The States Address Climate Change – Cap and Trade

Command and Control or Market Driven Solution

In a prior post we referred to Renewable Portfolio Standard programs as “point of sale” regulations for reducing greenhouse gases. In this post we describe Cap and Trade programs as “point of production” regulations for reducing greenhouse gases.

The two main point of production regulations to reducing greenhouse gases and “command and control” and “market-driven solutions”. In “command and control” the government mandates the quantity of greenhouse gases that may be each generator may produce. In “market-driven solutions”, the government provides incentives for the industry to determine the most cost effective solutions. Cap and Trade is a form of market-driven solution.

Cap and Trade Operation

In a Cap and Trade program the government sets a maximum quantity of greenhouse gases (in tons of carbon) that the industry may produce in any year. This maximum quantity is the “Cap” component of Cap and Trade. The government then issues a quantity of “allowances” equal to the Cap. It may issue the allowances to generators based upon their historic level of greenhouse gas production. Or it may hold an auction in which generators can purchase the allowances. At the end of the year each generator must hold a quantity of allowances equal to its greenhouse gas emissions. Generators that fail to hold an adequate number of allowances must pay a penalty.

Source: Calwatchdog.org

To ensure reduction in greenhouse gases the government will reduce the Cap and the allowances it issues in each succeeding year. Generators that take steps to reduce their greenhouse gas production will reduce the number of allowances that they need. They may also receive additional revenues by selling excess allowances. Generators that do not take steps to reduce their greenhouse gas production will have to purchase additional allowances to avoid the penalty. This opportunity to purchase and sell allowances is the “Trade” component of Cap and Trade.  

By giving generators the option to either purchase allowances or implement efforts to reduce their greenhouse gas production the Cap and Trade programs encourage the industry to take advantage of the most cost effective greenhouse gas reduction solutions. 

Program Successes

Cap and Trade programs generally work as intended. Acid Rain, caused by power plant emissions of nitrogen oxide (NO) and sulfur dioxide (SO2),  was once very harmful to fish and other wildlife. However, a Cap and Trade program established under the Clean Air Act successfully reduced SOemissions from power plants by 50% and substantially eliminated the harm from acid rain. 

And, in 2005, the European Union adopted a Cap and Trade Program aimed at greenhouse gas reduction. That program has a goal of reducing emissions by 21% below 2005 levels by 2020 and by 43% below 2005 levels by 2030. As of 2018, the European Union’s program was considered to be on target, having reduced emissions by 29% below 2005 levels. 

Federal Government Fails to Adopt a Cap and Trade Program

During the 2008 presidential campaign the editorial board of the San Francisco Chronicle asked Barak Obama to describe his response to climate change. Mr. Obama said that he advocated the use of a Cap and Trade program to reduce greenhouse gases.

However, the opponents of such a program pieced together portions of Mr. Obama’s comments and attributed the following quote to him: “If someone wants to build a coal-fired power plant, they can. It’s just that it will bankrupt them.” The Cap and Trade opponents then went on to attribute the following quote to Mr. Obama: “Under my plan. . . electricity rates would necessarily skyrocket.” 

A Google search of “San Francisco Chronicle Obama electricity rates” results in hundreds, if not thousands, of hits to speeches and articles from representatives of the coal industry, coal miners, and industry in general. They all refer to the above quotes and accuse Mr. Obama of seeking to undermine the United States’ economy in general and the coal industry in particular. 

In 2009, after Mr. Obama was elected President, the House of Representatives passed a comprehensive Cap and Trade bill referred to as the American Clean Energy and Security Act of 2009.  But the opposition to Cap and Trade had its effect. The Senate never acted on the House bill and it was never made into law. 

States Begin to Adopt Their Own Programs

In the absence of Federal legislation, the states have begun to implement their own Cap and Trade programs. California was the first state to implement such a program. As of 2017 that program had reduced greenhouse gas emissions in the state by 13%. And California was using revenues obtained from selling the allowances for various energy efficiency and clean air initiatives.

Multiple states participate in the Regional Greenhouse Gas Initiative (RGGI), implemented in 2008. Currently, the states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island and Vermont participate. And the program is expanding. New Jersey is scheduled to join in 2020. And Virginia is seeking ways to participate.

Under RGGI, each of the participating states is allocated a share of the annual capped CO2 emissions based on historical emissions. The overall cap and each state’s share of the cap is reduced each year. All of the RGGI states (other than New Hampshire) have committed to adjustments in the cap that will reduce their emissions to the goals of the Paris Climate Accord – i.e. to levels 26% to 28% below 2005 levels by 2025.

The RGGI states conduct annual auctions to distribute allowances used for compliance with RGGI requirements. Through 2014, the RGGI states have used the funds obtained from those auctions to finance $1.37 billion in energy efficiency and clean energy projects.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

Could Increased Electricity Usage be the Answer to Climate Change?

Greenhouse gas emissions from the transportation and heating sectors

Fossil fuels used in the production of electricity produce 28% of our greenhouse gas emissions. One would think that reducing our electricity usage would reduce our greenhouse gas emissions. But, some experts suggest that just the opposite is true. They say that we can reduce our greenhouse gas emissions by increasing our electricity consumption for electric vehicles and heat pumps.

Reducing electricity usage would reduce the greenhouse gas emissions associated with the production of electricity. However, electricity is not our only source of greenhouse gas emissions. 

Source: USEPA

We use fossil fuels for 90% of our transportation requirements. And we use fossil fuels for almost all of our residential and commercial heating requirements. This usage accounts for 29% and 12% of greenhouse gas emissions respectively. We can reduce greenhouse gas emissions in these sectors only by reducing their use of fossil fuels. In both cases electricity is the only available alternative to fossil fuels.

Electric Vehicles

Many experts view electric vehicles (EV) as the best way to reduce greenhouse gas emissions in the transportation sector. And state and federal governments are already offering incentives for drivers to purchase EVs. However, only 2% of new cars sold in America are EVs. Buyers have been slow to embrace EVs because of the following:

  • Time it takes to charge the vehicle;
  • Range of driving on a single charge;
  • Cost as compared to conventional cars; and
  • Lack of charging stations.

The automobile industry is working on these issues. And it will probably resolve them within the next several years. However, even if the American public fully embraces EVs, there is a question of the extent to which EVs will actually benefit the environment.

EV tailpipe emissions (including emissions associated with electricity used to charge the battery) are less than conventional auto tailpipe emissions. But tailpipe emissions are not the only source of greenhouse gas emissions. The “well to wheel” emissions – that is, tailpipe emissions plus the emissions from electricity required to produce the automobile – must also be considered. And, because of the electricity required to produce the EV battery, it takes more electricity to produce an EV than to produce a conventional auto.

Based on today’s mix of electricity production facilities the “well to wheel” emissions for EVs may actually be greater than for conventional autos. We will not, therefore, get the full benefit of EVs until more electric production is converted from fossil fuels to renewables.

Heat Pumps

Historically, we have used fossil fuels for almost all of our space heating requirements. But, during the 1970s there was a perception of a natural gas shortage. Without the availability of natural gas we started to use heat pumps fueled by electricity for space heating. After natural gas was once again readily available, heat pumps fell out of favor. In many cases the heat pumps installed in the 1970s were removed and replaced by conventional fossil fueled furnaces. Today, we get virtually all of our space heating from furnaces fueled by natural gas, oil or propane.

Now, with fossil fueled furnaces identified as a source of greenhouse gas emissions, heat pumps are getting a new lease on life. Heat pumps operate in the same way as air conditioners. In an air conditioner the hot air inside the home is transferred to a coolant which is condensed and compressed to transfer the heat outside. In a heat pump the hot air outside the home is transferred to a coolant which is condensed and compressed to transfer the heat inside. Although it may seem counterintuitive, outside air that is as cool as 32 degrees Fahrenheit contains enough hot air to be useful in a heat pump operation. When the outside air goes below 32 degrees the heat pump must use some type of auxiliary heating system to heat the indoor air.

The following video explains the operation of a heat pump:

Heat pumps operate on electricity. And electricity generation produces greenhouse gas emissions. However, even with today’s mix of electric generation facilities, the greenhouse gas emissions from the electricity used to run a heat pump are less than the greenhouse gas emissions produced from a fossil fueled furnace. And the greenhouse gas emissions associated with heat pump usage will further decrease as more electric production is converted from fossil fuels to renewables.

Conversion to EVs and Heat Pumps

No one is going to ask us to immediately replace our conventional autos and fossil fueled furnaces with electric vehicles and heat pumps. In fact, until more of our electric generation comes from renewables the electrization of the transportation and space heating sectors might have limited benefits. Therefore, conversion to electric vehicles and heat pumps should occur over the next 10 or 20 years in parallel with the greening of electric production.

It should also be noted that the current electric generation mix is geared towards meeting a peak demand that occurs on hot summer afternoons when air conditioners are in use. The increased electric consumption associated with the electrization of the transportation and heating sectors could cause a shift in the electricity load curve. This shift will have to be accommodated as new generating plants are added to the system.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

Is a Carbon Tax the Answer to Climate Change?

Increasing Interest in a Carbon Tax

Fossil fuel combustion causes 82% of the greenhouse gas emissions in this country.  Those that believe that human activity causes climate change agree that we must reduce those emissions. While there is no consensus on how to achieve these reductions support has been growing for a carbon tax. See the Environmental Defense Fund’s explanation of a cap and trade program, which is another viable method to reduce greenhouse gases.

Pollution from power plant that could be reduced with carbon tax
Source: butane.chem.uiuc.edu

A carbon tax is a fee imposed on the burning of fossil fuels. Such a fee forces users of carbon-based fuels to pay for the detrimental impact on the environment of their use.  For a detailed explanation of how a carbon tax might be used to reduce greenhouse gas emissions visit the Carbon Tax Center web site.

Forms of a carbon tax are already in effect or proposed in numerous countries including England, Ireland, Australia, Chile, Sweden, Finland and New Zealand. Forms of a carbon tax are also in effect in 10 states. And several bills have been introduced in Congress which would implement a national carbon tax.

How a Carbon Tax Would Work

There are numerous versions of a carbon tax. However, in this Post I will focus on a form of the tax that is assessed at the time that fossil fuels are mined or imported into the country. Presumably, those that pay the tax will pass the cost along in their sales price. Ultimately, the cost of the tax will be reflected in the of the price of gasoline and electricity.

The tax would also affect the cost of certain plastics that use fossil fuels but capture the carbon and do not emit greenhouse gases. This use of fossil fuels does not add to greenhouse gas emissions. Therefore, most carbon tax proposals provide credits for such plastics that zero out the cost of the tax.  

Impact on the Price of Electricity

Electric power production from coal, oil and natural gas causes one-third of the greenhouse gas emissions associated with fossil fuels. If a carbon tax is enacted the cost of electricity produced by coal, oil and natural gas will undoubtedly increase.

Opponents of a carbon tax base most of their opposition on the impacts that these price increases could have upon the economy.  For a good argument against a carbon tax see the article entitled 10 Reasons to Oppose a Carbon Tax on the American Energy Alliance web site. For a detailed discussion of the impact of a carbon tax see the paper entitled Effects of a Carbon Tax on the Economy and the Environment prepared by the Congressional Budget Office.

Opponents of the carbon tax contend that the cost of the tax will simply be passed along to electric customers in the form of price increases. However, such an argument does not fully consider the operation of deregulated markets that govern most of today’s electric consumption.

In the competitive markets each regional Independent System Operator (ISO) manages a power exchange where electricity is bought and sold. Hundreds, or even thousands, of generating plants participate in each of these ISO markets. These plants operate on fossil fuels, nuclear or renewable resources.  They all hope to sell their production to the market at or above their operating costs.

Each ISO follows a set of rules that dictates the order in which it will purchase power from these plants. These rules require the ISO to dispatch the plants in reverse order of their cost of production. Thus, during hours when electric consumption is low the ISO will dispatch only the lowest cost production. The ISO will dispatch higher cost production only during hours when consumption increases.

The following graph shows how an ISO dispatches different types of generation at different prices as consumption varies throughout a 24 hour period:

Carbon tax could impact economic dispatch position of fossil fuel plants
Source: pjm.com

As can be seen from the above, the ISO dispatches low cost renewable and nuclear power during low usage hours.  The ISO adds more expensive natural gas combined cycles, coal and combustion turbine oil plants only during higher usage hours.  

If a carbon tax causes the fossil fueled plants to become expensive it would certainly increase the price of electricity during hours when those plants are in operation. However, there is good reason to believe that the fossil fueled plants’ hours of operation may decrease. Their increased operating costs should increase opportunities for additional renewables to compete, and be dispatched, at price levels that are lower than the new cost of fossil fueled generation. This would limit the use of fossil fuel generation to hours when consumption reaches very high levels. In other words, the carbon tax would increase renewable generation and reduce the hours in which high priced fossil fueled generation is in use.

The Level of the Carbon Tax

One argument against a carbon tax is that it constitutes a political decision to force certain behavior – in this case reduced use of fossil fuels. However, it could also be argued that the current failure to recover the societal cost of carbon usage from its users constitutes a political decision to subsidize the use of fossil fuels.

The Environmental Defense Fund estimates that the detrimental societal cost of carbon usage is currently around $40/ton of carbon dioxide. Other estimates are both higher and lower. However, whatever the true cost of carbon emissions, it would seem that that cost should be borne by the carbon users rather than by society in general. Implementation of a carbon tax that at least equates to the societal cost of carbon usage would not be a new political decision. It would reverse an existing political decision to subsidize fossil fuel use.

Where Will the Revenues Go?

Revenues from a carbon tax could be substantial. Estimates are that a modest tax of $15/ton of carbon dioxide would result in $80 billion in tax revenues. There is a question of how that $80 billion should be used. Suggestions include using the funds to reduce the national debt, using the funds to finance renewable generation projects, and using the funds as tax credits for low income families to partially offset the increased costs of gasoline and electricity caused by the tax. Any carbon tax legislation will have to include the answer to the question of where the tax dollars go.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry.