Impacts of carbon policy

Gaining perspective on potential paths to limit carbon emissions

The utility industry expects to see new carbon policy limiting carbon emissions during the current administration. An informal poll taken at the KEMA Utility of the Future conference indicates that a majority of the audience believes the US will have some kind of carbon legislation by 2010.

The US Administration could take three potential paths to limit carbon emissions:

Legislation– for example the American Clean Energy and Security Act (ACES), also known as the Waxman Markey bill, has passed the US House of Representatives since the time of the Utility of the Future event and is currently pending Senate consideration.
EPA regulations– A recent determination that identifies carbon dioxide as dangerous to public health, gives EPA legal authority to regulate emissions of the gas.
Multilateral carbon treaty– Involvement in post-2010 Kyoto Negotiations under which the US could make commitments through an international treaty. In addition, the US could also participate in UN negotiations which will culminate in December 2009 in Copenhagen to set international offsets.

American Clean Energy and Security Act of 2009 (ACES)

ACES is considered the most aggressive carbon bill to come forward in the legislature and seeks to reduce emissions through a cap and trade mechanism. It also includes a wide range of policies such as a federal renewable electricity standard, energy efficiency standards, and a phase out of HFC gases.

The allocation of carbon credits is the most contentious part of the bill. If the money from the credits is used to invest in clean energy, energy efficiency, storage and carbon capture, it would be effective in reducing emissions, but if the funds from the sale of credits are used to lower bills for consumers, then it may eliminate the price incentives to reduce energy use which could weaken the goals of the legislation to reduce greenhouse gases.

Carbon policies, commodity prices and fuel switching

The effect of different carbon policies on commodity prices may vary considerably. For example, the current price of emissions credits in the Northeast Regional Greenhouse Gas (RGGI) Auction are low, around $3 - $4/ton.

The price of carbon in the market at large would probably have to be much higher to stimulate fuel switching from coal. Such a switch could drive the price of cleaner, natural gas higher thus raising the cost of energy. Carbon policy will have an effect on commodity markets in ways that may not be obvious and these effects need to be considered in setting new policy.

Carbon policies and the consumer

A PJM study cited in the discussion – “Potential Effects of Proposed Climate Change Policies on PJM’s Energy Market” – modeled the impacts of various scenarios to reduce carbon emissions. Study findings determined that reductions in energy load, through energy efficiency or conservation programs and an increase in wind generation, do reduce wholesale prices and have a positive impact on reducing emissions. The increased cost of the energy efficiency and wind generation would then be borne through a tax on retail customers or through the cost of renewable energy credits.

Costs of cap-and-trade program would be passed along through price signals at the wholesale and retail level, and a policy that sets renewable portfolio standards would be felt by consumers at the retail level. Estimates of the increased costs of carbon mitigation to the consumer vary depending on a number of factors. Consumers would be able to absorb modest increases in their bills, but the costs could be higher than they can easily absorb if commodity prices rise. With the current recession, consumers’ are not as willing or able to absorb rising utility bills

Carbon policies and renewable technologies

Carbon offsets, also a component of the ACES bill, provide emitters a way to meet their caps through development or investment in clean or renewable technologies. Developers of these projects will need to see higher prices for carbon than current market prices. There will also likely be higher transaction costs in the offset markets because of measurement and verification requirements. The current economic environment has had a negative effect on the number of offset transactions that are being developed. With policy still uncertain, many developers are unwilling to take risks.

Transaction costs in the trading markets for allowances and renewable credits are not expected to be significant, though there is some uncertainty about what these costs could be.

European and other experienced international players are starting to enter the US market for allowances and renewable energy credits and are looking at offset development projects. They bring knowledge and experience in offset developments and trading to stimulate competition. Emitters that get involved in pre compliance markets, as some are already doing, would get credit for that participation under the ACES act in its current form, so there is some incentive to get involved early.

About the Utility of the Future conference

KEMA’s 2^nd annual Utility of the Future executive conference was held June 18 – 19, 2009 in Washington DC.

For information on the panel participants and keynote speakers, download the conference summary Whitepaper, “Utility of the Future: Navigating energy sustainability.”

Thoughts, comments or insights? Join the KEMA Utility of the Future conversation.