Just over a month ago, the U.S. House of Representatives passed the Waxman-Markey energy tax.[1] Much of the debate focused on how much the bill will cost Americans. For example, the Congressional Budget office claimed the cap and trade section of the bill would only cost $175 a year in 2020, but this claim has been thoroughly debunked. The real question is how much confidence should we have in the modeling assumptions that the CBO and other modelers rely upon?
To estimate the costs and benefits of cap and trade legislation, economic models rely on computer models. The accuracy of these models depends on many assumptions. The problem is that some assumptions cannot be calibrated to actual data because those data, in many cases, do not exist. Some of the most troublesome assumptions concern the cost and availability of technologies for controlling greenhouse gas emissions. Many of these technologies are either not currently commercially available or have yet to be constructed in the U.S., making their true construction costs no more than assumed estimates. If these technologies are either more expensive or their date of commercial availability is later than assumed by the modelers, costs of compliance with the proposed legislation will be greater than predicted. These costs will be borne by the consumer regardless of what proponents of the measure tell us.
A number of organizations have estimated the cost of Waxman-Markey including the Congressional Budget Office[2], the Environmental Protection Agency[3], the Heritage Foundation[4], and the Black Chamber of Commerce.[5] All these studies predict that most of the CO2 reductions will come from the electric generating sector because coal generates 49 percent of the electricity generated in America. Coal is a carbon dioxide intensive hydrocarbon, but it is also the least expensive generating technology. To replace this coal, modelers believe that nuclear; renewable; or carbon, capture and sequestration technology will be used—all more expensive technologies than traditional coal.[6]
Nuclear Power
What are the problems with this approach? No nuclear plant has been built in the United States since 1977[7] and the Administration has substantially reduced funding for Yucca Mountain,[8] the expected repository for spent nuclear fuel. And while the Energy Information Administration estimates that a future nuclear plant can be built for about $3300 per kilowatt (2007 dollars)[9], electric utility companies (NRG, Florida Power & Light, Duke Energy, Progress Energy) are estimating costs between $5,000 and $10,000 per kilowatt[10]. Underestimates of construction costs will result in higher compliance costs and alternative compliance strategies with cap and trade legislation.
Renewable Technologies
Renewable technologies that qualify under the Renewable Energy Standard of the House-passed legislation are limited in a number of ways. First, these sources of energy are more expensive than traditional coal and natural gas generating technologies. Second, they are limited to certain areas with renewable resources (in the case of solar and wind). Third, these resources are extremely costly for central station electricity generation (in the case of solar and offshore wind). And fourth, they are not yet commercially available (in the case of biomass gasification). EIA’s revised Annual Energy Outlook 2009, which incorporates subsidies and incentives included in the federal stimulus package, projects wind to be 50 percent more expensive than traditional coal-fired generation (without subsidies) in 2016[11]. This is most likely due to the fact that the best wind sites are used by then. Solar technologies are estimated by EIA to be 2.5 to 4 times the cost of traditional coal-fired technologies[12], and, as such, are not the renewable of choice in climate change scenarios.
Biomass technologies tend to supply much of the renewable power generated in many cap and trade scenarios since they supply base load power and are available in areas of the country with limited wind and solar power (e.g. the Southeast). However, while modelers predict substantial biomass capacity to be built to comply with cap and trade regulations, recent construction attempts show the public to be less favorable. In Greenfield, Massachusetts, for example, a developer wanting to construct a 47-megawatt biomass-fired plant fueled by “clean” wood energy from the surrounding forests,[13]has found local residents concerned about depletion of their forests, pollution from the plant, truck haulage and water usage issues.[14] The assumption of modelers is that the carbon dioxide released by the plant will be absorbed by trees in the growing process, resulting in zero net greenhouse gas emissions. Renewable advocates also believe that the future fuel for biomass technology will be energy crops (e.g. switch grass, poplars) grown near the generating plant, but these energy crops have yet to be grown in the U.S. on a commercial scale. Future ethanol plants are also expected to be fueled by energy crops to reach the renewable fuel mandates already legislated by Congress.[15]
Carbon Capture and Sequestration
Carbon capture and sequestration (CCS) technology is not currently commercially available. The costs of CCS are an assumption rather than a reality. Some modelers believe that some of the existing coal-fired technology will be retrofitted with CCS technology and new coal-fired units will be built with CCS to replace existing technology that will be prematurely retired. The result would be like replacing a perfectly good automobile (cash for clunkers, anyone?) or home appliance before it has served its useful life. Only in this case, it is not the automobile or appliance owner’s decision to incur higher investment costs since the consumer will be charged for the new plant every time electricity is used. Also, significant CCS will require a way to dispose of the carbon and a transportation system to get the carbon to the disposal site.[16]
Modeling Uncertainties
The Energy Information Administration just released its analysis of the Waxman-Markey bill.[17] In their analysis, they included a scenario that modeled the bill, but limited the penetration of certain technologies (nuclear, fossil with CCS, and biomass gasification) to their reference case levels, i.e. to their projected levels with current laws and regulations included. In this case, called Limited Alternatives, electricity prices were 33 percent higher in 2030 than in EIA’s reference case.[18]
Another uncertainty in modeling the Waxman-Markey bill is whether international offsets would be severely limited by cost, regulation and/or slow progress in reaching international agreements covering offsets in key countries and sectors. In fact, the Congressional Budget Office has been criticized for the amount of international offsets they allowed in their analysis because of the uncertainty surrounding their implementation. For example, under the United Nations’ Clean Development Mechanism program, which allows companies to invest in offsets in developing countries, the ultimate availability of projects was
some 2 billion tons lower than initially anticipated. The shortage derived from a variety of reasons, including the simple start-up time to create a project.[19] To represent this uncertainty EIA modeled a No International Offsets Case that assumed all emission reductions would need to be domestic. This resulted in average electricity prices 26 percent higher than the reference case in 2030.[20]
But marrying these two cases (a situation that is not out of the realm of serious possibility), results in electricity prices 77 percent higher than the reference case in 2030. U.S. consumers would be paying 17.83 cents per kilowatt hour for electricity (in 2007 dollars) on average.[21]
But this price increase will not be uniform because electricity prices vary widely from state to state. For example, during the first 4 months of 2009, Connecticut’s average electricity price was 17.4 cents per kilowatt hour and Wyoming’s average electricity price was 5.9 cents per kilowatt hour—a spread of 11.5 cents per kilowatt hour.[22] States like Wyoming could see their electricity prices disproportionately skyrocket.
Of course, a redistribution of electricity prices would take place among States since generation fuels would change from being mainly coal-based to being natural gas, wind, and solar-based. In this case, coal-fired generation would be reduced by 85 percent over the next 2 decades, resulting in premature retirement of coal-fired generating capacity.
Unfortunately, when EIA’s analysis is quoted, most reviewers will quote the basic case where all of these major uncertainties are assumed away, providing proponents of the Waxman-Markey bill to sell this to the public as all gain and no pain when the reality is just the opposite.
Conclusion
Can politicians wave a magic wand and spur faster growth in these replacement technologies? Perhaps, but Congress does not have a good track record at picking “next generation” technologies. We have been told for years that advanced biofuels will soon be commercially available. Congress even passed a law mandating the production of large amounts of advanced biofuels, including cellulosic ethanol, to begin in 2009 and reach 22 billion gallons by 2022.[23] Now that it is 2009, this appears unlikely. So what compels our lawmakers to continue to pass legislation that has so many uncertain elements? For starters, just follow the money.
[1] Environment and Energy Daily, June 26, 2009, http://www.eenews.net/EEDaily/2009/06/26bn/1/#1 .
[2] http://www.cbo.gov/ftpdocs/102xx/doc10262/hr2454.pdf
[3] http://www.epa.gov/climatechange/economics/pdfs/HR2454_Analysis
[4] http://www.heritage.org/Research/Energyandenvironment/wm2438.cfm
[5] http://www.crai.com/uploadedFiles/Publications/impact-
on-the-economy-of-the-american-clean-energy-and-security-act-of-2009.pdf
[6] https://www.instituteforenergyresearch.org/wp-content/uploads/2009/05/levelized-cost-of-new-generating-technologies.pdf
[7] http://wiki.answers.com/Q/When_was_the_last_nuclear_power_plant_built_in_the_US
[8] Washington Post, March 4, 2009, http://www.washingtonpost.com/wp-dyn/content/article/2009/03/03/AR2009030303638.html
[9] Energy Information Administration, Assumptions to the Annual Energy Outlook 2009, Table 8.2, http://www.eia.doe.gov/oiaf/aeo/assumption/pdf/tbl8.2.pdf
[10]Robert Peltier, July 10, 2009, Master Resource, http://masterresource.org/?p=3539
[11] https://www.instituteforenergyresearch.org/wp-content/uploads/2009/05/levelized-cost-of-new-generating-technologies.pdf
[12] Ibid.
[13] Feeling the burn: Developer plans biomass power plant, Greenfield Recorder, January, 15, 2009, http://www.recorder.com/story.cfm?id_no=5676106
[14] Greenfield Recorder, July 3, 2009
[15] Energy Independence and Security Act of 2007, Public Law 110-140, http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ140.110.pdf
[16] http://en.wikipedia.org/wiki/Carbon_capture_and_storage
[17] Energy Information Administration, Energy Market and Economic Impacts of H.R. 2454, The American Clean Energy and Security Act 0f 2009, July 2009, http://www.eia.doe.gov/oiaf/servicerpt/hr2454/index.html.
[18] Ibid, Table 2
[19] Climate Wire, CBO report studies offset costs and reliability, August 4, 2009, http://www.eenews.net/climatewire/2009/08/04/4/ .
[20] [20] Energy Information Administration, Energy Market and Economic Impacts of H.R. 2454, The American Clean Energy and Security Act 0f 2009, July 2009, Table 1, http://www.eia.doe.gov/oiaf/servicerpt/hr2454/index.html.
[21] Ibid, Table 1
[22] Energy Information Administration, http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html
[23] Energy Independence and Security Act of 2007, Public Law 110-140, http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=110_cong_public_laws&docid=f:publ140.110.pdf
