Thursday, November 8, 2007

Should Carbon be made more expensive?

Carbon dioxide is what economists call an “externality,” something that imposes a cost on somebody other than the manufacturer. At some point, the thinking goes, Congress will force industries to pay those costs, either with a tax or a cap-and-trade system in which allowances will cost money. The consensus in the energy business is that lawmakers will come up with a charge that could start at $10 per metric ton or more.

On Thursday, a Senate subcommittee approved a bill to establish a cap-and-trade system for carbon dioxide, and the Democratic leadership is eager to have the Senate pass it by year’s end. But prospects in the House are less certain.

Still, with all the talk about a carbon charge, “your perspective shifts,” said Revis James, an economist at the Electric Power Research Institute, a nonprofit utility consortium in Palo Alto, Calif. “We’re definitely going to be paying a bill here for wanting to reduce these emissions.”

Some companies are already counting on paying such a bill. In October, NRG, an electric company in Princeton, N.J., made the first application in three decades for permission to build a nuclear power plant. In an interview, the chairman, David Crane, said his calculations showed that such a plant would be cost effective if the price of carbon dioxide emissions ran into “double digits” per ton.

The Electric Power Research Institute’s staff estimates the effect of a charge on carbon dioxide emissions on the price of a kilowatt-hour, the amount of electricity needed to run 10 100-watt bulbs for an hour. Natural gas produces 0.84 pounds of carbon dioxide per kilowatt-hour, and coal produces more than twice as much, 1.9 pounds.

At $10 per metric ton, the impact is minimal. But at $50 a ton, for example, the cost of a kilowatt-hour produced by coal goes from about 5.7 cents to about 10 cents. Wind power currently isn’t competitive, according to the institute’s calculation, but it becomes competitive when carbon dioxide costs $25 a ton. By their calculations, nuclear energy, with negligible carbon dioxide emissions, looks sensible at a small carbon charge.

-The Carbon Calculus

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