Climate for Change: The Sting of Cutting Carbon Emissions Depends on Where You Live

By Andersen, Glen | State Legislatures, December 2009 | Go to article overview

Climate for Change: The Sting of Cutting Carbon Emissions Depends on Where You Live


Andersen, Glen, State Legislatures


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The passage of federal climate legislation would affect the nation's energy infrastructure as profoundly as any policy of the past century.

If enacted in the form now being considered on Capitol Hill, state policymakers, utilities and industry leaders will see a host of challenges and opportunities as they redesign energy policies from the ground up to meet greenhouse gas reduction targets--transforming the way energy is generated, used and delivered.

Although it is impossible to predict with precision exactly how each region or state will be affected, some key factors will drive the new energy economy. These include the current mix of energy generation in different regions, availability of renewable resources, future cost of fossil fuels, and the success of carbon dioxide capture and storage technologies. It will also be affected by the need for utilities to earn a profit by meeting energy needs--whether they build new generation or reduce demand through energy efficiency.

One primary concern of state lawmakers is the potential for higher costs based on regional resources. Some states are coal dependent while others may have limited renewable resources.

For example, some legislators in Maryland, which has a renewable electricity standard and mandatory greenhouse gas reduction targets, worry federal laws may affect their ability to manage costs and meet goals.

"I want to see some consideration given to areas of the country that may not have the best alternatives for carbon-free generation," says Delegate Sally Jameson. "That's very important for those with fewer resources."

REVERSING A TREND

Many climate scientists believe an 80 percent reduction in global greenhouse gas emissions is necessary by 2050 to avoid the effects of catastrophic warming--flooding, drought, food and water supply disruption, and land loss from rising sea levels. In response to growing evidence that states may see significant economic losses, eight have set enforceable reduction targets. Congress, too, is considering a law requiring an 80 percent reduction in greenhouse gas emissions by 2050.

Carbon dioxide (C[O.sub.2]) is the most prominent greenhouse gas. And most C[O.sub.2] emissions come from the combustion of fossil fuel--for heating, electricity generation and transportation. An 80 percent reduction in greenhouse gas emissions will require greater energy efficiency, capture and storage of C[O.sub.2], and replacement of fossil fuels with low-carbon alternatives, such as renewable or nuclear energy.

The United States has been steadily increasing its reliance on fossil fuels since the industrial revolution, and its greenhouse gas emissions are growing as a result. It produces about 20 percent of the world's greenhouse gas emissions, while China produces about 21 percent. The European Union produces approximately 14 percent, and Russia, India and Japan around 5 percent each.

The U.S. Department of Energy forecasts the nation will use 12 percent more energy in 2030 than it does today, with much of it coming from fossil fuels. This estimate is based solely on policies that were in place by the spring of 2009. Most of the growth will come from the rising demand for electricity, expected to increase by 26 percent in 20 years. The growing population and rise in energy-hungry consumer items--such as large screen TVs, computers, game consoles and entertainment centers--will drive much of this increase.

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WHAT HAPPENS TO COAL?

A national cap-and-trade bill would put a price on emitting carbon by requiring power generators and large industrial sources to purchase emissions allowances. The number of allowances would be reduced every few years, which would drive up their price. This will gradually increase the cost of energy from fossil fuels and energy intensive products, leading consumers, businesses and utilities to use less energy and switch to low C[O.sub.2] emitting technologies.

The challenge for states will be how to meet this growing appetite for energy while radically decreasing emissions. Coal plants are responsible for about 80 percent of the carbon dioxide produced by the electric-power industry, and they generate about two-thirds more C[O.sub.2] than natural gas plants for each unit of energy they produce. Since about half of the nation's electricity comes from coal, much of the focus would be on replacing coal plants with low-carbon-emitting alternatives or fitting them with technologies that can capture and store carbon dioxide emissions.

There is spirited debate over how states would be affected by a national bill. Estimates of the cost of compliance range from relatively low to astronomical, depending on the source. Still, the transition to low C[O.sub.2] electricity is likely to have significant costs, though some may be offset by growth in new industries. It would require states and utilities to select from a list of options, which include capturing and storing COs from coal plants, replacing coal plants with renewable and nuclear energy power generation, and using efficiency technologies to reduce the growing demand for energy.

THE BOTTOM LINE

How much will this transition cost states?

The many existing cost studies of federal cap-and-trade legislation vary widely since each must make assumptions about how people, utilities and the government will act in the future. They must somehow guess the future cost of fossil fuels, how far renewable energy and carbon capture technologies will advance, how much they will cost, and what role they will play in the fuel mix. In addition, forecasts assume energy policy remains constant, which is highly unlikely. Uncertainty increases the further out one projects, so 20-year estimates are likely to be wrong.

The latest report from the Congressional Budget Office, released in September, predicts that the Waxman-Markey cap-and-trade bill would reduce after-tax income for the average household by 0.2 percent in 2020 and by 1.2 percent in 2050. These estimates do not count the benefits that may accrue because of reduced warming, since most would be seen beyond 2050.

Many are concerned about the costs, particularly those in coal-reliant states.

"I do not believe it is possible to significantly reduce emissions without major rate impacts and other price increases," says Kansas Representative Tom Sloan.

His concerns involve the lack of concerted analysis about how to fund long-range transmission lines that transport energy from renewable energy-rich regions to areas where energy is needed, which may lie hundreds or thousands of miles away.

"How do we resolve the political issues surrounding nuclear power, determine whether to retire older carbon-emitting plants and replace them with newer, 'cleaner' versions," he says, "and address issues like energy storage to increase the reliability of renewable energy?"

Much of the cost to individuals and businesses will be determined by the combination of policies and approaches states and utilities choose. However, each state's energy mix--how much energy it gets from coal, gas, petroleum, nuclear, hydropower and other renewable sources--will play a role as well.

"As states, we all have various energy mixes from which we derive our electricity," says Maryland's Jameson, "and these vary regionally across the country, depending upon available resources."

Some states rely heavily on coal, others on natural gas, and still others on hydropower or nuclear energy.

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States that rely more on traditionally low-priced coal tend to pay the lowest electricity rates. Indiana, Iowa and Ohio, which use coal to generate 75 percent or more of their electricity, may see greater challenges in meeting reduction targets, as could other coal-reliant states with low electric rates.

These states have more plants that would need to be retrofitted for carbon capture or mothballed for low C[O.sub.2]-emitting alternatives. Coal-reliant states may see greater price increases, too, since they often pay such low rates for electricity that any new generation, low-carbon or not, is bound to be greater.

California and Texas, which rely heavily on natural gas and low C[O.sub.2] energy sources such as wind and nuclear, are likely to see less effect on rates. Their higher electricity rates--almost double that of the lowest states' rates--make low-carbon generation options, such as wind, much more competitive with building new natural gas plants. Texas, in fact, is predicting its rates will fall as wind generation grows, since it will reduce demand for natural gas and drive down electricity prices.

A QUESTION OF FAIRNESS

Raising the price of energy will shift income among different socioeconomic levels, industries and regions. To lessen some of the blow, proposed cap-and-trade legislation both gives away and sells allowances, using the revenue to offset the higher expenses that households and businesses may experience.

The United States emitted about 6 billion metric tons of carbon dioxide from fossil fuels in 2005, the year used to set reductions in the current federal climate bill. This means at least $49 billion worth of allowances would be available during distribution and auction in 2011. To lower the cost of the transition, a significant number of allowances would be given to states and utilities based on population and how much C[O.sub.2] they emit.

"In general, per capita, the carbon-intensive and low-population states receive the most allowances, but there's a little something for everyone in each of the pots," says Kathryn Zyla from the Climate Center at Georgetown Law School. Zyla, who has published research on how many allowances each state would likely receive under the Waxman-Markey climate bill, says that when it comes to allowances for local utilities, which must be used to benefit energy consumers, "it's the carbon-intensive states that receive more per capita."

States also would receive free allowances if they adopt specific regulations or programs. For instance, free allowances would go to states that create and implement high-efficiency building codes or adopt standards for retrofitting existing buildings for energy efficiency. Energy efficiency is stressed in many climate plans since it's a low-cost way to reduce C[O.sub.2] and helps offset total energy costs for consumers. While they might be paying more for each kilowatt-hour of low carbon energy, energy efficiency helps them use fewer kilowatt-hours.

The current bill also sets up the Carbon Storage Research Corporation. It would use grants, contracts and financial assistance to accelerate the development of a process to capture carbon dioxide from coal plants on a commercial scale. The program would be funded by an assessment on fossil fuel-generated electricity by utilities and total about $1 billion per year, with costs passed along to ratepayers.

"Carbon capture and sequestration are critical to having an affordable, reliable and responsible electric energy system," says Kansas' Sloan.

Since nearly 50 percent of our electricity comes from coal, and the United States has hundreds of years worth of coal, "existing generation units cannot cost-effectively be 'written off' from either the economic or energy perspectives," he says. "Developing [carbon capture and sequestration] technologies, not only for new coal-fired generation units, but also for existing coal, natural gas, cement kiln and other emitters is essential."

GET EFFICIENT

A growing number of studies are finding that a large amount of energy efficiency must be tapped to effectively reach climate goals. Pressure is on utilities and states to change the current utility model, which discourages utilities from pursuing aggressive energy efficiency plans.

Tremendous energy efficiency opportunities exist within the economy, though if implemented they mean a decrease in energy sales for utilities. Since energy efficiency is the lowest cost approach for reducing greenhouse gas emissions and reduces consumer bills as well, it is the critical component to an affordable greenhouse gas reduction program.

Energy efficiency is not the only challenge. Cap-and-trade legislation is likely to create a significant increase in renewable energy--especially in the form of home or business mounted solar panels--meaning that more consumers will produce their own energy instead of buying it from the utility.

In the long-term, cap-and-trade legislation is likely to require a major shift in utility practices, and a change in policy if they are to remain profitable. Under a new model, utilities would have to focus on satisfying customers' energy needs, not just on selling kilowatt-hours. They still will need to earn a profit whether they build a new power plant or implement energy demand reduction strategies that avoid the need for new power plants. With energy costs likely to increase as a result of cap-and-trade, consumers will prefer that utilities pursue energy efficiency before building new plants.

States may need to create a new model where what is cheapest for the consumer is also best for the utility. In other words, investing in reducing consumer demand should be as profitable as selling more kilowatts.

STATES HAVE A SAY

Although federal requirements would certainly require dramatic changes and an increase in energy costs, states can radically influence these costs and the degree to which they affect consumers and the state's economy. Renewable and energy efficiency investments, as well as state policy more broadly, determine the obligations and costs to utilities.

"For example," says Zyla, "more energy efficiency achieved either by direct state investment or by state policy incentives--means less energy consumed and fewer emissions requiring the purchase of an allowance."

Ultimately, a tremendous number of variables will determine what effect climate-change regulation will have on different states. These include not only reliance on fossil fuels, but accessibility to renewable energy resources, proximity to other states with renewable resources, future costs of renewable energy and carbon sequestration technologies, future fossil fuel costs, and most important, the degree to which states pursue energy efficiency.

While the wrangling over a climate bill continues in Washington, D.C., states with climate policies are continuing to pursue their goals, putting all options on the table.

"We hope to move forward on our third nuclear reactor, which is carbon-free generation," says Jameson. "We need to encourage all forms of energy that are carbon free, and ensure there are no regulatory holdups for new technologies."

CHECK OUT steps states have taken to reduce greenhouse gas emissions and NCSL's environment and energy legislation tracking database at www.ncsl.org/magazine.

Glen Andersen tracks environmental issues for NCSL.

WHERE OUR ELECTRICITY COMES FROM

Hydroelectric    3.9%
Nuclear         20.6%
Natural Gas     22.3%
Other            7.4%
Coal            44.7%
Petroleum        1.1%

Net generation by energy
source year-to-date as of July 2009

Source: Energy Information Administration

Note: Table made from pie chart.

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