A month ago, I paid US$100 to retire 12 tons’ worth of carbon allowances from the Regional Greenhouse Gas Initiative. I received several handsome certificates, which I dedicated to several family members. The certificates promise that the allowances will indeed be retired from RGGI. At the time, I wondered what that promise is really worth. What would happen if power generators covered under RGGI go over their emission caps? Of course they would not be shut down; they would be fined (see article).
Will this prospect, plus the new reality of carbon costs, compel coal-based generating companies covered under RGGI to change the way they generate electricity?
According to the economic hypothesis underpinning the entire idea of carbon costing, through either a cap and trade scheme or an outright tax on carbon emissions, the answer is an unequivocal yes. Increase the cost of generating power with pulverized coal with today’s methods, and this will automatically force coal-based companies to cut their emissions by capturing them or by replacing coal-fired machines with gas- or biomass-fired generators or ones powered by wind or solar energy. So says the hypothesis.
This could indeed happen, if the Dark Green Spread—the price difference between coal-plus-power-plus-carbon and natural gas-plus-power-plus-carbon in the power systems inside RGGI—becomes, and stays, favourable to natural gas (which emits about 30 percent less carbon than coal). Note that I don’t mention renewables, even though they theoretically do not emit any carbon. This is because they are currently much more expensive than natural gas, which is in turn much more expensive than coal. It is therefore more realistic to compare coal with gas: first things first.
The rules currently governing RGGI investments in the 10 participating states lead directly to massive investments in natural gas-fired generation—if the allowance market ratchets up the cost of carbon sufficiently to overcome the Dark Green Spread. If that happens, retail power prices in the U.S. northeast, already by far the highest in the U.S., will go higher still.
And will this lead to emission reductions, which are the whole point of RGGI? Not necessarily. All RGGI states have mandatory renewable portfolio standards, requiring a certain percentage—usually fifteen to twenty percent—of electricity to come from renewable sources like wind, solar, and biomass. In a recent article, Don Jones points out that intermittent sources of energy necessitate parallel investments in fast-dispatchable fossil-fueled power. The criterion of grid stability—the maintenance of which is the prime directive of every system operator—will virtually ensure these fossil sources will be run as baseload.
So, if gas replaces coal in RGGI, it will also parallel renewables. The upshot is a major increase in fossil generation. Any emission reductions due to the retirement of coal will be wiped out by the increase in gas. And power will be dramatically more expensive.