Australia has just enacted a carbon tax law that it will
implement mid-2012. Is a carbon tax a
better policy than a Cap & Trade policy?
Better minds than mine disagree over the answer to that question and the
primary reason for disagreement is that they are both susceptible to misuse
when in place even though both have the ability to effect the right kind of
change – which is to say, to reduce carbon emissions while mitigating the cost
of doing so.
I’m going to sidestep that argument and I’m also going to
concentrate on the Power Sector to the exclusion of all others for this
article. And now I will suggest that a “Carbon
Price” has three goals to achieve in order to use to realize the ultimate
objective of reducing the carbon emissions of the power sector of any given
jurisdiction without jacking the price of energy and killing the economy:
1.
Reduce Demand for Electricity
2.
Re-dispatch (using different generators as first
call)
3.
Lowering the emission profile of new generation
to be brought on-stream
And now I’m going to further suggest that the way to do any of this is to RECYCLE the revenue of a carbon price, not to remit them to a government treasury but to the goal of reducing emissions and mitigating the cost of doing so. How do you ensure that the revenue stream doesn’t end up in the government coffers? Put the revenue stream in the hands of a Trustee charged with the goal of reducing emissions and the cost of electricity where possible.
Will a Carbon Price
achieve these three goals? What are the Problems?
Reducing Electricity Demand: The problem here is that the elasticity of price for electricity is actually even smaller than that of gasoline. And as everyone knows, as the price of gasoline goes up so does the grumbling; but not the reduction in use.
Re-dispatch: There is a base demand for electricity that
is fulfilled by hydroelectric, nuclear and wind facilities because they have
the lowest marginal cost to produce that electricity. They are also low carbon emitting sources. As demand runs above base, other generators
are called on-stream such as Coal, Fuel Oil and/or Natural Gas, probably in
that order. So how high does a carbon
price need to be to turn off coal and run renewable energy generation? To make a broad statement, you could double
the price of electricity to consumers and reduce emissions by about 5%.
From a consumers point of view, it is the clearing price of power that matters in a wholesale power market. Without a really high carbon price you can’t displace coal and a really high carbon price ain’t going to fly, politically. So, with, say, a $25 carbon price, if demand runs to a level that requires fossil fuelled generators to run then that higher price of electricity is paid for every single MWhr of electricity produced at that time. The result is a windfall in gains for generators with a lower marginal cost of production and that windfall is paid for by consumers. (residential, commercial and industrial). Basically, the carbon price is passed on to consumers in a magnified form because even non-emitting generators get the higher clearing price.
New Generating
Capacity: There is a better argument
here. A Renewable Portfolio Standard, or a Feed-in
Tariff or other proactive government policy allows a market operator to insert
renewable generation at the bottom of the bid stack so that the (at this time)
higher price of renewables is paid for renewable generation without influencing
the clearing price of all other generators.
AND NOW THE GOOD NEWS
McKinsey & Company have a rather famous carbon abatement
curve, as shown below. What it shows is
that Energy Efficiency programs can reduce emissions at an incredibly
inexpensive rate. Follow the curve, as
the cost of abatement climbs steeply (from deeply negative cost) and then less so from left to right. You can find this curve here: http://www.epa.gov/oar/caaac/coaltech/2007_05_mckinsey.pdf
Source: A cost curve for greenhouse gas reduction; The McKinsey Quarterly
So what is the message here? If you take the carbon revenue stream and apply it to energy efficiency programs to ‘buy’ energy efficiencies the cost has been worked out by Robert Cowart of the Regulatory Assistance Program (RAP) to be about $0.03 per kWhr. Not bad, eh? Take revenue, buy efficiency and reduce demand. Reduce demand and reduce the amount of time that fossil fuel is used to generate electricity and thereby reduce carbon emissions. Better still, there are economies of scale in the purchase of energy efficiency programs.
CONCLUSIONS
Putting a price on carbon is a great idea, but it is
incomplete. The bottom line is that utilizing
energy efficiency programs, renewable portfolio standards, Feed-in-Tariffs and
other policies greatly accelerate the reduction in GHG emissions. Putting the carbon revenue stream in the hands
of a Trustee with a mandate to reduce GHG emissions ensures that the
overarching ambition is achieved.
Need an example? The
Regional Greenhouse Gas Initiative of the Northeast and Mid-Atlantic states of
the U.S.A. www.rggi.org Read’em and weep.
References
Richard Cowart, Regulatory Assistance Project www.raponline.orgRegional Greenhouse Gas Initiative, www.rggi.org
Wikipedia, http://en.wikipedia.org/wiki/Ontario_electricity_policy#Central_planning_and_traditional_regulation_versus_competitive_markets
Christian Hewicker et al, Power Perspectives 2030, European Climate Foundation
Putting a Price on Carbon, Yale university http://e360.yale.edu/content/feature.msp?id=2148
No comments:
Post a Comment