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The Low Carbon Economy Act of 2007 (S.1766), recently introduced by Sen. Jeff Bingaman (D-NM) and five of his colleagues, provides a useful framework for spurring greenhouse gas emission reduction and will contribute to the ongoing debate in Congress on climate change legislation. The bill reflects a recognition that carbon capture and storage, CCS, technology is essential for the continued viability of coal-derived electricity in a world of growing carbon constraints. The bill sponsors offer an approach to accelerate the deployment of CCS systems that deserves careful consideration. Under this approach, plant developers would not be required to install CCS systems at new coal plants; they would instead receive "bonus allowances" as incentives to adopt CCS. The idea is that the market value of these bonus allowances would offset the cost differential between plants with CCS and uncontrolled coal plants with the goal of making CCS-equipped plants a cost-effective option under the bill’s cap-and-trade program for coal-burning facilities.
Our recent report "Global Warming and the Future of Coal" examines an array of options for achieving the goal of widespread CCS deployment at new coal plants. It analyzes whether CCS plants would be economically sustainable under the anticipated range of CO2 allowance prices in the early years of proposed cap-and-trade programs and concludes that CCS would not be a cost-effective compliance option under these programs. In contrast to S. 1766, our report does not propose offering utilities allowances as incentives to adopt CCS. We instead propose that Congress set an emission performance standard for new coal plants based on the effectiveness of available capture and storage technology, with a phase-in process to allow time for further testing and improvement of the technology. The performance standard would be accompanied by financial assistance to mitigate the added cost of CCS and protect against electricity price hikes.
Our report did not examine the pros and cons of using bonus allowances under a cap-and-trade program as a tool to incentivize utilities to build new plants with CCS systems. To supplement our earlier options analysis, this report will examine the CCS incentive provisions in the Low Carbon Economy Act and compare them to the emission performance approach recommended in "Global Warming and the Future of Coal." We show that the emission performance approach is more effective and less costly than the bonus allowance program proposed in the Low Carbon Economy Act for the following reasons:
Traditional emission control programs under the Clean Air Act and other laws set higher standards of performance for new sources of pollution than existing sources of pollution. New sources have generally been required to apply the best available emission control technology and have been subject to technology-based emission limits that supplement cap-and trade programs or other less stringent safeguards for existing sources. These stringent controls on new source emissions have made emission caps achievable by preventing emissions growth from new sources that would negate reductions from existing sources. Such new source emission standards achieved significant pollution reductions at an affordable cost, as well as sped the development and deployment of new technologies.
Application of the most advanced control technology to new power plants should be an essential element in an overall greenhouse gas emission strategy so that emissions growth from these plants does not jeopardize sector-wide emission reduction efforts. There is broad agreement that, while further testing and development are needed, CCS is the most promising—and probably the only effective—CO2 control technology for coal power plants.
An emission performance standard would ensure that all new coal plants capture and sequester their emissions rather than relying on bonus allowances that may or may not be sufficient to motivate plant developers to deploy CCS systems and could either provide inadequate incentives or unjustified windfalls to utilities.
Bonus allowances must overcome non-price barriers to building plants with CCS, including the reluctance of conservative utility executives to invest in new and uncertain technologies and the belief that second generation plants are more economical and reliable than first generation plants. As a result, the subsidies provided under a bonus allowance program would likely be considerably larger than necessary to close the cost gap between plants with and without CCS system.
One consequence of this is that the bonus allowance set aside could become so large that it reduces the size of the auction pool and/or shrinks allowance allocations to other regulated entities. Our calculations show that the bonus allowances awarded to utilities under S. 1766 could substantially exceed the 8 percent set aside, requiring a large transfer of allowances from the auction pool to utilities and reducing the revenues derived from the auction process.
The most likely scenario is that utilities will not sell bonus allowances in the open market but would use them to offset emissions from existing plants or even from new plants without CCS systems. This would delay reductions from the utility sector, put upward pressure on allowance prices and increase emission reduction obligations and costs for other categories of allowance holders.
These distortions of the cap-and-trade system would be avoided if an emission performance standard—and not a bonus allowance program—were the primary tool to achieve widespread deployment of CCS systems at new coal plants. While financial assistance would be available to plant developers, its purpose would be to protect consumers from undue energy price increases and not to create incentives for CCS deployment. As a result, such assistance could be precisely calibrated to reflect the carbon price differential between controlled and uncontrolled plants and could be adjusted over time as actual cost data becomes available. This would benefit energy users without providing a windfall to utilities.
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