The Weekly Carboholic

Posted on February 27, 2008

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In 1990, Congress revised the Clean Air Act to enable utilities to use market efficiencies to lower sulfur dioxide (SO2)pollution from power plants. In response to this cap-and-trade system, utilities have reduced SO2 pollution by 30% more than the federal government required. A similar mechanism has been suggested for reducing carbon dioxide (CO2) emissions. Earlier this month the Congressional Budget Office (CBO) released their analysis of three alternatives to reducing CO2 emissions, and their conclusion was that a carbon tax was the most efficient method, not the oft-touted cap and trade system. However, as is so often the case, the devil is in the details, rather than in the executive summary.

While it’s certainly true that the CBO said that a carbon tax was the most efficient, it was not the overwhelming favorite. According to Chapter 1 – Efficiency Implications of Different Policy Designs, a carbon tax that was designed such that the benefits of reduced emissions roughly matched the costs of meeting the emissions reductions in the first place was about 5x more efficient than a straight, inflexible cap on emissions. However, it was only 1.67x more efficient than the two cap-and-trade schemes that the CBO was able to analyze, and one of the cap-and-trade schemes could potentially be made as efficient as the tax if a) carbon allowances were auctioned instead of given away and if b) unused allowances could be “banked” in some fashion. One of the major advantages of a carbon tax that the CBO found was that the taxes were constant and pretty much immune to major price spikes that could ripple throughout the entire economy in a very bad way. Your electricity prices could theoretically vary wildly depending on the costs of carbon allowances, with one kWh costing 50 cents one week, $1.00 the next week, and then 10 cents the week after that. In addition, the CBO found that the economic costs of a carbon cap-and-trade program would likely be double that of an equivalent carbon tax program (equivalent in that both would be designed to roughly equalize costs vs. benefits).

However, the CBO also found that a hard cap could be more efficient under one very important condition – if there’s a climate “tipping point” that we have to stay below lest we trigger an unrecoverable positive feedback process in global heating. The question is whether or not such a tipping point exists, and if so, how close are we to reaching it. And the answer to that question will probably define whether we have to figure out ways to make cap-and-trade work, with all the price volatility that it will likely entail, or whether a broad-based carbon tax might be more effective over the long run with less economic damage.

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Last week we discussed Dr. Peter Neumann, a Colorado Springs, CO physicist who was testing a new pollution “scrubber” invention at a Colorado Springs power plant. This week we have Larry Baxter, a BYU professor of chemical engineerign who is working on a way to sequester carbon dioxide emissions from coal plants at a significant efficiency improvement over current proposed technologies.

Carbon sequestration has not yet been proven to work, but existing proposals estimate that the energy required to separate out and sequester CO2 will eat 25-30% of the total energy output of the power plant. Baxter believes that he’s come up with a method that will cut the efficiency losses from 25-30% down to 15%, a significant improvement. According to the Deseret News story, Baxter estimates that a modern coal plant with the proposed carbon sequestration technologies would produce coal power for about 11 cents per kWh (as compared to about 3.5 cents per kWh today), while his solution would cost more like 8 cents per kWh. With a little luck, both professor Baxter’s and Dr. Neumann’s solutions will work out. Competition is (nearly) always a good thing.

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Next time you drive by a wind farm or a field filled with solar-thermal reflectors, ask yourself this question – where did the energy to make those turbines and solar panels come from? In most cases, the energy came from coal. Which means that the green, renewable technology you support is made possible by the highest carbon-emitting energy source there is. So what does it really mean to be supporting renewable energy? According to the Des Moines Register, Iowa’s citizens are discovering that they have to ask this question, and that they don’t necessarily like the answer.

Officials of Alliant Energy who are trying to build a new 630 MWatt coal plant outside Marshalltown, Iowa, have told Iowa Utilities Board that the state needs the new coal plant in order to power fuel ethanol distilleries (factories? refineries?) and wind turbine blade factories. According to the story;

“You scratch the surface on ethanol and you find a black lump of coal,” said Mark Kresowik, who fights coal plants for the Sierra Club. “That changes the dynamics.”

In addition, Mr. Kresowik also points out that, although it’s true that plug-in cars are presently powered off coal in Iowa, “it doesn’t have to be.”

I’m glad that Iowans are having this debate, and that both the energy companies and activist groups like the Sierra Club are getting involved, because they raise the issues higher in the public consciousness. But as Iowa State Senator Larry McKibben pointed out in the story, “This is part of how we keep and transition to the new energy of the future.”

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The Christian Science Monitor had an article last week on how not all green energy investing funds are actually green. There are number of investment funds available that don’t really qualify as socially responsible investments, focusing their investments on companies that make their money off of global heating instead of companies involved in mitigating or counteracting global heating. As the CSM story says;

But as the DWS Fund demonstrates, not all investment products with a climate-change theme are committed to finding solutions.

Given that the mentioned DWS Climate Change Fund has no social mission, but instead is focused on those companies who stand to make great deal of money in the so-called green economy when the government implements a carbon tax or cap-and-trade on carbon emissions, does that make it any less a good investment? And is investing only socially responsible if the fund has an avowed social mission? I don’t know the answer, and I expect that the answer will vary greatly from one investor to another. But if one of your reasons for investing is to reduce global heating, then the old maxim “buyer beware” should apply to your socially responsible investments as much as it would to any other investment.

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