Friday, June 27, 2008

Special Treatment?

The Acorn blog still isn't ready, so energy-related raves are going to stay here for the time being. A colleague passed me this article yesterday; the mind started spinning; and I couldn't help myself...

The big goal a government has in mind when creating a carbon economy is to reduce carbon dioxide emissions to a sustainable level without overwhelming industry to the point that it stops producing. In the electricity generation industry, the idea is to reward the businesses that produce electricity while emitting little or no carbon dioxide and penalize the businesses that produce electricity while emitting a lot. Provide capital to clean producers to help them expand and produce more clean electricity, and force the dirty producers to innovate or die.

Does that sound reasonable? Is there anything significant that I'm missing?

The reason I ask is that I just read a New York Times article about Duke Energy CEO Jim Rogers and the complicated relationship he has with climate change, environmental protection, and Washington's approach to cap and trade.

The article is big, and there are plenty of points that it makes and questions that it raises, but it was the following quote that got me thinking about the goals of carbon economies.

Rogers sees this [the proposed and recently defeated Lieberman-Warner cap and trade bill] as a financial disaster for Duke. By his calculations, Duke would spend at least $2 billion in the first year alone and have to raise its rates immediately by up to 40 percent to cover that. Worse, coal-fired utilities would not get the special treatment they did under the acid-rain legislation. This time around, a large number of allowances would be given away to nuclear and hydroelectric utilities that already produce very little carbon dioxide. Those companies would not need their allowances and so could sell them for a healthy profit in coal-dependent states.

I don't understand what Rogers wants. I understand from quotes earlier in the article that he's worried about giving ridiculous amounts of new revenue to a government without a particularly impressive allocation plan. But he also wants special treatment for coal? He has a problem with the fact that a carbon economy will penalize coal-fired power and drive his business away from coal and deeper into renewables and nuclear?

Or maybe he's worried that it won't reward innovators that clean coal up?

I guess it's reasonable to consider the possibility that big penalties to coal fired generation and big subsidies to most everything else might overwhelm that piece of the industry, but it seems to me that, given the circumstances, it'll take technologies and/or policies much more radical than garden variety cap and trade to kill king coal.

Coal makes up a huge proportion of the US electricity mix, well more than double the proportions of natural gas and nuclear, its closest proportional rivals. Shouldn't it be safe for a while simply by virtue of its massive market share advantage?

And won't the limitations on the growth of its non-emitting competitors also protect it? Hydro can't grow much more, for there aren't many more good sites for it. Nuclear growth is tempered by huge up front costs, long and unpredictable build timelines, and collective memories of Chernobyl and Three Mile Island. And renewables are still tiny: big, exciting, hopefully realizable dreams, but just barely relevant statistically.

Maybe it's natural gas that keeps Rogers up at night? But gas isn't totally clean. Cleaner than coal, yes, but not so clean and so scalable that coal should be worried about being driven out of business before getting an opportunity to increase its own cleanliness.

It seems to me that coal will have plenty of time to innovate.

And, honestly, plenty is more time than we should give it. According to the principles that are leading us to a carbon economy, producers of coal fired electricity should be pushed and pushed hard. They should get a chance to clean up, but they shouldn't have unlimited time to do it. They should feel some pain. They waited for regulation to force them do the long term smart environmentally and economically right thing. They should pay a price for their environmental irresponsibility (which continues, as we speak) and have to make adjustments, with the quickness.

If they can't do that - if, ultimately, coal can't compete in an economy that's on the road to carbon dioxide sustainability - then we should forget about coal.

Anyway, please tell me what I'm missing here. I think it's strange and maybe even suspicious that Rogers has rescinded his support for cap and trade legislation because the only carbon economy he can stomach is one that's NOT significantly more painful for coal than for low carbon options. I thought that pain was the goal, and I thought Rogers wanted it.

Maybe I'm overreacting. Maybe I'm misunderstanding the man's position (giving too much weight to his desire for special treatment and too little to his worries about dumping too much money into the laps of a potentially irresponsible government). And maybe I just simply don't know what I'm talking about.

That happens quite a bit. Please call me on it.

Note: I wonder how a post like this might go over on the future Acorn blog. Would it be a problem to admit incomplete understanding of something at the absolute core of the future of the energy industry? Would that reflect poorly on me? On Acorn? Worth considering I guess, but my feeling is no. I'm new to the energy world, but I've noticed that very few people in the industry understand anywhere close to everything we all ought to know. There's just simply SO MUCH to know (counterintuitive regulations, dense engineering details, crazy new science, heaps of recent changes, heaps more on the horizon), much more than most people can handle.