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Researcher: Don't Let Credits Subsidize Coal

October 26, 2009
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A cap-and-trade system to curtail greenhouse gas (GHG) emissions that hands out credits to polluters for free would be worse than doing nothing as it would subsidize the dirtiest coal-fired generators, a Rice University researcher has warned.

"...[O]ne of the flaws with Waxman-Markey that is important in the design of any kind of cap-and-trade system is that you want the market design to do no harm. I want to design a system for allocations or credits that doesn't disadvantage cleaner fuels against more carbon-intensive fuels," said Amy Myers Jaffe, the Baker Institute's Wallace S. Wilson fellow in energy studies at Houston's Rice University. "The whole reason we do cap-and-trade is to try to make the playing field level when it comes to...the externalities of using a particular fuel.

"[If] we're going to give away free [emissions] permits to the people that have the highest and dirtiest emissions; that's worse than doing nothing. If you give free credits to the dirtiest fuels, you're defeating the reason for doing [cap-and-trade] in the first place."

Jaffe isn't the only one who thinks so. The gas industry has been stepping up lobbying efforts with the goal of achieving "a level playing field" with other fuels in any climate change legislation that become law. The Natural Gas Supply Association, for instance, is urging Senate leaders to "restructure the mandate [on carbon dioxide emissions] to a 'Carbon Efficiency Standard,' which provides proportionate credit for increasing the use of any fuel source contributing to lowering greenhouse gases [GHG] by replacing a higher-carbon energy source" (see related story).

Driving much of the gas industry's argument as well as Jaffe's reasoning is the boom in shale gas supplies in North America. Because of the abundance of shale gas resources and its effect on prices, natural gas this year has been able to push some coal-fired generators out of the dispatch stack (see NGI, June 22). Jaffe argues that market forces will continue to put coal at a disadvantage to gas as gas prices are expected to remain relatively low for the next 10 years or so.

"Our assessment is that that shale play is going to hold down the price of natural gas in the United States for an extended period of time, maybe a decade or more," Jaffe told NGI. "Gas was going to knock coal out again the way it did in the '80s because we're going to have a [gas] supply bubble in North America.

"Here's a case where we have available a fuel that's going to be cheaper and much lower in carbon, and it would beat out the higher greenhouse gas fuels and yet the legislation might do the opposite."

Jaffe does not advocate doing nothing to address climate change. However instead of a cap-and-trade scheme -- especially one that gives credits away -- or a carbon tax, why not just tax energy instead? Tax revenues could be used to offset the tax impact on lower-income consumers and to subsidize low-carbon fuels, she said.

So-called "winners" among fuels would not have to be chosen if a ceiling were set on carbon dioxide or GHG content in order to qualify for subsidies.

"Right now, coal is cheaper...Where it's cheaper it will stay in business. Eventually if you're subsidizing these other low-carbon fuels -- and natural gas itself is going to be cheap -- the market will bring you the actual solution."

Jaffe is skeptical, to say the least, of the prospects for carbon capture and sequestration (CCS), at least in the near term. "This CCS thing is a mirage," she said. Free credits for coal-fired power generators under a cap-and-trade scheme would push any commercialization of CCS technology even further into the future, she said.

"We're actually disincentivizing them from investing in CCS by giving them a credit for free for 30 years...I'm giving a company $80 a ton [of CO2] for free. Do you know how much money that is? That's billions of dollars! Why -- because I want to help them emit carbon into the atmosphere for as long a period of time as possible?"

Despite some who doubt that shale plays are all that the gas producer community believes they are, Jaffe said they're the real thing, "the next deep water," in fact.

"I can understand how if I were a [power] generator, I'd be having to take a Valium. In the past they went to a natural gas strategy and they got burned because the price of natural gas went up to $15/MMBtu. In today's geological least in North America...the supply outlook is such that [natural gas strategy] makes more sense to me."

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