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Can carbon tax remove gorilla in the room?

RICE (US)—In order to limit carbon dioxide (CO2) emissions, policymakers should levy a carbon tax to encourage a transition from coal-based electricity production to a system based on natural gas, a new research paper recommends.

The United States has pledged to reduce the 2005 levels of CO2 emissions by 17 percent by 2020.

There are three important unresolved questions in the current debate on the reduction of carbon dioxide emissions, argue Rice University researchers Dagobert Brito, the George A. Peterkin professor of political economy, and Robert Curl, the Kenneth S. Pitzer-Schlumberger professor emeritus of natural sciences and winner of the 1996 Nobel Prize in chemistry.

“First, what is the range of prices on carbon dioxide emissions that will be necessary to achieve the desired reductions? Second, should electrical generators and transport fuels be regulated jointly or separately? Third, should the restrictions be in the form of a quantity limit such as cap and trade or in the form of a carbon tax?”

The working paper was published by Rice’s Baker Institute for Public Policy.

Brito and Curl calculated the cost of CO2 emissions by modeling the transition from coal-based electricity generation to a system based on natural gas.

Because coal-based electricity generation accounts for about a third of US CO2 emissions (some 2 billion metric tons), Brito and Curl describe it as “the 900-pound gorilla in the room.”

Replacing coal generators with natural gas, they believe, “is the most economical way to achieve a target of reducing carbon dioxide emissions by 20 percent.”

It’s doubtful that natural gas supplies will be adequate to maintain the shift in the long run, the researchers say. Development of nuclear and renewable electricity generation will need to continue at a rapid pace.

Natural gas, however, can be the transition technology to carbon-neutral electrical generation. “Unless or until there is a technological breakthrough in carbon sequestration,” Brito and Curl write, “the carbon intensity of coal means that ‘clean coal’ cannot be an important factor in reducing carbon dioxide.

“Replacing existing coal generation capacity with modern coal generation plants can only reduce total carbon dioxide by 5 percent.”

The efficiency of coal generators is very concentrated, Brito and Curl note. For instance, “at current prices for fuels, a carbon price of approximately $30/ metric ton (MT) will shut down 10 percent of coal generator capacity. An additional increase of $15 — resulting in a carbon dioxide price of $45/MT — will shut down 90 percent of coal generator capacity.”

The narrow range for the price of carbon dioxide means that coal generator capacity is quite sensitive to the price of carbon dioxide emissions. Consequently, small variations in the price of carbon dioxide emissions can lead to large variations in the amount of electricity supplied by coal generators. The market in carbon dioxide permits could possibly create volatility in the market for electricity.

As a result of the risk of high volatility, the authors back a carbon tax to assist the transition from coal to natural gas. They also assert “it is possible to decouple the pricing of allocations for transportation fuel from the allocations for the production of electricity,” because the rise in carbon prices needed to effect the shift in electricity generation would have very little impact on transportation fuels.

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