No Magic Price Point for Kicking Carbon

A visitor to this site asked, “Do you have analysis saying at what price on carbon the economic dispatch charge for coal will equal and exceed that of other electricity- generation sources such as wind?” Here’s our reply, co-written with our Washington, DC rep, James Handley.

The carbon price level for breakeven isn’t one number, but a continuum.

Start with the demand side: with just a modest carbon emissions price, many steps to improve energy efficiency become more attractive. But the more costly ones obviously require a higher expected price.

Consider driving. There are an almost infinite number of ways for individuals to burn less gasoline. They range from buying a less-gas-guzzling car (which itself occupies a continuum: miles-per-gallon varies across the spectrum of available autos, and drivers can accelerate scrapping their current car for a more-efficient one), to driving less consumptively, driving less (by taking transit, walking, cycling or carpooling), and simply traveling less (by taking fewer and/or shorter trips).

critical_mass_vancouver_sockeyedGasoline use for driving is socially determined as well. Actual and expected gasoline prices strongly affect the choices available to us as individuals and how we relate to them. Decisions to forego discretionary trips — to the faraway mall, soccer game or social occasion — that can appear selfish or bizarre when gas costs a buck-fifty, become more socially acceptable when the pump price hits three dollars. Similarly, rising fuel prices help shift car manufacturers’ engineering and marketing decisions toward fuel conservation. Ditto for voters’ support of local and national governments’ funding of transit and so-called liveable streets.

There is no magic fuel or carbon price threshold at which these changes kick in (and below which, they don’t). This isn’t to deny tipping points. Indeed, we hinted at them just above. But fuel use is so varied and diffuse that there’s a spectrum for tipping points as well as for individual decisions. The carbon price that leads one car manufacturer to push fuel-efficiency to the fore will be different for its competitor, and similarly for transit providers, not to mention the cultural forces that bear so heavily on driving and other energy uses.

The same applies to the supply side, as illustrated by wind power. Wind farms at the choicest sites kick in at a fairly low carbon price. Indeed, the rapid rise of wind-powered generation — it accounted for 1.8% of U.S. electricity output in the first quarter of 2009 — attests to wind power’s steadily improving economics, although the federal Production Tax Credit, now 2.1 cents per kWh of wind output, obviously plays a critical role. According to the American Wind Energy Association, wind farms at high-wind sites are generating at 5 cents per kWh, just a bit above the average “all-in” cost of coal-fired power. On the other hand, falling prices of natural gas recently prompted T. Boone Pickens to delay his highly touted plan to build giant wind farms in Texas.

The point is that wind farms’ generation costs traverse a very broad range. Equally important, so do the costs of the existing coal-fired generators that the wind plants are intended to displace. Rather than operating at a single average cost, the U.S. coal plant fleet generates at a wide range of costs depending on plant efficiency, age, fuel supply and even the hour-to-hour loading level on the individual plant.

Accordingly, we should visualize wind’s capacity (and, solar plants’ as well) to displace coal- and gas-fired generation, not as one “bar” on a graph straining to inch out another, but as a series of curves that will cross and re-cross at thousands of points. The higher the carbon price, the more points at which the renewable sources will undercut the traditional fossil-fuel sources.

Finally, the same will also apply to carbon capture and sequestration. Should it ever prove technically feasible on the large scale required, the costs of CCS will not be one number but a range, due to the influence of site- and process-specific costs.

The takeaway: there’s no market-clearing carbon emissions price to usher in some “breakthrough” and kick fossil fuels into history’s dustbin. A steadily— and predictably — rising price on carbon will do the trick. (To see how far and fast, download our Carbon Tax Impact Model and plug in your own carbon price.)

Photo: Flickr / Sockeyed.

Comments

  1. Dan says

    Charles and James,

    Good heavens; if someone were to ask you what the typical price of potatoes is in the market, (s)he probably isn’t asking for a discourse on agricultural economics. While such a discourse may be valuable for some, a good answer would at least mention a typical price, or typical range of prices, one might expect to have to pay for spuds.

    The question was about coal vs wind. The questioner probably wants to know whether the carbon dioxide emission price (on a dollar per tonne of carbon dioxide basis) required to promote a major shift away from coal (i.e., not a 100% shift, but not a trivial shift either) is likely to be on the order of $2, $10, $20, $50, $100, or whatever. Why not give him/her an answer that’s useful?

    Currently, wind power development has two major government-provided incentives. The first is the production tax credit of about $20 per megawatt-hour (MWh); or $0.02 per kilowatt-hour.

    The second incentive is the requirement in many states for a certain fraction of electricity to be provided by renewable sources in the coming years. The economic cost of meeting this requirement can be approximated by the price of marketable renewable energy credits (RECs). A typical price of RECs in areas where they can be used to fulfill state mandates for renewable power is in the neighborhood of $20-$25 per MWh.

    Without both of these two incentives or some other comparable incentive, wind power project development tends to slow down dramatically. So, we can reasonably estimate that, under current conditions, an incentive in the $40 to $50 per MWh range is needed to promote a large-scale shift to wind.

    Put another way, coal-fired electricity typically sells at about $50 per MWh and it costs about $100/MWh to generate power from wind and make a decent profit (the cost figures in the AWEA links you give are out of date, not typical, or just plain wrong).

    Generating electricity from coal causes the emission of about one tonne of carbon dioxide per MWh. Certainly, there is variation caused by differning plant efficiencies, type of coal used, etc. But one tonne is a good enough estimate for a short answer to your questioner. For reference, the average carbon dioxide emission rate for the entire US electric power industry is about 0.6 tonne carbon dioxide per MWh.

    If wind needs a $40 to $50 per MWh incentive to compete effectively in typical power markets, and if coal emits about one tonne of carbon dioxide per MWh, it follows that a carbon dioxide emission charge of $40 to $50 per tonne of carbon dioxide will put wind power prices in the same ballpark as coal-fired electricity (assuming no other financial incentives). To the extent that the production tax credit and/or RECs remain in effect, the breakeven price of carbon dioxide emissions would be lower than the range I give.

    Sure, there is some wind power that is competitive when the incentives are less than given above; and some wind projects will never make it in the market. But at least we know that the carbon price (or other incentives) will have to be a few tens of dollars per tonne and it won’t have to be $100 per tonne in order to cause a substantial shift away from coal.

    From figures I have seen, solar thermal will require incentives of about $30 per MWh greater than the incentives needed for wind.

  2. Robert says

    The author here mentions T. Boone’s natural gas pitch as a source for wind power development.

    And Hansen mentions natural gas here:
    http://www.carbontax.org/blogarchives/2009/07/09/g-8-failure-reflects-us-failure-on-climate-change/

    90% of the sources of natural gas in the U.S. are energy- and water-intensive huge GHG emitters.

    Does anyone know whether Hansen’s mention of shale at the link here above is for unconventional gas drilling like that threatened in the Marcellus and other shale formations from New York State south? Clarification would help us understand the climate dimension of life-cycle GHG emissions of gas drilling often touted (by NRDC and Sierra Club) as a ‘transitional’ fuel.

    I ask because Hansen writes:
    “The essential step, then, is to phase out coal emissions over the next two decades. And to declare off limits artificial high-carbon fuels such as tar sands and shale while moving to phase out dependence on conventional petroleum as well.”

    but he also writes:

    “Tar sands and shale would be dead and there would be no need to drill Earth’s pristine extremes for the last drops of oil.”

  3. David Collins says

    The next-to-last sentence in the last paragraph of “No Magic Price Point for Kicking Carbon” is the most relevant. As Samuel Johnson said (before Mark Twain), “The prospect of being hanged focuses the mind wonderfully.” Similarly, “A steadily— and predictably — rising price on carbon will do the trick…” of focusing attention on reducing CO2 emissions. (Personally, I wish that more folks would realize that rising CO2 emissions are definitely an equivalent to what Samuel Johnson & Mark Twain hold as a mind focuser.)

    Separately, I have read comments “ad nauseam” about how the Waxman-Markey bill is better than nothing, and we should not let the perfect be the enemy of the good. I disagree completely.

    First, even a well designed and implemented Carbon Tax cannot be a complete solution to the climate crisis; it is good, but far from perfect. The Waxman-Markey bill is simply and completely inadequate. If you need to get to a window 20 ft high and you have a 10 ft ladder, holding out for a far longer ladder is not letting the perfect be the enemy of the good, because the 10 ft ladder is no dam’ good whatever for the task at hand. Pretending otherwise is merely being delusional.

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Last modified: July 25, 2009