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CMU Paper: Market-Based Mechanisms for CO2 Reduction Will Be Insufficient to Attain Mid-Century Goals

24 March 2009

A new paper from the Carnegie Mellon Electricity Industry Center concludes that while a market-based mechanism (e.g. cap and trade or a carbon tax) is a likely key part of a US strategy to reduce carbon dioxide (CO2) emissions, such a market-based approach alone will not induce the investments in long-lived technology required to achieve a 50 to 80% reduction in emissions of carbon dioxide by mid-century.

Although market-based mechanisms need to be implemented soon to establish a framework for emissions reductions, the Carnegie Mellon University (CMU) team argues, the range of prices for CO2 currently under discussion will be too low to enable achieving the longer-term targets. In the paper “Cap and Trade is Not Enough: Improving US Climate Policy”, the authors argue that the US Congress should simultaneously design, integrate and implement these targeted strategies:

  • For automobiles. Efficiency standards that at least double miles per gallon of automobiles and light trucks over current vehicles (CAFE); and a reduction of miles driven (VMT) through road pricing, pay-as-you-drive insurance, and by encouraging transportation alternatives.

  • For electric power. A tradable carbon emission portfolio standard (CPS) that gradually reduces the average amount of CO2 emitted per kWh for the electricity that companies sell to end users; and promotion of strategies that separate utility profit from the amount of electricity it sells so that utilities can earn profit from increasing energy efficiency.

  • For buildings and appliances. Higher and more inclusive efficiency standards for building design and construction, appliances, equipment, and lighting; and Federal incentives to induce localities to adopt building codes that lower the annual energy use in new buildings by at least 50% compared to conventional buildings.

In the rush to reduce CO2 emissions, and improve energy efficiency, there is a risk that inefficient, but well-intentioned policies may mandate technologies that cost dramatically more than more efficient routes to the same goals. Both Congress and the Executive Branch need to support careful, but rapid, engineering-economic analysis that can be performed in 90 days before undertaking any specific mandates. Such analysis can be performed more rapidly than most legislative and executive processes, and should not be an excuse for delaying action.

—Samaras et al. (2009)

The future price of CO2 permits would need to rise to at least $50/ton before electric power generating companies would find it cost-effective to build coal-fired power plants with carbon capture and sequestration (CCS), the authors note. Similar or higher prices would be needed for other types of low-carbon plant investment. Cap and trade proposals under discussion now would not reach that level of pricing for decades.

In the meantime, in the absence of any other regulatory constraints, new coal or gas-fired generation will be built without CO2 emissions controls. Even with a CO2 price as high as $40/ton, it is cheaper to build a pulverized coal facility and buy relatively inexpensive CO2 emissions permits. The same is true of natural gas-fired plants.

Without subsidies or other mechanisms that achieve high effective CO2 prices, other technologies such as wind, nuclear and solar will also not be cost effective strategies for limiting emissions.

Samaras et al. (2009)

A $50/ton price on CO2 emissions would have an even smaller impact on the transportation sector, the authors calculate, finding that even if an allowance price of $50 per ton were passed on to consumers at the pump, the resulting increase in fuel price would be about $0.50 per gallon.

Based on the consumer response to the spike in gasoline prices in 2008 and their subsequent precipitous fall, the CMU team concludes that a $10-$30 CO2 emission permit price would “have at best a tiny effect on vehicle technology, consumer choices among vehicles, or miles driven, unless the underlying price of gasoline is already high.

The mandated increase in CAFE to 35 miles per gallon, if it is attained, will further reduce the incentive to drive fewer miles by reducing the cost of travel. To achieve the large emissions reduction required to ensure that the atmospheric concentrations of CO2 do no reach levels considered by many scientists to be disastrous, addition measures beyond cap and trade will be necessary.

—Samaras et al. (2009)

In addition to higher CAFE standards and policies to reduce VMT, the authors suggest that alternative vehicles and fuels (and associated CAFE credits or low carbon fuel standards) should e evaluated over the full life cycle to account for significant emissions upstream, such as CO2 from power plants providing energy for electric vehicles.

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March 24, 2009 in Climate Change, Emissions, Fuel Efficiency, Policy | Permalink | Comments (19) | TrackBack (0)

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Fortunately the cooler heads in Congress have realized bogus Cap N' Trade schemes will kill the economy. With polls showing Americans more interested in fixing economics than global warming - Cap N' Trade thieves have been stopped.

But we can expect more gnashing of teeth and enviro-whining from this "green university." They and certain other universities lead the charge back to the stone age and gaia worship. Happily, while religious choice is uninhibited in the U.S. - we have ruled it out as a State function.

I would have to agree. If you look at the cost of gasoline in Europe: say e1 / litre at present ~= $5 / US gallon, you can see definite, but insufficient reductions in fuel usage.

You need to both mandate the change through CAFE or whatever, and back it up with taxation to:

a: raise some cash (the US will have quite a deficit to pay off)

b: Keep the pressure up and "make it real"

If gasoline is $2 / gallon to the customer, they have no incentive to use fuel efficient vehicles.
If it is $4 or $6, they will.

I would also suggest that some things are too cheap for people's own good, and need to be taxed to reduce consumption.

I would put plastic bags, cigarettes, gasoline and alcohol on that list.
Feel free to add to it yourselves...

To clarify: I was agreeing with the proposal, not Reel$$'s post!

More proof that this is the smartest community on the web.

CMU has correctly analysed the issues but I think the facts lead to a slightly different conclusion. While government taxation policy (or externality fee collection) can change behaviour, we face a world problem. ONLY a market based solution is going to work. In the history of humanity there has never been a Kondratieff cycle (Schumpeter long-wave) that was affected by government mandate.

We need more energy while at the same time we must reduce emissions of CO2. To make the situation more complicated, we need a solution today before we run out of resources (air and fossil fuels). If someone invents cold fusion tomorrow then that is the answer. If not, a fossil fuel solution is needed.

mankind must adopt a more efficient way of creating energy out of fossil fuels, at least twice as efficient as current methods. This new method must be scalable and CHEAP enough to make it econmically advantageous to throw out all of the current thermal energy devices and adopt the new efficient ones.

What I have described is not impossible. For proof look at the innovation of the semi-conductor, the 5th Kondratieff cycle. The Reinhardt Turbine offers the same development path in energy production as the semi-conductor did in IT.

Cap and Trade can be gamed. Anytime you have a law, people are busy trying to find a way around it. If less fossil fuel usage is a goal, then we have to find incentives and disincentives get it to go in that direction. Pretending it is a "market mechanism" is just wishful.

You tell coal fired power plants that they have to clean up by a date and then you help them clean up. They will not do it by themselves and just telling them to do it will not work. The direct approach will usually bring more direct results in achieving the goals.

I too agree with these conclusions. No single idea [whether it be efficiency standards, cap and trade or a carbon tax] will be enough. They may each be a part of the answer but relying on just one wont work as well as using all together.

It sounds to me like the conclusion of this study is not that market mechanisms are insufficient, just that the prices that are currently being discussed are insufficient.

The beauty of cap-and-trade is that if you have a strict emissions target you need to meet, you simply pull down the cap each year until you've met it. The price will adjust to whatever price is necessary to displace that consumption.

And besides, there should be once price on fossil fuels to reflect damages related to global warming, ADDITIONAL fees for imported oil to reflect costs associated with national security, ADDITIONAL taxes on motor fuels to pay for the construction and maintenance of the nation's roadways... We're not limited to one market-based mechanism.


cap and trade

What happens if the owners of the coal electric plant just decide the penalty is too high and they simply fire all thier employees and shut down?

The point the researchers are making is that government intervention, while well meaning can create a net less good for society. They are not making an argument for government to sit on the sidelines and spectate. Certainly valuing the externalities of CO2 is a role for government. Just as rules about disposal of any "bad". Companies are not allowed to dump toxic waste into the river becuase of governemt regulations, not market forces.

We must innovate immediately. It can be done!


Someone (Mahonj, Nat, ai, vv-tech.....) anyone who is in favor of cap n trade , carbon tax.

Ameren is an energy company in the middle of the country. The owners and CEO's have plenty of money, they could pretty much retire or move to something else any time they want. If congress passed cap n trade and the Ameren exec's decide it's just too much trouble to continue and shuts their doors.

What happens?

Ameren is the sole provider for several million people. Indy and St Louis residents would be sitting in the dark with food rotting in their frezers.

Then what?

A problem with different approaches is numeric inconsistency depending on different baselines and carbon intensity. Increasing renewables by 20% is not the same as cutting CO2 by 20% eg switching from coal to gas. Maybe the toughest legislative requirement overrules the others.

I agree cap and trade will be weak. In Australia there was a year long inquiry (Garnaut) but the lobbyists got it all changed in a few days. As for jobs moving to China and India perhaps the few countries with spare coal like the US and Australia should tax the hell of coal exports. Or tax goods imported from those countries. If we don't try to move away fast from carbon energy it's a tough legacy for the future, either due to depletion or climate problems.

They argue that a tax of $50 per ton of CO2 is too small, and describe a range of additional policies that would help reduce CO2 emission. But it would also help to simply impose a larger tax. $50 per ton of fossil carbon is equivalent to more than $180 per ton of CO2, and that would be enough to significantly inhibit consumption of fossil fuels. For example that would increase the price of gasoline by about $1.50 per gallon.

Nothing but more social engineering judging form the responses to this report.

For example:"As for jobs moving to China and India perhaps the few countries with spare coal like the US and Australia should tax the hell of coal exports. Or tax goods imported from those countries."

That sounds like the standard of living for all Aussies and some Americans will go in the tank.

But what the hell the should all drive bicycles and freeze in the dark anyway for contributing to global warming.

Has any Yahoo environmentalist ever thought that maybe the CO2 could be sequestered by forming carbonates thus thus locking it up in a solid. Said carbonates might even be of value as a building material.

No of course not that would mean using their brains what little they have of them.

Knee jerk reactions are so much easier they require no mental strain.

I have read that smoke stack scrubbers create an artificial gypsum that can be used in making dry wall. When issues are thought further through, alternatives may emerge.

The whole cap and trade scheme seems like a market-like experiment that could easily fail and then progress in this area could come to a halt. Let's get consensus on what will really work in this country and implement it.

PP&L has built a wall board plant across the road from their Monitor plant.

BTW, if you want clean air SJC move out of California and move next to the Monitor coal fired plant.

I am not too worried about shutting down clean burning coal plants. At some point, reasonable folks will travel to DC. We will grid lock DC preventing congress from going home in limos until poor policy is reversed. Framers and truckers did it when Carter was president.

Quoth a poster above:

The beauty of cap-and-trade is that if you have a strict emissions target you need to meet, you simply pull down the cap each year until you've met it. The price will adjust to whatever price is necessary to displace that consumption.
You mean, "the consumption will be capped by price increases regardless of the immediate conditions", like the price of oil capped consumption last year.  THIS IS DEFECTIVE BY DESIGN.  If there is a cold winter, we do not want some arbitrary consumption level diverted from industry to home heating and driving employment down; if there is a warm winter, we do not want the incentive to insulate houses reduced.  Caps cause uncertainty, and uncertainty kills incentives.  What happened to the incentive to save petroleum as the price cratered?

Taxes create certainty.  We need a carbon tax + dividend.

Quoth SJC:

I have read that smoke stack scrubbers create an artificial gypsum that can be used in making dry wall.
Yes, sulfate scrubbers do that.  They can easily create more gypsum than the drywall market can absorb, driving the price below zero.  Try again.

Quoth Twit P:

I am not too worried about shutting down clean burning coal plants.
Empty set.  I'm not concerned about grounding the fleet of flying pigs either.

EP-

I was merely making a statement for the benefit of others that may not know this. If you want to be hostile, take it somewhere else.

I agree with the report's findings that there needs to be several different approaches to the GHG emissions problem. The one's mentioned are good candidates, and no doubt there are others as well.

"What happens if the owners of the coal electric plant just decide the penalty is too high and they simply fire all thier employees and shut down?"

For those coal plants that don't shift to carbon sequestration, this is their eventual future. The power they generated will be taken over by some other provider. Threats like this are never a deterrent, just FUD to attempt to scare the weak minded.

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