The Economics of Carbon Emissions
The Business of Green, a special section in today’s New York Times, features an article, The Carbon Calculus, that provides tangible examples of the economics of a potential cap-and-trade system for carbon dioxide emissions.
Most political analysts expect Congress to impose some sort of cap-and-trade system, which will effectively raise the cost of low cost but high-emission fuels like coal and oil. Under such a system, alternative fuels, with lower emissions, would become economically competitive with today’s cheap fuels.
Using data from the nonprofit Electric Power Research Institute (EPRI), the Times demonstrates that a cap-and-trade system would begin to impact the economics of alternative energies as the carbon-dioxide charge approached $20-30 per metric ton. As shown in the diagram above, at $10 per metric ton, there would be little impact, but as it reaches $25 per ton, wind power could be competitive to coal. Assuming ongoing technology improvements that continue to lower the price of solar, biomass and wind power, there could be an economic incentive at the lower end of that range.
According to CreditSights, a market to buy and sell greenhouse gas emission credits would create incentives to invest in technologies to reduce emissions:
In an efficient market, it should be more expensive to offset emissions with credits and more beneficial to make the necessary improvements to reduce emissions.
In August, EPRI released a study assessing the potential impact of development of a portfolio of advanced electricity technologies. The study reached four conclusions:
- The strategy for reducing emissions will be technology-based
- A diverse portfolio of technologies will be required; there’s no one technological “silver bullet”
- A significant and sustained R&D investment, coming from both the public and private sector, will be required
- Both short- and long-term R&D activities will be needed in order to affect a substantive reduction in emissions
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