Read the full report (pdf)
The Lieberman-Warner Climate Security Act, S. 2191, sponsored by Sens. Joseph Lieberman (I-CT) and John Warner (R-VA), is a major leap forward in efforts to reduce emissions of carbon dioxide (CO2) and other greenhouse gases that cause global warming. It would establish a cap-and-trade program that would reduce U.S. emission of greenhouse gases by nearly 20 percent to 25 percent by 2020, and by 65 percent to 70 percent by 2050. The Senate should enhance and pass this legislation.
A critical step in meeting S. 2191’s targets is demonstration and deployment of technology that enables coal-fired power plants to capture and store their carbon emissions in underground formations rather than releasing them into the atmosphere. Rapid and widespread deployment of this carbon capture-and-storage, or CCS technology in new coal-fired plants would greatly reduce the carbon footprint of coal-fired electricity generation in the United States and developing countries such as China. This would preserve the viability of coal as an important energy source in a world that must constrain carbon emissions to combat global warming.
Without rapid CCS deployment, the future role of coal will become increasingly uncertain. If built, a new generation of uncontrolled coal plants would remain in service for several decades, emitting billions of additional tons of CO2 that would compromise our ability to achieve the deep reductions required under S. 2191. Investors may well be reluctant to finance these plants because of uncertainties in the future price of allowances and the large costs required to control their emissions at a later date.
Moreover, heightened opposition to new, uncontrolled coal plants could motivate utilities to turn to other sources of electricity generation. Storing and capturing the CO2 emissions of new coal plants from the outset would increase their acceptability to the public and provide greater certainty to investors. This would ensure that America’s coal reserves could continue to play a major role in our energy mix.
Incentives for CCS under S. 2191
S. 2191 contains a number of provisions to encourage CCS. While these provisions will help CCS deploy earlier than in the absence of subsidies, a careful analysis demonstrates that they will achieve less deployment than is possible, and at a higher cost than is necessary. More effective and less costly would be an emission performance standard for all new coal plants based on the current CO2 capture capabilities of the best available CCS technology.
In conjunction with this standard, Congress should provide subsidies to accelerate CCS deployment and offset its increased costs. This two-fold approach was first described in “Global Warming and the Future of Coal.” The combination of assured financial support for new coal plants with tight emission standards would provide a secure path forward for coal-fired electricity—even with increasingly stringent limits on CO2 emissions.
S. 2191 does not have a performance standard that would require new coal plants to install CCS, or achieve equivalent reductions. Instead, it uses a variety of financial incentives as inducements for CCS adoption. One such inducement, embodied in Title III, is to award “bonus allowances” to plant owners who capture and store their carbon emissions. A second inducement, embodied in several provisions of Title IV, is to provide direct financial support to CCS demonstration and deployment projects, drawn from the proceeds of annual auctions of emission allowances under that Title.
These measures—bonus allowances and direct financial subsidies from auction revenues—would provide markedly different levels of assistance to plant developers, reflecting different premises about how best to spur CCS deployment.
The bonus allowance program in Title III would award free allowances to plant owners starting at a rate of 4.5 allowances for each ton of CO 2 captured and sequestered, with the bonus allowance rate diminishing over time to zero in 2040. Four percent of all allowances would be set aside for the program, and individual plants would receive bonus allowances for the first 10 years of operation.
The formula for subsidizing CCS under Title IV varies across provisions. Of most interest is Section 4403, which creates a program to stimulate CCS deployment. Under this program, grants would be provided that cover the incremental costs of building and operating a CCS plant as compared with a conventional uncontrolled coal plant.
The incentives in Section 4403 are based on a formula similar to one proposed in our previous report, “Global Warming and the Future of Coal.” That paper argues that subsidies would complement a new source emission performance standard by encouraging investment in new coal plants, protecting consumers and businesses in coal-dependent regions from undue energy cost increases, and preventing a decline in coal mining employment. However, we recommend that such subsidies only seek to offset the higher costs of building and operating new coal plants with CCS, not confer additional financial benefits on plant owners.
Comparing the Bonus Allowance and Performance Standard Subsidy Mechanisms
This paper presents a detailed analysis of the cost-effectiveness and over- all impact on CCS deployment of the bonus allowance and incremental cost (performance standard) subsidy mechanisms. It concludes that the latter approach will result in greater deployment of CCS at a lower per plant cost but only if an emission performance standard is adopted to require CCS at all new coal plants—as proposed in our May 2007 paper. This is because an emission performance standard will eliminate the need to pay plant developers a sizable premium to choose CCS over conventional coal combustion technology.
In comparing the two approaches, our analysis examines two allowance-price scenarios. The first is a low price scenario (similar to the Environmental Protection Agency’s carbon price projections for S. 1766 and S. 280 ) that assumes the cost of allowances begins at $12 per ton in 2012, increasing by 50 cents per year until 2016, and then by $1 per year thereafter to $30 per ton in 2030. The second is a high price scenario (corresponding closely to the EPA carbon price projections for scenario 10 in S. 2191). It assumes that the cost of allowances is $17.50 in 2012, $23.50 in 2016, $32.50 in 2022 and $46 in 2030.
Methodology for Comparing the Two Approaches
To determine the value of the bonus allowances, we first calculate for each year from 2012 to 2030 how many plants would be eligible to receive these allowances before the 4 percent ceiling is reached (see Appendix beginning on page 21). To determine the value of the allowances available for each year, we multiply the total number of allowances in that year by 4 percent and then multiply that amount by the price of the allowances in the year under each scenario. For plants that begin operation in 2012 and 2022, when each 10-year period starts running, we then calculate the total value of the bonus allowances that each plant would receive as well as the total value of the allowances for all plants.
We do a similar calculation to determine the cost of an incremental cost subsidy like the one in Title IV and our performance-standard proposal. To make this calculation, we first assume that the cost differential between CCS plants and conventional coal plants (including both construction and operating costs) is $45 per ton for plants that begin operation in 2016 (the first year when the performance standard would be in effect under our proposal), $38 per ton for plants that begin operation in 2021, and $30 per ton for plants that begin operation in 2026.
We then on a yearly basis multiply the price differential for the specific plant ($45 per ton for plants that go into operation between 2016 and 2020) by the number of tons captured, and subtract from that number the cost that a non-CCS plant would incur in that year to purchase allowances under the two price scenarios.
We next assume that 10 gigawatts of new plants will go into operation for each year from 2016 to 2030 and calculate the total subsidy in each year. For each plant, we calculate the total value of subsidies from the date the plant goes into operation until 2030.
These calculations enable us to compare the value of the bonus allowances and performance standard subsidy on a per plant basis and on an aggregate cost basis. This analysis shows that the bonus allowance program would result in substantial windfalls to plant developers. In the case of scenario 2, the windfall would be well above even conservative estimates of the per ton incremental costs of building and operating plants with CCS.
Overview of Key Findings
In sum, the key findings of our analysis are:
- Bonus allowances issued from 2012 (when the program begins) to 2030 would be worth a total of $68.6 million under our scenario 1 and $110 billion under our scenario 2.
- Between 2012 and 2028, the bonus allowances would subsidize only 38 GW of coal-fired plants with CCS, with an additional 10 GW becoming eligible for allowances in 2029 and 2030. Thus, bonus allowances would be made available to only a third of the 145 GW of new coal plants projected by DOE to be built during this period.
- The bonus allowances would provide subsidies of between $2.8 billion (scenario 1) and $4.6 billion (scenario 2) to some plants. In the latter case, this would be far more than the cost of constructing a coal plant with CCS.
- If allowance prices turn out to be greater than estimated, the value of total bonus allowances issued would increase as would the amount of the subsidy for each plant.
- Under the performance standard approach, the cost of the subsidy for 150 GW of new coal capacity between 2016 (when the performance standard would go into effect) and 2030 would be $95.9 billion (scenario 1) and only $28.7 billion (scenario 2).
- Thus, for a cost of 40 percent more at a low allowance price(scenario 1) and almost 4 times less at a high allowance price (scenario 2), the performance standard incentives would subsidize three times as many CCS facilities as the bonus allowance approach. In other words, the bonus allowance system would provide much larger benefits to many fewer plants.
- Comparing the size of the subsidy on an individual plant basis from 2012 to 2030, the bonus allowance approach would be between 1.7 times (scenario 1) and 6 times (scenario 2) more expensive per GW than the performance standard approach for plants that begin operation in 2012 and 2016, respectively, and between 4.5 and 9.6 times more expensive for plants that begin construction in 2022.
- Bonus allowances also provide far greater monetary benefits per ton sequestered than the performance standard subsidies. For example, in 2012, the bonus allowances are worth 80 percent more per ton under scenario 1, and three times as much under scenario 2. In 2020, the value of bonus allowances per ton is more than twice as great as the subsidy under scenario 1 and over seven times greater for scenario 2. This is another telling measure of the windfall provided by bonus allowances when compared with the actual incremental costs of a CCS plant.
- Under the performance standard approach, the cost of the subsidy would drop if the price of allowances increased or the price differential between plants with and without CCS decreased because of improvements in technology.
Why Are Bonus Allowance Costs Higher?
The principal explanation of the dramatic cost differences between the two approaches is that the bonus allowance program pays a generous premium to plant developers whereas the incremental cost subsidy does not. Where controlling carbon emissions from new coal plants is optional, such a premium would be necessary to overcome the non-price barriers to building CCS plants.
These non-price barriers include the risks of investing in a technology of uncertain cost and effectiveness as compared to a proven technology with known cost and performance characteristics. In an industry as cautious as the power industry, such non-price barriers are likely to be substantial. This would slow down the deployment and commercialization of CCS technology.
Non-price barriers, however, would no longer come into play if, as a result of an emission performance standard, CCS (or an equivalent level of emission control) were required for all new coal plants and, thus, construction of conventional uncontrolled plants no longer remained an option. With such a standard in place, there would be no need to offer a financial premium to persuade plant developers to choose CCS over conventional coal technology. This would speed the development of CCS.
In sum, if the goal is to spur the largest possible number of coal plants with CCS at the lowest overall cost in the shortest amount of time, the best approach is an emission performance standard for all such plants, coupled with the use of allowance auction proceeds to cover the incremental costs of building plants with CCS.
The current provisions of S. 2191, by contrast, would result in substantially fewer CCS plants built at a higher cost. Additional coal plants either would not be built because bonus allowances are unavailable to finance CCS, or new plants would be built without controlling their CO2 emissions, which would magnify the task of achieving substantial emission reductions overall from all sources.
In addition, if current state and community opposition to new coal plants persists, plant developers who are unable to obtain bonus allowances may simply turn to different fuel sources altogether rather than bear the additional costs of CCS themselves.
Adding to the Distribution of Free Allowances Through the Bonus Allowance Program
There are additional consequences of indirectly subsidizing CCS through free allowances as compared with using auction revenues to provide direct subsidies. Both approaches confer financial benefits on utilities. Allowances can be monetized by selling them in the credit-trading market. In this sense, free allowances are no different from direct subsidies. However, under S. 2191, the value of the bonus allowances could far exceed the incremental cost of constructing and operating a new CCS plant, and the excess revenue from these free allowances could be used to offset the emissions of existing plants. This would allow utilities to delay or avoid emission reductions that the coal plant fleet would otherwise need to achieve as the annual emission cap declines.
In addition, unlike direct subsidies, bonus allowances would augment the allocation of free allowances to utilities, enabling them to purchase fewer allowances through the auction process and reducing auction revenues as a result. This shortfall would need to be rectified—either by burdening other regulated entities with higher allowance purchase costs or by increasing the percentage of allowances sold at auction and reducing the number given away for free. In contrast, direct subsidies from auction revenues would not alter the relative proportion of allowances that utilities and other sectors receive for free and purchase at auction and, as a result, would not distort the allowance allocation process.
CCS Incentive Provisions in Lieberman-Warner Title IV
While the direct subsidy approach in Title IV is preferable to the Title III bonus allowance program, the current CCS incentive provisions in Title IV are unwieldy and could benefit from reworking. Sections 4402 and 4403 contain five different programs to provide assistance for demonstration and deployment of CCS. These programs are funded at different levels and establish different eligibility and performance criteria for CCS projects but do not have clearly differentiated goals.
To reduce redundancy and confusion, the various CCS provisions in Subtitle D of Title IV should be simplified into two programs. The first program would focus on subsidizing large-scale CCS deployment after an emission performance standard takes effect. This program should receive 80 percent of total CCS funding and should provide sufficient revenue to support 150 GW of new coal capacity as well as the retrofit of many existing plants.
The goal of the second program, which would receive the remaining 20 percent of CCS funding, would be to encourage research and development for new capture-and-combustion technology at coal plants, as well as CCS pilot and demonstration projects for these new technologies, and testing of sequestration sites. With these programs in place along with an emission performance standard, the Title III bonus allowance program would be redundant and could be eliminated.
Our analysis shows that the current CCS provisions in Title IV would provide more than sufficient funding for these two programs. Under Title IV, CCS would receive approximately 45 percent of the auction proceeds that would flow into the Title IV Technology Deployment Program, which would in turn be allocated 52 percent of total auction proceeds. Funding of these CCS provisions would increase over time because auction revenues would grow as the percent of allowances auctioned and the market price of allowances increase.
We estimate that between 2016 and 2030, the CCS incentive provisions would receive in the range of $149.2 billion under the lower allowance price scenario 1, and $237.8 billion under the higher price scenario 2. This is substantially greater than the predicted price tag under these scenarios of $95.9 billion and $28.7 billion, respectively, to subsidize the incremental costs of 150 GW of new CCS capacity over the same period.
Thus, it would be possible to use the auction revenues not only for CCS deployment at new plants but for CCS retrofits at existing plants as well as a subsidy program for early demonstration projects, sequestration site testing, and R&D.
In the pages that follow, we present a more detailed cost analysis of both the bonus allowance provisions of S. 2191 and the performance standard/incremental cost subsidy approach—alongside a complete explanation of our recommendations to ensure the Lieberman-Warner bill achieves the greatest deployment of CCS technology at the lowest possible cost as soon as possible.
Read the full report (pdf)