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.