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Carbon in the West

Prices between $50 and $80 a ton will trigger major market responses.

Fortnightly Magazine - November 2008

and a price of about $80 a ton substantially will reduce it. In the wild-card future, it will require about an $80 price to flatten growth, and a price in excess of $125 to make substantial reductions.

CO2 prices in these ranges will lead to retail power prices 40 to 80 percent (depending on CO 2 price levels) higher than they are in the WECC today in the immediate aftermath of price imposition. Such levels will have significant impacts on the electricity sector and on electricity customers.

Over the study’s 18-year horizon, these higher prices also will create investment incentives for non-emitting generation, enabling such generation capacity to come online if the market functions reasonably well. This capacity will temper power-price differentials over time. In this analysis, for a CO 2 price of $100 a ton, retail prices in 2030 are projected to be between 15 and 30 percent higher than the $0 a ton case, a far cry from differentials in 2012.

Additionally, customer response to price increases, including lower utilization of existing electrical devices and investment in more efficient technologies, will hold down power-price escalations. Without this effect, prices might be expected to rise even higher. However, customer response is not free and represents a real cost to consumers and loss in consumer welfare, albeit not measured explicitly in this analysis.

Finally, natural gas price and availability represent critical linchpins in this system in early years, as short-term reductions in emissions will depend on the ability of natural gas generation to fill the gaps left by coal cutbacks. This criticality will fade over time, as more non-emitting technologies—including CCS, renewable energy, and nuclear—increasingly enter the market and fill the void.