestioningly accepts the climate change mantra. Just how badly that break has been is going to become evident in the coming months. (Note how I become very nervous of making a prediction).

Buying Turkmenistan's natural gas

Turkmenistan holds significantly large quantities of natural gas (they hold the world’s fourth largest reserves) and these have, over the years, proved attractive to Russia, China and the West. Until fairly recently, despite some bad relationships from time to time, the natural gas that the country produced made its way towards the West through Russia. With only Russian pipes as the conduit, Turkmen gas was under the real control of those who chose whether to pump the gas, or not.

However, when times were flush for the industry (can this be just over a year ago) and in order to ensure supplies for its customers in the West, Russia agreed to a much more beneficial pricing for the Turkmen gas, and was buying some 50 bcm a year. This was all arranged after the Russian Presidency changed hands, and was one of the first items on the new President’s agenda.

Since then things have not really gone well for the relationship as a whole. Turkmenistan has agreed to send natural gas to China, providing it with a second customer, while the price of natural gas has fallen with the recession in demand, around the world. That pipeline is now expected to be in place by the end of next year, and I saw pipelines being laid in China on my recent visit, as they extend the network. The pipeline is expected to carry some 40 bcm (more than Russia will buy this year).


Turkmenistan has also agreed to supply Iran with 14 bcm of natural gas with a new pipeline to carry gas down into Iran being planned for the near future.

Gazprom profits, meanwhile have dropped 62%, as the demand from Europe has dropped dramatically – with Gazprom market share falling to 16%. There was an “accident” to a pipeline between Russia and Turkmenistan, and since then no gas has flowed through the pipelines.

So, in this day of solar car racing (I hear that the route for the new competition has now been agreed), it is perhaps appropriate that the Russians and Turkmen are hoping to improve their relations with an off-road race that has Gazprom and Turkmengas as the main sponsors, of what is known as the Silk Way Rally. President Medvedev will stop by again on Sept 13th intending to renew the deals.

The need for Gazprom to sweeten relationships with Turkmenistan has much to do with the face of the gas pipelines planned to flow into Southern Europe from further East. There are two competing options, the Nabucco pipeline that the Western nations favor, and the South Stream that is being pushed by Gazprom and friends.

Gazprom, working with Italy's ENI , has so far received backing from Bulgaria, Serbia, Italy, Greece and Hungary for the pipeline that would carry gas from Central Asia under the Black Sea to Europe by 2015. Austria and Slovenia are close to signing up to the deal, Gazprom said.

Among those happy to purchase from Gazprom is the UK, that now gets some 16% of what it needs from Russia.

To provide some of these gas needs for Europe (which collectively has been getting about 25% of its gas from Gazprom) Gazprom is building a collector pipeline known as the Caspian Gas pipeline that will carry gas from Turkmenistan and Kazakhstan to the tune of some 20 bcm a year. There was a meeting of officials from Azerbaijan, Kazakhstan, Russia, and Turkmenistan in Aktau, Kazakhstan' today to discuss the project. Iran was somewhat upset about not being invited.

Gazprom has also opened a new pipeline into Lithuania and beyond to Kaliningrad. It will be known as Red Junction, and carry 2.5 bcm per year. First shipments are due in December. Thus it has the customers, and can profit well from the transport of gas through its pipelines.

But with Gazprom happy to promise new and existing customers a secure supply, there have to be some concerns over how much can come from Turkmenistan

Turkmenistan has two options. It can refuse to agree to lower gas prices to Russia. How long can it hold out without gas revenue from Russia? It may use part of the Chinese credits to tide itself over until gas flows to China in 2010. The other option is to agree to lower gas prices to Russia for a short period. At present Russia does not need Turkmen gas to supply the European market. However if EU economies recover in 2010 or 2011 it will need Turkmen gas. Europe faces the risk that Gazprom will not be able to deliver the necessary gas. That would mean high prices for the available gas. Hence the Chinese deal is good news for Turkmenistan. It is bad news for Russia but also the EU.

P61. Pick Points

A few stories of interest to start off the week.

When I wrote about the EIA Energy Conference last week I had promised that I would make a better reference to the views of others who were there. For example, I noted that Reuters had a piece on the final morning session dealing with greenhouse gases and climate change. Robert Rapier has two posts up now, one on Dr Chu’s remarks; and the second on the rest of day 1. Robert went to the session on Transport demand that I missed, and so this is a place to catch up. His take on the Renewable Energy session is also a little different, and so a trip over there would be worthwhile. Gail, at TOD, has so far, only covered the Plenary Session.

Stranded Wind also has a post summarizing the whole Conference at Daily Kos.

Moving on around the world to see what other stories have been gathering headlines, it sometimes seems that one cannot go far without bumping into Gazprom stories. It seems to have troubles on two fronts at the moment. Looking first at its supply, it has (as I noted last Sunday) run into a bit of bother with Turkmenistan. The story got worse as the week continued with a reported gas explosion in a pipeline inside Turkmenistan that was carrying natural gas to Russia. This shut down the feed to Russia.

"Turkmengaz informed Gazprom that on April 9 at 01:32 an explosion occurred at the 487th kilometer of the Davletbat-Daryalik pipeline. Since then, transport of Turkmen gas to Russia has not been carried out," Gazprom said.

"At the present time the Turkmen side is working to rapidly repair the damage.... The damage will not affect the supply of gas to Gazprom's customers," it said in a statement.

This was followed, on Friday, by a story in the LA Times where Turkmenistan blamed Gazprom

Turkmenistan's Foreign Ministry said in a flurry of statements that Russia's Gazprom decided on short notice to reduce the amount of gas it takes from Turkmenistan. Gazprom's export division gave only one day's warning, which wasn't sufficient time for Turkmenistan to reduce its flow into the pipeline network, the ministry said.

The blast, which occurred late Wednesday, "was caused by a gross unilateral violation by Gazpromexport of the norms and rules of the natural gas sales agreement," the statement said. Another statement said Gazprom's actions were "rash and irresponsible" and put lives at risk.

Turkmenistan is now reportedly angry that the Russians are, in contrast, blaming the blast on them. Repairs were scheduled to take 3 days. The story is now being carried in Moscow, where part of the blame is seen to be because of the decision of the Turkmen to seek international bids for a pipeline, instead of giving it to Russia.

There has been a significant drop in demand from Europe. In March Gazprom produced 24% less gas than the same month last year, and is down 18% over the whole quarter. Demand in Russia alone dropped 6.6%. With demand for Russian gas expected to stay depressed by 10% over the next five years. However in the short term, it does report seeing a slight upturn in demand from Europe.

Which brings us to the second side of the story, since Gazprom is now threatening to fine Ukraine for not consuming more gas, and lowering demand below expected levels. With this threat of a lack of customers it seems odd to some that Gazprom is taking the step of buying Eni’s stake in Gazprom Neft (the oil side of the house). At a cost of $4.2 billion it is considered “a strange decision” given the company’s need to cut debt. On the other hand there is now an agreement to ship some of Sakhalin gas to the West Coast of the USA. (Actually to Mexico and then into the US).

In a statement announcing the agreement yesterday, the two companies said liquefied natural gas (LNG) from the newly completed Sakhalin-2 project will be shipped to a regasification facility in Baja California, Mexico. It will then be transported to southern California by pipeline and sold to U. S. consumers by Gazprom's subsidiary in Houston, Gazprom Marketing & Trading USA, Inc.

The first tanker of Sakhalin gas arrived in Japan last Monday, after leaving the island on the 1st April. Japan is expected to take 60% of Sakhalin’s supply (about 7% of Japan’s need) with the remainder being split between South Korea and the USA.

While many eyes on Pakistan are focused on the problems with insurgents and controlling the travel of the Taliban and friends across the border into Afghanistan, it is not as widely known that the country remains in a relatively desperate energy shortage. In one of the latest moves to counter this, the country will go onto daylight saving time on April 15th, in a move that is hoped to save the country 250 MW a day. Given that the country is short around 4,000 MW, this won’t help much. In Islamabad alone the gap was 190 MW last Thursday causing 150 MW of load shedding to be imposed. By Sunday it had increased to a shortfall of 1,200 MW and after having only had load shedding of 4 – 6 hours, the city is now back to blackouts of up to 12 hours as air conditioning demand rises with the hotter weather.

In Karachi the daily shortfall of 350 MW is coming with 8-10 hours of unannounced blackouts. (Hat tip to Energy Shortage). The Prime Minister still believes that load shedding can be ended this year. Part of the problem in Karachi, apparently, is that the power company has been taken over by a Saudi company who then sold it, but the new owners have yet to take possession. None of the problems have apparently been tackled.

And just to return to Russia for a moment, I had always remembered that before things got unpleasant in Iraq, Russia had been on its way to getting a sizeable chunk of the energy in that country. Turns out that they are now back

A Russian consortium including oil group Lukoil signed a $3.7 billion deal to develop Iraq's West Qurna oil field in 1996, when Saddam Hussein was in power.

"The goal has been set to restore the contracts concluded between Russian and Iraqi companies before the war," Energy Minister Sergei Shmatko told Reuters, adding that a working group on the issue would convene in the near future. . . . .
Saddam's government tore up the Lukoil deal in 2002, months before the invasion, saying the Russian company had done no work at West Qurna since signing it and had failed to fulfil its contractual obligations.

JP Morgan said in March last year that, according to Russian estimates, production at the field was expected to peak at 700,000 barrels per day, and reserves could total between 4.5 billion and 7.3 billion barrels.

Cap and Trade

The Administration has stated that it is looking favorably at the concept of “cap and trade” as a way of controlling the generation of carbon dioxide from power plants, and concurrently encouraging power generation from renewable and sustainable sources that do not generate these gases. So it is reasonable to ask what exactly “cap and trade” is, and what else we might know about it.

I started by going to the MIT study (pdf) on the subject that was published in 2007. Looking for a simple definition of the term I found:

The term “cap-and-trade” is used to describe a policy that identifies greenhouse-gas-emitting entities covered by the system, sets caps on their emissions and allows trading in the resulting emissions allowances. The “entities” are the points of responsibility for emissions and they may be defined at various levels in the economic system from the coal mine and refinery gate (upstream) to the firm or gasoline station (downstream). At these points the emissions accounting is carried out. Emissions allowances (actually entries in an electronic bookkeeping system) are distributed such that the total is equal to the national cap, and covered entities must surrender allowances equal to their emissions, or the emissions that result when the fuel they supply is burned. Market trading in these allowances establishes a price on emissions that in turn creates economic incentives for cost-effective abatement.1 It is common practice to distribute allowances to the entities that are the point of regulation, but this procedure is not a requirement of the system. Allowances could be distributed without charge to any persons, firms or other organizations in the economy, or they could be auctioned.

In other words the mine/power plant/car owner is first assessed to determine how much carbon (which is short for carbon dioxide) that source will emit. After individual entities have been assessed there is a national summation of the volumes that are emitted. Knowing that, and the individual sources, a source is given a maximum capacity (cap) or allowance that it can produce in a year. As it produces the carbon, the allowance must be given up. Once the allowance is used up then, presumably, the source must be shut down until the start of the new year. If the owner of the source wants to continue using it (you still need to get to work, for example) then he/she must purchase an unused allowance from someone else who wants to sell it. The initial assumption is that the seller will do this at a price that is established in the free market. This is the “trade” part of the term. Initial prices set in the abstract to the MIT report suggest a value of $30 to $50 a ton of CO2 as the price for this allowance.

DOE and NASA have combined to create the North American Carbon Program, and there is a map available that shows the relative levels of CO2 around the nation. It is rumored that there will be a ruling, fairly soon, from the EPA finding that CO2 is a danger to the public. This ruling will likely drive standards for allowable emissions of the gas, particularly from automobiles.

"EPA's going to look at Mass. Vs. EPA and will make an endangerment finding," Browner told Dow Jones Newswires in an interview. The Supreme Court ordered the EPA in the Mass. Vs. EPA case to determine if carbon dioxide endangered public health or welfare.

The ruling will bring with it the need for rules for sources that generate CO2, and the current date for these announcements has been suggested as April 2, the anniversary of the Mass judgement. Congress is hoping to have legislation approved by Memorial Day.

There is a web site that allows you to calculate, based on your car, and how many miles you drive, how much carbon you produce. I input the information on the Camry (15,421 miles since I bought it last January, using 455 gal of gas) and I get a carbon production of 8,893 lbs – or roughly 4.5 tons. If we assume a price per ton of $45, then the cost, if I were to buy the allocation would be $200. The car I replaced was a Buick Regal, and for the same amount of driving I would have generated 13,339 lbs of carbon (682 gal of gas). The price of the carbon would be $300. (Incidentally it also allows you to calculate the carbon cost of an airline ticket – so my flight to Washington is going to cost 645 lb of carbon). The Web site I was doing the calculation on is one that allows trading in carbon offsets. These are defined as

A carbon offset is a certificate representing the reduction of one metric ton (2,205 lbs) of carbon dioxide emissions, the principal cause of global warming. Although complex in practice, carbon offsets are fairly simple in theory. If you develop a project that reduces carbon dioxide emissions, every ton of emissions reduced results in the creation of one carbon offset. Project developers can then sell these offsets to finance their projects.

There are hundreds of different types of carbon reduction projects. For example, a wind farm generates clean energy, which reduces carbon emissions from coal-burning power plants. In order to finance its operations, a wind farm can sell these reductions in the form of carbon offsets.

In the above example with the trading of my car I generated around 2 tons of carbon that I no longer used. In theory I could sell that offset to someone who needed the credit.

(In practice it is unlikely to work that way, or at that level, but it illustrates, perhaps, the point, which would apply if I did something on a much larger scale). Using a car as an example is not bad, from the point of view that about a quarter of emissions come from them in the United States, but it is difficult, short of just putting a simple tax on gasoline or diesel, to monitor how much driving an individual does, and thereby to impose penalties for driving too much.

The initial approach will therefore begin with businesses that generate significant amounts of energy, or conversely, generate power without creating carbon, and which thus would have allocations to sell. It almost has to be a national program since, as the LA Times pointed out

All existing cap-and-trade programs have one thing in common: They regulate the source of the emissions. The power plant or refinery or factory churning out the carbon is responsible for controlling its own emissions and trading credits. That won’t work in California, because from 22% to 32% of our power is generated out of state, and California can’t regulate plants outside its borders. Moreover, those out-of-state plants tend to be much dirtier than local ones. So how does a statewide cap-and-trade program account for all that pollution?

Europe provides an example of a situation where cap and trade is already in existence. It has some current problems :

The price of a ton of carbon dioxide in the current phase of the trading system has fallen to record lows recently. And although there are few suggestions the price could collapse entirely, the recent drop still is a worrying reminder that a market-based system to reduce emissions can be subject to significant volatility.

The question of price, and who gets the “profit” is obviously one that governments must decide. It has been suggested that the White House hopes that the sale of credits might raise as much as $80 billion a year, starting in 2012.

In Europe last summer a carbon credit cost $40 a ton (31 EUR) it now costs $10 (8.2 EUR). This has a negative impact on the drive for change, as Julian Glover notes:

A year ago European governments allocated a limited number of carbon emission permits to their big polluters. Businesses that reduce pollution are allowed to sell spare permits to ones that need more. As demand outstrips this capped supply, and the price of permits rises, an incentive grows to invest in green energy. Why buy costly permits to keep a coal plant running when you can put the cash into clean power instead?

All this only works as the carbon price lifts. As with 1924 Château Lafite or Damian Hirst's diamond skulls, scarcity and speculation create the value. If permits are cheap, and everyone has lots, the green incentive crashes into reverse. As recession slashes output, companies pile up permits they don't need and sell them on. The price falls, and anyone who wants to pollute can afford to do so. The result is a system that does nothing at all for climate change but a lot for the bottom lines of mega-polluters such as the steelmaker Corus: industrial assistance in camouflage.

"I don't know why industrials would miss this opportunity," said one trader last week. "They are using it to compensate for the tightening of credit and the slowdown, to pay for redundancies."

In Europe he considers that the cost of the credits would need to be in the $40 - $60 range to allow renewables to compete with fossil fuel.

It will be interesting to see how the rules over here develop.