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Carbon Limits Will Help Fix a Broken Energy Market and Spur Economic Growth

Benefits of EPA’s Proposed Carbon Pollution Rule

SOURCE: AP/Kevin Wolf

EPA Administrator Lisa Jackson is interviewed by The Associated Press at EPA headquarters in Washington. The new carbon rule proposed by EPA would be beneficial, both in terms of health and for the clean energy economy.

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As the saying goes: When one door closes, another opens. That is certainly true of the Environmental Protection Agency’s proposed carbon pollution rule, which will finally shut the door on new coal plants polluting for free and open the door to more clean energy.

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Power plants that burn coal for electricity are not held accountable for the “hidden” health and environmental impacts they impose on society. Recent research published in the Annals of the New York Academy of Sciences estimates that these hidden impacts from coal-fired electricity, or “externalities”—such as land-use disturbance from mountaintop removal coal mining in Appalachia, the release of methane and mercury contaminants into our air and water, and the buildup of carbon dioxide in our atmosphere—cost the United States between $175 billion and $523 billion per year. Likewise, a National Research Council study placed the health costs from coal-electricity generation, including a rise in respiratory illnesses, at $62 billion annually.

These costs represent a textbook economic failure that will no longer be true for new power plants once the rule goes into effect. The rule will place the first-ever limit on carbon pollution for new coal-fired power plants, reducing their carbon output by 40 percent to 60 percent.

Further, with the appropriate set of policies in place, this rule can help drive investment in clean energy by leveling the playing field with artificially cheap coal, spurring economic growth and job creation in a new clean energy economy that grew at twice the rate of the overall economy during the peak of the Great Recession of 2007–2009, according to analysis by the Brookings Institution.

In this column, we will argue that the carbon rule corrects longstanding failures in the energy market, protects public health, and will spur economic development in a new clean energy economy.

Leveling the energy playing field

Coal has played a leading role in America, powering much of the Industrial Revolution and the economic growth of the past century. Just this past year coal was responsible for 44 percent of our nation’s electricity, although as mentioned in the previous section, this electricity comes with heavy hidden costs.

More recently, however, the total share of the United States’s coal mix in our electricity generation has dropped dramatically: The first quarter of 2012 showed coal having only a 36 percent share, down nearly 20 percent from the first quarter of 2011, according to new figures from the U.S. Energy Information Administration. While much of this decline is due to the increased utilization of natural gas plants, the trend is becoming clear that the “King Coal” era is ending, and the new carbon rule will continue a process that is already well underway.

Restricting new coal plants will not compromise reliability and prices

Conservative lawmakers and fossil-fuel interests argue that preventing new coal-fired plants from being built—that taking them "offline"—will increase electricity prices and decrease reliability of service. Fortunately, recent experience with the PJM Interconnection, the world’s largest competitive electricity market, has proven otherwise.

PJM is responsible for providing 51 million customers with reliable and affordable electricity through all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia, and the District of Columbia. To accomplish this, they hold a capacity auction, which ensures that there are sufficient electricity-generation resources to meet projected demand plus a little extra, called a “reserve margin.”

Essentially, the reserve margin means that PJM must have generation resources well in excess of the bare minimum of what would be needed to meet peak demand. This margin serves as a buffer so that electricity can be reliably provided even in a worst-case scenario where there is maximum demand and some system failures. In the most recent auction in May 2012, PJM exceeded their target of a 15 percent reserve margin by securing a margin of more than 20 percent.

This is noteworthy because PJM is showing that they can meet slowly rising demand without having to build new coal plants. Further, PJM plans for about 60 percent of all new electricity generation for their area in the next five years to come from renewable energy.

This tells us that PJM is increasing the market share of renewables while decreasing their reliance on coal, and that the result—contrary to what some would have us believe—is that this transition is occurring with increased reliability of service and lower prices.

In practice, the proposed carbon pollution rule could make the construction of new coal-fired power plants uneconomical. The typical new coal-fired power plant would have to reduce its carbon pollution by 40 percent to 60 percent; burning coal with this kind of reduction is only possible with expensive carbon-capture-and-storage technology that can add as much as 30 percent to operation costs. These new economic factors, which correct the free-polluting market failure of existing coal-fired power plants, would ultimately prevent the construction of 21 new pending power plants and would save 123 billion pounds of carbon pollution from going into the air annually.

Natural gas power plants, however, should be able to comply with this standard without additional controls. Although natural gas is very cheap right now and is likely to take the place of some coal in the near term, history has shown—and many analysts and industry experts have argued—that natural gas may not stay cheap or abundant for long and is subject to price volatility, making it very difficult to plan for as new domestic energy demand continues to soar.

With coal and natural gas potentially becoming more expensive, the carbon rule will therefore help level the energy playing field by creating an incentive for investors, utilities, and decision makers to break ground on new renewable energy projects such as wind and solar, whose fuels are completely free and unlimited.

Along the way, the United States can build new industries, jobs, and technical capacity to protect the recovering economy from further—and likely inevitable—shocks in the fossil fuel market. As Energy Secretary Steven Chu recently stated, “When it comes to clean energy, our motto should be: ‘Invented in America, Made in America, Sold Around the World.’”

Driving growth in renewable energy

Utilities know they still have to keep the lights on without new coal plants, and to do that they will need to solicit innovative new solutions.

The best place for utilities to start is with the practical alternatives already in existence—for which we need look no further than clean energy. Renewables, paired with investment in energy efficiency, can start to fill the energy void left by a phasing out of coal power plants while minimizing the health and environmental concerns from “externalities” such as pollution, avoiding the notoriously volatile price fluctuations of fossil fuels, and promoting economic growth.

As the demand for cleaner sources of energy grows in the coming years, the technologies that provide them will achieve scale and market parity, becoming fully competitive with fossil fuels.

But some pundits would genuinely have people believe they have to choose between prosperity and clean air, jobs and safety, and free markets and a responsible government. This idea, with all its attendant implications, is patently false. The next section will detail how investing in clean energy will spur new jobs, industries, and economic growth.

Taking new coal offline is no silver bullet for clean energy

The transformation to a clean energy economy won’t happen by itself. For starters, natural gas will likely be the primary replacement fuel in the short-term. To achieve true energy security and a cleaner future, however, we need to diversify our energy portfolio.

Market-correcting signals such as the new carbon rule should be paired with a strong set of policies that support investments in clean energy and energy efficiency. One such policy is a national clean energy standard, which would mandate that the country receive 35 percent of its electricity from truly renewable sources by 2035. This policy has been proposed by CAP and currently exists as various laws in 29 states and the District of Columbia (also called a renewable portfolio standard). With these conditions in place, we can expect to build the foundations of a clean energy economy that will outperform the fossil-fuel-based economy.

Further, as many are warning, renewable energy investment in the United States faces a steep drop-off in federal support in the coming years if important policies such as extending the production tax credit, investment tax credit, and the Treasury Cash Grant Program are not set in place.

Clean energy spurs economic growth

Increasing public- and private-sector investment in clean energy will lead to economic prosperity and create jobs. Back in 2009 the federal government invested $44.3 billion in the clean-tech market through the American Recovery and Reinvestment Act. With the global clean-tech market now worth $263 billion, this investment is helping kick-start U.S. economic growth and increasing our competitiveness internationally.

To illustrate: The Recovery Act investment in clean energy—which will amount to $150 billion by 2014—will leverage anywhere from $327 billion to $622 billion in public- and private-sector investment. This is a public-private investment ratio ranging from 2-to-1 to 4-to-1.

And the potential impact on jobs rates is promising: Every $1 million spent on clean energy investments creates 16.7 jobs, compared to those same dollars creating only 5.3 jobs in the fossil-fuel sector. Even during the height of the recession between 2007 and 2010, employment in clean-tech sectors grew by 12 percent. Further, the Recovery Act leveraged public and private investment such that by the middle of 2010 it had created or saved up to 3.4 million full-time equivalent jobs, boosted U.S. GDP by up to $520 billion, and reduced the U.S. unemployment rate by up to 1.8 percentage points, according to analysis by the Blue Green Alliance.

These jobs are distributed throughout the workforce. The table below shows that the employment created through clean energy investments beats out fossil fuel investment at every level of employment.

Breakdown of job creation

But this isn’t just about jobs. Part of bringing prosperity to America’s doorstep is doing the work in our backyard. For instance, there are more than 400 wind-related manufacturing facilities in the United States, and turbines located here currently boast 60 percent domestic content in the manufacturing and installation process. When investment dollars get poured into those businesses, they stay within our borders, keeping innovative industries and good jobs domestic. Additionally, there is the simple fact that new infrastructure, in the form of renewable generation facilities, will require American workers to build, operate, and maintain the facilities.

One-time investments in clean energy such as the Recovery Act, however, will not be enough to keep pace with the rest of the world. Already, other industrialized nations are pouring billions of dollars into renewable energy to gain a foothold in emerging markets and become exporters of clean technologies. They know the game: Whoever fails to invest and innovate will be left holding the bag of coal and will pay the asking price for clean energy down the line, forfeiting intellectual property rights and manufacturing dominance in the process.

If we don’t seize this opportunity, our competitors will. In 2011 China alone invested more than $45 billion in clean energy. The European Union was right behind, with Germany investing $30 billion, Italy investing $28 billion, and the United Kingdom investing $9.4 billion. India put $10.2 billion on the table as well.

Last but not least, requiring new power plants to reduce their carbon pollution creates opportunities for entrepreneurship. There will be entirely new sectors of employment that will be created to address the challenges that will pop up along the way. The brightest minds will be put to the tasks of innovating to solve new problems, of overcoming new barriers, and of creating new avenues for exploration.

We should not shy away from this grand challenge of reimagining and re-engineering a future in which new competitive and groundbreaking technology replaces old, inefficient, and antiquated modes of production. This is where Americans have historically shown their true spirit of innovation and problem-solving.

Conclusion

Our failure to accurately price the energy we consume has been a longstanding issue in the market, and it has led to the continued supremacy of fossil fuels even though practical alternatives exist. The carbon pollution rule will limit the amount of carbon that new coal-fired plants can emit, making new construction of these plants largely uneconomical. When the pending rules are final, the Obama administration should implement carbon-pollution reductions for existing power plants to help level the energy playing field even more and reduce the health and environmental costs associated with coal.

These important rules will help ramp up investment in clean energy and energy efficiency, which will create jobs, foster competition, and encourage domestic manufacturing.

In addition to reducing emissions, the United States should continue to invest in the development and production of clean and renewable alternatives to fulfill our energy needs. Proactive policies such as a national clean energy standard should be seen as the natural complement to emissions reductions. As demand for these clean technologies rises, they will reach market parity with conventional fossil fuels.

Protecting public health and the environment are top priorities for the Americans—and they will remain top priorities. Along the way, rewiring our economy for clean energy will create prosperity and growth that will ensure that future generations have a clean bill of health, as well as opportunities for success.

Adam James is a Special Assistant for Energy Policy and Jorge Madrid is a Research Associate at the Center for American Progress.

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