Andy Stevenson's Blog: Curbing Pollution

The Clean Air Act's Investment Returns Rival Warren Buffett's

2010-02-11T06:06:14Z

What if I were to tell you that we are all shareholders in an investment vehicle that has produced better returns than Warren Buffett's Berkshire Hathaway over the past forty years. Strange as it seems it's true. Stranger yet, that investment vehicle is called the Clean Air Act.

According to the EPA study of the cost and benefits of the Clean Air Act, compliance costs totaled $500 billion from 1970 to 1990. While these investments in cleaner air, water and reduced death are indeed significant, they pale in comparison to the $22.1 trillion in benefits gained by its shareholders, the American people, over this time frame from lower mortality, fewer cases of chronic illness, and less frequent trips to the hospital (see table below):

During this period, emissions of sulfur dioxide (SOx), nitrogen oxide (NOx), volatile organic compounds (VOCs), and carbon monoxide (CO) were reduced by 30-50% while primary particulates fell 75% and lead (Lb) emissions fell 99%. These reductions were achieved while the population grew 23% and the economy grew 70% and clearly demonstrate how good environmental policy can produce exceptional economic results.

In fact, the returns on these investments in our health and welfare are so dramatic that they rival the performance of Warren Buffett's Berkshire Hathaway during its heyday. On an annualized basis, the Clean Air Act returned only 1% less than Mr. Buffett during the period from 1970 to 1990 (21% vs 22% on an inflation adjusted annualized basis).

Furthermore, the EPA's cost-benefit estimates for the 1990 Clean Air Act Amendments, which focused on reducing acid rain, ozone destruction, and other hazardous air pollutants are forecast to be equally successful as investments for us, the shareholders in America's future. In constant 1990 dollars, these additional programs are estimated to cost $210 billion from 1990 through 2010 and yield $1,200 billion in benefits.

This six-fold return on investment, combined with the returns from the program during the period from 1970-1990 put the Clean Air Act ahead of Warren Buffett's Berkshire Hathaway on an annualized basis during this forty year period. In fact, using the EPA's estimates, investments made to comply with the Clear Air Act actually outperformed Mr. Buffett by nearly 20% on a total return basis during this time frame (see graph below):

And while this comparison is far from exact given the difficulties in valuing death, sickness, and quality of life, it seems fair to say that these shareholder returns, which total nearly $37 trillion in current dollars, put the Clean Air Act in very good company indeed.

Cleaner Cars to Drive Down our Gas Bills by 10% under Climate Bill

2009-11-15T18:13:41Z

While the oil lobby continues its gas attack on climate legislation, a recent government study suggests that accelerating CAFE standards under the Waxman-Markey climate bill would actually lower our gas bills by more than 10% over the next two decades (see graph below):

Under the EIA's Accelerated CAFE Case analysis of the Waxman-Markey bill, the average fuel economy of a car on the road is expected to improve by roughly 0.6 mpg over the next two decades. While this may not seem like a lot, the EIA calculates that by the year 2030 these improvements will save over 91 billion gallons of gasoline (see graph below):

In fact, the EIA forecasts that this reduction in oil demand is large enough to reduce imports by 10%, cut our CO2 emissions by over 900mln tons, and actually lower global oil prices by around 3.5% (see graph below):

These benefits from building and driving cleaner cars are expected to allow our gas bills to continue to fall even as oil prices and carbon prices continue to rise. Furthermore, by making fewer trips to the gas station (a benefit in its own right in my opinion), consumers are even forecast to see their gas bills fall below what they would have been without a climate policy in place.

This is not something you are likely to hear from the oil lobby. The oil lobby only wants us to focus our attention on the costs associated with capping our greenhouse gas emissions and does not discuss any of the benefits we are expected to gain from driving more efficient vehicles. If we separate out the carbon costs in a gallon of gasoline from the clean car savings in a gallon of gasoline (using the EIA's data), we find that they largely offset one another and in fact the clean car savings starts to outpace the carbon costs by the year 2026 (see graph below):

Climate Policy will Help Accelerate Deployment of Cleaner Cars

According to EPA estimates, domestic automakers will need to make $56bln in incremental technology investments between the years 2012 and 2016 to meet President Obama's 35.5 mpg CAFE target. A funding requirement that is expected to be recovered through the sale of these more efficient cars and light trucks.

While some of these investments are already in place, the Waxman-Markey climate bil is expected to provide the temporary assistance needed to fully make this transition. Under the bill, the auto companies with have access to over $20bln in re-tooling incentives and $25bln in loan guarantees. Enough investment capital to achieve President Obama's CAFE targets, dramatically improve the competitiveness of domestically produced automobiles, and create thousands of new clean car jobs.

In sum, the EIA's modeling of the Waxman-Markey climate bill shows that investments in cleaner cars can help drive down our gas bills by over 10% under climate legislation. Investments that will help us achieve President Obama's accelerated CAFE targets, cut our CO2 emissions output, reduce our dependence on foreign oil, lower global oil prices, and help create thousands of good paying manufacturing jobs for America's workers. Benefits that will make passing climate policy a clean energy bargain for the American consumer.

Americans are Dying to Support our Fossil Fuel Habit

2009-10-26T06:12:42Z

A new report from the National Research Council of the National Academy of Sciences (NAS) reveals that our energy bills are $120bln higher than they appear due to the "hidden costs" associated with the air pollution created by burning fossil fuels. The NAS report, which was commissioned by the US Treasury on behalf of Congress, estimates that over 90% of these hidden costs are due to premature death, implying that at least 18,000 Americans die each year to support our fossil fuel addiction (see table below):

The report concludes that these estimates are conservative as they do not include any costs related to climate change, national security, other pollutants, or the impacts of mountain top coal mining and that if these other costs were included they would raise the hidden cost of fossil fuels far higher than the $878 per household estimated using the assumptions underlying the NAS report.

Paying for our Fossil Fuel Addiction with Our Lives

According to the analysis, over half of these hidden costs come from the burning of coal to generate electric power. We currently burn over a billion tons of coal each year, releasing millions of tons of dangerous pollutants into the air in the process. The NAS report estimates that the "hidden" costs of these emissions at $62bln per year or around $530 per family on average. For people who live east of the Mississippi River, along the Ohio River Valley, in the Middle Atlantic and the South, however, these "hidden" costs are significantly higher as are the risks that these costs may be "paid" for by a loved one.

The report does note that these hidden costs from burning coal are actually expected to fall somewhat to around $38bln per year by 2030 as cleaner plants come on line. While this is a significant improvement given that coal consumption is expected to rise by 20% in 2030 under business as usual, it still means that over 165,000 Americans are expected to die prematurely due to the production of coal-fired power. It must also be remembered that this trillion dollar "hidden" cost is additional to the effects of producing over 50 billion tons of CO2 pollution from these facilities during this timeframe. Costs that are expected to accelerate the impacts of climate change around the world.

Under climate legislation, however, these hidden costs are expected to decline as coal-fired power is steadily replaced by cleaner alternatives. Indeed, under the government modeling of the ACES climate bill, coal consumption is expected to fall by 50% when compared to business as usual forecasts. This reduction in coal consumption is expected to not only help reduce the number of lives lost from breathing dirty air by the thousands but also lower our cumulative CO2 output from coal plants by around 25% between now and 2030.

The other large source of hidden costs comes from the combustion of transportation fuels. According to the study, air pollution from vehicles costs us $56bln per year ($36bln from light-duty and $20bln from heavy-duty vehicles). This works out to about 29 cents a gallon or roughly $330 per household per year. What is more, tailpipe pollution is not expected to improve over the next two decades according to the NAS report. This means that by the year 2030, the cumulative air pollution damages from burning transportation fuels and coal are expected to exceed $2trln. An extremely high cost of our addiction to fossil fuels given the 340,000 premature deaths this figure represents (see graph below):

Natural gas is the final fossil fuel source of air pollution included in the study with externalized heath costs of around $2.14bln per year ($741mln from electric power and around $1.4bln from heating our homes, offices, and powering our industrial output). This roughly translates into an additional 0.16 cents per KWh of natural gas power if it were included into our fuel bills, adding around $18 per year to household energy costs. While this is a relatively small hidden cost, the overall hidden costs of natural gas with respect to global warming are still significant. Indeed, under climate legislation natural gas is expected to replace coal as our second largest source of CO2 emissions (after transportation fuels) by the year 2030 (see graph below):

In sum, Americans are literally dying by the thousands to support our addiction to fossil fuels. In fact, you and I have a better chance of dying from air pollution than we do from homicide. What is more, while the "hidden" costs highlighted in the NAS study are only a small portion of the overall hidden costs associated with our current energy economy, they present an immediate threat to our friends and family that cannot easily be ignored. Costs that should make us even more vigilant in our efforts to pass strong climate change policy and help create a cleaner energy future.

10 Reasons to Vote to Pass the Landmark ACES Climate Bill

2009-06-25T21:32:40Z

The House of Representatives is expected to make a landmark decision on our energy and climate future as early as tomorrow. The 1,200 page American Clean Energy and Security (ACES) Act will establish a cap and trade system for greenhouse gas emissions and provide the incentives and standards needed to transition our economy away from its dependence on climate changing fossil fuels. In this sense, the ACES bill should be regarded a climate bill, an energy bill, an economic stimulus bill, and a homeland security bill all rolled into one.

Here is a top ten list of reasons why House members should vote to pass the ACES Act :

1. Enhanced Energy Security

The ACES bill not only creates meaningful incentives to help industry build cleaner cars, power plants, and manufacturing facilities, it also puts in place efficiency standards that will lower energy demand and provide us with a pathway to true energy independence.

The cleaner cars incentives provide a good example of how the ACES bill will help reduce our dependence on foreign oil. The bill provides the re-tooling incentives and loan guarantees needed to achieve President Obama's aggressive targets for cleaner higher mileage vehicles by the year 2016-targets that are expected to cut US oil dependency by 1.4 million barrels a day by 2020, according the Union of Concerned Scientists (UCS). This is roughly equivalent to the amount of oil we currently import from Saudi Arabia today.

In addition to lowering domestic demand for foreign oil (which UCS estimates will save us $30-$70bln a year at the pump), the bill would also dramatically increase our domestic oil supplies through enhanced oil recovery (EOR). EOR pumps CO2 into depleted oil wells to recover more oil and is currently responsible for 10% of domestic oil production and is expected to grow to 25% of production in the US by 2020.

Under the aggressive incentives in the bill to develop carbon capture and storage (CCS) to scale, EOR producers could have access to enough low cost CO2 from power generation facilities to produce an additional 45 billion barrels of domestic oil, according to a recent study by the Department of Energy. This trillion dollar double benefit from CCS development and EOR will provide billions of dollars of tax revenues to states and further enhance our energy security through increased domestic production.

2. Jobs

The transition to a low carbon economy will require trillions of dollars of investment and the hard work of millions of Americans. According to a recent PERI study, clean-energy investments at the level of about $150 billion per year-i.e. around 1 percent of U.S. GDP-can generate about 1.7 million net new jobs throughout the U.S. economy. This compares very well to fossil fuel investments, which would only generate roughly 600,000 net new jobs from the same capital allocation.

In addition, the ACES bill not only encourages investment in existing domestic manufacturing facilities (to take advantage of the output based incentives) but it will also accelerate investment in the new industries needed to help re-power the American economy over the long term. From the benefits of an increased demand for energy efficiency services (which ACEEE forecasts could create nearly 650,000 new jobs over the next few decades) to the benefits of creating whole new industries to meet the rising demand for low carbon technologies (including high efficiency motors, combined heat and power equipment, high speed rail equipment, mine methane and carbon capture equipment, water metering equipment, insulation materials, bio-fuel refinery equipment, lighter alloys, and more efficient automotive batteries), opportunities exist under the ACES bill to grow the millions of jobs needed to get the America economy back on track.

3. Pays for Itself

The ACES bill not only pays for itself but according to the Congressional Budget Office actually provides the US Treasury with $24bln in needed revenue over the next decade.

4. Bridges the Credit Gap

The ACES bill creates a stream of emission allowances for utilities and energy intensive manufacturers that can be bundled together and used as collateral for low carbon investments. By using allowances in a way similar to that of emitters under the acid rain program (who were able to use their emission allowances to help fund their scrubber purchases), these emitters would be able to bridge the credit gap faced by companies today looking to make large capital expenditures. This means that these companies can get work starting not in 2012, but as soon as the bill is enacted to make the investments needed to become less energy intensive and more globally competitive.

The ACES bill also creates a financing arm in the Energy Department to fund a range of low- and no-carbon energy projects that will also help accelerate low carbon technology investments.

5. Comes with a Modest Price Tag to Consumers

The EPA's analysis of the ACES bill released last week concludes that the costs with respect to households will be "modest" at about $80-$111 per household per year. Numbers that are less than 5% of the estimates from climate bill doomsayers like the Heritage Foundation and NMA who have yet to properly model the bill.

According to the EPA, "these costs include the effects of higher energy prices, price changes for other goods and services, impacts on wages and returns to capital" and "do not account for the benefits of avoiding the effects of climate change."

6. Reduces Energy Price Volatility

In addition to providing meaningful guidelines for the carbon trading markets, the ACES bill should actually be commended for attempting to close many of the regulatory loopholes used by speculators to manipulate energy prices in the US.

Under the ACES bill, Congress would not only require the regulatory authority to establish uniform position limits, reporting requirements, and comprehensive market oversight provisions for the carbon markets, it would require the oil, natural gas, coal, and electricity markets to follow suit.

These requirements are not only expected to greatly reduce unwanted volatility in the carbon markets but dramatically improve transparency and reduce excess speculation in other US energy markets as well.

7. Improves Regulatory Certainty

Following the EPA's long-awaited "endangerment determination" on CO2, which officially recognizes that global warming pollution is dangerous to our health and the environment and should be regulated under the Clean Air Act, industry has been trying to understand how this decision will affect their businesses. The ACES bill seeks to provide industry with a road map to understanding their carbon risk and provide the regulatory certainty needed for them to cost effectively invest in low carbon energy solutions needed to meet our targets of an 83% reduction in emissions by the year 2050.

8. Pays Dividends with Respect to Homeland Security

With the launch of the DBAM carbon counter the writing is now officially on the wall with respect to how quickly our carbon emissions are rising and the potential impacts this will have on our national security. From a rise in "failed" states, to a breakdown in global commerce to the threat to our own coastlines, the ACES bill establishes a plan of attack for addressing climate change and will hopefully yield a global agreement over the coming months to reverse this trend toward higher emissions and increased climate uncertainty.

9. Reduces Global Oil Demand / Lowers Global Oil Prices Over Time

While it is very difficult to measure the impacts that lowering our demand for oil by around 1.4 million barrels a day by 2020 will have on global oil prices, it will certainly help keep prices from rising as fast as they would under business as usual forecasts. China currently consumes around 9% of global oil supplies and is expected to increase that amount to around 15% by 2020, putting increasing pressure on oil prices. The ACES bill provides the funding needed to lower our oil consumption and hopefully keep last summer's spike in oil prices (which was caused in part by a supply demand imbalance of around 1.1 million barrels a day) from becoming an ongoing concern.

10. Creates New Renewable, Efficiency, and Performance Standards

The ACES bill requires retail electricity distributors to meet a rising fraction of demand with renewable energy and electricity savings, starting with 6 percent in 2012 and rising to 20 percent in 2020. These standards should help de-carbonize the power grid over time.

The ACES bill also sets strong targets for energy efficiency improvements in new residential and commercial buildings and strengthens the Energy Department's energy efficiency standards with respect to "best-in-class" appliance deployment. According to a recent ACEEE report, these targets are expected to save households $3,900 a year in lower energy costs by 2030.

With respect to performance standards, the ACES bill raises performance standards on new coal-fired power generation over time in a way that will discourage the development of long-lived, high carbon power generation going forward. These standards are expected to not only improve our air quality, but slow the onset of peak "cheap" coal in the US where coal supplies fail to remain cost competitive over time.

Mandating Carbon Capture Could Help Close Kansas' New Carbon Loophole

2009-05-07T17:47:52Z

While President Obama and others speak out about the need to close the carbon loopholes in this country, one newly appointed Governor has taken it upon himself to buck the trend and open up a new one. A carbon loophole based on the ability of a coal plant to remarkably "increase a states renewable energy production".

This past week, the newly appointed Governor of Kansas, Mark Parkinson, used this curious bit of logic as a way to justify his approval of an 895MW supercritical coal plant at Sunflower Electric Power Corporation's Holcomb facility. While wind may also benefit from the new high-voltage transmission lines needed to carry electricity from the plant to customers in Colorado, this project will clearly not live up to its billing as a job creator.

If Governor Parkinson was motivated to break away from former Governor Kathleen Sibelius' position on new coal in the state based on the number of permanent jobs created at the facility, it would be a curious decision indeed. According to Sunflower Electric Power Company's press release only 50 permanent jobs will be created at the new Holcomb facility. This works out to roughly $80mln of investment per job, and doesn't even include the 1) financial risk from higher than expected construction, credit, and fuel costs, 2) regulatory risk from carbon emissions, and 3) demand uncertainty risk from the economic downturn. Risks that could inflate the cost of building this facility by billions of dollars over time.

Given these miserly job numbers, you have to wonder why Governor Parkinson would sign off on a plant that would not only raise local energy prices but turn his state into a carbon dumping ground for its neighbors.

Maybe Governor Parkinson expects the $95mln upfront fee and $25mln a year management fee being paid to Sunflower will actually lower energy costs for in-state consumers. While this sounds plausible, a quick look at the math shows that these fees will not stop the costs of power from this new coal-fired facility from rising. Under the Waxman-Markey climate draft for example, while the Sunflower plant would certainly qualify to participate in the incentive program for capturing their carbon and storing it underground (a process known as carbon capture and storage or CCS), it would not likely receive any transition assistance for its carbon emissions.

As a result, Sunflower would be subject to pay carbon costs starting at $24mln a year for their 200MW portion of the facility that would escalate to $172mln by 2050 using EPA carbon cost estimates. This would mean that Sunflower's $95mln up front fee and their $25mln annual management fee would be eclipsed by the facilities carbon costs by the year 2021 (see graph below). In terms of costs per kilowatt hour, these carbon costs would translate into an increase of 2 cents per kilowatt hour in the early years, rising to an increase of 14 cents per kilowatt hour by 2050. Costs that will make this facility a poor long-term power investment.

The math improves dramatically, however, if Governor Parkinson requires the Holcomb facility to invest in carbon capture and storage as pre-requisite for getting his approval. Indeed, from a tax revenue perspective the Governor should be actively pursuing this type of investment, given that the plant sits in an ideal location for providing CO2 for use in enhanced oil recovery (EOR). According to the Department of Energy, Kansas has 1.2 billion barrels of stranded oil that can be economically recovered through EOR with CO2. By providing the needed pure stream of CO2 from the Holcomb facility to flush out this stranded oil, an investment in CCS by the Holcomb plant would generate enough tax revenue to justify this project many times over to the people of Kansas.

As it stands, however, when the rising cost of financing a non-capturing coal facility is factored in, the economics of Sunflower's 895MW facility at Holcomb look pretty lousy. Indeed a combination of higher funding costs, regulatory uncertainty with respect to carbon, and future power demand concerns have already sidelined plans for several unmitigated coal plants this year, and judging by the cost estimates of the Sunflower facility the Holcomb plant would be no exception (see table below)*:

In sum, unless Governor Parkinson mandates that this new coal-fired facility captures its carbon, the decision to approve the Sunflower request to build an 895MW facility is opening up a carbon loophole that his state will be paying for decades into the future. By capturing this faciliites carbon and using it for CO2 EOR, however, the economics change. The state can benefit from the tax revenues from an additional 1.2 billion barrels of oil produced using CO2 EOR, and the climate can be spared from 90% of the facilities 6.6 million tons of annual CO2 output. CO2 ouput that will carry a meaningful economic cost once climate change legislation has been passed by Congress.

*The cost estimates for the Holcomb facility are based on a study by RW Beck for a similar supercritical coal-fired power plant in Meigs County Ohio. The financing rate for the Holcomb facility has been adjusted by 1% to reflect today's financing challenges

Its Waxman-Markey 3, Gingrich 0 in the Climate Policy Debate

2009-04-01T23:10:26Z

While Newt Gingrich is expected to continue his war against climate legislation in favor of "drilling here, drilling now", this is a fight he is going to lose. In fact, climate change legislation, like the draft bill submitted by Representatives Waxman and Markey this week, offers three very compelling reasons why climate legislation should be passed this year to help re-power the American economy.

Reason 1: Jobs

The Waxman-Markey discussion draft would accelerate investment in the low carbon technologies needed to transform America's energy economy from a twentieth century provider of high carbon power to a twenty first century provider of low carbon power. This multi-trillion dollar transition is going to create millions of jobs for electricians, construction workers, plumbers, engineers, manufacturers, and service providers that cannot be exported.

Indeed, "green jobs" offer a very high return on investment from local labor. NRDC estimates that the $50bln in green stimulus offered as part of President Obama's stimulus bill, will create 1.5 million "green jobs". Jobs that will provide society with a very high payback in terms of lowering our over all energy costs, reducing pollution levels, and cutting our carbon emissions.

Newt is going to have a hard time competing with this kind of payback from the oil and gas industry. Not only can you create four "green jobs" from the investment dollars needed to create one oil or gas job, if you are looking for any kind of payback to society from these investments, the oil industry it is the last place you would look. Exxon alone has paid out $150bln to their shareholders over the past 5 years, creating almost no payback to society in terms of improved energy security, higher employment, or lower energy costs.

Weighing these two approaches, I would have to give the nod to Waxman-Markey for creating more jobs for more Americans.

Waxman-Markey 1, Gingrich O

Reason Number 2: Real Energy Independence

While Newt carries on about the billons of gallons of untapped resources off our coasts, he is kidding himself if he thinks that we can become energy independent based on domestic oil exploration alone.

We currently import two-thirds of our oil and high risk/high cost solutions like off-shore drilling will not solve our problems. Furthermore, as Newt no doubt knows, America's energy bill will increase by $420billion annually within the next 5 years if we do nothing to reduce our dependency on oil and fossil fuels. That amounts to $3,500 annually for every family in the nation or more than ten times the costs of a well designed cap and trade bill.

Indeed, if Newt is actually serious about reducing our dependence on foreign oil, he should be focusing his attention on ways to advance enhanced oil recovery using CO2. Given that the oil industry expects CO2 EOR to grow from 10% today to 25% by 2020, Newt should be hard at work figuring out a way to give EOR CO2 players better access to CO2 so they recover the 45bln barrels of stranded oil that the Department of Energy estimates to be economically recoverable in the US from existing wells.

The Waxman-Markey climate proposal does just this by investing tens of billions of dollars into carbon, capture, and storage technology for deployment at our nation's coal-fired power plants. If the performance based subsidies are effective, and developers build or retrofit coal-fired power plants with CCS equipment, hundreds of millions of tons of cheap carbon dioxide could be made available to the oil and gas industry, that would then be used to dry clean out the stranded oil.

Furthermore, the Waxman-Markey bill encourages development of a long list of low carbon technologies that will not only reduce the amount of oil and coal we consume (lowering their prices), but will also reduce our dependence on foreign oil in the only way that is meaningful, by diversifying our fuel sources.

If it were up to Newt, we would just remain as dependent as ever on foreign oil, and be subject to events like we are experiencing today where 43% of domestic rigs have been shut down since September due to the credit crisis. These kinds of disruptions will only increase the price volatility for natural gas down the road and seems like an unworkingable long term energy policy prescription.

Waxman-Markey addresses our energy security on a number of fronts while Newt is leaving us stuck with the same high risk solutions that will cost us ten times the amount of good climate policy. Again Waxman-Markey get the point.

Waxman-Markey 2, Gingrich O

Reason 3: Climate Legislation Will Encourage Investment Needed to Accelerate Our Recovery

The cap and trade legislation put forth by Waxman-Markey reduces our carbon output through a combination of investment incentives and efficiency standards. Whether that is through putting combined heat and power equipment (CHP) into a factory to convert the waste heat from industrial processes into power generation, improving the fuel economy of cars sold in America, or retrofitting commercial and residential buildings to save wasted heating and energy costs, investments to take advantage of the energy and carbon savings will be accelerated under a cap and trade bill.

These types of investments already have a very short payback period. However, under the Waxman-Markey bill, demand side assistance will be given to utilities, industry, schools, and hospitals to invest in these low carbon solutions, creating the needed demand side pull to accelerate these investments. This will also give American suppliers of low carbon solutions the demand needed to increase production and help us recover faster.

Since Newt's economic recovery plan is to remain loyal to business as usual, keep the oil industry fat and happy, and point fingers as to how we got into this mess in the first place, the Waxman-Markey draft bill seems to have the edge again.

Waxman-Markey 3, Gingrich O

So there you have it. The Waxman-Markey climate bill offers an important first step in passing climate legislation that will grow jobs, improve our energy independence and create the investment needed to accelerate our recovery through supply push and demand pull.

Newt, on the other hand, will continue to supply push the exaggerated costs of a cap and trade bill (and hope that no one checks his math) and demand pull more checks for his lobbying services as a way to re-power his bank account.

Utilities Look to Save Money by Fuel Switching Away from Expensive Coal

2009-03-24T21:22:24Z

Despite the fact that the number of rigs exploring for natural gas in the US has dropped by over 40% in the past six months, the supply of natural gas in the market remains stubbornly high. In fact, weak industrial demand, milder temperatures, and expectations of additional liquid natural gas supply coming to market this summer have pushed prices low enough that utilities are now beginning to switch from using coal to natural gas in order to save money.

In the last two months both Southern Coal and American Electric Power have come out with statements that they would be burning less coal in favor of natural gas because natural gas generation costs are lower. Indeed, the economics of fuel switching are so attractive that Industry analysts are now expecting that utilities will take advantage of the oversupply conditions in the natural gas market to reduce their coal consumption by millions of tons this year.

While this appears to be a rather large amount of fuel switching, a recent investment bank report suggests that during the 2001/2002 winter, power generation from natural gas increased substantially due to low natural gas prices relative to coal. This motivated power generators to increase their demand for natural gas by more than 1.4 Bdf/d that year while coal demand fell by nearly 28 million tons. In percentage terms, this was a roughly 3.3% decline year-on-year in coal demand while natural gas rose more than 6% year-on-year (see graph below):

Furthermore, the industry report expects more coal-to-natural gas fuel switching to take place now than in 2002 due to improvements in the efficiency of combined cycle gas turbines (CCGT) at natural gas plants. This increase in efficiency will allow utilities that burn gas to operate at cheaper rates than they did previously and thereby discourage the continued use of coal.

Another important fact to highlight is while natural gas prices have plummeted this year, coal prices have remained relatively stable. This failure of coal prices to fall in line with natural gas prices helps further support the argument that there is not enough "cheap" coal available today to meet the needs of a liquid coal industry in the United States. Our electricity bills would only rise further if liquid coal was allowed to compete with power generation for our coal supplies and efforts to encourage the construction of liquid coal facilities should be dismissed out of hand as being unworkable.

In sum, fuel switching away from coal to natural gas is already taking place in the market as natural gas is now a cheaper fuel source than coal. Indeed, coal is now an expensive fuel and is only expected to get even more expensive as climate legislation begins to regulate carbon dioxide emissions.

Gallup's Poll on the Economy, Energy and Climate Has Passed Its Sell-by Date

2009-03-20T17:56:56Z

A recent Gallup poll survey conducted on the priorities for Americans with respect to the economy, energy production, and the environment has concluded that "there is little question that the current economic crisis poses a significant challenge for the environmental movement in this country". The article titled "Americans: Economy Takes Precedence Over Environment" notes that based on its survey, support for environmental protection has slipped below the economy for the first time since Gallup began asking these questions in 1984.

While on the face of it Gallup's assertion may not surprise many given that we are experiencing one of the worst economic slowdowns in recent memory, the fact is that this conclusion has more to do with asking a 25 year old question about how the economy, energy, and the environment interact than with what Americans are actually thinking today.

With unemployment expected to rise further this year, Americans' priorities are rightly focused on jobs and more specifically the demand needed to support those jobs. President Obama understands this and his stimulus package aims to create at least 4 million jobs over the next two years. The kinds of jobs he expects to be created highlight why Gallop needs to rethink its questions. NRDC estimates that the $50bln of clean energy investments in the American Recovery and Reinvestment Act will create 1.5 million "green" jobs that will help grow the economy and help to protect the environment at the same time.

In addition to the stimulus bill, the passage of cap and trade legislation, that would fast track investments in a series of low carbon technologies starting today, would create jobs for the millions of Americans needed to transform our multi-trillion dollar energy economy. Engineers, electricians, plumbers, industrial workers, installation specialists, and service employees are needed to get the job done and these are all jobs that help grow the economy, keep our energy dollars in the US, reduce our green house gas emissions, and ensure that America's recovery is sustainable over the long term.

As a specific example, a cap and invest bill will provide the economic and regulatory certainty needed to accelerate investment in the manufacture, installation, and use of combined heat and power (CHP) equipment in the United States. By providing supply-side incentives to encourage domestic production of CHP equipment, which lowers fuel consumption by capturing and utilizing the waste heat from its industrial processes, and at the same time offering demand-side incentives to schools, hospitals, and industrials to install and operate CHP equipment in their facilities, jobs can be created and our overall energy costs can be significantly reduced. In a recent study by Oak Labs, scaling up CHP capacity can reduce US energy costs by nearly $1trln over the next two decades, improving our energy productivity and employing nearly one million people in well paying jobs that can't be exported.

Given the recent collapse in global demand, companies aren't just looking for access to capital, but access to customers in order to help re-power the economy. Under a cap and trade bill, incentives can be provided to not only push from the supply side but also to pull from the demand side to achieve the economic stimulus needed to grow jobs and reduce our carbon emissions at the same time.

Another example of how a cap and trade policy can stimulate investment today in low carbon technologies is in the demonstration and deployment of carbon, capture and storage (CCS) at coal-fired power plants. This critical technology is currently being produced in the US by General Electric and others for industrial processes and while it is technologically ready to be deployed at the power plant level to help solve one of our greatest challenges, de-carbonizing the electrical grid, utilities have been unwilling to invest in CCS at their plants due to the fact that carbon emissions have until this time cost them nothing.

Going forward, with a cap and trade policy in place that puts a price on carbon, creates a performance standard for coal, and offers meaningful incentives to deploy CCS equipment to first to market players, utilities are widely expected to accelerate their plans for investment in this technology, opening up a new industry in America. Over the medium term, these utilities would then be able to provide a cheap source of carbon dioxide to oil companies to help them recover an estimated 45 billion barrels of stranded domestic oil through a process called enhanced oil recovery (EOR). This double benefit of climate legislation helps address another one of the problems with Gallup's survey questions. The issue of whether increasing energy production necessarily comes in direct conflict with efforts to protect the environment.

Indeed, if the Gallup poll wished to refine the debate about domestic energy production and the environment, it should be asking Americans the following question: Which of the following statements about the economy and the environment do you most agree with? Protection of the environment focused on reducing our dependence on foreign oil should be given priority, even at the risk of limiting the amount of energy supplied by domestic fossil fuels - such as oil, gas and coal, or the development of US fossil fuel supplies - such as oil, gas, and coal - should be given priority even if that inevitably increases our dependence on foreign oil over time?

In sum, while the Gallup poll survey correctly highlights the impact that the recession is having on the economy, its conclusion that "Americans are more willing than ever to forgo protection of the environment if needed in order to ensure economic growth or the production of energy" is more of a reflection of the out-dated nature of their questions than an accurate reflection of Americans' attitudes about the how the economy and the environment interact today.

Transforming our twentieth century energy economy into a twenty first century energy economy is going to require trillions of dollars of investment and millions of Americans to make it happen. While President Obama recognizes this and is looking to use environmental solutions to stimulate the demand needed to ensure a sustainable recovery, Gallup is still relying on 25 year old questions that have lost their relevance to the debate.

The ODEC (New Coal) Doctrine:Stand Firm in the Face of Economic Uncertainty

2009-03-13T16:36:47Z

Old Dominion Electric Power Corporation's plan to build a 1,500MW supercritical pulverized coal-fired power facility in Dendron, Virginia comes with significant economic risk that can raise the "expected" cost of this facility by tens of billions of dollars over time. Costs that will need to be borne by its rate paying cooperative partners for the next 45 years due to the wholesale power agreements they have signed onto with Old Dominion in January of this year.

As a bit of background, Old Dominion Electric Cooperative (ODEC) is a transmission and generation cooperative that provides electric power to 11 member electric distribution systems. These members in turn provide the power to nearly 1 million customers in the states of Virginia, Maryland, and Delaware.

Currently, ODEC generates 1,800MW of power from its own facilities and buys an additional 850MW of power in the marketplace on behalf of its member co-ops. In order to meet future load growth demand and reduce the number of power contracts they are currently buying in the marketplace, ODEC is looking to invest $6bln in a new base load power plant in south-west Virginia. This 1,500MW coal-fired power facility, known as the Cypress Creek Power Station, would be financed by a debt issuance secured by 45 year wholesale power contracts from their 11 member co-ops and is expected to come on line by 2014.

ODEC claims that building this coal facility is the most "cost effective and sustainable" long term solution for their members. However, after factoring in potential construction cost over-runs, higher than expected financing costs, fuel price volatility, and carbon costs under a risk case analysis of this project, this does not appear to be the case. In fact it appears that this facility could be subject to tens of billions of dollars of cost over-runs even under very conservative assumptions.

Since ODEC plans to build a non-capture ready facility, Cypress Creek Power Station is likely to be required to pay the full cost of their annual carbon emissions under a cap and trade bill that would exempt new coal from any transitional assistance provided to the existing industry fleet. These costs alone would be significant for the facility given that Cypress Creek is expected to produce 10 million tons of carbon dioxide a year. In dollar terms this is likely to start at $190mln a year for this facility (assuming a $19/ton price for carbon in 2014), and escalate to $1.2bln a year by 2050 (assuming a $120/ton price for carbon at that time). When this carbon risk is combined with the risk of higher construction, fuel, and financing costs, these additional expenses would increase their consumer's electric bills by as much as 4.5 cents a kilowatt hour by 2015 rising to 17.5 cents per kilowatt hour by 2050. Furthermore, much of these higher costs would be locked in, forcing the cooperative members to absorb the higher cost of power for decades to come due to their wholesale power contracts with ODEC.

In addition, from a demand perspective, while ODEC forecasts higher demand for their members at the present time, these assumptions may fail to materialize due to a combination of slower economic growth and reduced power demand from their customers. In fact, while power demand has increased roughly 1-2% per year from residential and commercial customers since 1994, according to a recent investment banking research report, actual usage per residential customer has fallen 2-3% and usage per commercial customer has fallen 1-2% during this same time frame. This is mainly attributable to improvements in the energy efficiency of the homes, offices, and appliances and this trend could be accelerated even further under the energy efficiency provisions in the current economic stimulus bill.

In an S&P report issued this month entitled "Will the Recession Pull the Plug on U.S. Public Power Companies and Electricity Co-ops", S&P sees declining energy sales, increasing payment delinquencies and bad debt expenses, and political pressure to hold down rates as all adding economic challenges to electricity co-ops over the next several years. This is not to say that ODEC will not need additional load based power over the medium term, but as energy sales decline and more utilitites find themselves with excess capacity, a more incremental approach may be warranted given the unknowns with respect power demand going forward.

With respect to coal, S&P expects that as "utilities incur the cost of carbon regulation, generators that rely on coal may well find erosion in the variable cost advantage that they currently enjoy vis-a-vis natural gas generators" which would question ODEC's logic that coal is the most cost effective alternative available to them at the present time.

While ODEC may say that they are still willing to "stand firm in the face of uncertainty" with respect to the cost of carbon regulation, many other large public power and cooperatives openly disagree with this posture and are avoiding coal investments altogether at the time being. At a recent conference on power demand trends, one of the largest co-op by generation in the country explained how they had done a thorough review of their options for adding additional load based power demand and concluded that they were "tentative to use coal" at the given time due to the high level of regulatory uncertainty surrounding carbon emissions costs.

In sum, Old Dominion Electric Cooperative's plan to investment $6bln in a supercritical pulverized power plant that will not capture its carbon emissions is neither "cost effective" nor "sustainable" for its member cooperatives when all the risks are properly accounted for. ODEC's members need to step forward and question the logic of "standing firm in the face of uncertainty" and add their voices to the debate over whether building this facility makes any economic sense at all given potential liabilities from carbon regulation and cost over-runs. Tens of billions of dollars of additional costs are at stake, and given it is their nearly 1 million customers that will ultimately be tasked with paying for it over the next 45 years, it is important that members concerns are voiced before additional funds are miss-spent on this project.

Peak "Cheap" Coal Concerns Make CTL Production Plans Unworkable

2009-02-25T17:14:03Z

While the coal industry has been very receptive to meeting the needs of a large coal-to-liquids (CTL) industry in the United States, it seems unclear how they would actually service these new customers with domestic coal supplies at reasonable prices. Indeed, according to the most recent AEO 2009 report, if the CTL industry grew to the size proposed by industry lobbyists, the US would have to actually import coal by the year 2015 at current prices.

To illustrate, let's just say for the sake of argument that the economics didn't matter and that we decide to let the coal-to-liquids industry have their way. That the US government ignores the fact that the break even price to build a CTL plant is above $95/barrel of oil and decides to write a check for $30bln to produce 300,000 barrels a day of CTL by 2015. What would happen to coal supply and coal prices? Does the coal industry have enough spare production capacity on line to produce the additional 58 million short tons of coal annually needed to supply the CTL industry in 2015 without seriously impacting coal prices?

The answer as it stands is no. In fact, using the AEO2009 assessment of coal production, the US would either have to import 30 million short tons of coal in 2015 to meet this increase in demand or raise prices to mine the additional output. Indeed, given that last years spike in coal prices was caused primarily by a 20 million short ton increase in coal exports by US coal producers, the inability of domestic suppliers to cover a 58 million ton increase in coal demand at a reasonable cost should be a serious cause for concern. Especially as it pertains to our electric bills, since coal prices are already high relative to natural gas on a heat rate and transportation adjusted basis (see graph below):

Now the coal industry may respond to this by saying that there is plenty of coal to go around, all we have to do is dig a little bit deeper. Sure extraction technology isn't likely to improve fast enough over the next several years to scale up output significantly, but hey we are the Saudi Arabia of coal. We are open for business and ready for the challenge.

This is what's known as the Exxon Mobil defense. The coal industry will give us their word that they will deliver the additional supplies needed, but since they will actually benefit more from higher coal prices, they are unlikely to try too hard to come up with the goods. They know that if demand rises 5%, which it would by 2015 in order to meet the needs of the CTL industry, prices are likely to go up and up and up and that means so will our electricity bills.

Further, even if they can meet the challenge, what will this mean to our long-term coal supplies? The coal industry has gone to great lengths to comfort the American consumer with the notion that coal is our best and only "cheap" long term energy solution. Unfortunately the numbers they have been using to back up this statement come from a report written when Sweet Home Alabama was rocking the top of the charts (that's 1974 for anyone under fifty).

What the coal industry knows but isn't telling you is that recent work done on our economic coal reserves points to a far shorter time span. In fact, when US coal reserves are adjusted to account for rising coal production rates, financing costs, coal quality, transportation costs, and other environmental and economic considerations the 250 years of reliable "cheap" coal power statistic quickly falls on its face.

In fact, according to a National Academy of Sciences report from 2007, "it is not possible to confirm the often-quoted assertion that there is a sufficient supply of coal for the next 250 years". The report concludes that after factoring in the additional inputs described above, there is probably only sufficient economic reserves of coal left to meet the nation's energy needs for the next 100 years at current consumption rates.

While 100 years of supply might still sound like a long time, if we adjust this number to account for the fact the coal consumption is expected to rise (at a rate of roughly 0.8% a year according to the EIA), the NAS's 100 years of supply at constant consumption levels without CTL production would fall below 75 years of supply at current prices. Of course at higher prices our reserves would be able to provide more coal but the days of "cheap" coal would be long gone. The number of years of coal at current prices would actually fall below 50yrs of supply under the Coal-to-Liquids Coalitions target of 300,000 bpd by 2015 assuming growth rates continued at 5% per year thereafter (see graph below):

A recent assessment of the coal reserves in the Gillette Coalfield by the US Geological Society (USGS) highlights the differences between estimates of coal reserves, mine able coal, and economically recoverable coal. This study is significant as a basis to judge how long our "cheap" coal supplies will last as the Gillette Coalfield, located in the Powder River Basin in Wyoming provides 37% of the nation's coal and is the single most productive coal basin in the country.

In the report, the USGS calculates Gillette's total original coal resource without restrictions to be 210bln short tons. When mining losses, processing losses, and financing costs are taken into account, however, the USGS concludes that the amount of economically recoverable reserves is only 10.1bln short tons of coal or less than 6% of the original resource total at current prices (see graph below):

This reduction in economically recoverable coal in the Powder River Basin can be traced in part to the fact that the easy "cheap" coal has already been mined out of the region. As coal seams in the Powder River Basin tend to slope downward, the task of mining what's left is now becoming an increasingly complex and progressively more expensive (not to mention dangerous) endeavor. While the report clearly points out that production would be higher at higher price points, this additional coal would not be "cheap". By supplying coal to the CTL industry, the coal industry would be crossing the line in terms of peak "cheap" coal in the US. This is especially true when the environmental costs that will come with carbon regulation are factored into the equation.

The Gillette Coalfield report's conclusion that the economically recoverable coal is only 6% of the original source amount should also call into question the wisdom of using an analysis that was written over thirty years ago and assumes a blanket 25% recovery rate for coal reserves to promote our economic coal reserves. Especially as other USGS studies have documented that the economic recovery rates in other parts of the country are far lower than 25% as well.

While you may even argue a 50 plus year supply seems like a long time, it is important to remember that the pressure this would have on coal prices and long-lived coal assets would start to be seen much sooner than this. Perhaps even in the next decade. The US would be forced to deal with this situation by either quickly drawing down its economically recoverable supplies or start importing more and more coal. Either way our energy bills would feel the pinch and the gains from domestically producing CTL would not justify its impact on our countries energy security.

In sum, US coal reserves are unlikely to be large enough to accommodate the additional demand for coal coming from a large domestic CTL industry. Peak coal is not the issue. Peak "cheap" coal is and a 5% increase in coal demand would be more than enough to raise electricity prices and pollution levels in the US far more than the country would benefit from creating a large domestic CTL industry.

Baard's Coal to Liquids Facility Does Not Deserve A $2.3bln Loan Guarantee

2009-01-29T20:48:20Z

Baard Energy has announced that it is seeking $2.3bln in government guaranteed low interest rate loans from the Department of Energy to help construct a new $6bln coal to liquids fuel plant in Wellsville, Ohio. This proposal should be viewed as a high risk use of public funds and a complete rip-off to the American taxpayer given the facilities high break even costs, large carbon footprint, and its weak ability to leverage additional investment.

According to Baard's own website, the Baard coal to liquids facility is expected to produce 53,000 barrels a day of coal to liquids fuel without the benefit of biomass (for at least the first 10 years) or carbon sequestration. This facility is expected to have a carbon footprint of 27mln tons of CO2 and produce a straight coal to liquids fuel which, according to a recent NETL study, has a greenhouse gas emissions rate that is 47% higher than petroleum derived diesel fuel (the EPA has this number signficantly higher). The high GHG emissions of this straight coal to liquids fuel would be in direct violation of the Section 526 of the Energy Independence and Security Act of 2007 which prohibits federal agencies from procuring a fuel unless its life-cycle GHG emissions are equal to or less than those for conventional petroleum sources (the "petroleum baseline"). In addition, President Obama is unlikely to make it any easier for Baard to sell their CTL to the US government. He has recently said that he would not support a CTL plant unless its life-cycle GHG emissions are 20% lower than conventional fuels.

What Baard seems to be betting on is that the government remembers its early promises to use a 30% biomass co-feed and sequester 90% of the carbon from the facility. This was in their original proposal and according to NETL would have produced a fuel that is 63% lower in GHG emissions than standard diesel. While this facility would have complied with government purchasing requirements, Baard is balking at the $109/barrel break even cost (excluding carbon costs) to build such a facility, deciding that it would rather build a straight coal to liquids plant that has a $84/barrel breakeven rate (excluding carbon costs) and take its chances. Like magic Baard's bait and switch has turned a coal to liquids fuel that was meant to reduce GHG emissions by 63% into one that increases GHG emissions by 47% or more. Now the good people at Baard are expecting the US taxpayer to applaud and throw money, a lot of money.

Indeed, given how bad the economics of building a straight coal to liquids plant are with oil prices hovering around $40/barrel and climate legislation seeming imminent, Baard must be assuming that they can not only find a way to exempt themselves from the current environmental laws on the books, but also figure out some way to pass on the additional costs to their customers. The main customer being the US Air Force, which means you and me.

As can be seen in the table below, the break even cost of straight coal to liquids is currently $84/barrel of oil without carbon costs. This break even cost rises to $100/barrel equivalents at $45/ton of CO2 and then reaches a break even cost of $115/barrel at a CO2 price of $90/ton. In other words, a taxpayer investment in the facility looks bad today and only gets worse over time. This is in contrast to the cost profile of even a 15% biomass co-feed facility that includes carbon sequestration. Fuel from this facility would emit 33% less GHG emissions than standard diesel and would start out at a break even of $95/ton without a carbon price. It would then ratchet down to $86/barrel at $45/ton of CO2 and then $76/barrel as the carbon price reaches $90/ton.

	CTL w/o CCS	CTL with CCS + 15% Biomass Co-Feed
CO2 = $0/t	$84.50	$95.44
CO2 = $45/t	$100.09	$85.95
CO2 = $90/t	$115.69	$76.43
Source: NETL CBTL Final Report 2009

In sum, the American taxpayer should adamantly oppose Baard's request for a $2.3bln loan guarantee from the Department of Energy as the facility undermines current environmental law, makes no economic sense, and fails to provide the leverage needed to stimulate additional private sector investments.

Moodys and S&P Need to Get Serious About Carbon Risk

2009-01-26T15:55:42Z

Following two important announcements in the past month, it seems clear that industry and government now both converging on the view that carbon risk will have a significant impact on the economics of building new coal fired power plants.

In December, the EIA released its Annual Energy Outlook for 2009 (AEO2009) and for the first time incorporated an investor carbon risk factor in its reference case. To quote from the report "the AEO2009 reference case assumes no changes in current laws and regulations. However, it reflects the behavior of investors and regulators who, in their investment evaluation process, are implicitly (or explicitly) adding a cost to many proposed power plants that employ GHG-intensive technologies", as a result "additions of new coal-fired power plants are significantly reduced from earlier projections."

The impact of applying carbon risk to the economics of building new coal in the EIA's analysis is fairly dramatic. Using demand growth assumptions just 4% below the AEO08 estimates, the number of new coal-fired power plants built through 2030 drops from 100GW to 42GW. In addition, the EIA in their AEO09 report is now expecting almost no new coal capacity will be built between 2013 and 2024 (1.2GW additions) apparently due to investor concerns about uncertainty of carbon emissions regulation.

This new government projection preceeded the release of the USCAP Blueprint for Legislative Action that not only calls for coal fired power plants to pay for their carbon emissions from 2012, but would also establish performance standards on new coal builds. The document also includes performance-based subsidies to develop and deploy carbon capture and storage (CCS) technology to scale as a way to mitigate the impacts of new regulation on power providers.

Government and Industry Get It on Carbon Risk. What about the ratings agencies?

Indeed, with President Obama signaling his intention to put climate legislation near the top of his policy agenda, investment in new long-lived coal power generation needs to incorporate carbon risk as a prominent factor in assessing a projects economic viability. This link between assessing carbon risk and applying it on a consistent basis across the power generation spectrum is where the ratings agencies should fit in. Unfortunately this is not happening. In fact, S&P and Moodys have been taking a fairly reactive role in assessing the potential carbon risk from new coal projects.

This lack of focus on carbon risk from the ratings agencies not only affects new investments, but also impacts the asset values the agencies have assigned to the existing power generation capital stock. With trillions of dollars of capital stock subject to carbon regulation under a climate bill, investors will need to know how the ratings agencies intend to model the impacts of carbon risk and as of today this isn't happening to any large degree.

Given that both the USCAP companies and the US government's Energy Information Administration recognize that the rules of the game are changing, Moodys and S&P need to become more involved in an area that should be a growth area for their businesses. Indeed, with USCAP now advocating a performance standard that would apply at some point to all new coal builds not permitted by January 1st 2009, the agencies should also be focused on the credit risks inherent in plant design selection, since performance standards supported by many of the countries largest emitters is likely to have enough buy in to be included in other legislation addressing climate change.

AMP-Ohio's desire to build a 960MW coal-fired power plant in Meigs County, Ohio offers a telling example how little impact carbon mitigation plans have had on the ratings agencies assessment of the economic viability of coal plants in recent years. In October 2008, AMP-Ohio released a revised RW Beck study of the economic risks of its planned facility. In this report, RW Beck revised up its assessment for construction and fuel costs for the plant in line with market estimates but decided to leave out carbon costs estimates altogether in its base case scenario. It had previously included very conservative estimates of these costs but eliminated them entirely based on their assessment that the political climate is too uncertain to determine whether or not AMP-Ohio would be required to pay for their carbon emissions. This base case scenario of zero carbon costs appears to have been acceptable to the ratings agencies, as the banks have already begun marketing the debt for this $4bln deal to their clients.

As the AMP-Ohio deal is being structured with 50 year take or pay contracts which leave the 70 municipalities in Ohio plus other communities in Michigan, Virginia, and West Virginia with nearly $23bln in potential hidden costs down the road, the risk assessment from the ratings agencies appears to view the carbon risks as being extraneous to the investors. However, as detailed in my blog AMP-Ohio's New Coal Plant is a Bad Bond Bet, if the total risk exposure including carbon is not properly assessed, the lack of disclosure of these risks today will not make the bond holders immune from default down the road. If they are to truly serve the investor's interests, the ratings agencies need to measure the carbon risk of this facility independently of AMP-Ohio's analysis, especially with carbon legislation becoming more and more likely in the near term.

In sum, the ratings agencies need to become more involved in assessing carbon risk as climate legislation will directly impact new coal investments as well as the asset value of trillions of dollars of long-lived capital stock. Relying on company produced reports to determine whether management is thinking about carbon risk is not enough. Metrics must be created and used across the power sector to determine how well these new facilities are able to adapt to higher performance standards and carbon regulation. S&P can be applauded to some degree for the metrics it has created to encourage energy efficiency efforts at the utility level to reduce emissions but more needs to be done to directly measure the carbon risk of new coal in a systematic and transparent way.

5 Reasons Why Cap and Trade is Preferable to a Carbon Tax

2009-01-20T18:18:18Z

It is often asserted that a carbon tax would be simpler, more transparent, and have fewer special provisions, accommodations, or loopholes than a cap and trade system. The fallacy, however, is to compare a "real-world" cap and trade design with an idealized carbon tax design.

Indeed, every pressure for special accommodations seen in the legislative process for developing a cap and trade system would be present in the legislative process for adopting a carbon tax. The following is a list of five reasons why cap and trade is preferable to implementing a carbon tax as a means to achieving our expressed goal of an 80% or greater reduction in greenhouse gases by 2050:

1) Guarantees Emission Reduction

If the goal is to reduce the amount of greenhouse gases in the atmosphere by 80% or more, a cap and trade program that gradually reduces the amount of CO2 permits available to emitters over a 40 year horizon is far more effective at achieving this goal than a tax. A carbon tax can only attempt to change consumer behavior and is therefore one or more steps removed from actually affecting the desired emission reductions within an acceptable time frame. In other words, a cap directly regulates the quantity of dangerous pollution, whereas the emission results of a tax are less certain.

2) Creates Better Economic Certainty for Investment

In order to make the investments in clean energy needed to achieve our goals, investors need a clear price signal. Cap and trade provides a 40yr framework of economic certainty that will allow investors to base their investments on what industry thinks the price of carbon is today and will be far into the future. A carbon tax would only offer what government thinks a carbon tax rates needs to be on a year by year basis in order to best attempt to affect the desired emissions reductions.

3) Program Costs are Countercyclical

The price of carbon under cap and trade legislation will fall as the CO2 output from the economy slows and will rise as the CO2 output from the economy accelerates. In other words, carbon prices are countercyclical and wouldn't provide an undue burden on the economy during periods of economic stress. This makes cap and trade far more effective than a carbon tax, which needs to take into account how much progress the carbon tax has made historically before it can decide whether or not to provide economic relief during an economic slowdown.

4) Less subject to Political Intervention

While the regulation of a cap and trade market for CO2 is likely to be reviewed every five years, the program itself will be designed for nearly four decades and will not be subject to the intense political pressure that a carbon tax during periods of economic stress. As it is politically advantageous to under-estimate the amount of tax needed to affect a certain change in behavior, it is likely that a carbon tax program would be persistently behind on its reduction targets and constantly confronted with calls to either reform or abandon the program. Further, during periods of nascent economy growth, politicians will constantly struggle to determine the amount of increase in carbon taxes needed to avoid derailing the recovery.

5) Better Advances Goals of Complementary Standards

Under a carbon tax, innovation in one area isn't rewarded as predictably as it is under cap and trade program, as carbon taxes don't directly affect emissions reductions but rather consumer behavior. This makes cap and trade more effective at stimulating investments in complimentary standards which measure their economic value based on known carbon prices.

USCAP Says Yes We Can as Congress Prepares Climate Legislation by Memorial Day

2009-01-20T16:50:33Z

On January 15th the US Climate Action Partnership, a group of 26 major industry players and 5NGOs (including NRDC), released its Blueprint for Legislative Action on climate change -- a document designed to provide Congress with a consensus approach to reducing our greenhouse gas emissions by 80% in 2050.

While the Blueprint's signers acknowledge "that this is not the only possible path forward and we stand ready to work with the Administration, Congress, and other stakeholders to develop environmentally protective, economically sustainable, and fair climate change legislation", the Blueprints' call for urgent action on climate change is groundbreaking in its acknowledgement that climate protection does not require economic sacrifice and can in fact help to provide a foundation for our economic recovery.

Indeed, momentum for passing climate change legislation this year seems to be gathering steam as House Energy and Commerce Committee Chairman Henry Waxman released a statement last week setting a timeline to pass comprehensive climate and energy legislation out of the Committee by Memorial Day. Chairman Waxman's announcement was then supported by House Speaker Nancy Pelosi who stated she "shares Chairman Waxman's sense of urgency" on climate change legislation and "his belief that we cannot afford another year of delay".

In order to meet the goal of an 80% reduction in emissions at a manageable cost, USCAP's Blueprint for Legislative Action recommends the creation of a cap and trade program for carbon emissions. Under this program, carbon emitted from point source facilities would be capped at a declining rate through 2050 (until emissions in the economy reach an annual target of less than 2 billion tons from just over 7 billion tons today). The right to emit carbon under the cap would then be either auctioned off or directly allocated to emitters on an annual basis. These allowances, amounting to trillions of dollars over the life of the program, would then be traded in an open market to facilitate the transfer of allowances from one economic actor to another and to provide a clear price signal for new investments in the clean technologies needed to transform the way our energy is "produced, delivered, and consumed".

Since the price of carbon allowances over time will be primarily determined by how well low carbon innovation is able to keep up with a declining cap on our carbon output, USCAP recommends that some of the funds from a cap and trade system be allocated to promoting the scaleable deployment of clean technologies in the marketplace. To ensure that this supply/demand balance is achieved, the Blueprint calls for revenues from the program be used in part to fund the deployment of several low carbon technologies including; solar, wind, efficient vehicles, low carbon fuels, industrial efficiency, buildings efficiency, and carbon capture and storage.

Other uses for carbon revenues under the program would include providing funds to; 1) mitigate the financial impacts on consumers, businesses and the overall competitiveness of the economy, 2) advance carbon technology research and development, 3) provide workforce training, 4) facilitate adaptation at the state, tribal, and local levels, 5) provide financial relief for low-income families, and 6) dividend funds back to households.

In particular, USCAP calls on Congress to provide substantial financial incentives for the early deployment of carbon capture and storage (CCS) technology to avoid "locking in" high carbon emissions from new coal facilities without CCS. To ensure new coal facilities are developed in a manner that speeds the deployment of CCS, USCAP also recommends that all new coal and other solid fuel facilities permitted between now and 2020 be subject to a performance standard that would require new plants to emit no more than 1100lbs of CO2 per Mega-watt hour. The Blueprint also would require plants permitted after 2020 to emit no more than 800lbs of CO2 per Mega-watt hour. Financial incentives would be structured to achieve even better performance.

A Game Changing Call to Action

The USCAP Blueprint for Legislative Action is a game changing call to action and a significant step forward in getting climate change legislation on President Obama's 2009 agenda for the following reasons:

1) The USCAP Blueprint is a Consensus Document -The Blueprint for Legislative Action is a consensus document on climate legislation drafted from a diverse body of high carbon intensity manufacturers, utility service providers, and NGOs. While this group did not address the concerns of all affected parties, it did establish a meaningful starting point for more intense debate on this issue.

A complete list of the organizations involved is as follows: Alcoa, AIG, Boston Scientific Corporation, BP America Inc, Caterpillar Inc, Chrysler LLC, ConocoPhillips, Deere & Company, Dow Chemical Corporation, Duke Energy, Dupont, EDF, Exelon Corporation, Ford Motor Company, FPL Group, General Electric, General Motors, Johnson & Johnson, March Inc,, NRDC, The Nature Conservancy, NRG Energy, PepsiCo, Pew Center on Climate Change, PG&E Corporation, PNM Resources, Rio Tinto, Shell, Siemens Corp., World Resources Institute, and Xerox Corporation.

2) The Blueprint is Designed to Reduce 80% of our Emissions at a Manageable Cost to the Economy- The CEOs issuing the Blueprint have agreed that reducing our CO2 emissions by 80% by 2050 can be achieved at a "manageable cost to the economy". This contradicts the claims and fears of some organizations and members of Congress that climate legislation will create a huge cost burden for the economy. Indeed, the USCAP CEOs have stated that action is urgent, not only to protect the climate but to provide a foundation for economic recovery.

3) "Early Action" Incentives Under the USCAP Plant would help to Re-power Stalled Clean Tech Investments - The USCAP plan allows investment in clean technologies to be accelerated to take advantage of "early action" performance incentives.

4) The Blueprint for Legislative Action Provides a Framework to Create Our New Energy Economy - The Blueprint calls for a transformation in the way we "produce, delivery, and consume" energy. This transformation would require large scale investments that would provide good paying jobs and reduce our dependence on foreign oil. Such a program would provide much needed stimulus to the economy as millions of Americans would be needed to engineer, manufacture, install and service this new energy economy. Further, by adopting a cap, invest now, and recover strategy, that uses future carbon allowance revenues to jump start energy productivity driven clean tech investments today, additional focus would be given to improving our energy productivity, easing the transition to a low carbon model once the program is officially launched.

5) The USCAP Blueprint Creates a Performance Standards for Coal- Support for performance standards on coal is a major step forward to reducing our carbon output as it will push banks and rating agencies to evaluate the viability of new coal plants based on their ability to meet stricter carbon output standards. In addition, a performance driven incentive structure is mapped out to deploy carbon, capture and storage (CCS) to scale at coal-fired power plants and other industrial sources of CO2. Carbon, capture and storage technology is seen as a critical "wedge" technology for global reductions in CO2 emissions as 8.3 Gigatons of CO2 are currently emitted from coal-fired power plants and a program which both puts a price on CO2 emissions and funds the development of CCS technology to scale will either prove out the ability of CCS to meet our reduction needs in the short term or force us to look beyond coal as a long term source of global energy supply.

In sum this Blueprint for Legislative Action presents a well-structured framework for capping our carbon emissions. Now it's up to President Obama, Congress, and others to build on the momentum provided by the Blueprint and focus at least part of our economic recovery strategy on the business of climate change.

Baard Deserves a Lump of Coal in Their Stocking

2008-12-16T17:18:32Z

Baard Energy's suggestion last week that the US Air Force should effectively ignore its own environmental regulations and commit to buy Baard's synthetic fuel as a way to help revive employment opportunities in Ohio should be dismissed outright. In fact, it seems almost laughable that Baard's "creative greening proposal" should be given an audience at all given the government is refusing to buy Baard's synthetic fuel based on the fact that the lifecycle greenhouse gas emissions from Baard's fuel exceeds that of conventional fuels by over 60% (see graph below):

Indeed, if Baard was actually "taking coal and cleanly turning in to high quality fuel", it would not be in violation of Section 526 of the Energy Independence and Security Act of 2007 and would be eligible for consideration from the DoD based on the merits of the plant. Baard's original plan to include carbon, capture and storage and a 30% Biomass co-feed would actually have made their fuel less carbon intensive than diesel and probably make them eligible for DoD consideration, but Baard has since abandoned this plan and instead opted to produce a lower quality product.

Further, the idea that this facility will in some way help "green the nation" clearly fails to take into account the fact that this $6bln facility is expected to have a carbon footprint of nearly 27 million tons of CO2 a year (when the electricity facility is included), and would increase fine particle matter and sulfur dioxide pollution substantially in an area of the country already overburdened with pollution from neighboring facilities.

This is not even weighing in on the financial risk of the facility for Columbriana County, which would ultimately be held liable in the event that higher than projected funding, construction, carbon, and fuel costs made the facility uneconomic to run over time. Indeed without a government contract to supply the Air Force with costs plus production of synthetic fuel, it seems unlikely that this facility will be built at all given the economic risks involved in developing Baard's dirty brand of CTL.

While the proposed Baard facility poses serious environmental and financial risks, the good news is that there are better alternatives for attracting new, long-term jobs to Columbiana County and the rest of Ohio. Transitioning to a clean energy economy will require rapid growth in many of Ohio's manufacturing sectors. Electricians and carpenters will retrofit our state's buildings to improve their energy efficiency. Millwrights, machinists and steel workers will build wind turbines for use in northwestern Ohio and in neighboring states. Welders and electrical engineers will build solar panels. Agricultural workers and chemists will work to produce cellulosic ethanol from grass, wood or agricultural waste. Unlike the coal industry, these industries represent growth sectors in both Ohio and nationwide. Instead of bucking the national trends, Columbiana County can lead the way by embracing such green jobs.

There are also better alternatives for achieving energy security than turning coal into fuels. Higher automobile efficiency, smart growth, and renewable fuels could all reduce our dependence on oil while saving consumers money and protecting the environment. In addition, high efficiency plug-in hybrids are a far superior strategy to liquid coal given that electricity can be formed from a wide array of resources. Even if some of the electricity needed for plug-in hybrids was generated from coal with carbon capture and sequestration, the pollution footprint would be much lower than that of fuel from Baard's proposed liquid coal facility. We should invest in these cleaner, more efficient, and more economical alternatives rather than continuing to subsidize the use of dirty coal.