"Cap and Trade" sounds so mushy. How would the average US voter have any idea at all whether he/she should vote for a Congressional or Presidential candidate who espouses C&T;? You just want the nearest coal fired power plants to clean up enough to make life pleasant, fish not mercury contaminated, trees not killed by acid rain, asthma rates dropping, and climate stabilized. How might a specific Cap & Trade proposal translate to achieving those common values? At what point does the headline of this post get addressed? Using carbon dioxide as the pollutant we most need to reduce, and from which all else follows, work recently done by Carnegie Mellon Electricity Industry Center researchers gives us a framework to begin to answer these questions.
Dalia Patiño-Echeverri, Benoît Morel, Jay Apt, and Chao Chen offer an excellent abstract of their recent paper:
In a cap-and-trade system, a power plant operator can choose to operate while paying for the necessary emissions allowances, retrofit emissions controls to the plant, or replace the unit with a new plant. Allowance prices are uncertain, as are the timing and stringency of requirements for control of mercury and carbon emissions. We model the evolution of allowance prices for SO2, NOx, Hg, and CO2 using geometric Brownian motion with drift, volatility, and jumps, and use an options-based analysis to find the value of the alternatives. In the absence of a carbon price, only if the owners have a planning horizon longer than 30 years would they replace a conventional coal-fired plant with a high-performance unit like a supercritical plant; otherwise, they would install SO2 and NOx controls on the existing unit. An expectation that the CO2 price will reach $50/tonne in 2020 makes IGCC with carbon capture and sequestration attractive today even for planning horizons as short as 20 years. A carbon price below $40/tonne is unlikely to produce investments in carbon capture for electric power.
Bottom line for us: If the US Congress sets a "Cap" at much under $50/tonne, they're deluding us with a delay and defer move. So, lets watch closely. And big Kudos to the CM crew for framing the issue in an understandable way.
With advance permission, the full paper may be downloaded from CMU, here.
Via:: Carnegie Mellon University Image credit:: coal pile at night, Boat Nerd