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Environmental

Is reality setting in as the difficulties of an effective cap-and-trade program appear on the horizon?

 
What will be the goal of a cap-and-trade program? How much of a decrease in CO2 emissions will be the ultimate objective? For discussion purposes, many commentators seem to take the hypothesized goal from the Dingell-Boucher "discussion draft" put forth in October, 2008. [See http://www.instituteforenergyresearch.org/wp-content/uploads/2008/10/dingell-boucher-draft-cap-and-trade-bill.pdf.] The proposed legislation envisioned an 80% reduction in CO2 by 2050; even though the takeoff is slow [six percent reduction in GHG emissions from 2005 levels by 2020, a 44 percent reduction by 2030 and an 80 percent reduction by 2050], the rate of reduction accelerates in the out-years. Skeptics assumed that the out-year goals were so steep that the legislation would be amended, and that the real objective was to minimize the near-term goal. In any case, the 80% by 2050 target has been used by innumerable "talking heads" when discussing global warming.
 
Adopting a long-term, economy-wide greenhouse gas reduction goal of 80 percent [which is more sweeping in its scope that the Dingell-Boucher discussion draft] would put the onus on the electricity industry for two-thirds of the required reductions, according to a report by ICF International, an energy and environmental consulting firm. See http://www.icfi.com/markets/energy/marketing/so2-compliance.asp. From this perspective, current generating technologies, and particularly coal-fired plants, would bear a very large proportion of the reduction burden. Absent CO2 offsets, if this industry's capacity is not replaced by so-called renewable sources and conservation, a major impact will occur to the electricity generating business.
 
This scenario is also the basis for some commentators' projections that electricity prices will increase substantially (15-30%) as the industry is "forced" to buy offsets to keep their generating capacity online. Moody's Investors Service notes that carbon cap-and-trade legislation could clear the House within a few months, sending it to the Senate by the end of the summer and possibly being ready for President Obama's signature by the end of 2009. Further, the nature of the cap-and-trade program is hard to discern at this time. As such, doubt as to what will emerge from Congress has Moody's predicting relative stability in credit ratings for electricity producers in the short-term, but predicting a "generally negative credit bias associated with carbon costs for a majority of the sector" on the horizon for many coal- and natural gas-based electricity wholesalers. Based on estimates of a $20 per metric ton charge for CO2 emissions, Moody's estimates that the 2.4 billion metric tons of CO2 produced by U.S. utility companies every year could cost the sector $48 billion down the line. On the other hand, the report also states that the U.S. Department of the Treasury could pick up $120 billion in new revenue from CO2 surcharges, for the overall 6 billion metric tons of CO2 created by all American industries annually. According to estimates provided by President Obama's recently proposed budgets, if the legislation passes, carbon credit revenue could stack up to $645.7 billion by 2019.
 
Coal-dependent power, which accounts for 50 percent of U.S. electricity generation, could be the hardest hit, the report says. Adjusting for market variables, Moody's predicts coal-based electricity companies could see wholesale margins erode between 25 and 38 percent due to carbon-cap taxes. Additionally, market prices for coal power could shoot up between 20 and 25 percent, based on report estimates. Coal dependent wholesale merchants and coal-based project financing are set to take the hardest credit hit should carbon costs be implemented, Moody's said. It listed the likely negative credit implication of any such legislature as "high" for the two sectors. Natural gas, the second-most affected sector, has a less negative outlook, but investors should still be wary, the report says. For further information, see http://www.reuters.com/article/marketsNews/idUSN2447599020090325, http://ibtimes.com/articles/20090325/ucarbon-cap-raise-power-prices-moody-039-s.htm, and http://www.iii.co.uk/news/?type=afxnews&articleid=7235384&action=article.
 
Concerns about price increases and generating capacity are also the rationale behind FutureGen, a research demonstration project funded by DoE to design, build, and operate the world's first coal-fueled, near-zero emissions power plant, at an estimated net project cost of between $1.5 billion [the Bush estimate] and perhaps $2.5-3 billion [based on recent comments by the new Secretary of Energy]. See http://www.futuregenalliance.org/.
 
Because the cap-and-trade system could theoretically result in substantial price swings, Representatives Doggett (D., TX) and Cooper (D., TN) have introduced HR 1666 [see http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1666:]; the objective is to minimize such swings. An independent board would be created to determine the annual prices per ton of carbon necessary to hit annual emission targets from 2012 to 2020, and the Department of the Treasury would conduct allowance auctions each quarter in order to maintain the price set by the board, according to the bill. The board would be subject to a strict conflict-of-interest provision, as well as post-employment restrictions, to prevent any possibility of manipulation, according to the authors; one admires their optimism. The board would also be required to review the program every year and determine how well emissions targets were being met. Since there will always be a spread between the value of an offset to a particular business and the price at which it is set artificially, one can easily image corruption running amuck under such a system.
 
As you can tell, the projections, hypotheticals, worries, and panic have only just begun.