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Spencer Ying

The Economics of Global Warming

Technical Memo of Current Technology

For Investment in Carbon Emissions Reduction

March 4th, 2009

Executive Summary:

The debate over Global warming at the very least has brought in a new wave of forward thinking. The true impact and cost of Global warming remains unclear - scientists have suggested a spread of possibilities ranging from minor regional weather changes to global catastrophe[1]. There are still scientists who disagree with the definite conclusion that global warming is man-made - a recent publication (February 2009) from the Japan Society of Energy and Resource has 3 out of 5 scientists saying that anthropological global warming is still a hypothesis and that the IPCC has not gathered enough evidence to warrant a conclusion[2]. However, regardless of stance, Global warming has brought in environmental consciousness, a limited resource mentality, and external social and environmental costs into decisions of policymakers and companies long absorbed with short term costs and short sighted gains. 

Even though it is questionable about CO2's impacts on our global climate, it is a fact that we are emitting carbon dioxide into the atmosphere at a scale that is globally significant. Much of human waste has a negligible weight on our environment. Our total wasted heat from energy usage accounts to 1/100,000th of the amount that the earth absorbs from the sun - a scale that is nothing to worry about[3]. However, studies have shown that CO2 has risen from 280 parts per million to 330 ppm since the industrial revolution - a 35% increase. Our atmosphere is projected to have 800 ppm of CO2 by 2100 at our current emissions rate - an increase of over 200%[4]. A movement this much on one of the variables that is connected to our global energy system is something that should be withheld until further research has proven its impact insignificant. Right now our policy is reversed - we continue to emit CO2 until we find that it has catastrophic impacts. This needs to change, especially in light of mounting evidence of a connection between temperature and CO2 levels.

Barrack Obama has proposed setting up a governmental organization that would invest $15 billion dollars in technologies to mitigate climate change. This paper attempts to explore the technical opportunities available in the United States to mitigate our carbon footprint while looking at their potential economic or social impacts. Specifically, we will look at the current wind, solar, hydro, and nuclear technologies for reducing CO2 in energy production, and biomass and other alternative fuels for reducing CO2 emissions from our transportation sector. At the end of the paper, we give a short summary of suggested investments and their respective short term and long term costs.

CO2 levels

CO2 emissions in the United States total around 7 billion metric tons per year, and is increasing by about 1% per year since 1990. 33% of CO2 emissions is caused by electricity generation, 28% by transportation, 19% industries, and the rest is split evenly in agriculture, residential, and commercial sectors[5]. Most of the green house gas emissions comes from the energy and transportation sectors, and are the areas that would yield the most benefit from a CO2 reduction policy.

Currently the US is responsible for 25% of all CO2 emissions in the atmosphere today, more than any other country. Since 1990, the majority of developed nations have kept their emissions at a constant level - in contrast, the US carbon emission level has grown by 20%[6]. Regardless of how developing nations grow, the US will still have the largest amount of CO2 emitted into the atmosphere for decades. It is our responsibility to develop successful policies and technologies that reduce carbon emissions without choking our economy so that developing nations can follow suit.

For it is clear that reducing CO2 emissions has an economic cost. The new technologies that reduce CO2 emissions have a price tag, and it is not cheap. It is estimated that the economy would lose .2%-2% of GDP per year to reduce CO2 emissions to meet Kyoto Protocol levels[7], and an additional .4%-.9% amount of government spending per year to eliminate the carbon emissions from our electricity by 2050[8]. This seems like a reasonable estimate considering that the US spent 1.5% of GDP per year to reduce air pollution discharges in the 1970s and 80s. The real challenge is how to do it in a gradual, efficient, and cost effective manner. 

Electricity Generation:

26% percent of the US's electricity generation is already low carbon - 19% through nuclear plants, 5% through hydroelectric dams, and the other 1% between solar, wind, and geothermal[9]. Coal Plants produce slightly less than half of our electricity, and natural gas plants produce most of the rest. Our current options for low carbon energy ranges from replacing our existing coal and natural gas plants with low carbon substitutes to applying new carbon capture technology to our existing plants in operation. All of these options have different costs and benefits, and we will look at their applicability to our current energy production sector in depth. 

Coal Plants currently output 33% of all CO2 emissions in the US, and should be out first consideration for CO2 reduction. Currently, Carbon Capture and Sequestration technology allows Coal and Natural Gas plants to be low carbon by capturing and storing the carbon underground. If these technologies were in place, it is estimated that carbon emissions will be reduced by 80-85%, just about solving the emissions problem for the electricity sector[10]. 

However, in practice, implementing CCS has its limitations. The average coal power plant is 34 years old, and over 10% of them are above 50 years old[11]. Coal Plants have not been built in large quantities since the 1990s, and most of them are middle aged, too old to invest in and yield a sufficient annualized return[12]. It is more cost effective to install new plants than to upgrade existing plants with carbon capture. In addition, no large modern power plant exists today with CCS technology, new or old, and the prospect of new CCS coal plants are being overlooked by a cheaper, slightly less environmentally friendly alternative. What the energy companies have turned to in recent years are natural gas plants, which currently outputs 7% of the US's CO2 Emissions[13]. Natural gas prices fluctuate depending on demand and could require higher operation costs than coal, but these plants have a low initial capital cost, produce reliable power, and have a lower carbon footprint than coal plants, making them an attractive choice compared to expensive nuclear or unreliable solar or wind alternatives. The expansion of natural gas plants is only expected to continue within the coming years.

Several scenarios can kick start CCS investment without government spending. One scenario is if natural gas prices skyrocketed due to inflated demand; since natural gas plants right now are the preferred investment, a huge increase in natural gas prices would force companies to look at different technologies - nuclear or CCS coal plants for reliable green energy. Another is if government policy required new plants to leave space for CCS capabilities - this would encourage new plants to look at CCS when a carbon emissions tax or other similar policy is implemented in the future. 

Barring these things, in order to make CCS a viable alternative several policies must be implemented. CCS currently costs about 70-100$ per CO2 ton for a new power plant, and would require a tax or some other emission limitation system in order to be market competitive[14]. In addition, the government will have to provide some additional initial incentives to stimulate the risk averse energy sector - an initial subsidy to get the first large scale CCS power plant running, and subsequent investment into CCS plants. 

Even if CCS were heavily subsidized, its costs and effectiveness changes for different plants. It is unreasonable to think that CCS can be cost effective everywhere, especially because the type of plant dictates the techniques needed, the costs incurred, and the CO2 reduction results. Location also matters, and cause considerable capital spenditures if located far away from a carbon capture facility[15]. Because of this, CCS is only part of the solution of lowering our carbon emissions.

Another part of the solution is nuclear power. Nuclear power plants are carbon free, run at 90% capacity, average a very low maintenance cost per kilowatt hour, and are heavily regulated for safety. However, they have a very high initial capital cost - at around 4-5 times the initial capital required to build a nuclear plant compared to a natural gas plant, it is sometimes not an option for smaller electric companies[16]. They also have a history of negative public opinion and strict regulations, causing delays in the construction of nuclear sites and increasing costs. Regulations have since been relaxed and are continuing to be streamlined, and public opinion of nuclear is gradually increasing as new technology and other countries prove its safety.

The greatest benefit of nuclear right now is that it is well tested and invested in. The annualized price of electricity for nuclear is competitive with coal and natural gas based prices and it has many companies investing in the technology to improve its capital costs, safety, and efficiency. Unlike CCS, which still hasn't been proven on a large scale, nuclear has been heavily tested in other parts of the globe. 

Unfortunately, given the landscape of US electricity companies, it isn't the silver bullet of electricity generation. A country that we can look to that has shifted the majority of its electricity production to nuclear power is France - it currently has 85% of its power generated through 59 nuclear power plants, and has been a largely successful endeavor[17]. However, France has done this through a nationalized government run electricity company, giving them a monopoly on power generation as well as a large amount of resources to accomplish this task. France also has little natural coal, oil, or gas, and therefore has few choices in order to maintain energy security. In contrast, the US electric grid is made up of lots of small regional companies that compete with each other on market prices. The US also has an abundance of coal and other resources. This makes it difficult for companies to justify high cost expenditures, and also lessens the case for a switch to exclusively nuclear technology. 

Renewable Energy

Nuclear and Carbon Capture/Sequestration are both low carbon alternatives, but they aren't renewable alternatives. In the next section we will look at several renewable alternatives and discuss their potentials.

Wind Energy production has increased in the United States substantially over the past few years. Within the past 10 years, it has increased from almost nothing to 30 billion kilowatt hours in 2008. While this only counts for .77% of the US’s net electricity generation, it has overtaken solar and geothermal (both less than .5%)[18].

Part of this rapid growth in wind power is its competitive cost. In 2006 the US government estimated the lifetime cost of new generating capacity for wind at $55.80, which is comparable to coal (at $53.10) and natural gas ($52.90), and turbines can be installed one at a time, reducing the need for large initial capital[19]. Wind power also has low maintenance and fuel costs, making its operational costs relatively low. This makes wind power an attractive alternative for green energy investments.

However, wind farms are not without problems. For one thing, wind power fluctuates throughout the day. Wind power does not match daily load well – output is the least at night when the most power is required. Wind power also does not match season well either – in the US wind power drops during the summer, which is the most power intensive time of year (in the UK, the reverse tends to happen)[20]. Windy areas are often far from where people build homes– this causes additional transmission infrastructure to be built.

The biggest problem though is that wind, as well as most renewable resources, does not output a constant supply of power. This means that if wind was the main power supply, backup power utilities are required to ensure that we have consistent power generation even when wind is at a dead still. This means that wind power farms need additional backup generators or alternate sources of energy to ensure energy demand is met, increasing its costs and carbon output.

Wind could still be used to handle a small percent of the electricity load reliably. Studies have shown that wind could account for 15% of a region’s energy usage for relatively modest intermittency and regulation cost[21]. Even with the fluctuation of wind power, costs for energy substitution when wind power is low are reasonable.

Significantly less energy production is in solar energy (around .01%)[22]. Solar energy is much more expensive than coal, gas, or wind and the nature of fluctuations in solar power are more costly than those of wind turbines[23]. All of the current solar operations in the US are heavily subsidized and even solar thermal technologies are relatively expensive[24].

Solar is still an attractive area of green energy– it has the least amount of land usage out of all of the available renewable energy sources, and it is the most abundant energy source out there. However, its significant price tag, as well as its load balancing cost prevents it from being market competitive. More years of innovation and research are required to make this technology ready for the electricity grid.

Hydroelectric power plant production has largely ceased since the upset over land destruction caused by damming up rivers. The US currently has 6% of its electricity in hydroelectric dams, and has estimated that we could harness an additional 3% of hydroelectric power from our natural resources[25]. With only 8.4% of our electricity renewable, it could increase our renewable capacity by over a third.

Electricity Conclusion:

No single technology is a silver bullet for a green electricity sector – rather, a healthy portfolio of these technologies will be necessary to reduce carbon emissions in our lifetime. A spread of differing technologies with different capital costs, maintenance structures, and reliability is needed to allow our private electric companies to be able to invest based on their need. It is important that we give private industries cost incentives and realistic opportunities to go green.

To do this, several opportunities still need to be market tested, and several more need to be improved to be viable in a competitive market. CCS needs to be tested on a full scale coal or natural gas plant, as well as subsidized for market competitiveness. Specially priced government loans should be available for nuclear plants, and Wind farms should be subsidized so that deployment methods and wind farm operational structures can be optimized. Solar thermal should be continued to be explored, and government grants researching cost effective solar energy should be given out.

Transportation

Transportation is the second highest CO2 emitter, with 28% emissions[26]. Unfortunately the main decision makers in the transportation sector are individuals, and the deciding factor is the price of luxury. Cheap oil prices have caused development of larger, luxurious, wasteful vehicles, while oil price spikes have shifted demand to smaller, efficient vehicles[27]. However, there are still some technological alternatives that allow for CO2 reduction without a major change in how society works.

Biofuels is one alternative that shows some initial promise. Biofuels are grown substitutes for fossil fuels made from dead biological material, and include liquid fuels like ethanol and biodiesel. Ethanol can be mixed with gasoline, and most cars can run on a 10% ethanol mix (90% gasoline, 10% ethanol). Biodiesel can be mixed with petro diesel at a 20% mix[28].

Biofuels as are on the market today are corn derivatives. These Biofuels have a 20-25% CO2 reduction to cars when mixed with gasoline[29]. However, these Biofuels also promise a path to energy security and a severe reduction of gasoline costs for oil companies. Because of this, corn based Biofuels have been promoted heavily through the use of government subsidies[30].

However, evidence indicates that corn based Biofuels have an adverse effect on global welfare as a whole. The rapid expansion of the ethanol industry is the root cause for the burning down of the Amazon rainforest at rates that emit more CO2 than one can save back in a lifetime[31]. Turning corn into ethanol also has increased food prices around the globe, and has caused an expansion of land usage, further increasing CO2 emissions worldwide[32]. While Biofuels may have positive benefits for carbon reduction, the fast expansion of corn based Biofuels have mitigated the effects and even caused more damages to the environment.

Cellulosic Biofuels are the next generation of Biofuels made from cellulose of plants. They have been shown to reduce CO2 emissions by 85%, do not compete with food prices, and can be harvested naturally in the US[33]. Problems currently exist for the technology to separate the cellulose from the plants, but these Biofuels show the most promise for a true CO2 reduction plan in our transportation sector.

Hydrogen cars are being researched and considered for mass consumption – however, the technology is still too far off. Hydrogen cars have a high expected cost compared to current gasoline run cars, and hydrogen fuel, even higher costs to produce[34]. The problems of a hydrogen economy plague the car –storage and fuel distribution remain a largely unsolved problem[35].

Hybrid electric cars are getting recognition, and can contribute significantly to lowering our carbon emissions. The US averages 18 miles per gallon for its cars – doubling that would roughly half our carbon output. Hybrid cars that function like normal gasoline engines are already increasing our mpg, although more obvious changes like lowering the weight of cars contribute significant amounts as well. Plug-in Hybrids, which require charging at an electricity station, could open the consumer up for battery cars which use no gasoline at all. Battery cars have limited range and require careful travel planning especially with the lack of refueling stations currently – however, their costs decrease as more and more people use them.

Summary for Transportation:

Social changes aside, technology can still provide a major decrease in carbon emissions for the transportation sector. Cellulosic Biofuels could provide substantial reductions in CO2 emissions; minimizing the refinement cost is a big priority. Subsidies for hybrid manufacturing could drive down their prices and increase national MPG. Continued investment in hydrogen and battery powered cars could eventually change our existing transportation economy.

Conclusion:

In our recommendation, the budget will be allocated based on percentage. The goal of this budget is not to force green energy onto the market, but rather to foster an environment where future decisions of what energy plant to build (after old coal plants are decommissioned) allow green solutions to be competitive and desirable choices.

Solar: 5-10% ($1 billion) invested into research.

Solar has still a long way to go before we’ll see any likely returns. In the short run, this will not provide much carbon reduction; however, in the long term, this will enable solar solutions for any number of energy demands that we may have.

Wind: 5-10% (1 billion) invested into research, wind subsidies

Investment into wind energy will see an immediate increase in wind production, as well as new processes, turbines, and efficiency to drive wind prices lower to be a truly desirable energy solution. This would have almost immediate impacts on carbon emissions, and will optimize the production of wind farms, reducing its cost.

CCS: 10-20% (2 billion) invested into a new CCS plant and initial subsidies

Investment into Carbon Capture Technology would fund the building of initial CCS coal and natural gas plants, in order to get data on expected additional costs of a CCS plant for policy decisions and to convince electric companies about its viability.

Nuclear: 30% (4.5 billion) invested into a new government loan program

This investment aims to allow companies to borrow money for nuclear plants without too much risk. It aims to help energy companies afford the initial capital cost of nuclear power. When coal power plants get decommissioned, this should help reap in benefits of lower emissions.

BioFuel: 30% (4.5 billion) invested into research and new companies

Environmentally friendly BioFuel is still a bit off. This investment aims to promote research in next-gen cellulosic BioFuel. This is a long term investment for an eventual competitive low carbon fuel for our vehicles.

Cars: 10-20%(2 billion) invested into hybrid subsidies, battery and hydrogen research

Hybrid subsidies will have an immediate payoff by increasing national MPG. Eventually, research in this area may allow our cars to run more on electricity than on gas, cutting our mileage even further, or reduce the need for gas altogether.

Many immediate short term gains can be achieved by implementing policies that impose carbon taxes or energy taxes on companies and consumers. These policies are outside the scope of our technical investment package.

Bibliography:

Apt, Jay. Options for Electric Power Generation. January 28th 2009. Pg 1-111 (4)

Apt, J., D. Keith, and G. Morgan. “Promoting Low-Carbon Electricity Production,” Issues Online in Science and Technology, 2007. Pgs 261-273.

Branstetter, Lee. Transportation Options. Lecture 2. Feb 2009.

Chaisson, E.J. (2008) Long-term Global Heating from Energy Usage. Eos Transactions of the American Geophysical Union 89(28):253-255. (3)

Collens, William. "The Physical Science Behind Climate Change." Scientific American Aug. 2007: 17-27.

D. Whitford. “Going Nuclear,” Fortune, August 6, 2007.

Goosen, John. Safe, Clean Reliable Nuclear Power. WestingHouse Electric Company LLc, Feb 2, 2009.

Hannele Holttinen, et al. (September 2006). ""Design and Operation of Power Systems with Large Amounts of Wind Power", IEA Wind Summary Paper". Global Wind Power Conference September 18-21, 2006, Adelaide, Australia.

Lawrence Goulder and William Pizer. “The Heat is On,” The Economist, September 7, 2006.

Orlowski, Andrew. "Japan's boffins: Global warming isn't man-made" The Register: Sci/Tech News for the World. 4 Mar. 2009 ................
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