CMU Paper: Market-Based Mechanisms for CO2 Reduction Will Be Insufficient to Attain Mid-Century Goals
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.
Constantine Samaras, Jay Apt, Inês L. Azevedo, Lester B. Lave, M. Granger Morgan and Edward S. Rubin (2009) Cap and Trade is Not Enough: Improving US Climate Policy