Federal cap and trade in the U.S.: happy days for coal, nuclear

Two days ago, the U.S. senate voted 89 to 8 to prohibit electricity and gasoline price increases under a federal cap and trade program. The mainstream environmental lobby must be feeling a bit of déja vu as they recall a similar senate vote in 1997. At issue then was whether the U.S. should sign the international climate change agreement that eventually became the Kyoto Protocol. With a vote of 95-0 against, the answer was pretty clear. The April 1 2009 vote echoes the 1997 sentiment.

In these circumstances, the prospect for a meaningful federal-level cap and trade system in the U.S. looks dim. Henry Waxman and Edward Markey rolled out a scheme hours after I predicted the impetus would come from congress and not the administration (see article). But the 89-8 senate vote, initiated by John Thune (R-South Dakota), makes it hard for Waxman-Markey to fulfill its intent, which is to add meaningful costs to carbon emissions.

This means that coal- and nuclear-powered electricity generation will maintain their incumbent’s advantage in de-regulated power markets. With carbon costs staying low, the price of natural gas will have to fall further still for the marginal cost of gas-fired power to compete with that of coal (nuclear is unaffected). The continental gas price is low now because of the recession. When the economy goes back up, so will the price of gas.

This will make things very interesting for those who think that renewable sources like wind and solar are the answer to greenhouse gases. Waxman-Markey calls for renewable portfolio standards of 25 percent all across the U.S. If the Thune amendment stays, who will pay the exorbitant in-feed tariff that will finance the expansion of wind and solar and pay for the parallel fleets of backup gas-fired plants?

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