Cap and trade OK, with strings attached

Jeff Postelwait

The idea of a federal cap-and-trade system is becoming more accepted in the power generation industry as a way of cutting greenhouse gas (GHG) emissions. But industry leaders favor a scheme they say will be less expensive to implement.

In a carbon cap-and-trade scheme, emission credits (also called permits or allowances) can be given away freely to regulated entities, sold at a federal auction or distributed using a combination of auctions and allocations.

In general, power producers open to cap and trade favor a system in which the credits are distributed freely rather than auctioned off. They say such a system would allow them to pass on fewer costs to their customers.

Attitudes are changing perhaps because of growing signs from the Obama administration and the Environmental Protection Agency that carbon and other GHGs will be regulated at the federal level soon.

Regional Differences
In a recent statement, President Barack Obama reiterated his support for moving toward cap and trade.

"I think cap and trade is the best way, from my perspective, to achieve some of those gains, because what it does is it starts pricing the pollution that's being sent into the atmosphere," Obama said. "The way it's structured, it has to take into account regional differences. It has to protect consumers from huge spikes in electricity prices."

Tom Williams, director of external relations for Duke Energy, took the president's mention of regional differences as a sign that the administration might be moving away from its earlier preference for a federal carbon credit auction. Proceeds from such an auction could be used as a revenue stream for federal tax relief provisions.

"Cap and trade was designed to be a transitional policy, not a punitive one," Williams said. Duke opposes a 100 percent auction system for distributing credits.

Williams said that as the third largest coal-burner in the U.S., Duke supports cap and trade, but wants to "get it right." Duke's 35,000 MW generation portfolio is 71 percent coal-fired.

The 25 states that rely on coal-fired generation for more than half of their electricity would be hit especially hard financially under such a system, he said. Duke is a founding member of the United States Climate Action Partnership, which also opposes auctioning emissions credits.

Auction as a Tax
Frank Prager, vice president of environmental policy for Xcel Energy said his company supports a federal climate change policy that can achieve cuts in carbon emissions, but favors free distribution of credits over a federal auction.

"We do support mandatory federal action on the climate, but not just any federal action. It's got to be something that reflects the reality of where the technology is and it should recognize our ability to control costs to our consumers as a result of the policy," Prager said.

Prager said a 100 percent federal auction scheme for distributing credits would have roughly the same effect on the industry as an across-the-board carbon tax--both of which would have unnecessarily negative affects on the power generation industry.

"An auction is nothing more than an enormous tax on energy," he said. "If the allowances are distributed through an auction, it's effectively a carbon tax. You end up charging people through the auction just as you would with a carbon tax."

Instead of either system, Xcel supports free distribution of credits as the best way to achieve cuts at the lowest cost.

"We support a large allocation of the credits to the utility industry and other industries," Prager said.

Xcel's portfolio of about 18,000 MW is more than 50 percent coal-fired, and about 30 percent natural gas-fired.

Transition to Auction
Southern Co. supports the greenhouse gas regulation stances held by the Edison Electric Institute. According to Valarie Holpp, spokesperson, that means both EEI and Southern Co. favor a cap-and-trade program, but remain open to a carbon tax or hybrid approach.

In one of several points of agreement with EEI, Southern Co. recommends increasing generation from renewables, nuclear power and pushing development of carbon capture and sequestration to achieve long- and short-term carbon emission reductions.

Southern Co. also recommends that allowances be allocated in the early years of a climate program, with a gradual transition to a full auction.

Southern Co. generates more than 50 percent of its 42,000 MW portfolio from coal, with another 25 percent from natural gas.

Melissa McHenry, spokesperson for American Electric Power, said any cap-and-trade system must take the development of new technologies into account in a realistic way.

"We think cap and trade is a demonstrated approach that has worked in the past, but it needs to have timetables and targets that will allow for the development of technologies that will reduce carbon. We can't do an immediate switch," McHenry said.

Like Southern, AEP also favors a gradual transition with an allocation scheme for distributing carbon credits. McHenry said that a 100 percent auction scheme would increase the cost of achieving reductions without adding any additional environmental benefit.

AEP's generation portfolio is about 70 percent coal-fired, with more than 26,000 MW generated from coal plants.

Skeptical Leaders
Consulting firm Black & Veatch commissioned a survey of industry attitudes toward GHG regulation schemes and found that energy company executives were skeptical of climate change legislation on a personal level. However, they still wanted their companies to be viewed as leading the charge for lower emissions.

Bill Kemp, vice president for business strategy and planning for Black & Veatch, said it is logical for large power generators to oppose an auction-based scheme form credit distribution.

"It's in the self-interest of the industry," Kemp said. "In buying credits at an auction, they would have to compete against other generators and incur the costs of buying those credits. If credits are distributed freely, costs would not be passed along to customers."

A cap-and-trade system that provides credits to regulated entities without requiring a buy-in would upset the fewest people, he said.

"Besides narrow self interest, there's also concern for customers. I think there is an economic logic to a slow transition and putting the full price of carbon onto customers more gradually," he said.

As talk of regulating carbon at the federal level with a comprehensive climate change bill ratchets up, Kemp said all types of power generating entities are weighing their compliance options carefully.

"It's a challenging time in the industry to be an executive or a decision maker. They are all looking for ways in which their options are for reduce their emissions. Plant optimization is one thing you can do for increasing efficiency in existing plants, and certainly everyone will be taking a look at that," Kemp said.

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