By Kasia Duda, Carbon Credit Capital
Editor’s note: This article takes for granted that some form of federally mandated restrictions on carbon dioxide will be passed and implemented in the near future. While this view is widely held by many in the policy and energy industries, it is also widely contested. With changing political winds and increasing public resistance to the potential costs and economic disruptions associated with cap-and-trade, or legislating the reduction of GHG emissions, there is a growing belief that federal GHG, or climate, legislation may not be forthcoming. Working from that assumption, it could be equally likely that future legislation would focus on a direct energy tax, energy efficiency, and/or on restricting EPAs ability to regulate in the area of GHG reductions.
Greenhouse gas reduction in the 21st century introduces challenges, risks and complexity for coal-powered energy producers world-wide. Government, investors, and customers have demanded cuts in greenhouse gas (GHG) emissions that could have enormous implications for the power sector – the largest emitters of GHG. To respond to these demands, the utility industry will need to be ready for a major transformation. A new report from Carbon Credit Capital, LLC (CCC) stresses that this impending liability for coal-fueled utilities can also be an important opportunity. The report outlines a plan to help develop a low cost strategy for GHG mitigation.
The U.S. Congress is debating the design of a plan for the reduction of GHG emissions. While the latest attempt to introduce cap-and-trade, as presented by Senators Kerry and Lieberman in the American Power Act (APA), has been postponed until after the November elections, it is almost certain that GHG will be regulated in the U.S. Cap-and-trade has been given the greatest attention in the debate. CCC has taken the position that the establishment of cap-and-trade in the U.S. will provide the right incentives for U.S.-covered industries to reduce emissions in the most cost-effective way and that this is a better option than top-down regulation by the EPA or the Dept. of Energy.
Coal-fueled power plants will have three options for compliance with emissions reduction requirements: 1) internal abatement, 2) allowances and 3) offsets (both domestically and internationally sourced).
A coal-fueled utility can make use of various technologies to reduce its carbon footprint that include retrofitting, carbon capture and storage, fuel switching, and building new, more energy-efficient plants. While some of the “low-hanging fruit” in terms of internal abatement may still be available, sooner or later a utility will run out of affordable options and will have to look for other opportunities to comply with impending regulations either from the Clean Air Act or from a federal bill.
Allowances are “permits to pollute” distributed by the government. One allowance is equal to one metric ton of carbon equivalent. The specific number of allowances available for the power sector has not yet been determined. However, the APA bill specifies the total number of allowances available to all of the sectors, as presented in the graph on the preceding page. Allowances will cover only part of the emission liability; the rest will need to be covered or reduced using internal abatement and offsets.
The period from 2013 to 2016 should be thought of as a planning period as the power sector will receive free allowances to cover most of the emissions from (to-be) regulated companies. After 2016, as the total number of distributed allowances decrease, the difference between these and projected “business as usual” emissions1 will increase. This means that the number of offsets and internal abatement projects will need to increase in order to meet the cap.
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