Economics of Pricing the Cost of Carbon Dioxide Restrictions in the Production of Electricity
Brito, Dagobert L.; Curl, Robert F.
One of the more difficult issues in the debate over policy to reduce carbon dioxide emissions is calculating the cost of a carbon dioxide constraint. In this paper, we calculate the cost of a carbon dioxide constraint in the production of electricity by modeling the replacement of coal generators with natural gas generators. We find: 1) Replacing coal generators with natural gas generators is the most economical way to achieve a target of reducing carbon dioxide emissions by 20 percent. 2) Unless there is a technological breakthrough in carbon sequestration, the carbon intensity of coal means that “clean coal” cannot be a significant factor in reducing carbon dioxide. Replacing existing coal generation capacity with modern coal generation plants can only reduce total carbon dioxide by 5 percent. 3) The distribution of the efficiency of coal generators in the United States is very concentrated. This concentration restricts the range over which carbon dioxide prices effectively manage the displacement of coal by gas. At current prices for fuels, a carbon price of approximately $30/metric ton (MT) will shut down 10 percent of coal generator capacity, and a price of $45/MT will shut down 90 percent of coal generator capacity. 4) The narrow range for the price of carbon dioxide means that coal generator capacity is very sensitive to the price of carbon dioxide emissions. This creates the possibility that a market in carbon dioxide permits will result in high volatility in the market for electricity. 5) The carbon prices implied by the transition from coal to gas will have very little impact on transportation fuels. Consumption of transportation fuels would only be reduced by about 5 percent or less by carbon dioxide prices that are compatible with the transition from coal to gas.