Clean air doesn't come on the cheap

It’s getting close to rubber-meets-the-road time for federal climate change legislation, the time when we get a better idea of how much this is going to cost. A report by the main Texas grid operator, ERCOT, arguably tried to do just that yesterday, we reported.
It shouldn’t be any surprise that putting a price on carbon will cost some money. The whole reason these laws are proposed is because of the notion of externalities, in this case that the price we pay for power doesn’t actually reflect its true cost when considering its impact on the environment. (This being Houston this is where we need to acknowledge that not everyone believes burning fossil fuels is having a negative impact of the planet’s climate.)
The method outlined in the federal legislation getting the most attention is a cap-and-trade system, which sets a definitive cap on total emissions and lets companies buy and sell excess emission allowances. Environmental groups generally support this method because it sets a clear goal for emissions, and bankers and trading firms like it because they make money off of such systems, either fees for transactions or profits off of price movements.
The price of carbon in such a scheme could be highly volatile, however, which is why many economists and some energy producers tend to prefer a simple carbon tax because the price is much more predictable — the government says “you pay $X for every ton of CO2 emitted” with the hope it will be an incentive to reduce emissions. It is also much simpler to administer (i.e. it’s expected CO2 trading will develop a complex derivatives market that will make the mortgage market look laughably simple).
How much it will really costs us to put a price on CO2 is hard to say. The EPA estimates CO2 would range from $13 to $17 a ton in 2015, rising about 5 percent a year to between $17 to $22 a ton by 2020 and $74-$96 a ton by 2050. There’s no shortage of other studies that try to come up with a cost, but it should be noted that the current bill also includes a bunch of energy efficiency efforts that some argue will actually reduce costs (there’s a lengthy thread of back-and-forth over the price estimates in the blogosphere too.)
Is history any guide? The European Union launched its carbon trading scheme earlier this decade to decidely mixed results, with emissions reductions not quite hitting the mark and prices being pretty low (after an early climb). Some predicted the original cap-and-trade model, the U.S. acid rain program, would bankrupt the power industry, but it ended up being pretty manageable largely because it turned out the technology to remove the most undesireable components from coal plant smoke stacks wasn’t that expensive to develop.
Here are some other versions of the ERCOT story from Reuters, The Dallas Morning News, The Fort Worth Star-Telegram and the Wall Street Journal.
Here’s a cost study by PJM Interconnect that ERCOT more of less modeled its study on.
And here’s more on the first mandatory carbon market in the U.S., which just started this year.
Also, here’s a Houston-based site that tracks climate change news, and the popular Carbon Offsets Daily blog.