A closer look at current U.S. CO2 pricing

Kevin Drum over at Mother Jones blogged on my recent Grist post, joining my mom in the list of people who publicly praise my math skills. Thanks!

Much more interestingly, he raises this question:

Are we wiling to charge [a price for CO2 emissions] openly, with the carbon charges going to the public, [or] inside a complex giveaway to a favored corporation?

(The question is in response to my estimate here that the recently passed Illinois Clean Coal Portfolio Standards Act represents an implicit $300-$500-per-ton payment in the name of CO2 reduction.)

It’s a great question because the truth is that under current federal and state policy, we do pay people for their actions to reduce CO2. But we do so in a horribly inconsistent way, providing not only inconsistency between technologies and “favored corporations,” but also wild disparities in price.

For instance, suppose you’re getting $0.03 per kWh from your state renewable portfolio standard. Those kWh displace — on average — 1,300 lb per MWh of U.S. power, and you are therefore being paid $46 per ton of CO2 you reduce. CO2 reduction is not the only justification for RPS policies, but would we ever have an RPS if we didn’t care about CO2? I doubt it.

The good news there is that people are, today, being paid in the U.S. for reducing CO2. But is there any rhyme or reason to their price? And is it at all consistent with what others are getting for the same environmental service?

More math below the fold.

1. Wind, geothermal, and closed-loop biomass are eligible for a $0.021 per kWh production tax credit. That works out to $32 per ton of CO2 reduction.
2. Open-loop biomass, landfill gas, municipal solid waste, and qualifying hydro are eligible for $0.01 per kWh production tax credits. That works out to $15 per ton of CO2 reduction.
3. The investment tax credit for solar PV at 30 percent of project capital costs works out to $253 per ton of CO2 reduction. (I assume $8,000 per kW, a 20 percent capacity factor, and a 12 percent annual cost of capital.)
4. The investment tax credit for fuel cells is also 30 percent. If we assume a typical fuel cell is $6,000 per kW, natural gas-fueled, and 45 percent efficient with a 60 percent annual capacity factor, that’s a $262-per-ton credit for CO2 reduction.
5. Nuclear plant loan guarantees have a massive impact on the ability of those plants to finance themselves. If I make the conservative assumption that this federal backstop to 80 percent of the capital costs of the plant lowers the borrowing costs of those plants by 10 percent (e.g., money they can borrow at 12 percent interest would have cost them 22 percent without the loan guarantee), that program alone is paying them $165 per ton of CO2 reduction. (This value may well be infinite, because it’s not clear to me that anyone would loan money at any price to a nuclear plant developer without those loan guarantees.)
6. The ethanol blender’s credit at $0.51 per gallon yields a net well-to-wheels CO2 advantage relative to gasoline of about 20 percent. At that level, this works out to a $52-per-ton payment for their CO2 reduction.

One can quibble with an assumption here or there, but here’s the larger point: The absence of a coherent policy on CO2 emissions has not stopped well-meaning legislators from crafting incentives that encourage actions to lower CO2 emissions. But those actions are wildly incoherent, providing radically different incentives to different technologies for no obvious reason.

This suggests the following:

First, it is a certainty that we are not making rational investments in response to the climate challenges we face. OK, that’s no great insight, but it does bear keeping in mind as we think about future CO2 policies. When two otherwise environmentally-identical technologies are subject to ten-fold differences in their public subsides, markets will allocate capital in ways that have nothing to do with fundamental value (economic, environmental, or otherwise).

This raises the question: What might a world look like that did provide a consistent policy signal on CO2? One, we would deploy a host of technologies that are cheaper and more diverse than those we currently deploy in the name of CO2 reduction. Two, we would deploy a host of technologies that cannot possibly be contemplated by those who’s knowledge of possibilities is limited to those possibilities we are currently deploying. In other words, all of us.

Taken in combination, this means that a consistent and coherent plan to reduce CO2 emissions will be cheaper and engender a more diverse suite of technologies, companies, and solutions than we can possibly contemplate based on current experience. All we have to do is start.

Note: Here and throughout, I have insisted, erroneously, on using 2,000 lb tons rather than the metric 1,000 kg tonnes in which CO2 prices are commonly denoted. Adjust the math if you like, but it doesn’t affect my larger point about the massive variability in CO2 pricing.