Eastern Front flares up in U.S. Kyoto war; nuclear industry could be the big winner

Last week I outlined how the Arnold Schwarzenegger–Tony Blair pact spelled bad news to those who oppose the Kyoto Treaty. The Terminator’s alliance with Blair represents the first major beachhead won by pro-Kyoto forces in America. But now the anti-Kyotos will be dealing with a headache on their eastern flank, in the form of the Regional Greenhouse Gas Initiative (RGGI). The RGGI is an alliance of seven northeastern states. It was initiated by New York governor George Pataki (another Republican) in response to President Bush’s inaction over Kyoto.

The RGGI will cap members’ aggregate electricity-related emissions at 121 million tons per year, beginning in 2009.

As with the European Union’s emission trading scheme (ETS), the RGGI’s success will stand or fall on the strength of its due diligence. i.e., on how strict its authorities are in approving members’ estimates of their projected emissions.

You will recall the problems with Phase 1 of the ETS (see my July 2 post). The price of carbon permits crashed on the nascent European permit market when it became apparent that there was a surplus of permits. This reduced emitters’—including electricity generators’—disincentives to emit. The whole point of creating a carbon market was to make emissions expensive, and thereby force emitters to find ways to reduce emissions without curtailing economic output.

Why was there a surplus of permits? It essentially boiled down to the European Commission’s generosity in granting carbon permits based on numbers provided by the companies themselves, and approved by the companies’ host countries.

The RGGI’s designers appear to want to avoid something similar. As mentioned, the cap will be 121 million tonnes. According to the Energy Information Administration, the RGGI states’ electricity related CO2 emissions were over 142 million tonnes in 2004. This means that, by 2009, RGGI participants have to reduce their aggregate emissions by 21 million tonnes—an ambitious target.

Will this spur investment in “clean energy”? And does “clean energy” include nuclear energy? Surely it must, and if so I can think of one company that is well-placed to take advantage of the situation. According to Greenwire, local authorities have offered Constellation Energy, which currently owns and operates roughly 3,700 megawatts of nuclear capacity in the RGGI area, $300 million to build a new reactor at one of its existing sites in Maryland. (Maryland will join the RGGI in 2007.) The new reactor, if Constellation’s construction application is approved, will likely be an Areva Generation III 1,600 megawatt unit.

If this comes to pass, Constellation will thereby offset 1,600 megawatts of the coal-fired capacity it owns within the RGGI area. If this unit were to run for one year at 80 percent capacity factor, it would offset over 10 million tonnes of emissions.

And if the RGGI’s designers are able to solve the over-allocation problems that plagued Phase 1 of the European Emission Trading Scheme, those 10 million tonnes will be worth a lot of money to Constellation.

Nuclear power proponents in Canada would do well to study the U.S. nuclear industry’s response to the RGGI.

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