Cap and trade is on life support and we might need a backup plan. Here’s one, but do we really want to do this at all?
by Larry Berg, Berg LLC
As Merriam-Webster Online explains, one definition of conundrum is “an intricate and difficult problem.” Regarding climate change and electric utilities, that about sums it up.
In the 1970s, scientific researchers began observing and warning that an ever-increasing imbalance of greenhouse gases in the atmosphere, especially carbon dioxide, was leading to global warming. Later it was renamed climate change to describe more accurately the total effect.
The electric power sector accounts for some 40 percent of U.S. anthropogenic CO2 emissions, meaning emissions resulting from human activity. The primary fossil fuel sources emitting CO2 when burned—coal and natural gas—supply about two-thirds of all energy delivered to U.S. consumers.
Environmentalists and the green movement have been calling for wholesale replacement of fossil fuel sources with renewables. Renewable facilities, however, are expensive to install and unreliable for baseload power needs.
Nuclear is expensive to install, as well, but the fuel is cheap and it is a great baseload resource. Yet, a negative U.S. public perception of nuclear power in addition to concerns regarding safety and spent fuel disposal has lingered 30 years since Three Mile Island, “The China Syndrome” and Chernobyl.
Lawmakers have taken on and struggled with climate change but are nowhere near a solution. The electric power industry seems paralyzed and is waiting for legislation or regulation. Energy bills have been proposed in the U.S. House and Senate and have been dispatched. The power sector is up to its elbows in quicksand thinking that if it just doesn’t move a muscle, well, at least it might not sink any deeper.
It’s a conundrum, all right.
The Cap-and-Trade Charade
It has become routine to hear passionate defense or disparagement of cap-and-trade programs embedded in versions of proposed legislation.
This is a complex concept destined to cost a fortune, to be subject to potentially abusive corporate and political manipulations, and to be unlikely to assure the desired result: a more carbon-balanced world.
No consensus exists in the Senate regarding cap and trade. It appears climate legislation of any kind will not be enacted in 2010.
Before the Copenhagen summit in December 2009, climate change and some form of cap and trade was all the rage. Since then, saving the planet has taken a back seat to U.S. health care, financial reform and oil spills. Ironically, the snowfalls that buried the nation’s capital this past winter had legislators on both sides of the aisle questioning scientific evidence of climate change and global warming. Political winds have shifted for now.
Despite this shift, there is good reason to expect climate legislation or some form of Environmental Protection Agency (EPA) action soon. It might be time to think of cap-and-trade alternatives.
A Bad Deal
Why is there no consensus in the Senate? And what is it about cap and trade that doesn’t garner universal support? Any legislation that seeks to reduce greenhouse gas emissions drastically in a short time likely will be expensive, regardless of a cap-and-trade program or regulation under a cap-or-else plan.
Some consumers could see a 40 percent bump in electric rates by 2020 as a result of a bill such as Waxman-Markey, and that’s before factoring costs associated with organic growth and inflation.
U.S. consumers would be affected by more than electric bills because all commodities that require electricity to make, move and deliver products and services would become more expensive. Additional costly transportation-related requirements regarding vehicle emissions would exist, as well.
If the cost is so great, why have legislators tried to drive an energy bill through Congress? And why are many large utilities and lobbyists supporting and promoting cap and trade? A former colleague speculated that big players like cap and trade because they think they understand it and can deal with it. The real answer is less noble. Cap and trade typically includes such variables as allowances, auctions and offsets, and all have real value. There is leverage in trading tons of carbon. There potentially is money to be made, as well.
Look at Europe, which did the same thing in 2005. Energy prices soared, economic competitiveness fizzled, jobs were lost and investment went to other corners of the world. Worst, Europe’s carbon emissions increased initially. Common sense should tell us we want no part, at least in that form.
Finding a Solution
If cap and trade is not the answer, how can we meet reasonable carbon goals without overly burdening consumers, bankrupting the economy further, and making small players feel as though they cannot compete at the potentially high-stakes table of carbon allowances, auctions and offsets?
For the electric power sector: We decide where to arrive as a nation on a carbon-intensity basis, convert that to a mandated national energy mix, and move toward that goal by a certain time. Call it a cap-without-trade program with appropriate consequences for failure. Nevertheless, we must be realistic about costs and have the stomach for significantly higher prices on all commodities, not just electricity.
No matter how much we do, we might not reduce the world’s carbon footprint such that we stop or reverse some perceived global warming or climate change.
Assessing the Situation
The U.S. electric power sector currently emits approximately 2.5 billion metric tons of CO2 each year and, as noted above, that represents about 40 percent of all U.S. CO2 emissions (transportation-related emissions account for 33 percent and the remainder is spread among residential, commercial and industrial sources).
The U.S. carbon intensity level from power generation sources, as measured in metric tons of CO2 per megawatt-hour (MWh) generated, is approximately 0.62.
If we want to reduce current U.S. carbon emissions in the electric power sector by at least 20 percent, for example, what must happen?
- Set a national target intensity level of 0.45.
- Require all electricity generation entities to meet or better that level by a given year, perhaps 2020, because that seems to be one of the desired long-term target dates.
- Phase in the requirements over time.
- Hit noncompliers with appropriate penalties and a carbon tax.
A Modest Result
If all electric power sector emitters meet the target (some will better the target), the U.S. will have reduced carbon emissions at least 500 million metric tons per year, reducing total anthropogenic global emissions from generation sources about 5 percent, and from all sources by about 2 percent.
CO2 contributes no more than about 25 percent of the total greenhouse gas effect. Naturally occurring water vapor is the primary component.
This would not be an eye-popping improvement from a global perspective, yet for our nation, it is what in the strategic planning world we call a SMART goal: specific, measureable, attainable, realistic and timely. (See the nation’s current energy mix and emissions data in Figures 1 and 2.)
Now consider an energy mix as shown in Figure 3. Striking a better balance among the baseload coal, natural gas and nuclear and with a modest increase in more costly, less reliable renewables, a 20 percent emissions reduction starts to take on a more viable, potentially achievable reality.
Not even this modest target will be simple or inexpensive to hit. To achieve this energy mix we must make the following adjustments to our current electric generation fleet by 2020:
Net Capacity Reductions
Coal -85,500 MW
Net Capacity Additions
Renewables 150,000 MW
Nuclear 70,000 MW
Natural Gas 4,000 MW
Percentages of natural gas and hydro would remain relatively the same in the mix, while dirty coal would be a big loser and zero-emission nuclear a big gainer. Despite reflecting only 4 to 10 percent increase in the mix, we also must install significant, new renewable resources, given their poor availability. Adding 150,000 MW of wind, solar, biomass and geothermal will be challenging and expensive.
At the highest end of the renewable cost scale, photovoltaic (PV) solar facilities still run some $6,000 per kilowatt installed (compared with less than $1,000 per kilowatt for natural gas). Thermal solar, wind, biomass and geothermal are less costly than PV solar but more costly than natural gas. Conservatively, renewable additions under this plan could cost the nation about $500 billion, not including the transmission infrastructure needed to deliver it from sunny deserts and wind alleys to load centers.
We also must permit, construct and commission the equivalent of 55-60 new, 1,200-MW nuclear plants. These also will be expensive, assuming $5,000 per kilowatt installed, the total nuclear sticker price is $350 billion.
The most difficult, painful task politically and from a reliability and low-cost perspective, will be the shuttering of many coal-fired plants. This effort will involve such expenses as decommissioning and stranded-cost recovery for those facilities, which are not easily estimated, but it is fair to expect they could be substantial and potentially in the hundreds of billions of dollars.
The total price tag for the proposed new energy mix is on the order of $1 trillion.
Can this new mix be achieved? Absolutely, it can, but only with the collective resolve of all stakeholders: power producers, regulators and consumers. Will it be costly? Obviously. And these costs come out of consumers’ pockets. Will it be cost-effective? Not unless you assign a hefty value to reducing total global CO2 emissions by a tiny amount. Will this action alone affect climate change and halt global warming conditions? Unlikely. Noted environmental scientist Paul “Chip” Knappenberger wrote in May 2006 (see http://masterresources.org) that reducing U.S. CO2 emissions from electric generators by as much as 83 percent—the Waxman-Markey goal for 2050—still likely would affect global temperatures by less than one-tenth of 1 degree by 2050. This will be an insignificant response in his view and many others. That says even less for the modest 20 percent reduction that could cost $1 trillion.
Global Response Needed
The atmosphere knows no national boundaries, so climate change will require a global response. China must be on the leading edge of that response. It has overtaken the U.S. as the leading emitter of greenhouse gases, and no amount of effort on the part of the rest of the world can absolve China of dealing with this issue. The U.S. and China account for just more than one-half of all CO2 emissions from electric power generation (see Figure 4). Throw in India, Russia and Germany, and the top five emitters account for about two-thirds of all emissions from electric generation.
Making a Choice
A single source of electric power that is all at once reasonably priced, available and reliable, socially acceptable and environmentally neutral does not exist. Is the U.S. willing to spend significant money to affect the climate to a level likely environmentally insignificant, then hoping other major world players will follow?
It’s a question about costs and benefits, but also about the moral obligation and commitment to the planet our grandchildren will inherit. Can we make a difference, and if not, should we attempt anyway, knowing the cost will be substantial and must be paid by our grandchildren, as well? Where is the tipping point? Would a 40 percent increase on electric bills, for example, be acceptable or feasible?
I’ve offered here a simplistic blueprint for the U.S. to reduce its carbon emissions from electric generation by 20 percent without the potential headaches of a cap-and-trade program. On an order-of-magnitude basis, however, it could cost us $1 trillion for the privilege.
If we do something of this nature knowing it will not solve the problem, what’s next? There will be no easy answers. Consumers are as torn as the industry. They look to leadership in Washington and at utilities to figure it out.
An intricate and difficult problem? To be sure. Merriam-Webster got it right. Those in the electric power industry agree and know it for what it has become: the climate change conundrum.
Larry Berg is a utility consultant focusing on climate change and strategic and resource planning. He is a project management professional who spent 29 years at El Paso Electric Co. as director of forecast and planning, director of corporate projects and technical assistant to the president and CEO. He also served as the company’s Y2K program director. He retired in 2010.