Utilities favor federal carbon dioxide permit-trading plan

July 6, 2009
Resigned to inevitable government curbs on their carbon dioxide emissions, about all Indiana utilities could do was say which poison they'd prefer to swallow.

They're closer to getting their favorite poison, with the U.S. House passage June 26 of a bill that would create a market for trading carbon dioxide permits.

Whether the deeply controversial bill will pass the Senate is anyone’s guess.

The approach in the Waxman-Markey American Clean Energy and Security Act is somewhat akin to the cap-and-trade program used for years to force lower sulfur dioxide and other smokestack emissions that cause acid rain.

As with that approach, utilities successful in cutting emissions to the limit can sell their allowances or bank them. If emissions exceed the amount permitted by the allowances, the company would pay a fine.

“The cap-and-trade system is proven. We do believe it will work in this system,” said Ann Murtlow, president and CEO of Indianapolis Power & Light.

Weeks before Waxman-Markey’s passage in the House, Murtlow and other utility executives were warning of even higher costs associated with a so-called auction cap-and-trade scheme favored by the Obama administration.

Under the so-called “auction” approach, utilities and other companies emitting large amounts of carbon would not be granted a set number of allowances as with the House measure; instead, they’d have to purchase allowances at a government auction.

Moreover, allowances would have to be purchased not just for emissions produced above a maximum cap—but for all carbon emissions. Electric customers would be tapped to help pay for large capital investments utilities would need to make to lower their carbon emissions, and they’d pay the cost of the allowances to emit carbon dioxide, said Ed Simcox, president of the Indiana Energy Association, which represents 14 of the state’s biggest electric and gas utilities.

The government would rebate part of that to certain customers hard hit by the cost. But critics say some proceeds from the auctions would be used to drive up all manner of government spending.

It’s yet to be seen whether the auction approach surfaces in future legislation or perhaps partially through administrative fiat.

Murtlow estimated that Waxman-Markey could boost IPL rates 20 percent over what they’re projected to be in 2020. But under an auction approach, rates could climb 45 percent to 50 percent by 2020 over where they would otherwise be projected, “much of this occurring as a near-term rate shock and without producing any incremental benefit to the environment,” Murtlow said.

Meanwhile, Duke Energy, the largest electric provider in the state, estimates that rates for industrial customers would rise about 35 percent in the Midwest if it had to purchase carbon allowances at $20 a ton, “and that’s a conservative price estimate.”

Charlotte, N.C.-based Duke is already committing billions of ratepayer dollars on coal-based generation in advance of coming carbon regulation. It is building a $2.3 billion coal gasification plant in Edwardsport. The utility is exploring disposing of the carbon dioxide the plant will produce by injecting it deep into underground rock formations. It would be the largest commercial application  of so-called carbon capture and sequestration. But it would be on top of the already rising costs of the coal gasification plant. And critics say the CCS technology is by no means proven or practical.

IPL has been preparing by increasing its reliance on renewable generation, agreeing to buy power from a 100-megawatt wind farm in Benton County that has the potential to reduce carbon by 230,000 tons annually. That’s less than 1 percent of total estimated carbon emissions for all Indiana electric plants.

Just what lower-carbon path IPL will take in response to eventual federal regulation is unclear. It could convert some of its coal boilers to burn natural gas, which is less polluting but more expensive for ratepayers.

Nuclear generation is the only technology that can produce vast amounts of power without appreciable amounts of carbon, Murtlow noted. But nuclear plants are expensive and particularly controversial. Public Service Indiana, which is now owned by Duke, had to abandon its partially completed Marble Hill nuclear plant in Madison in the 1980s after dramatic cost overruns. Marble Hill nearly caused PSI to go bankrupt and left a cloud over nuclear power in Indiana, which still has no nuclear generating plants.

Duke recently acknowledged it is considering a site in southern Ohio for a nuclear plant. It already operates nuclear plants in the Carolinas.

Whatever the lower-carbon approach taken, utilities need to have clarity from the federal government soon, Murtlow said, given the substantial capital investment involved.

“We need to know what the rules are going to be. Uncertainty can be paralyzing … uncertainty is very problematic for our industry.”

Not everyone shares the preference for Waxman-Markey’s allocation method. The legislation appears to leave wiggle room for utilities, such as counting overseas hydropower as a credit to offset carbon emissions, said Grant Smith, director of Citizens Action Coalition.

He’s grown cynical as the bill was watered down. He said the result is carbon reductions in name only.

“The cap-and-trade provisions do not protect ratepayers,” Smith said. “Rather, they provide the coal industry with billions of dollars in assets and broad enough loopholes … that may result in very little carbon reductions.”

Smith favors another approach toward reducing CO2—a carbon tax, such as taxing coal at the mine.

“It’s transparent. ... Everybody knows what the price is going to be down the road,” he said.

Groups such as CAC have been pushing ultimately for energy efficiency and renewable generation as the way to address carbon.

“Everybody’s really arguing the status quo,” Smith said.

Though many utilities say a cap-and-trade policy as under Waxman-Markey may be less disruptive than the auction approach, the whole idea of cap-and-trade remains anathema to Gov. Mitch Daniels.

In a letter published recently in The Wall Street Journal, Daniels decried the disproportionate effect cap-and-trade would have on Indiana and other Midwestern states that get nearly all their electricity from coal generation.

“Quite simply, it looks like imperialism,” said Daniels, insisting the bill would “impose enormous taxes and restrictions on free commerce by wealthy but faltering powers—California, Massachusetts and New York—seeking to exploit politically weaker colonies in order to prop up their own decaying economies.”

Those states generate a lower percentage of their electricity from CO2-producing coal and therefore wouldn’t be as at risk of huge rate increases to satisfy federal regulations.

Daniels said the carbon reduction plans proposed would hurt Indiana’s already struggling manufacturing economy.

“And for what? No honest estimate pretends to suggest that a U.S. cap-and-trade regime will move the world’s thermometer by so much as a 10th of a degree a half century from now. My fellow citizens are being ordered to accept impoverishment for a policy that won’t save a single polar bear.”

Waxman-Markey seeks to curb greenhouse gas emissions 17 percent by 2020.

Some scientists say man-made CO2 is largely responsible for a rise in global temperatures. Others cite natural cyclical phenomenon and say a scientific case has yet to be proven regarding the human contribution.




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