Cap-and-Trade System Might Cost Less Than Critics Say

The financial impact of regulating coal-fired power plants that produce carbon dioxide emissions under a cap-and-trade system is much less than previously projected, and a carbon capture and storage (CCS) option could keep the price of carbon credits low, according to new research. Opponents of the U.S. climate bill's proposed cap-and-trade system claim it will be a financial burden on both energy consumers and companies.

A key finding reveals that the price of electricity for consumers could rise as much as 23 percent, but researchers said this is significantly less than others have projected. In addition, because of the way the energy industry is regulated in the U.S. consumer pricing would rise much more slowly -- over 30 years -- than in unregulated markets.

The study (PDF), conducted by Stanford Graduate School of Business Professor Stefan Reichelstein and doctoral student Ozge Islegen, measures and quantifies the price associated with regulating carbon emissions.

The researchers focused on three key questions:

• At what price for emission permits would fossil fuel power plants, in particular coal-based plants, invest in the new clean CCS technologies rather than buy such permits on the open market?
• Will CCS technologies keep the market price of emission permits reasonable?
• How far are electricity prices likely to rise in the case where two scenarios are both fulfilled: (1) if power generators are required to obtain emission permits; and (2) if CCS technology is available on the terms currently projected by engineering cost studies?

Although CCS technology has been documented in a number of pilot projects, it has yet to be proven for large commercial installations, say the researchers. FutureGen, an Illinois-based partnership of private firms and the U.S. government, is investing in CCS technology for a commercial-sized coal-fueled power plant. If this is possible, then the cost savings possible by implementing CCS should scale well, they said.

The report finds that for coal-fired plants the break-even price for the adoption of CCS technology is just $25 to $30 per ton of carbon dioxide emissions. Once the price of emission permits moves beyond that range, operators of coal-fired power plants would find it advantageous to invest in CCS technology rather than buy emission permits, according to the report.

Researchers said this finding stands in contrast to the conclusions of a widely quoted 2007 McKinsey & Co. study, Reducing Greenhouse Gas Emissions: How Much at What Cost?, that predicted the price of permits would have to reach $50 per ton before power plants would convert to CCS.

The emissions level from coal-fired power plants in the United States and other parts of the world, particularly China, implies that the CCS option could keep the market price of emission permits relatively low, according to the report.