Carbon Price and Fossil Fuels

Brian Hicks

Written By Brian Hicks

Posted June 14, 2013

The Obama administration has imposed changes to the U.S. government’s cost estimates that account for carbon dioxide emissions.  This could shake up U.S. policy and fossil fuel projects in a big way, including the Keystone XL oil pipeline.

President ObamaNew estimates for the cost of projects like the pipeline and various power plants are up a whopping 66 percent.

These new estimates account for the climate change damage that the projects would create.  Some believe the new numbers of today are still too low for the ramifications of tomorrow.

These estimates will surely affect government actions in some ways, like setting efficiency and emissions standards for power plants all the way down to basic home appliances.  The talk of a tax imposed on the price of carbon emissions is also sure to be a topic of hot debate.

What this new estimate ultimately falls back on is what economists are calling “the social cost of carbon,” or the price society pays for the damages caused by carbon dioxide emitted into the atmosphere.  The higher this cost becomes, the higher emission control standards will go in an effort to reduce harmful greenhouse gas.

The increase that the administration revealed to this “social cost of carbon” went from $26 a metric ton in 2010 when it first issued a set of estimates to $38 a metric ton in 2015 and a price tag of $43 by the year 2020.  That’s where the 66 percent jump comes into play.

With that kind of money on the line in years to come, this would equate to billions upon billions of dollars riding on projects and policy.  Government actions that involve anything from new mileage standards to clean-energy loans will prove more valuable in their cost-benefit analysis.

The problem is, the government has not accounted for more cost-effective ways to produce this energy. With the shale boom in the U.S., power plants are relying heavily on natural gas. And now the government has chosen to make this more difficult without providing an alternative.

This standard could be used for approaching projects like TransCanada Corp’s (NYSE: TRP) Keystone pipeline and for Peabody Energy Corp. (NYSE: BTU), which has projects planned on public land.

Quiet Implementation

Knowledge about the climate grows every, day and so does the damage that is sustained in undertaking some of these big projects, but we know that already.  It’s nothing new – just a new set of numbers.  But imposing a penalty will do little when there is no alternative. 

What is critical now is to harness the knowledge we possess and make the most of it.  This means careful and considerate planning – doing things the right way – the way they should be done in the first place.  But it shouldn’t change our ideas, or the fact that the U.S. still needs a pipeline that runs from Canada.

And it won’t stop there.  Obama said he would address climate change in his State of the Union, and this goes to show that he means business; everything from buildings to vending machines will be considered when it comes to energy efficiency.

The estimates, which were compiled in May, were calculated by an inter-agency taskforce made of scientists and economists in an effort to better understand the consequences of greenhouse gas emissions.

What is really unsavory about the whole ordeal is how the administration went about revealing these new estimates to the public.  Like a snake in the grass, the changes in carbon prices were slipped in as an early afternoon announcement that took place on May 31 about the efficiency standards for, of all things, microwave ovens – not exactly headline news.

Even supporters of the movement couldn’t help but roll their eyes.  I think it deserves a little more attention than a microwave.

Project Influence

If these changes are applied to projects like the Keystone XL pipeline – a project that still needs presidential approval to obtain its permit – this one pipeline alone would show tens of billions of dollars in added costs over its lifetime. 

If Obama does decide to approve the pipeline, a lawsuit to challenge the “social cost of carbon” would surely take place.

In any likelihood that this new policy is enacted, it’s a game changer, for sure.

For example, vehicle fuel-efficiency standards would cost the industry $350 billion over the next 40 years.  It’s only when the same rules, or the “social cost of carbon”, is applied in savings that the country is provided with any cost net benefit.

Environmentalists are happy that Obama seems to be making good on his promise to attack global warming. But they seem to have forgotten about the lack of efficient alternatives.

Obama had a point when he spoke of our obligation to combat climate change a few months back and said, “A failure to do so would betray our children and future generations.”

But when the nation is struggling for alternatives, a tax might do little to help.


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