Here Come the Mandatory Carbon Limits!

But if you have carbon markets, why do you need subsidies?


Living in a carbon constrained world looks inevitable. Congress will be voting on a number of proposals to set limits on the emission of greenhouse gases later this year. So industrialists see the policy handwriting on the wall and are now rushing to help shape the emerging greenhouse gas (GHG)emissions regulatory scheme.

In January the U.S. Climate Action Partnership, consisting of 10 big companies including DuPont, Alcoa, General Electric and Duke Energy, issued a "blueprint for a mandatory economy-wide, market-driven approach to climate protection." Also in January, the Electric Power Supply Association, the lobby group that represents the competitive power suppliers that account for 40 percent of the generating capacity of the U.S., acknowledged that "regulatory and legislative processes are moving forward seriously and with speed." The EPSA declared it "supports enactment of comprehensive, mandatory federal legislation to require steps to minimize the impact of greenhouse gases on the environment." And last week, the broader electricity lobby group, the Edison Electric Institute, came out in favor of "federal action or legislation to reduce greenhouse gas emissions that …involves all sectors of the economy, and all sources of GHG." Even the environmental lobbyists' favorite climate change whipping boy, Exxon Mobil, seems to be coming around to the idea that the Feds should act to cut greenhouse gas emissions.

Industry wants the Feds to establish a nation-wide and industry-wide cap-and-trade market in greenhouse gas emissions, especially a market for carbon dioxide emissions. The proposals all also call for substantial federal subsidies for research and development of new low- and no-carbon energy technologies. All acknowledge that there are no currently available "silver bullet" energy technologies to cut greenhouse gas emissions. Any reductions in GHG emissions will have to be accomplished with a mix of increased energy efficiency in buildings and appliances, expanded nuclear power generation, a switch to hybrid vehicles, more energy from renewable sources, and, here's the big one, some kind of cost-effective technology to bury carbon dioxide emissions from burning fossil fuels.

The sort of carbon trading scheme that these industry groups are proposing involve markets in which carbon dioxide (CO2) emitters are issued emission permits and then allowed to trade them. Over time, the Feds would screw down the number of permits to eventually reach some acceptable level of carbon dioxide emissions. The idea is trading a declining number of emissions permits will enable industries to figure out among themselves which ones can most efficiently reduce their emissions at the lowest cost.

So how much can we really expect to cut emissions if such a scheme is enacted? The Electric Power Research Institute (EPRI) issued a new report on Thursday that in effect looked at what implementing all of the recent proposals might achieve by way of reductions in the 25 years for the power generation industry. Specifically the report looked at what it would take to reduce emissions below what they were in 1990 by 2030. As a baseline keep in mind that had the U.S. adopted the Kyoto Protocol we would have committed to reducing our overall emissions by 7 percent below 1990 levels by 2012. Even more ambitiously, the U.S. Climate Action Partnership called on Congress to require mandatory emission reductions of between 10 and 30 percent by end of the 15 years. The EPRI assessment is sobering.

The 2005 Energy Outlook report by the Energy Information Administration (EIA) says that total U.S. electricity generation is now 3836 terawatt hours. Today, burning coal produces over 51 percent of our electricity; natural gas, 17 percent; nuclear, 20 percent; hydropower, 6.7 percent; and other renewables, just 1.6 percent. In the EIA baseline case, electricity generation rises to 5400 terawatt hours by 2030 with electricity from coal rising to nearly 60 percent of production and with renewables accounting to just 3 percent of generation.

The EPRI case study also projects demand of about 5400 terawatt hours in 2030. However, EPRI projects that coal-fired generation will account for about 54 percent of power production, of which 14 percent will be generated by plants that bury their carbon dioxide emissions by pumping them into underground reservoirs. Nuclear rises to 25 percent of production, and generation from non-hydro renewables increases to 6.7 percent. To achieve GHG cuts back to 1990 levels, the EPRI report assumes that 50 new nuclear plants will be built (EIA assumes just 10); that 10 percent of new vehicle sales in 2017 will be plug-in hybrids that can travel 30 miles without burning gasoline and that their market share will climb by 2 percent per year thereafter. In addition, coal plant energy generation efficiency will improve from around 33 percent today to over 50 percent by 2030. Finally, the report assumes that demand for electric power will drop from 1.5 percent per year to 1.1 percent per year because the Feds will impose higher energy efficiency standards on buildings and appliances.

Of course, the EPRI report is looking at the prospects for emission reductions in just the power industry. Steeper cuts might be possible for other industries which could allow us to meet the more the bolder national goals proposed by the U.S. Climate Action Partnership companies. Still, the EPRI study makes it clear what cutting greenhouse gases will require by way of new technologies and investment.Very strangely, the EPRI analysis does not assume any specific price for carbon emissions.

Besides calling for mandatory emissions limits, the Climate Action Partnership and other industry groups are seeking federal research largesse. Specifically they are asking for joint public/private sector cost sharing, higher subsidies for energy technology research, and financial incentives to use low-carbon technologies, including loan guarantees, investment tax credits, and procurement standards. In the past, federal bureaucrats have proven themselves pretty incompetent in dispensing energy research pork barrel. Just recall the Synfuels debacle and the billions wasted on hydrogen car research. Setting up a carbon market or imposing a carbon tax will boost the price of high-carbon fuels. Facing higher energy prices will provide plenty of motivation for companies to develop and deploy new energy technologies and for consumers to buy more efficient cars, appliances, and homes. No federal fairy-godmother dispensing corporate welfare required.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.