Saturday, July 12, 2008

What's the effect of carbon prices?

There's a common misconception that oil-fueled transportation will be the main front in the fight against global warming. In reality, carbon prices will make far more of a difference in the electricity market.

Consider a price of $200 per ton of carbon dioxide. While this is ludicrously high, it's an interesting thought experiment. Such a price roughly translates into a $2 increase in gas prices. To be sure, this is a significant jump, but we've experienced the same runup in price over the past several years, and automobile transportation has hardly been wiped off the face of the Earth.

Meanwhile, that same carbon price causes a 20 cent per kilowatt hour increase in the cost of coal-fired electricity. The current wholesale price of coal power is 4-5 cents per kilowatt hour; a 20 cent jump would make coal decisively less economical than almost every alternative source of power, including solar thermal, wind, combined-cycle gas, and nuclear. Unless coal plants implemented thorough carbon capture and sequestration, coal electricity would be wiped off the face of the earth.

The lesson? While high carbon prices affect all carbon-intensive parts of the economy, the impact is far more radical for electricity than for oil-fueled transportation.

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