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The Costs of Going Green

Carbon costs will reshape the generation fleet and affect retail rates.

Fortnightly Magazine - June 2009

on the GHG reduction front; 7

• The Energy Independence and Security Act of 2007 (EISA) and the American Recovery and Reinvestment Act of 2009 (the stimulus package), have locked in non-trivial GHG reductions and energy savings; 8

• Federal regulatory initiatives have reduced GHGs ( e.g., the renewables fuels mandates, CAFE standards, lighting and appliance standards in the EISA of 2007);

• State GHG-reduction and renewable programs have mushroomed; 9

• Regional GHG efforts ( e.g., the Regional Greenhouse Gas Initiative, Western Climate Initiative, and Midwest GHG Reduction Accord) are flourishing;

• There is strong international action to reduce GHGs (the European CO 2 trading market; and the Asia-Pacific Partnership to collaborate on climate-friendly approaches in seven countries representing over 50 percent of global emissions;

• With greater climate awareness, more Americans are warming up to the idea of driving fuel-efficient cars, including hybrids, and many are driving less; and

• EPA’s recent endangerment finding now makes the prospect of CO 2 regulation under the existing Clean Air Act a real possibility, and serves as a strong incentive for Congress to find a legislative solution to the GHG issue.

With all this activity, there isn’t yet an over-arching national plan for how to satisfy both our energy needs and deal with the climate crisis at a reasonable cost. This is a complex undertaking, and the challenge falls to the Obama administration, requiring both national leadership and international cooperation. Congress is considering national legislation to limit GHG emissions in the United States next year, which could substantially affect the cost of power from carbon-containing sources, and the more stringent the emissions cuts required, the greater the impact. Issues such as the allocation of emission allowances and the role of offsets will significantly influence the cost of such a policy. The control, trading or taxing of GHGs clearly will affect the owners of both existing generation and new capacity, as well as all electricity consumers, and the economy as a whole.

Impacts on Existing Generation

What will happen to existing capacity under legislation that controls CO 2 emissions? Under all the proposed versions of CO 2 legislation, it will take several years before the necessary regulations are promulgated and a cost for carbon is added to the cost of generation. That is, if CO 2 legislation is passed, the U.S. EPA or other agencies will need to write the regulations to implement it, and provide a transition period for compliance. Thus, if there is CO 2 legislation this year, carbon emissions likely will begin incurring a cost in the 2013 to 2015 time frame. After that point, the additional cost of emitting carbon will depend on the strategy and approach to compliance that the plant owner takes. Some compliance options with regard to the existing fleet of power plants could include:

Purchase Allowances : Continue to generate as before to meet consumer needs, and pay to purchase all allowances not granted to the plant owner under the legislation for all tons of CO 2 emitted from existing fossil plants;