Modest Carbon Price Will Significantly Lower Power Sector Emissions

December 11, 2013
Rachel Cleetus
Policy Director

Part three of a three-part blog series.

Last week some colleagues and I published an article in the Electricity Journal showing that almost 60 gigawatts (GW) of coal-fired generators could be candidates for closure based on their poor economic profile relative to competing cleaner options like natural gas and wind. We also found that a modest carbon price of $20/ton of CO2 would more than double that figure to nearly 138 GW, reducing CO2 emissions by up to 745.7 million tons. You can read more about our analysis here and in blog posts by my colleagues Jeff Deyette and Steve Clemmer.

Major U.S. companies are already using a carbon price for planning

As a recent report from the Carbon Disclosure Project shows, major U.S. companies (including a number of utility companies) are already using a carbon price (ranging from $6-$60 per metric ton CO2e) in planning future financial decisions. They understand that, with the effects of climate change becoming increasingly apparent, policy makers will soon have to respond to the American public’s desire for action.

A price on carbon seems a likely tool — and one that many economists recommend — to address climate change in a market-oriented economy like the U.S., and these companies are taking steps to prepare for that eventuality.

A price on carbon shifts generation away from coal

In our core case we compared the cost of electricity from existing coal-fired generators, including the costs of installing four major modern air pollution controls (for SOx, NOx, PM, and mercury), to that from existing natural gas plants. We also ran a scenario comparing existing coal with new wind power costs.

Our carbon price case is designed to explore the economics of coal-fired power in a carbon-constrained world. We used a modest price of $20/ton of CO2 applied to emissions from fossil-fired generation sources (coal and natural gas). Natural gas, with lower carbon emissions from combustion at the plant, carried a lower but still positive carbon penalty.

Our results show that, with a carbon price, 137.8 GW of U.S. coal capacity would become uncompetitive compared with existing natural gas plants. Compared with new natural gas plants, 59 GW of coal would be ripe for retirement with a carbon price in place. This is in addition to 18 GW of coal capacity that was retired in 2011-2013 and 28 GW that has been announced for retirement by 2025.

Retiring these units (the 137.8 GW) could reduce CO2 emissions by up to 745.7 million tons if they are replaced with carbon free resources. Replacing them with existing natural gas would lower the carbon benefit to 469 million tons. (This is solely based on emissions at the point of generation and does not account for emissions from extraction or transport of natural gas).

For comparison, a recent study from Synapse Energy Economics showed 228-295 GW of coal-fired power is uneconomic, assuming a “mid-range” carbon price (starting at $20.00/ton of CO2 in 2020 and rising to $69.50/ton of CO2 in 2042) and a wider array of pollution control costs.

Risks of overreliance on natural gas

While we made a comparison between coal and natural gas costs in this carbon price scenario, we are by no means advocating that all the retiring coal be replaced with natural gas. In fact, our wind comparison scenario shows that wind power is competitive with existing coal and natural gas in many parts of the country, even without a carbon price.

Since wind power does not emit any carbon, it is likely to be even more competitive with a carbon price that would raise the cost of generating electricity from coal and natural gas. (We did not analyze this scenario). Furthermore, an overreliance on natural gas comes with significant climate, environmental and health risks, as UCS has pointed out.

States with the most coal capacity that is ripe for retirement

Our carbon price case shows that Florida, Texas, Indiana, Michigan, and Georgia lead in the amount of coal capacity that is ripe for retirement compared to existing natural gas plants, assuming a modest carbon price.


Cleaner alternatives to coal are available

Coal-fired generators are simply becoming more and more uncompetitive. In addition to the ones we identify as uneconomic in our core case, it’s clear that many more are on the cusp of being uneconomic. Any of a number of factors – including a modest price on carbon, lower natural gas or wind costs, increased energy efficiency in homes and business, or stronger policies to reduce public health impacts of coal – may be enough to tip the scales conclusively for these units. Recognizing these realities, it makes even less sense to invest in expensive upgrades that may at best keep these generators limping along for a few more years before they succumb to market pressures.

As our core case and wind scenario show, cleaner alternatives to coal are plentiful, including ramping up generation from existing underutilized natural gas plants and generating more energy from renewable sources like wind. A carbon price would create incentives to further expand these and other cleaner options like energy efficiency. Some of the revenues from a carbon price could also be reinvested to ramp up low-carbon energy options, help low-income communities disproportionately impacted by energy price increases, and help with transition programs for workers affected by the shift away from coal.

Cutting power plant carbon emissions to address climate change

Coal-fired power is the single largest source of CO2 emissions in the U.S. Recent trends in the power sector have led to a dramatic shift away from coal, including low natural gas prices, increased efficiency, and the falling cost of renewables. This has in turn contributed to a 3.8 percent decline in U.S. energy-related CO2 emissions in 2012 alone, dropping those emissions to their lowest level since 1994, according to the EIA. However, more needs to be done to ensure that this trend continues at a rapid rate, while ensuring that we take steps to avoid a dangerous overreliance on natural gas.

EPA’s upcoming carbon standards for existing power plants can play a significant role in reducing emissions from the power sector. Flexible guidelines from the EPA could allow states to adopt a variety of compliance options including a carbon price (for example, via existing state carbon cap programs such as those implemented by the RGGI states and California), renewable energy standards, and energy efficiency standards. Eventually, as many businesses seem to already expect, action from Congress will be needed to put a national price on carbon. Our analysis shows that a carbon price can play an important role in lowering emissions.