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Can Emissions Trading of Carbon Dioxide Bootstrap the Transition? MICHAEL J. WALSH Environmental Financial Products LLC If I could question a roundtable of social scientists, physical scientists, and technologists, the first thing I would ask them would be what we have allowed ourselves to get into on this planet. We are facing major environmental problems that are going to take real collaboration among all of these groups, demanding new technologies, and scientific breakthroughs to solve. Emissions trading can not only “bootstrap” the transition but can also accelerate it, making it more acceptable to the public and to the political organizations we all work with. Trading in markets is really the only logical mechanism for efficiently orchestrating all of the available mitigation options. Economic efficiency is not just a luxury or a background concern; it is of major importance. As we start this transition, the public will demand that we do it intelligently—that we not waste resources and that we use the resources we have wisely. Many decades from now, trading will continue to be the management mechanism we use to slow down our depletion of the planet’s carrying capacity for climate change. Why? First, I believe the pricing mechanism will ensure that we never run out of fossil fuels. Second, it will be more than a hundred years before we reach the point when the net value of fossil fuels is negative. Even though we are beginning to realize that the net value of fossil fuels is substantially lower than we thought it was because of negative externalities, I assume that fossil fuels will continue to be used and, at the same time, that the optimal level of greenhouse-gas emissions is not zero. Earth has a finite absorptive capacity, a finite carrying capacity. Nevertheless, a hundred years from now, we will still have to restrain and manage the release of greenhouse gases, and markets are a logical and proven mechanism for doing so.
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In this paper, I explain what emissions trading is, why it is desirable, what our experience has been with it, and the steps we are initiating to build institutions to support emissions trading for greenhouse gases. It usually takes about 30 years for a problem to be identified, for capital to be dedicated to the problem, and for markets to be initiated and reformed until they are mature and in a liquid state. With greenhouse gases, we are about 10 years into that process. Ten years from now, we may have reasonably functional markets. Twenty years from now, emissions trading will be routine. And that’s what we want it to become, a routine part of business—not particularly costly and not difficult to maintain. This conviction is based on my philosophy and my educational background. I was trained as an economist, and I spent some time in the academic world and some in the U.S. Treasury Department. I then joined the Chicago Board of Trade, which, in the early 1990s, was exploring opportunities for new markets and initiated a partnership with the Environmental Protection Agency (EPA) to help administer the auction mechanism as part of the sulfur dioxide (SO2) trading program. The colleagues I have worked with since 1995 have been active for several decades in designing, building, and trading in new markets. We have experience in the agricultural, financial, energy, and now emissions markets. In fact, we have done several greenhouse-gas trades, and nearly all of them have been exports from the United States to other countries. This may turn upside down the idea that the United States is the high-cost producer of mitigation services. Social scientists and economists tend to have a unique point of view on environmental issues. To economists, a stable climate, or protecting against climate change, can be considered a public good, and public goods have several common characteristics. First, they are “nonrival,” that is, one person’s enjoyment of a stable climate does not take away from another’s. Second, a public good is nonexcludable. One person can’t prevent another from having access to a stable climate or from protection against climate change. These fundamental characteristics are very different from the characteristics of private goods, when one person’s consumption takes away from another’s and people can be excluded. With public goods, the economy often yields what is termed a “market failure,” that is, the market fails to provide the right amount of a good or service, in this case, a stable climate. A market failure that damages local commons or global commons is often considered a rationale for a coordinated response, which is often thought to be most effective when taken by a government. But many of the organizations we work with that pursue common actions are associations of like-minded individuals or like-minded entities rather than governmental entities. In a way, they reflect the club theory of activity. People decide they will govern themselves, their own group, and they form their own municipality, such as their own tennis club or their own local orchestra. Like-minded individuals come together for a broader good.
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The larger problem when dealing with a public good, particularly management of Earth’s climate, is that until now, we have not put a price on its use. We have implicitly said that people could use as many resources as they like and release as much greenhouse gas as they see fit. Because no one was paying a price to consume the resource, no concerns were raised. Naturally, when the price for a resource is zero, the resource will be overused. We’ve mispriced our resources, so we have overused them. As a result, the concentrations of greenhouse gases in the atmosphere have escalated to the point that they now threaten the stability of the planet. Overuse is common for many aspects of climate and resources. A very tragic example is the world’s fisheries, a global common resource. With some very important exceptions where trading instruments have been used effectively to manage the resource, we have not sufficiently restricted access to fishing stocks. Other examples of overuse are easy to find—in our air and water resources and our land-use resources. The local, regional, and global commons have been grossly damaged by our failure to put a proper price on them and to build restraint into the system. Early in the last century, a well known economist, Arthur Pigou, said the problem was that the price was too low and that we should put a tax on polluting activity—either on the manufacturer or on the product so that there would be less pollution. This does not mean we have to drive every harmful activity to zero. That may be necessary sometimes—with lead pollution, for example—but usually simple restraint is enough. The general rule is: the price is too low and we have to restrain the activity, so let’s put a tax on it. The tricky part is that taxes raise all sorts of fiscal and revenue questions. On an administrative basis, it’s very difficult to determine the level of tax that would get us back to the desired level of activity. Using taxes to restrain and reduce pollution has proved to be a bit too tricky. In fact, taxes have not been pursued as aggressively as they might have been. But, eventually, pollution taxes will probably become part of the mix of tools we will have to use. In the 1960s, Ronald Coase at the University of Chicago, who was awarded a Nobel prize, argued that common resources should have property rights— ownership shares or some sort of private ownership. In the case of pollution, for instance, the parties closest to the problem—the recipients of the pollution and those who cause it—could effectively negotiate an efficient, effective solution to the problem. This could happen, provided that there are rights in clearly divided shares to the property and that the transaction costs are not too high. The idea is that, if somebody owns the resource, better care will be taken of the resource than if it is owned by everyone but taken care of by no one. Based on Coase’s idea, we could approach our environmental problems on a property-like basis. In the 1970s, an attempt was made to institute a tradable-permits regime in big U.S. cities and industrial areas. The early trials of this ad hoc trading mechanism were quite clumsy, the instruments were poorly
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defined, and the transaction costs were very high. Gradually, we evolved a more commodity-like market, with clear ownership, clear definitions, and low transaction costs. We are now working in the American Midwest to build the institutions to make emissions-trading markets for greenhouse gases a reality. The economic rationale for emissions trading is that it provides flexibility so emissions can be cut at lower cost. Cost effectiveness is important because, if we spend more than is necessary to address a problem, we take away resources from other pressing issues. The idea is to use our scarce resources wisely. The philosophical rationale is that emissions trading works with businesses. It makes cutting pollution less of a problem and more a part of ordinary management routine. On the macrolevel, an emissions-trading program should provide price signals so that low-cost mitigation options are pursued first, and those who face higher costs can contract with others to meet some of their commitments. Markets produce price signals that indicate the real costs of achieving an objective. In Washington, D.C., this aspect of emissions trading is especially important. Instead of lobbyists arguing endlessly over the cost of achieving an environmental objective, the market can give us a much clearer answer. Over time, emissions trading will lead to innovations that will lead to dynamic efficiency. Those who create mitigation options and techniques will be rewarded as environmental protectors. That is the right way to shift the balance. How does emissions trading work? First, we determine how much of a particular pollutant an ecosystem can tolerate, and we set an overall target. By defining the target, we turn the resource into a limited property. Second, we divvy up the shares, establishing ownership rights to the property, called an “emission allowance.” Third, we require that the emission sources be monitored according to standards and that the emission levels be reported on an ongoing basis. Then we allow emission allowances to be transferred among those who find it advantageous to do so. Finally, we have an annual “true-up.” At the end of the year, participants must surrender to the market administrator enough certificates (emission allowances) to cover the emissions they have released during the year. The overall idea is that those who can cut pollution at the lowest cost will do more of it. Those who face a higher cost to cut pollution will outsource, that is, somebody else will make the reductions on their behalf. This way we will find a smarter, more efficient way to use mitigation resources. Emissions trading is appropriate when emissions come from many sources— SO2 and many other pollutants and greenhouse gases. The common problem in the current situation is the increasing concentration of greenhouse gases and the risks of climate change. We can define and monitor the reduction objectives. We know what the levels should be in the long term, and various global conventions have agreed on an intermediate goal of stabilization at a rather high level of greenhouse-gas
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concentrations (e.g., doubling of the preindustrial levels). To get the market going, we must define near-term objectives. The economic advantages of emissions trading arise when there are differences in mitigation costs among emission sources and mitigation projects. In other words, some sources face high costs to cut emissions, and others face low costs to cut or mitigate emissions. Under these conditions, trading between these two entities can offer opportunities for gains. The question is whether we can enforce limits on greenhouse gases while maintaining other environmental protections. The emission of greenhouse gases is not an isolated problem. Indeed, in the acid rain program, there was great concern that trading of emission allowances would cause local pollution hot spots. To prevent them, we continue to apply the national ambient air quality standards for local air quality. Whether we do that well enough is an open question. Emission-allowance trading can only work within certain limits; we cannot allow violations of ambient air quality standards. Finally, for emissions trading to work, there must be a reasonably functional legal and business environment; capable institutions must be in place. Many countries simply do not have these institutions, so it will be necessary for them to evolve further before they can support emissions trading. The United States first made a rather clumsy attempt to initiate emission trading in the 1970s, with some perverse results. In the 1990 Clean Air Act, the first Bush administration signed into law a program calling for a 50-percent cut in SO2 emissions. SO2 and nitrogen oxides (NOx), pollutants associated with acid rain, harm forests, streams, and lakes, as well as human health and infrastructure. The 50-percent cut, which was to be phased in over time, was implemented through an emissions-trading program. The success of the program makes it a benchmark and a reference point for many other emissions-trading proposals. The main goal was to cut SO2 emissions from power plants from 18 million to 9 million tons per year. When we divided the shares to create the emission allowances, some were allocated based on political considerations and some were allocated neutrally. Political considerations did not adversely affect the environmental outcome. The law stipulated how the power companies must monitor and report emissions. Then industry was allowed latitude in the methods, locations, and timing for cutting emissions. I have stacks of records documenting the naysayers. In 1992, when I was on the Chicago Board of Trade staff and we struck a partnership with EPA to run the annual auction, we spent a lot of time educating industry and regulators about the program. The media skewered the idea, and the trade publications said it was wrong and that it simply could not work. But the program is a complete success, with 100-percent compliance. There has not been a single material violation of the program, trading has been active, and the economic outcomes have been efficient. But first and foremost this is an environmental program, and we have made major progress. In the very early
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years, the U.S. Geological Survey found immediate reductions in the acidity of precipitation in the most severely affected part of the country. Progress has continued as the level of allowed emissions continues to come down. New York State had rather high sulfur deposition rates before the program began but substantially lower rates after implementation. The Appeals Court there has now thrown out an effort to restrict the sale of emissions allowances from New York to so-called upwind states. Depending on weather conditions, upwind could have been defined as Florida or Maine. In reality, the flow tends to be west to east. Nevertheless, the Appeals Court ruled that restricting the sale of emissions allowances would constitute interference with interstate commerce. The naysayers said the huge pollution sources in the Ohio River Valley region would just buy allowances from other places and continue to pollute. And some of that has occurred. But there simply are not enough allowances in other states to allow the Ohio River plants to avoid making reductions, and they have made major cuts. In fact, the program is working quite well. From an economic point of view, the market outcome has been fascinating. The consensus prediction in the early 1990s was that the cost of cutting SO2 would be in the range of $350 to $1,000 per ton. Fearing that the price might climb too high, Congress established a set-aside pool of allowances for independent power projects at $1,500 a ton. Some people believe that this might be the eventual market price. In the 10 years of auctions at the Chicago Board of Trade, the price has averaged $135 a ton. This means that the annual costs of cutting sulfur emissions by half from power plants is in the range of $1.2 billion a year, less than 1 percent of production costs for electricity in this country. In other words, with a 1-percent cost increase, we have cut acid rain by 50 percent. In the context of estimated benefits ranging from $10 billion to $30 billion a year, that’s a mere blip on the screen. But in terms of market trading, it’s a 10:1 to 30:1 leveraged trade. That’s a good trade, the kind of trade we should be trying to make whenever possible. Some people find the idea of trading in pollution confusing. But some of the best trades in this market were made by a group of 12-year-old middle-school children from Glens Falls, New York. They pooled their funds to come up with $3,000 to buy up emission allowances at auction. The next year, several middle schools in the area formed a syndicate and pooled $21,000 of their own money, earned from bake sales, rock concerts, auctions, and similar activities. They bought a whole bunch of allowances at $66 apiece. On average, they have doubled their money, and their success has given us the best ammunition in the world. If someone on Capitol Hill suggests that the program isn’t logical or isn’t working, we can bring some of these children before Congress to defend their property rights. This exciting, successful program is our model, a proven example, a proven technology, a market technology. The economist Joseph Schumpeter described three phases of the inventive process. First, there is the invention. One might say the early emissions-trading
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trials were the invention of that concept. The second stage is the standardizing and commodifying of the innovation. For emissions trading, this occurred when trading was made easy, lowering transaction costs. We are now in the third phase, the imitation and replication stage. Now we want to take this technology, this market tool for managing pollution, and replicate it and extend it to other pollutants. I’ve been working on greenhouse-gas trading full time for about 7 years, and I’ve spent 12 years working with emissions trading generally. Regrettably, progress has been limited and very slow. It seems that government structures, particularly multilateral structures, have a very difficult time building new market institutions. To address this problem, we asked the Joyce Foundation of Chicago to study the feasibility of starting a greenhouse-gas reduction market on our own. The study indicated that this could work; we would have to have self-regulation, which is possible. This may not be the ultimate answer, but it would certainly be a step in the right direction. We then asked private-sector companies if they needed such a market. The idea was that, if there were half a dozen entities—a few power companies, an oil company, some farmers and foresters and landfill gas collectors—we could create a small test market, a voluntary pilot program. We invited about 60 or 70 potential participants, and many said they would be interested. Based on their interest, we formed the Chicago Climate Exchange (CCX), a voluntary, pilot, greenhouse-gas trading program for emissions sources and offset projects in North America. We also want to experiment with an international mechanism by having offset projects in Brazil. Our first objective is proof of concept; we want to prove that a greenhouse gas cap-and-trade mechanism, like the SO2 program, can work and can be supplemented with individual projects, such as sequestration and other small mitigation projects. Our second objective is to develop market infrastructure and skills. We expect it will take several decades to get it right. Third, we want to use the price information as a basis for future programs. We want to know what it costs to mitigate greenhouse gases. The CCX will provide real market information from actual mitigation activities. We want to provide a modest, but predictable, greenhouse-gas reduction schedule and start the process. We want to start small because we believe we can’t start too big. The United Nations (U.N.) cannot tell us how to set up a market. The U.N. may be a beautiful mechanism for getting agreement, but the people who know how to set up markets are in the private financial and industrial sectors. They are the ones who should take the lead. Currently, there is an inchoate market in greenhouse gases. Our company has been involved in half a dozen international trades, but the instruments and the commodity are not well defined, and transactions costs are very high. There are more lawyers involved than financiers, and that’s a bad sign. We want to standardize trading in greenhouse-gas reductions, to make them routine and easy, and
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to liquefy the market so the capital market can work. Once resources can flow freely and actively, we will have the financial leverage to solve the problem. The steps that we propose for standardizing and routinizing and liquefying the market largely mimic the steps that have been taken in other commodity markets. We are also proposing reduction schedules, starting with a 1998–2001 baseline because we have emissions data for those years. We agreed that the reductions will start at 1 percent below baseline in 2003 and will fall 1 percent per year thereafter. CCX will be a four-year pilot program and is designed to bring in new emissions sources. We think we have some reasonable and balanced ways to do so. We were looking for half a dozen entities to lead the way in establishing a greenhouse-gas market; we have found them, and many more, which is an indicator of the demand for action on this front. There were 14 founding members of the CCX—and it continues to grow—representing 250 million tons of carbon dioxide (CO2) emissions, equal to half the emissions in all of Canada. The founding members include diverse energy, manufacturing, and service sector entities, several with global reach. The initiative has already spread beyond industrial sectors to other major sources of emissions, including a municipal government (the city of Chicago). Many local, small initiatives have also been undertaken in the agricultural, forestry, and conservation stewardship sectors, which not only absorb carbon, but will also have huge side benefits. We are all very excited about this. Trees and grasses and properly managed soils can not only absorb carbon, but they can also improve water quality, provide habitat protection, and reduce energy consumption. Groups like Ducks Unlimited, which owns a great deal of land, are involved, as well as farm groups that will act as aggregators for individual farmers. Some financial and inspection groups are also participating. If the carbon side can help finance some of the benefits of good stewardship of land, we’ll all be better off at the end of the day. Why would a big industrial concern subject itself to paying to mitigate emissions of greenhouse gases? Why would a company write a check to somebody else to mitigate greenhouse gases? Some companies cannot quickly shift their coal-based power plants to gas or other lower polluting technologies. These companies come to the table first because they want some of the first-mover advantages. They recognize that regulation is coming, and they want not only to enjoy the potential commercial benefits, but also to help design the protocols for future programs based on their experience (rather than on lobbyists’ notions and arguments). Second, they want to be able to manage greenhouse gases and trade skillfully while maintaining their ongoing businesses. Third, many of them are big coal burners, and they intend to continue operating their facilities. They recognize that they will be required to mitigate some of the greenhouse emissions from those facilities, and they want a low-cost mechanism for doing that. In this
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way, they would be able to continue to burn coal provided they can offset their emissions. So they are looking for a structure that can help them through the transition—and transition is the key word here—to cleaner technologies and energy systems. Finally, there is a growing recognition that sustainable companies, those that are cleaner and more attentive to environmental concerns than their peers, ultimately seem to yield higher returns than their not-as-sustainable compatriots. This does not mean that an environmentally sound company will automatically have higher profits. However, it appears that sustainable companies are also smarter companies. They do many things better than other companies, which shows in their financial performance. That is important because share prices are hugely important to CEOs and boards, which are always looking at the financial bottom line. If a company is going to become an environmental leader, it will be because it improves its financial bottom line. In discussing this issue, I use the word stakeholder rather than stockholder because every day corporations are coming to recognize that their greatest asset is their human capital. Young people often want to work for companies they like and respect, and a company’s ability to attract talent is being driven, at least in part, by its environmental signature. Moreover, companies that are better environmental citizens have better relations with customers, suppliers, and governments. It has taken several decades for this ethic to enter the marketplace, but companies now recognize that environmental leadership is in their best interest. This is why some companies are prepared to make some outlays now to get ahead of the curve and be on the right side of the issue. They recognize that there really is a wrong side and a right side of this issue. Undoubtedly, 10 to 20 years from now we will look back and realize that some of the things we did were flat-out wrong—the market design was wrong, the quantification was wrong, the global warming potential conversion value was wrong. But the only way to find that out is to go through the process. We’ve debated this issue for more than 10 years now, but there has been virtually no hard action on the ground. It’s time we get started. With greenhouse-gas trading, we can make a start—we are crawling children—but if we want to be able to sprint and leap the high hurdles in 20 or 30 years, we have to crawl first. We know there are massive uncertainties, but if we can start to test techniques for bringing individual landowners in with very simple structures, perhaps naively simple structures, at least we will make progress. At the same time, researchers funded by universities and taxpayers and private budgets must continue to work on the scientific fundamentals. Let me review. Economic institutions offer attractive and feasible ways to manage the transition to a less-carbon-emitting economy. In addition, economic mechanisms will still be necessary a hundred years from now because fossil fuels will continue to be consumed. Markets, which are a proven tool, seem to be the
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only logical way to orchestrate efficiently all of the mitigation options (e.g., agriculture, forestry, industry, energy, and transportation). We can change, and it won’t take rocket science, but it will take a lot of leg work, and it can be done. It takes about 30 years from the time a problem is identified until a market is mature. We are nearly half-way along that curve. At the CCX we have made a start in a small and simple way with an association of like-minded entities. We are optimistic that this problem can be solved intelligently and efficiently using a capital-markets approach.
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The Top Ten Things You Should Know about Carbon Sequestration HOWARD HERZOG Massachusetts Institute of Technology We started our research program at MIT in 1989, when there were only a handful of active research groups. Over the past 13 years, I have seen tremendous growth and accomplishments in the field. On the agenda, my talk was subtitled “What is the Right Economic and Social Mix?” Although I will address related issues, I am not going to attempt to answer that question because I don’t feel we are at a point where we can determine the right mix. The right mix will ultimately be shaped by the marketplace and the political environment. Rather than answering this question, I will tell you the top 10 things I think you should know about carbon sequestration. 10. Fossil fuels are here to stay. Let me qualify that I don’t mean forever, but fossil fuels will be our dominant energy source for at least the next 50 years, if not the next 100 years. We have invested trillions of dollars in infrastructure, and even in Washington, D.C., that is a big number. Fossil fuels have more than 85 percent of the market share, and that market share is rising. I just don’t see any scenario in which fossil fuels will drop below 50 percent of the market share in the next 50 years. This is not to say that we should consider carbon sequestration as a way to perpetuate the use of fossil fuels. It does say that fossil fuels are a reality and that we need technologies to deal with that reality. These technologies will make fossil fuels more expensive, which in turn will help nonfossil-fuel technologies penetrate the market. Sequestration can not only help reduce carbon emissions from fossil fuels, but can also help other technologies enter the marketplace sooner.
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9. Sequestration technologies exist today. Capture plants exist today. Pipeline networks exist today. Injection of carbon dioxide (CO2) underground exists today. Norway has the Sleipner Project and a new North Sea project called Snovit, which will be very similar to Sleipner. Norway is considering gas-fired power plants with CO2 capture. In Norway, power plants are a big, politically charged issue. A couple of years ago, this issue caused the fall of a government; that government is now back in power and trying to resurrect the power plants in a somewhat different way. The infrastructure issue may seem overwhelming, but just compare our world to a hundred years ago when the Wright brothers hadn’t yet flown their first plane. After this session, I will go to the reception, but I will still be in my bed in Boston by 11 o’clock tonight. The infrastructure of airline travel would seem incredible to people from a hundred years ago. So would the interstate highway system. In a hundred years, infrastructure can change enormously. If we think of changing it in one day, it can be overwhelming; but if we think of changing it over a long period of time, it is not. 8. Sequestration is nondiscriminatory; it likes both electrons and protons. One way sequestration works is through energy carriers (electrons and protons). Electricity is the energy carrier today, and its use is increasing. A potential new energy carrier is hydrogen, and we may or may not develop a hydrogen economy. Either way, it does not really matter for sequestration. Carbon can be sequestered from electric power plants and from hydrogen production plants. Sequestration is a viable alternative for many different futures. The basic technology for sequestration is a robust solution for a wide range of future scenarios. 7. Fantasizing about winning the lottery is fun, but don’t bet the farm on it. We have heard about many technologies today. Some we may call evolutionary; others are revolutionary. Some things we talked about today are very risky. They may have big payoffs, but they may also have high risks. You can’t put all of your money in that basket. You have to spread your research effort around. Some of the more mundane technologies, the evolutionary technologies, are like your rent money, and its not wise to gamble with your rent money. 6. Sequestration costs less than you may think. The point I want to make is that wind has been called a viable energy source because of a 1.7 cent/kWh production tax credit. If you give fossil-fuel plants a 1.7 cent/kWh production tax credit for sequestration, you will see quite a bit of sequestration at those plants. About a year ago, I heard a talk by someone at the
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Nuclear Energy Institute, who said building a new nuclear plant would cost 6 to 7 cents/kWh for electricity. That is in the same ballpark as the cost of sequestration. One hundred dollars per ton of carbon is equivalent to a 25-cent tax on gasoline. I don’t know about the gas prices in your neighborhood, but the gas prices in my neighborhood in the last two months have gone up more than 25 cents. We are not talking about a $100/ton of carbon tax being put on today, but maybe over a period of several years. The economy definitely can absorb carbon prices at that level. 5. What the heck is “dollars per ton avoided”? Lately, I have come to the conclusion that “dollars per ton avoided” is the most misused term in the carbon-mitigation world. It does have its place, and the best place for it is in project pricing. I also want to say a mea culpa because I am as guilty as anybody else of misusing this term. The reason the term is misued is because you not only have to analyze new technologies, you also have to compare them to a base case. But what is the base case for a new integrated-gasification combined-cycle plant with sequestration? Is it an integrated-gasification combined-cycle plant without sequestration? Is it a pulverized-coal plant? Is it a natural-gas plant? The numbers change dramatically, by more than a factor of two, depending on which base case you use. Dollars per ton avoided is correctly used only for a given project. Look at Option A and Option B, and compare those options to find the dollars per ton avoided. If the market sets a price for carbon that is higher than my project cost, then the project should go ahead. If the project cost is more than the market price, I should just buy permits or pay the tax. Using dollars per ton avoided to compare projects or technologies that have different conditions is really misusing the term. A better analysis can be done using integrated assessment models that include all of these technologies and then ask at what marketplace price of carbon these technologies will advance. But even that has problems. Here is an example. One of my students is working with our economists to represent carbon sequestration into a general equilibrium model. The base numbers he is using were developed by another of my students. I am also working with David Keith of Carnegie Mellon University, using the exact same numbers and putting them into their dispatch model. The models are a little different. The general equilibrium model takes into account a lot of feedback from the general economy and is highly aggregated, but it doesn’t look at dispatch. It is much too aggregated for that. David’s model looks at dispatch, but doesn’t have a lot of the feedback we have. When David runs his model with basically the same cost numbers, he gets a number on the order of $100 per ton of carbon. When we run our model, we get a number of about $200 per ton of carbon. What is going on here? Who is right and who is wrong? They are both right, and they are both wrong. Why are they both right? Given the assumptions of the
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models, I believe the calculations in both cases are right. But the models use different assumptions, which can make a fairly big difference in the price. Every time you hear numbers like this, you have to question them. You have to ask that they be put in context so you can understand what they mean. Number 4. Every silver lining has a touch of gray. We should look into four major kinds of reservoirs for carbon sequestration. Three are geologic reservoirs—coal beds, aquifers, and oil and gas reservoirs; the fourth is the ocean. All four have advantages and potential, but they also all have significant problems that will have to be overcome. In other words, they have a touch of gray. In terms of sequestration, the reservoir is a critical path item. And I don’t think it is a case of either/or. The more kinds of reservoirs available, the better off we will be. If you live in Chicago, you are not interested in ocean reservoirs. If you live in Tokyo, you don’t have geologic reservoirs, so you are very much interested in ocean reservoirs. Local circumstances are very important for sequestration. The more reservoir options that are available, the wider spread and the more economical use we can get from them. Number 3. Legislation cannot remove the ocean from the carbon cycle. More than 80 percent of the CO2 emissions emitted today will end up in the ocean in the next thousand years. Today, about 30 percent of the emissions in any one year are in the ocean—2 gigatons of carbon per year out of a little more than 6 gigatons end up in the ocean. In an experiment in Hawaii, we had trouble in the permitting process, and we met with some local opposition. A coalition to stop CO2 dumping was formed. Members had “Stop CO2 Dumping” bumper stickers on their cars, right above the tailpipe, where the CO2 was coming out. Of course, eventually 80 percent of this CO2 ends up in the ocean. Nature simply will not let us put the oceans off limits. Unless we are incredibly lucky, we are either overusing or underusing the ocean. Which is it? I don’t know, but I think it is very important that we find out. The worst case would be to find out 20 or 30 years from now that climate change is really serious and that we have got to do something quick. Unless we work today to gain a scientific understanding, we will be under enormous pressure and may make some really dumb decisions. Number 2. Can’t we all just get along? We must keep as many options open as possible. When it comes to implementation, we may wind up with only a few options, but local variables will be important. Certain areas are amenable to solar energy, others to wind, others may
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need sequestration. Some countries may be more amenable to nuclear power. Different areas will require different solutions. I think all options should be kept open; all of them have pluses and minuses. Today, people are justifying the one they are working on, saying Technology A is better than Technology B; as long as it is not Technology B, it is good. The Groundwater Journal recently ran a piece called “Can Hydrology Save the World?” that included these two sentences: “Deep ocean injection faces strong resistance from environmental groups and is unlikely to emerge as an important option for CO2 storage. Deep geologic injection is emerging as the most promising option for CO2 disposal.” It should come as no surprise that this writer is working on geologic injection. I don’t necessarily disagree with his statements, but they are based purely on bias and not on a hard analysis. I would rather see a statement that geologic diposal is emerging as a promising option because of A, B, and C, than a statement that geologic disposal is worthwhile because it is not ocean disposal. Sooner or later, we may decide we can’t keep so many balls in the air. When we finally do adopt a carbon policy, the marketplace should decide. Besides being economically viable, the different approaches will have to win public acceptance through some sort of permitting process. I think research today should be focused on determining the effectiveness and impacts of sequestration. When there is market incentive to reduce carbon emissions, there will be a great incentive to reduce costs, and I believe that they will be reduced. But the environmental and safety issues are noncommercial, and understanding them will be to everybody’s benefit. Therefore, this is an appropriate subject for government-sponsored research. Number 1. You can visit me at sequestration.mit.edu.
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