Berkeley, March 4, 2010
Severin Borenstein, Co-Director of the Energy Institute at Haas, moderated and spoke in the “Heated Debate over Cooling Policies” panel as part of UC Berkeley’s Energy Symposium 2010. As moderator, he wasn’t scheduled to be a speaker, but he filled in for scheduled panelist California State Assemblymember Nancy Skinner who wasn’t able to attend.
Borenstein’s analysis of the likely effects of proposed cap and trade plans on the global consumption of fossil fuels was both compelling and troubling, as he made the case that in order to effectively curtail the global use of fossil fuels, the price of carbon would have to be much higher than $30 per ton. Borenstein said that alternative energy doesn’t just have to beat the current market price of gas and coal, it really has to beat fossil fuels’ very low extraction cost (plus any added carbon price), since current fossil fuel prices have plenty of room to flexibly drop with changing market conditions.
Honking horns can be heard from the street below as drivers respond to boycotting students protesting against statewide budget cuts and fee hikes.
“It does look we are on a track, if we ever actually do get climate legislation, to get an extraordinarily low price, one that will cause no press conferences outside the gas stations. $30 a ton, which seems to be, even that is a difficult price for Congress to accept, would be about 27 cents a gallon at the pump. We see fluctuations like that all the time, and I think, it just would draw no attention. It would also cause almost no change. $30 a ton doesn’t take coal out of being the most efficient cost effective way to produce electricity. If that’s your entire climate policy, you continue to make electricity with pulverized coal power plants. It’s worse than that I think in ways people don’t appreciate, which is that the price of fossil fuels right now reflects not just the cost of extracting it but a scarcity rent associated with a shortage of fossil fuels. This is even true in coal because of the transportation costs for moving coal, but it’s clearly true in oil, everybody understands that most of the oil can be extracted for well under $80 a barrel. The flip side of that is, if you really are going to drive those fuels out of the market, which is what you have to do, if we’re talking about market mechanisms you have to make it uneconomic to produce energy with those fossil fuels. Think about what happens if you start using a lot less oil. The price of oil will fall. But if it falls to $40 a barrel, the price of gasoline’s going to go down to. That’s going to make it much less economic to use alternatives to gasoline. Likewise if the price of coal falls, or if mine mouth power plants continue to operate even when carbon prices go up, you’re not driving them out of the market.”
“What that means is that if you really think through the full economics of what it would take in terms of market mechanisms to remove fossil fuels from the system, a price of $30 a ton isn’t going to do it, and my guess is a price of $80 a ton isn’t going to do it. Because what’s going to happen is as the price of carbon goes up the price of fossil fuels goes down, and they continue to be economic. What the alternatives have to beat is not the current price of fossil fuels, what they have to beat is the true cost of extracting them. That is you have to be able to make them uneconomic at just the marginal cost of extraction, and fossil fuels are incredibly cheap to extract and burn. So if we’re talking about a market mechanism, I think that we need to be thinking about prices that are well in excess of the prices that Congress now talks about.
This worries me about cap and trade, it worries me even more about taxes, because once you start talking about taxes and you lock in a number, cap and trade has the flexibility to then change if you’re not making progress on reducing carbon. Taxes requires a new act of Congress, literally, to get to a higher tax, so we put in a $30 a ton, $40 a ton, some sort of tax, and if we find out it’s doing nothing, we like the EU is now, are shocked to find out that despite the fact that we’ve passed legislation, our greenhouse gas emissions have continued to climb, and now we have to start all over again, and I think it just becomes more and more difficult. Unfortunately, when I’ve said this to my environmental friends, they have not hopefully but reassuringly told me that it will be easier because there will be more obvious climate disasters by then. You know that just can’t be the right public policy track, right?”
Report by James George