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350 or Bust
The Houston Chronicle, May 25, 2009

Study doubts bill’s effect on coal use
By Tom Fowler

The climate change bill that passed through a House committee last week wouldn’t create windfall profits for all coal-fired power plants as some critics claim, but it could undermine efforts to encourage power producers to use other fuels, according to an analysis of the legislation by an international consulting firm.

The sweeping bill voted out of the House Energy and Commerce Committee would create a cap-and-trade system that aims to lower greenhouse gas emissions by setting steadily decreasing limits and requiring polluters to obtain emission permits, which would be traded on a new market.

The bill’s authors had to make a major compromise, however, agreeing to give away many of the initial permits rather than selling them through an auction. Proponents of giveaways argued they would keep the cost of compliance low in the early years of the program, so technology can catch up with the law’s goal of reducing total emissions by about 80 percent by 2050.

Coal-fired power plants, which produce about a third of U.S. greenhouse gas emissions, will get as much as half of their emissions permits for free in the first year of the program, 2012.

Environmental groups have criticized the free permits as “corporate welfare” that undermines the goal of creating direct reductions in greenhouse gases. Greenpeace’s critique of the bill said it “would give corporate polluters hundreds of billions of dollars in subsidies in the form of ‘allowances’—or free pollution credits—rather than making them pay the true costs of their businesses.”

According to a study of the bill by Point Carbon, a Norway-based news and analysis service covering electricity and natural gas markets, coal-fired power plants would get about $61 billion in free allowances from 2012 to 2030, based on Environmental Protection Agency projections of emission permit prices. That would amount to about one-third of that industry’s compliance costs.

The free allowances were included as part of a political compromise designed to let coal plant operators break even relative to other power plant operators that use fuels, such as natural gas, which emit less carbon dioxide.

Without the free permits, coal plant costs would rise steeply in some regions — including much of Texas, New England and California — where natural gas-fired plants tend to set the price at which all power is generated.

The bill does seem to reach that break-even goal in those three regions, Point Carbon said. But coal-fired plants would come out ahead in other regions, where coal and natural gas alternate as the fuel source that sets the price for the market. This includes power grids serving New York, New Jersey, Pennsylvania, Virginia, Ohio, North Dakota, Wisconsin, Illinois and Michigan.

“Leveling the playing field between natural gas and coal partly defeats the purpose of having a cap-and-trade program, in that is fails to establish a direct financial incentive favoring lower-emitting fuels like natural gas,” according to the study.

The main winners will be power generators that don’t emit greenhouse gas, including wind, hydroelectric and nuclear. Those plants won’t have to buy allowances but will benefit from the overall higher wholesale power prices that are expected under cap-and-trade.

Last week the Department of Energy reported a 2.8 percent drop in overall emissions in the U.S. in 2008, mainly due to the recession.

Copyright © 2008 The Houston Chronicle

Photo © Paul S. Hamilton