What is the Future of U.S. Coal?

Climate concerns have gone mainstream, even in the United States.  This has been reflected in the passage by the U.S. House of Representatives of HR 2454, the so-called Waxman-Markey bill, and will soon be reflected in the debates in the U.S. Senate.  (I have written a number of blog posts on this topic.  If you’re interested, please see:  “Opportunity for a Defining Moment” (February 6, 2009); “The Wonderful Politics of Cap-and-Trade:  A Closer Look at Waxman-Markey” (May 27, 2009); “Worried About International Competitiveness?  Another Look at the Waxman-Markey Cap-and-Trade Proposal” (June 18, 2009); “National Climate Change Policy:  A Quick Look Back at Waxman-Markey and the Road Ahead” (June 29, 2009).  For a more detailed account, see my Hamilton Project paper, A U.S. Cap-and-Trade System to Address Global Climate Change.)

At the center of much political attention in the United States is “the future of coal,” a subject that was illuminated by the 2007 MIT study with that title, authored by John Deutch and Ernest Moniz, as well as several reports issued by the U.S. Energy Information Administration (EIA).

CO2 emissions from coal consumption accounted for 30 percent of U.S. greenhouse gas emissions in 2005, and nearly all resulted from coal’s use in generating electricity.  According to EIA forecasts, the vast majority of coal demand over the coming decades will be from existing power plants, with currently existing plants still accounting for two-thirds of total demand in 2030.  Therefore, while much attention has been given to how climate policy and technological advances may affect new power plants, over the next two decades a policy that affects both existing and new coal-fired power plants would have far greater impacts than a policy that affects only new plants.

Potential climate policies can be grouped into four major categories:  standards, subsidies or credit-based programs, carbon taxes, and cap-and-trade (like Waxman-Markey).  The cost of retrofitting existing plants to meet CO2 emission standards would likely be so high that standards could be imposed only on new plants.  While such standards may dampen investments in new coal-fired power plants – as they may require expensive carbon-capture-and-storage at any new coal plant (see below) – standards would be unlikely to affect operations of existing plants.  In fact, by increasing the cost of new plants, such standards can encourage generators to extend the life of existing plants.  Hence, new source standards hold little promise in this domain.

Likewise, while subsidies or credit-based programs – including renewable portfolio standards — may displace some new coal-fired generation with other types of generation, they will have little, if any, effect on the operation of existing coal-fired power plants.  And carbon taxes are opposed by the regulated community because of the additional costs they would place on private industry, and are opposed by environmentalists because of the political challenges.

This leaves cap-and-trade.  Such a system would cover both new and existing emission sources, and could have a more pervasive effect on coal use than standards, subsidies, or credit-based programs.  For this and other reasons, most policy attention in the United States has been focused on potential cap-and-trade systems.

Coal combustion generates the most CO2 emissions per unit of energy.  As a result, a cap-and-trade system’s effect on the cost of coal use would be significantly greater than its effect on the cost of gasoline or natural gas consumption.  For example, a $100 per ton of CO2 allowance price would increase the average cost of electricity generation from coal-fired power plants by about 400%, the average cost of electricity generation from natural gas plants by about 100%, and gasoline prices by about $1.00 per gallon.

The competitiveness of conventional coal-fired electricity generation relative to other technologies diminishes as the stringency of an emissions cap increases.  Therefore, much attention is being given to opportunities to employ carbon-capture-and-storage (or CCS) technologies, which would separate carbon dioxide from other stack gases, liquify it, and store it underground for long periods of time.

Three important caveats about CCS should be considered.  First, it is likely that CCS will be economically practical only for new plants, and only when CO2 allowance prices exceed $100 per ton of CO2 for early adopters (cost estimates have increased over the past few years, as technological and institutional challenges have become clearer).  Second, there is significant uncertainty about the cost of CCS, because it has not yet been commercially demonstrated.  And third, CCS significantly reduces, but does not eliminate, CO2 emissions from coal-fired generation.

In light of the growing momentum toward a mandatory U.S. climate policy, the anticipated impacts of such policies on coal use are an important issue.  But the remaining uncertainties are great.  Impacts of a climate policy on coal use will depend upon the type of climate policy employed, the stringency of the policy, the future price of natural gas, the future cost and penetration of nuclear and renewable technologies, and the cost of coal-fired generation with carbon capture and storage technologies.  Are all promising topics for future posts.

About Robert Stavins

Robert N. Stavins is the Albert Pratt Professor of Business and Government at the Harvard Kennedy School, Director of the Harvard Environmental Economics Program, Chairman of the Environment and Natural Resources Faculty Group at the Kennedy School, Director of Graduate Studies for the Doctoral Programs in Public Policy and Political Economy and Government, Co Chair of the Harvard Business School Kennedy School Joint Degree Programs, and Director of the Harvard Project on International Climate Agreements. He is a University Fellow of Resources for the Future, a Research Associate of the National Bureau of Economic Research, the Editor of the Review of Environmental Economics and Policy, and a Member of: the Board of Directors of Resources for the Future, the Board of Academic Advisors of the AEI Brookings Joint Center for Regulatory Studies, the Editorial Boards of Resource and Energy Economics, Environmental Economics Abstracts, B.E. Journals of Economic Analysis & Policy, and Economic Issues. He is also an editor of the Journal of Wine Economics. He was formerly a member of the Editorial Board of Land Economics, The Journal of Environmental Economics and Management, the Board of Directors of the Association of Environmental and Resource Economists, a member and Chairman of the Environmental Economics Advisory Committee of the U.S. Environmental Protection Agency's (EPA) Science Advisory Board, the Chair of the Scientific Advisory Board of the Massachusetts Executive Office of Environmental Affairs, a Lead Author of the Second and Third Assessment Reports of the Intergovernmental Panel on Climate Change, and a contributing editor of Environment. He holds a B.A. in philosophy from Northwestern University, an M.S. in agricultural economics from Cornell, and a Ph.D. in economics from Harvard. Professor Stavins' research has focused on diverse areas of environmental economics and policy, including examinations of: market based policy instruments; regulatory impact analysis; innovation and diffusion of pollution control technologies; environmental benefit valuation; policy instrument choice under uncertainty; competitiveness effects of regulation; depletion of forested wetlands; political economy of policy instrument choice; and costs of carbon sequestration. His research has appeared in the American Economic Review, Journal of Economic Perspectives, Quarterly Journal of Economics, Journal of Economic Literature, Science, Nature, Journal of Environmental Economics and Management, Ecology Law Quarterly, Journal of Regulatory Economics, Journal of Urban Economics, Journal of Risk and Uncertainty, Resource and Energy Economics, The Energy Journal, Energy Policy, Annual Review of Energy and the Environment, Explorations in Economic History, Brookings Papers on Economic Activity, other scholarly and popular periodicals, and several books. He is the co-editor of Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World (Cambridge University Press, 2007), editor of the fifth edition of Economics of the Environment (W. W. Norton, 2005), co editor of Environmental Protection and the Social Responsibility of Firms (Resources for the Future, 2005), editor of The Political Economy of Environmental Regulation (Edward Elgar, 2004), co editor of the second edition of Public Policies for Environmental Protection (Resources for the Future, 2000), and the author of Environmental Economics and Public Policy: Selected Papers of Robert N. Stavins, 1988 1999 (Edward Elgar, 2000). Professor Stavins directed Project 88, a bi partisan effort co chaired by former Senator Timothy Wirth and the late Senator John Heinz, to develop innovative approaches to environmental and resource problems. He continues to work closely with public officials on matters of national and international environmental policy. He has been a consultant to the National Academy of Sciences, several Administrations, Members of Congress, environmental advocacy groups, the World Bank, the United Nations, the U.S. Agency for International Development, state and national governments, and private foundations and firms. Prior to coming to Harvard, Stavins was a staff economist at the Environmental Defense Fund; and before that, he managed irrigation development in the middle east, and spent four years working in agricultural extension in West Africa as a Peace Corps volunteer.
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5 Responses to What is the Future of U.S. Coal?

  1. Phillip Huggan says:

    Coal equals LNG equals tar sands. Duke Energy is diversifying into wind. There’s lots of things you can manufacturer from coal. Natural gas pipelines are great if you can think of a power hungry industry to grow along pipeline (off peak power, desalination, I dunno). Tar sands in Canada use a lot of natural gas, I assume this folds into finding power hungry apps….

    15 of 16 largest manufacturing companies on Earth are autos or fossil fuels. IDK how economical it would be to promote just harvesting natural gas where oil and gas reserves are found. IDK even if natural gas reserves are large enough to cover the ammortization of a new natural gas pipeline. The whole world’s economy is stuck in this deadend path analogous to rallying your Right Wing base into a market forces dead-end, not realizing you can change your policies on a dime but that they won’t follow you until their educated kids get dad’s wallet….
    Much of oil’s business lines look promsing but are only a revenue sliver.

  2. Phillip Huggan says:

    All the fossil fuel exploration (argh even natural gas) in Central-West USA is and will destroy freshwater supplies, including irrigation water; about 1/8 of USA’s freshwater and crop yields are at aquifer pollution risk. This seems minor to me at the moment, maybe the Colorado will dry up anyway, IDK.

  3. Vera says:

    The issue of the future of coal depends mainly in a few things. How the government strongly supports green energy and find means to find more alternatives and hasten existing ones. The politics involved in rallying for supporters and producing laws and programs that would support green energy. The issue of the alternative is not a question, the issue of leaving the profitable coal industry, and oil industry is the issue.

  4. I hope the government will have a great decision if this will be approve or not. I am a nature lover and I don’t really like people to ruin our natural resources for business. I hope there will be some other proposal which will benefit us all and will not harm nature.

  5. Environmentally friendly energy sources are the best option to save this Planet.

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