Carbon Pricing

CARBON PRICING....Over at Gristmill, Sean Casten reports on the latest energy boondoggle in his home state:Tenaska, an independent power company, has been seeking to build a coal plant in Illinois. The problem being of course, that new, coal-fired power plants...

| Wed Jan. 21, 2009 3:01 PM EST

CARBON PRICING....Over at Gristmill, Sean Casten reports on the latest energy boondoggle in his home state:

Tenaska, an independent power company, has been seeking to build a coal plant in Illinois. The problem being of course, that new, coal-fired power plants are really, really, really, really lousy investments....So how did the Illinois legislature respond? "Clean Coal Portfolio Standards." Seriously.

Tenaska gets a long-term power contract on what would otherwise be a massive economic boondoggle. Illinois gets to increase power rates and rates of fossil extraction....And the whole thing is dressed up in an environmental cloak. Methinks the impeachment proceedings shouldn't limit themselves to the executive branch.

Now, I'm one of those odd people who thinks that looking at the plain arithmetic of something like this actually makes it easier to comprehend. Luckily, Sean provides it for the project in question (the Taylorville Energy Center), which is getting approval for a rate increase in return for plans to sequester about half of its CO2 emissions. It's a 525 MW facility that will cost $3.5 billion, so here's how the costs break down:

  • $6,666 per kW

  • Delivered power costs on the order of 20 cents/kWh

  • Total CO2 emissions of 800-1,000 lbs/MWh

So how does this work out compared to the U.S. average? Here's the answer:

  • 300-500 lb/MWh reduction in CO2 emissions

  • Offset by a $0.11/kWh rate increase

  • Simple division shows that Illinois ratepayers will subsidize this plant to the tune of $400-700 per ton of CO2 reduction

This is the kind of thing to think about when people talk about carbon taxes or cap-and-trade programs. One of the problems with pricing carbon is whether we have the political will to price it high enough to really make a difference. For example, the European ETS program, a cap-and-trade system, currently prices carbon emissions at a meager $16 per ton of CO2. And that's after four years of operation.

But compare that to what the Illinois legislature just did: they put an effective price on carbon of more than $400 per ton of CO2. If they're willing to do that — if legislatures are willing to pay rates that high — then that's the market price of carbon. The only question is whether we're willing to charge that price openly, with the carbon charge going to the public, instead of being hidden inside a complex giveaway to a favored corporation. Count me on the side of the public on this one.