Economic impacts of carbon pricing 11

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1. 

   Nigel Goddard Posted 2:02 pm
   27 May 2009

     So why all the fuss? Not because 1.4 cents/kWh is going to kill our
   economy. Rather, it’s a big deal from the perspective of a power plant owner.
   A $20/ton carbon price imposes something like a ~40% reduction in the
   profits of a modern coal-fired power plant unless they can pass it
   along to their customers. This is only true if the permist are auctioned.  If they are given to the owners, then as economists will say and as the EU ETS has shown, the price will be passed on to consumers.Nigel

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      Sean Casten Posted 6:51 pm
      27 May 2009

      Nigel,That's exactly the problem.  The only reason to give away the allowances for free is because the polluters have political clout - not because it makes any environmental or economic sense.  And if we do give them away for free, we're then stuck in a conundrum: Do we pass prices onto consumers for a cost that the polluters didn't have to bear, thus representing a windfall gain to polluters, exactly as has happened in Europe, creating the bizarro-outcome where the economic beneficiary of CO2 policy is CO2 polluters - and creating a situation where the basis for giving away the allowances - that is, consumer protection - is replaced with a consumer-borne cost for a fee that doesn't exist?  If not, do we give neither polluter nor consumer a price signal to change their CO2 behavior?Both options are lousy, in the sense that the defeat the whole purpose of a cap & trade system.  And they are innate to the allowance model.So I come back to my question - do we ignore the math and go with the allowances because it's politically easy, or do we do the math and actually use a cap & trade system to..., well, cap & trade?

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2. 

   kv1009 Posted 10:28 pm
   27 May 2009

   Hello....                  This article is very useful for people to know how much does carbon pricing cost us on our electric bills and so on.Kavi--------FTP Server

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3. 

   enviroperk Posted 9:48 am
   28 May 2009

   I would think the average increases are reasonable, though I would expect there would be a wide regional variation.For example, the Chicago has a high percentage of nuclear power sourced electric generation, where areas like Missouri has 80% coal generation. So the average numbers are deceptive; there will be no price increases in Chicago but major increases in Missouri. Which was the intention of the law, discourage high CO2 sources and make no or low CO2 impact alternatives like nuclear, most cost effective. It appears that wind and solar have little chance of becoming a large enough replacement in the Missouri climate, so  nuclear is benefiting.Just an observation.

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   1. 

      Sean Casten Posted 10:05 am
      28 May 2009

      Enviroperk,You're right, but note still that these are small impacts at the retail level.  (Note also that IL is heavily dominated by coal, but that's a separate issue.)Even in a 100% coal grid with pretty inefficient coal plants, running 1.1 tons/MWh, a $20 carbon price is a $22/MWh (2.2 cent/kWh rate increase).  The basic math is the same, in the sense that the preponderance of economic pain is at the level of the power plant, not the rate payer. 

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      1. 

         enviroperk Posted 11:59 am
         28 May 2009

         First of all, I am on the side of more expensive combustion-based use of energy. For more expensive electricity will force conservation and efficiency improvements, the fastest way to reduce CO2 IMHO. I used to believe nuclear power was an option, but have come to my senses for non-environmental reasons. ( http://www.rmi.org/images/PDFs/Energy/E09-01_NuclPwrClimFixFolly1i09.pdf)
         
         It should be noted that a $.022 per KWH (plus state and local taxes on same) is about a 25% increase in electric cost (assuming 8.6 cents KWH).
         
         As for the "the preponderance of economic pain is at the level of the power plant, not the rate payer. " In my area ( Entergy.com ), all costs related to fuel over a base rate are passed on as "Fuel Cost Adjustments", so I don't understand how the pain is at the level of the power plant? Certainly I am missing a piece of the puzzle here.

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4. 

   Tricia G Posted 12:04 pm
   28 May 2009

   I have little hope about doing the "right" thing. From High Country News a while ago, in a long article about the Colorado River and its water issues, was a quote from Eric Kuhn. He runs the Colorado River Water Conservation District, which represents 15 counties on Colorado's Western Slope. "In the South Platte, we intentionally chose political expedience over good science," he said. "We knew better, but people chose to make the wrong decision because it was the political path of least resistance."

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5. 

   Sean Casten Posted 1:26 pm
   28 May 2009

   Enviroperk,Re: fuel cost adjustments, you're right.  The question though is political: will rate commissions force utility shareholders to bear the brunt of carbon compliance or utility customers (or some mix of the two).  It's a damned-if-you-do-damned-if-you-don't choice, since in one case the customer has no incentive to conserve and in the other the shareholders pay no price for their actions.  (As The Economist described the latter this week, it's like "handing the proceeds of a tobacco tax to the shareholders of Philip Morris".)In short, the politics are far from certain.  If they weren't, the coal lobby wouldn't be pushing so hard for free pollution permits...

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6. 

   GH_ME Posted 4:28 am
   02 Jun 2009

   Thanks for this useful analysis.  I see two more reasons to be optimistic about carbon pricing:
   1.  Revenues from carbon pricing (either a carbon tax or the the proceeds from a permit auction) can be used to defray income taxes. This can be done in a progressive way if energy/carbon taxes are seen to be regressive, as gas taxes are. This "revenue recycling" both reduces households' pain (and therefore political objection to the policy) while making the labor market more efficient, since income taxes in general reduce people's incentive to work.2. The analysis given here assumes status quo with respect to power generation technology.  In reality, the presence of a carbon tax provides generators et al. with a strong profit motive to switch to existing, less carbon-intensive methods, or to develop new ones.  As these changes happen, the economic cost of any given carbon price will decline (or you could slowly increase the price of carbon toward its true social impact while keeping the economic burden pretty much constant).At any rate, thanks again, for providing this concrete illustration.  Krugman had a recent column with a similar conclusion ("An affordable salvation", NYT 04.30.09 -- sorry for no link).GH, Brunswick ME

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   1. 

      Sean Casten Posted 5:59 am
      02 Jun 2009

      GH,Thanks - but be very careful with your first point, which is a thoroughly lousy policy idea (even if ubiquitous).  No business gets to raise their prices or invest in new technologies just because their competitors got a fine.  But if all we do is put a price on carbon, that's exactly the situation that low/no carbon producers will find themselves in.  The scale of reform necessary in the energy & industrial sectors to decarbonize is massive - not impossible, but massive, and will require enormous capital investment in new technologies.  As such, the central test we ought to apply to any carbon regulation is whether it encourages that investment.  Fining the competition fails that test.Ergo, using revenues from carbon fines to defray income taxes or serve other progressive goals might be good for a whole lot of reasons, but is lousy from a carbon policy perspective.  The $ needs to go back to people who are lowering CO2 emissions, providing a carrot to balance the stick and ensure that we quickly and cheaply get CO2 emissions down. 

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