Picking Energy Losers

by Dan Watkiss, McDermott Will & Emery LLP

At the fastest rate in 300 million years, oceans are acidifying as a result of carbon dioxide emissions, according to a new study by a team of researchers led by paleoceanographer Bärbel Hönisch at Columbia University's Lamont-Doherty Earth Observatory. This is ominous news when efforts to reduce industrial carbon emissions have largely fallen off the political agenda and some presidential candidates deny the environmental damage caused by those emissions. There is, however, one bill in each house of Congress that would make reducing CO2 emissions from electric generation a priority of national energy and environmental policy. Although unlikely to progress in the thick of a presidential election, these bills might provide a path to a cleaner energy future after November.

The Hönisch study explains that oceans absorb CO2 out of the air like a sponge. There the gas reacts with salt water to form carbonic acid. Over time carbonate shells on the sea floor neutralize the acid. But if CO2 is absorbed too quickly, the resulting acid overwhelms the neutralizing capacity of the shells. A surge in atmospheric carbon that occurred 56 million years ago warmed the planet and, through acidification, caused mass extinctions of single-celled organism that lived on the oceans floors, as well as the fish and crustaceans that fed on them. The rapid pace of acidification today, if not contained by new laws, could prove even more destructive of coral reefs and other aquatic life.

The proposed legislation in the House of Representatives targets carbon emissions directly through a carbon tax. California Rep. Pete Stark and eight co-sponsors introduced House Bill 3242, the Save Our Climate Act (SOCA), in late October. Similar to a sales tax, SOCA would amend the Internal Revenue Code to impose an excise tax on the carbon content of any taxable fuel sold by a manufacturer, producer or importer. Taxable fuels are coal (including lignite and peat), petroleum (not destined for the strategic petroleum reserve), natural gas and certain biomass. The amount of the tax initially is set at $10 per ton of the CO2 produced by combustion of a taxable fuel with annual increases in the amount of such tax until CO2 emissions for a calendar year do not exceed 20 percent of emissions in 1990.

SOCA's sponsors project that during the next 10 years the tax will raise $2.6 trillion, which would be used in part to defray the cost of administering SOCA and to fund a Clean Climate Trust Fund.

In Senate Bill 2146, the Clean Energy Standard Act of 2012 (CESA), New Mexico Sen. Jeff Bingaman, chairman of the Senate Energy and Natural Resources Committee, and eight co-sponsors take a different approach to reducing CO2 and other emissions. This proposed legislation would require electric utilities to procure from clean energy sources an escalating percentage of the electricity that they sell to consumers-24 percent in 2015, rising to 84 percent in 2035. The legislation also would establish a national trading program for clean energy credits utilities could use to demonstrate compliance. Clean energy under CESA would comprise electricity generated by a source placed in service after Dec. 31, 1991, that uses natural gas, hydro, nuclear, qualified waste-to-energy, qualified biomass or renewables (including solar, wind, geothermal, current, wave, tidal or ocean). Clean energy also includes any generation source placed in service after the enactment of CESA, the carbon intensity of which is less than 0.82 metric tons of CO2 equivalent per megawatt-hour, or that is a qualified combined heat and power generator. Nearly all operating nuclear plants would not generate clean energy under the act because they were placed in service before 1992.

Two of the three electoral-vote viable Republican presidential aspirants and President Barack Obama are not science deniers and have acknowledged the urgency of protecting our climates and oceans by reducing emissions of CO2 and other greenhouse gasses. To stop endangering climates and oceans, high-carbon drivers of our economy must be phased out. Without carbon capture and sequestration-the progress on which remains persistently elusive-coal-fired generation should be and will be the chosen loser; petroleum (rarely used for electric power generation) also will be a loser but to a far lesser extent.

Picking losers and by implication winners in this fashion is sound national energy and environmental policy. While the cost of delivered electricity stands to rise in some regions, reliable service should not suffer as coal-fired generation is phased out. Coal-intensive power markets are generally sufficient or long on baseload capacity. The nonpartisan Congressional Research Service (CRS) confirmed this in a Jan. 9 report analyzing the likely effects on reliable electric service of the Environmental Protection Agency's recently finalized Clean Air Act regulations limiting emissions of toxic air pollution. As with SOCA and CESA, those air regulations primarily affect existing coal-fired generation. CRS concluded that "although the (air toxics) rule may lead to the retirement or derating of some facilities, almost all of the capacity reductions will occur in areas that have substantial reserve margins." And, contrary to critics of the EPA's air toxics rule, coal units typically are not used directly for peak-load service; to the extent that they are, it is a terribly inefficient and costly source of peak energy that should-for economic and environmental reasons-be phased out as quickly as feasible.


Author

Dan Watkiss is a partner in the law firm McDermott Will & Emery LLP and is based in Washington, D.C. He focuses on transactional and regulatory matters in energy and related infrastructure industries. Reach him at dwatkiss@mwe.com.

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