Thursday, February 07, 2008

The Carbon Price Signal

The controversy over the cancellation of federal support for the Futuregen "clean coal" power plant project could continue for some time, with supporters referring their case to the Congress. Shifting the federal government's role in supporting carbon capture and sequestration technology to one of financing CCS at commercial coal plants certainly has the potential to move it into the mainstream faster than the Futuregen approach would have, though at the cost of at least a couple of years of project timeline recycling. Absent from this debate, however, is the most important factor in making the technology attractive to commercial power generators. We need to provide power plant investors with a revenue stream for CCS, in the form of a clear price signal on carbon dioxide emissions, whether from a carbon tax or cap & trade.

Yesterday I attended a lecture at Resources for the Future in Washington, DC by the Secretary of the Pennsylvania Department of Environmental Protection, Kathleen McGinty. Her talk focused mainly on the integration of big-picture greenhouse gas strategies such as cap & trade and carbon taxation with more targeted measures, such as state Renewable Portfolio Standards and Pennsylvania's requirement that all power load growth be covered by conservation and demand-side management. She cautioned against relying too much on a carbon price signal for the power sector, when legacy baseline power plants continue to receive substantial capacity payments and benefit from "locational marginal pricing", in which the price of power is determined by the last, most expensive increment. That's an important insight, but I would still conclude that for the wide deployment of CCS--which is otherwise all added cost and no extra revenue--only the prospect of avoiding a significant and relatively certain future cost will induce power plant owners to incorporate physical CO2 management into their facilities, unless it is required by law.

Secretary of Energy Bodman makes the case that since Futuregen was originally planned, a number of commercial coal power plants incorporating "clean coal" technology based on integrated gasification/combined cycle (IGCC) have been proposed, and that these plants are ideally suited for CCS. That's true, as far as it goes. Offering the developers of these plants federal funds to incorporate CCS might indeed accelerate the broad deployment of carbon sequestration, if the only cost difference involved were in the up-front investment required. But the physics of separating and storing CO2 ensure that a plant with CCS will generate less net power and cost more to operate than one without it. Even if CCS costs plant operators nothing up front, they face billions of dollars in higher expenses and lower revenues, over the life of each plant.

Without putting a price on carbon emissions, via either cap & trade or a carbon tax, federal subsidies for CCS construction costs can't make a dent in the emissions from a coal power sector that generated 70% more of the nation's electricity in 2006 than nuclear power and all renewable sources combined, including wind, solar and large-scale hydropower. Unless it includes a forthright discussion of how we establish a price for greenhouse gas emissions, the entire debate over the future of Futuregen rings hollow.

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