Tag Archives: Cap and Trade

The End of Cheap Coal

One of the reasons why the push for Cap and Trade was a good idea was it would not only internalize the cost of carbon emissions, but it would also raise the price of energy created from coal.   With higher prices for kilowatt per hour from coal energy, cleaner energy sources would become competitive.  Currently, cleaner energy sources can barely compete with coal, with exceptions of course.  But if legislation wasn’t going to push up the price of burning coal, then in the long-term, rising international demand would.  That time is now.

In 2009, China has ceased to export coal and has now began to import it.  According to the financial times, in 1993 the same happened to oil.  China’s oil imports exceeded what was being imported and the consequence was a climb in the average oil price, all too well known thanks to oil spiking at $150 a barrel in 2008.  China had been using more oil than it could produce in order to fuel its large amount of economic growth, and oil wasn’t the only commodity.

China isn’t the only player.  India as well as the emerging markets have offered its heavy share of the demand, tipping trade balances toward imports and helping to drive up commodity prices for oil and building materials.   The same is expected for coal.

This is good news for America, which contains the largest coal reserves in the world.  This is also good news for the coal industry, as it will be able to profit from an uptick in prices.

This is not so good for the coal power industry, especially in America.  While the coal industry will benefit in developing nations who have already increased the capacity to burn coal for energy and produce steel from coke, the developed world already faces pressures for pursuing greener technologies instead of burning coal.  And the coal power industry should be scared: the only thing keeping them from not succumbing to the powers of green energy is price, which is now soon to change.  With coal prices higher translating into higher per kilowatt hour energy costs that begin to be on par with greener technologies, the coal power industry will have a tough fight.

Green technologies already have the leg up of being green and renewable.  Obama’s recent moves to push for nuclear energy, which would already be competitive given Obama’s plan, and the ARRA’s subsidizing of renewable resources like wind and solar significantly put the government against the coal power industry.

The government’s backing of renewable energy certainly distorts what the market wants when providing energy, but a needed distortion nonetheless.  The only hope for the coal industry is to level the playing field by either removing green energy subsidies (not likely) or becoming green it self.  The industry’s only hope is going for clean coal. And now, it doesn’t have the luxury of waiting anymore.

Before one says that clean coal isn’t viable, I disagree.  It is possible, given recent developments in innvoation.  I blogged recently about Thomas Friedman’s catch about clean coal:

If you combine CO2 with seawater, or any kind of briny water, you produce CaCO3, calcium carbonate. That is not only the stuff of corals. It is also the same white, pasty goop that appears on your shower head from hard (calcium-rich) water. At its demonstration plant near Santa Cruz, Calif., Calera has developed a process that takes CO2 emissions from a coal- or gas-fired power plant and sprays seawater into it and naturally converts most of the CO2 into calcium carbonate, which is then spray-dried into cement or shaped into little pellets that can be used as concrete aggregates for building walls or highways — instead of letting the CO2 emissions go into the atmosphere and produce climate change.

If this can scale, it would eliminate the need for expensive carbon-sequestration facilities planned to be built alongside coal-fired power plants — and it might actually make the heretofore specious notion of “clean coal” a possibility.

With coal prices expected to rise, you can bet this will scale. With clean coal on the horizon, subsidizing greener technologies won’t be needed anymore or vice versa, coal won’t be dirty anymore. Either way, whether a Cap and Trade bill , favorable legislation towards green technologies or the sheer power of the market was going to force it, switching towards less CO2 intensive energy was inevitable. Now, about those mountain tops…

Indecision on climate bill dampening economic recovery?

So says Obama. From Real Time Economics:

Senior Obama administration officials say the nation’s economic recovery could stall if Congress doesn’t pass a climate bill this year.

The officials warn that investors are so uncertain about the future cost of emitting greenhouse gases that they are sitting on capital rather than pouring it into “clean” technology, new power plants or energy-intensive manufacturing.

The administration has for months been moving away from advocating climate legislation primarily as an environmental issue and toward a jobs-creation argument. But the comments are a marked shift to a stronger rhetoric: fears of prolonging the recession. The White House says spurring “clean,” or low-greenhouse-gas-emitting energy, can help lay the foundation for the 21st-century U.S. economy.

“Right now there’s a lot of money on the sidelines,” said Energy Secretary Steven Chu. “Capital on hold means investments not being made, investments not being made means jobs not being created,” he said at an Export-Import Bank conference last week.

Companies that could capitalize on a carbon-constrained economy, such as General Electric Co., Alstom SA, Areva, Babcock & Wilcox, a unit of McDermott International, Siemens AG, Chesapeake Energy Corp. and First Solar Inc., say policy clarity will focus investment. So do emitting businesses that will need to adapt, such as American Electric Power Co. and BP PLC.

Ambiguity, however, breeds risk, which begets financiers’ reluctance.

It is an interesting argument. Financial decisions makers will always delay their decisions until some certainty can be had.  But, I don’t think indecision is hampering recovery. I think it is only limiting the potential for growth in clean energy. Nothing should change the outlook for conventional energy because climate change legislation’s aim is to not reduce the amount of conventional energy but reduce carbon. Financial decision makers regarding conventional energy should be much savvier when facing this uncertainty because the room for change is available post investment.  Unless congress is going to enact climate legislation that will completely cripple the conventional energy industry, (it won’t) carbon will be priced should be priced where alternative energy will become competitive.  There is no metric for pricing carbon at it’s value. (Pigovian tax)  Politics determines it.  Cap and trade is the best mechanism for private investment to determine the actual cost of carbon.

What the issue here is, investors wishing to take advantage of more growth in clean energy are waiting on congress to make clean energy more competitive.  So, while indecision is not hampering recovery, it certainly is hampering growth.  And given this comment:

“People need to realize this is a global market for our capital,” GE’s Walsh said. “Our money is going to go where we see long-term certainty … and if Europe has a better framework, that’s where our money’s going to go,” he said.

I would have to say that a climate bill is not an issue of environmentalism anymore. Its about helping new industries compete with a global mindset that may have more forward thinking politicians than America does. So maybe I should retract my comment: Indecision with climate change legislation isn’t hampering our recovery; its hampering our competitiveness with the rest of the world in clean energy.

Put climate change where your mouth is

Via MR, a really good NYT article written by John Tierny with a proposal that will put climate change skeptics and proponents beliefs to the test: tie the amount of carbon taxed/capped to the rise in temperature on earth.  Why is this great? If skeptics are right, we don’t pay anything.  If global warming proponents are right, we will have the safe guards installed to make sure that when temperatures do rise, we are able to internalize the actual cost of carbon, thereby limiting the amount we emit into the future.

Of course there will be needed discussion on just how the temperature should be measured, but the idea is foolproof nonetheless: the only judge of how much damage we are really doing to our earth will be from the earth itself.  No arguing over fudged forecasts or ulterior motives, this plan would take all of the political risk out of future changes to the climate and create a more forward looking plan; a plan that everyone will now have a stake in, including private investors – if they want to make sure that they hedge against higher costs in the future.

The problem with politics now would be how to implement it. Cap and trade or carbon tax?  The article suggests:

[…] it would be even better, Dr. McKitrick says, to use the temperature readings as the basis for a carbon tax instead of a cap-and-trade system. Like many economists and environmentalists, he argues that the carbon tax would be more effective at reducing emissions because it is simpler, more transparent, easier to enforce and less vulnerable to accounting tricks and political favoritism.

It is certainly true that a carbon tax would make things easier, but does it provide the efficiency that cap and trade would provide? One of the benefits of cap and trade is to allocate carbon credits to those who need to pollute the most, providing incentive for others to focus on creating more efficient and cleaner ways of lessening their carbon footprint. Just because a carbon tax may be easier, it still doesn’t yield the benefit of the gains from trade that could happen if carbon is able to be capped. In this case, only true polluters would bear the brunt of the costs, which could in turn, offset end costs to consumers. (Which is the driving point for cap and trade)

A better way to tackle climate change?

The Netherlands has proposed to tackle climate change a different way:

The Dutch government said Friday it wants to introduce a “green” road tax by the kilometre from 2012 aimed at cutting carbon dioxide emissions by 10 percent and halving congestion.”Each vehicle will be equipped with a GPS device that tracks how many kilometres are driven and when and where. This data will be then be sent to a collection agency that will send out the bill,” the transport ministry said in a statement.

Ownership and sales taxes, about a quarter of the cost of a new car, will be scrapped and replaced by the “price per kilometre” system aimed at cutting the Netherlands’ carbon dioxide emissions by 10 percent.

Traffic jams will be halved and it helps the environment,” the ministry said.

So, what if the U.S. was to try and use this as  a way to combat climate change? Well in U.S. dollars it will be a proposed cost of around 7 cents per mile.  We drive about 12.5k miles per year so that would yield a total cost of $875 annually per person.  With about 275 million motor vehicles on the road, that would yield an average of $240 billion dollars a year!  That would have a sizable impact on reducing the deficit.  If this were implemented it would have a significant impact on reducing traffic congestion and it would internalize the externality of carbon dioxide, helping to pay back for environmental damage.

Besides the political implications, (regressive taxation, blah blah) the U.S. is a much bigger country than the Netherlands and our vehicle mileage is drastically larger because we have more ground to cover.  Although technically feasible, the huge cost of implementation by putting GPS units in every car even if we exempt trucks, motorcycles and classics may be worth mentioning.   Though $875 dollars a year isn’t that bad, especially if sales taxes on cars were cut, I don’t think Americans particularly like the idea of having to pay more for their driving.  They probably won’t like the idea of big brother tracking how much you drive either.

It would make sense to just tax oil, but American’s won’t have that, especially when already faced with high gasoline prices.  But wouldn’t Americans prefer this than the high energy costs transferred from cap n trade?  I mean, the majority of carbon dioxide comes from our use of oil in transportation, although I am not sure it would be as effective as cutting carbon dioxide as cap and trade would.  And so this makes me wonder, which would be more politically effective, this or cap and trade?

HT: Mankiw

Cap-and-Trade Showdown

The bill is out…so how are things going?

All the analysis done already for the recent Kerry-Boxer bill. (here)

And for those still in the camp of carbon-taxes and double dividends, Environmental Economics has a good post on where assessing efficiency is too complicated when deciding the optimal amount for how much polluters should pay. Rather, we would should cap the amount of carbon that can be exhausted now to prevent further exhaust in the future.  It doesn’t gain much in public revenue, but isn’t the purpose of this to save the planet? Let’s do it in a way industry groups don’t have to kick and scream their way through the senate votes.

Oh, wait, many of them were doing that already.