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A Mandatory US Federal Carbon Emissions Program (Kyoto-II) Will Reduce the Cost Advantage that Michigan Fossil Electricity has over Michigan Wind Electricity


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My presentation at the 2009 Michigan Wind Conference, Cobo Hall, Detroit, MI, March 3, 2009

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A Mandatory US Federal Carbon Emissions Program (Kyoto-II) Will Reduce the Cost Advantage that Michigan Fossil Electricity has over Michigan Wind Electricity

  1. 1. <ul><li>A Mandatory US Federal Carbon Cap (Kyoto-II) will Help Reduce the Cost Advantage that Michigan (MI) Fossil Electricity has over MI Wind Electricity </li></ul><ul><li>Tues., 03/03/09 2:00-3:00pm </li></ul><ul><li>Cobo Hall Detroit, MI  </li></ul>
  2. 2. The Conference
  3. 3. The Presenter Michael Stavy Consulting Energy Economist 432 N. Clark St. Suite 204 Chicago, Il 60654 USA 312-832-1631 [email_address]
  4. 4. The Lecture Handout <ul><li>Download lecture handout with details and footnotes </li></ul><ul><li>At end of presentation provide webpage, username and password </li></ul>
  5. 5. The Disclaimer <ul><li>While I prepared this presentation and I believe that it contains correct information, I make no warranty expressed or implied, nor do I assume any legal responsibility for the accuracy, completeness or usefulness of any information presented. </li></ul><ul><li>Presentation © 2009 Michael Stavy </li></ul>
  6. 6. <ul><li>The Global Problem </li></ul>
  7. 7. <ul><li>Increase in GHG emissions is causing an increase in the earth’s surface temperature </li></ul><ul><li>Global warming is an observed scientific fact </li></ul><ul><li>An increase in temperature will change life as usual (LAU) </li></ul>
  8. 8. Life as Usual Parc Montsouris, Paris 14 th
  9. 9. An OECD Coal Plant Life as Usual will not continue
  10. 10. <ul><li>Solutions to Global Warming </li></ul>
  11. 11. <ul><li>Suffer </li></ul><ul><li>Adjustment </li></ul><ul><li>Mitigation </li></ul><ul><li>The Kyoto Protocol is an attempt at mitigation </li></ul><ul><li>Windpower is a mitigating technology </li></ul><ul><li>Kyoto Protocol mitigating “Galbraithian” technostructure </li></ul>
  12. 12. The Lecture <ul><li>Michigan wind-centric </li></ul><ul><li>Kyoto-I (and Kyoto-II) centric </li></ul><ul><li>Carbon reduction centric </li></ul>
  13. 13. <ul><li>The Kyoto Protocol </li></ul>
  14. 14. Protocol Basics <ul><li>Tries to change the human economy so that it will produce the required output with less carbon </li></ul><ul><li>A treaty among sovereign nations </li></ul><ul><li>UNFCC Secretariat administers Protocol for signatory nations </li></ul><ul><li>Protocol only applies to signatory nations and their citizens </li></ul>
  15. 15. Protocol Basics <ul><li>Only citizens of signatory countries can trade Protocol carbon units </li></ul><ul><li>No matter what the Annex B domestic architecture, Protocol trading is sovereign government to sovereign government </li></ul>
  16. 16. Protocol Basics <ul><li>Sets a cap (ceiling) on carbon emissions in the Annex B signatory countries </li></ul><ul><li>U S A not currently a signatory </li></ul><ul><li>Protocol (Kyoto-I) used as model for future mandatory US federal carbon cap (Kyoto-II) </li></ul>
  17. 17. The Green House Gases <ul><li>Protocol measures GHG in metric tons (t m ) of carbon dioxide (CO 2 ), the major GHG. </li></ul><ul><li>In the Protocol, the other GHG emissions (i.e. CH 4 , N 2 O, HFC, PFC, SF 6 ) are standardized into t m -CO 2 by their global warming potential (GWP). </li></ul>
  18. 18. Protocol Carbon Unit <ul><li>Main GHG from burning fossil fuels (coal, natural gas, oil) to generate MI electricity is CO 2 </li></ul><ul><li>t m -CO 2e or t m -CO 2 or t-CO 2 </li></ul><ul><li>carbon emissions or C emissions </li></ul>
  19. 19. More on the Protocol Carbon Unit <ul><li>A ssigned Carbon Emission A llowance U nit (AAU) is the basic Protocol carbon unit of measurement </li></ul><ul><li>AAU = 1 t m -CO 2 </li></ul><ul><li>AAU are only issued by the UNFCC Secretariat </li></ul>
  20. 20. Protocol Carbon Cap <ul><li>Carbon cap is maximum t-CO 2 /yr that a country is allowed emit into air </li></ul><ul><li>Base Year 1990-t 0 </li></ul><ul><li>Emissions measured from base year </li></ul><ul><li>First Commitment Period 2008-2012 </li></ul><ul><li>Period during which Annex B countries must reduce their carbon emissions by, on average, 5.2% from t 0 </li></ul>
  21. 21. The Annex I Countries <ul><li>Annex I countries are all the OECD countries plus CIT countries. </li></ul><ul><li>CIT are former East European countries that are transitioning from central planning to market economies </li></ul><ul><li>The developed countries </li></ul>
  22. 22. The Non-Annex I Countries <ul><li>Countries under development </li></ul>
  23. 23. The Annex B Countries <ul><li>Certain Annex I countries that have been assigned to reduce their emissions </li></ul><ul><li>Protocol assigns carbon cap in AAU (1 AAU = 1 t-CO 2 ) to each Annex B county </li></ul><ul><li>U S A is an Annex I country assigned to Annex B but is not a signatory </li></ul>
  24. 24. Kyoto-II Basics <ul><li>US signatory to Kyoto-II </li></ul><ul><li>Except for certain parameters, Kyoto-II has same architecture as Kyoto-I </li></ul><ul><li>Base Year stays 1990-t 0 </li></ul><ul><li>Second Commitment Period 2013-2017 </li></ul><ul><li>Period during which Annex B countries must reduce their carbon emissions by, on average, another X % from t 0 </li></ul><ul><li>Possible goal 385 ppm atmospheric CO 2 </li></ul>
  25. 25. Carbon Control Architectures <ul><li>Protocol allows each Annex B country to design its own regulatory structure to reduce its carbon footprint </li></ul><ul><li>Three most common are </li></ul><ul><li>1. Cap and command </li></ul><ul><li>2. Cap and trade </li></ul><ul><li>3. Carbon tax </li></ul>
  26. 26. US Cap and Command-C & C <ul><li>Each MI fossil power plant given cap-maximum t-CO 2 /yr that it can emit </li></ul><ul><li>Based on historical emissions </li></ul><ul><li>Plant penalized if actual t-CO 2 /yr > cap </li></ul><ul><li>Not rewarded if actual t-CO 2 /yr < cap </li></ul><ul><li>Wind plants emit 0 t-CO 2 /yr </li></ul>
  27. 27. US Cap and Command-C & C <ul><li>C & C used for HFC emissions caps under the Montréal Protocol </li></ul><ul><li>US Montréal Protocol signatory </li></ul><ul><li>Table # 1 below shows Kyoto-II C & C emissions data for 3 hypothetical MI fossil power plants </li></ul>
  28. 28. US Cap and Command-C & C <ul><li>Fossil power plant 1 is even with cap </li></ul><ul><li>Plant 2 is below its cap </li></ul><ul><li>Plant 3 is above its cap </li></ul><ul><li>Current US state Renewable Portfolio Standards (RPS) are C & C architectures </li></ul>
  29. 30. US Cap and Trade-C & T <ul><li>Basis for C & T is the “command” from </li></ul><ul><li>C & C </li></ul><ul><li>Used by EU ETS </li></ul><ul><li>EU ETS will be model for US Kyoto-II C & T </li></ul><ul><li>US voluntary emissions schemes do not significantly reduce CO 2 emissions -- not good for MI wind electricity </li></ul><ul><li>Each US power plant is given cap (max t-CO 2 /yr that it can emit) </li></ul>
  30. 31. EU ETS <ul><li>Protocol allows countries next to each other to cap emissions under a joint emissions bubble </li></ul><ul><li>European Union Emission Trading Scheme (EU ETS) is one such bubble </li></ul>
  31. 32. Countries Under the ETS Bubble <ul><li>25 EU Countries </li></ul>
  32. 33. EU ETS Specifics <ul><li>Study EU ETS because it is currently the only major C & T market </li></ul><ul><li>Under EU ETS bubble, the AAU is called Eu ropean Carbon Emission A llowance (EUA) </li></ul><ul><li>Use AAU for US Kyoto-II carbon unit </li></ul>
  33. 34. EU ETS Specifics <ul><li>EU Directorate administers the EU ETS </li></ul><ul><li>EU Directorate receives AAU from the UNFCC Secretariat </li></ul><ul><li>EU Directorate distributes EUA to EU ETS countries </li></ul>
  34. 35. EU ETS Specifics <ul><li>Each EU ETS country decided which industrial sectors are capped during first commitment period </li></ul><ul><li>For now only look at carbon caps for EU ETS and US electric utility industries </li></ul>
  35. 36. US Cap and Trade-C & T <ul><li>Each US plant must have an AAU for each t-CO 2 /yr it emits up to its cap </li></ul><ul><li>Assigned cap based on historical emissions </li></ul><ul><li>Plants get AAU from US carbon market purchase, US government auction or US government distribution </li></ul>
  36. 37. US Cap and Trade-C & T <ul><li>US government will get Kyoto-II AAU from UNFCC Secretariat </li></ul><ul><li>US government auctions greatly increases US AAU price- very good for MI wind </li></ul><ul><li>Auctions also very good for planet Earth </li></ul>
  37. 38. US Cap and Trade-C & T <ul><li>Table # 2 below shows Kyoto-II C & T emissions data for same 3 MI fossil power plants </li></ul><ul><li>Plant 1 is even on AAU </li></ul><ul><li>Plant 2 is long AAU; sells AAU </li></ul><ul><li>Plant 3 is short AAU; buys AAU </li></ul>
  38. 40. US Cap and Trade-C & T <ul><li>If a power plant actual emissions < assigned cap, it is long , can sell its AAU in the US carbon market </li></ul><ul><li>If a power plant actual emissions > assigned cap, it is short , must buy AAU in the US carbon market </li></ul>
  39. 41. Cap and Trade Market Efficiency <ul><li>A power plant long is more efficient </li></ul><ul><li>in reducing carbon emissions than a plant that is short </li></ul><ul><li>allowing short emitters to buy from long emitters increases economic efficiency </li></ul>
  40. 42. US Cap and Trade-C & T <ul><li>Kyoto-II C & T helps reduce US fossil electricity’s cost advantage over wind electricity by including the carbon cost of the fossil electricity ( US$/MWh) </li></ul>
  41. 43. Carbon Cost of Fossil Electricity <ul><li>Under Kyoto-II C & T, the carbon content </li></ul><ul><li>(t-CO 2 /MWh) of US fossil electricity must be offset with AAU </li></ul><ul><li>US carbon cost of fossil electricity depends on its carbon content and the cost of an AAU </li></ul><ul><li>Higher the AAU price, the greater the carbon cost, the better it is for MI wind electricity </li></ul>
  42. 44. Carbon Cost of Fossil Electricity <ul><li>Table # 3 below shows carbon cost for US coal, natural gas and wind electricity </li></ul><ul><li>Carbon cost of wind is given as a comparison </li></ul><ul><li>Carbon content of fossil electricity from my 2004 Global Wind Power Conference Paper </li></ul>
  43. 46. Price of US Kyoto-II AAU <ul><li>EUA price is proxy for US AAU price </li></ul><ul><li>Currently no US market price for mandatory carbon </li></ul><ul><li>EUA is best mandatory market price for carbon </li></ul>
  44. 47. Price of US Kyoto-II AAU <ul><li>EU ETS has no public EUA markets with transparent prices for long-term contracts or for current (spot) trades </li></ul><ul><li>EUA prices and volumes not in public domain </li></ul><ul><li>European Climate Exchange (ECX) only provides public access to transparent prices for EUA futures and options </li></ul>
  45. 48. Price of US Kyoto-II AAU <ul><li>ECX EUA Dec 08 futures </li></ul><ul><li>30 Sept 08 month-end settlement price used as proxy EUA price </li></ul><ul><li>EUA price is proxy for US Kyoto-II AAU </li></ul><ul><li>EUA settlement price: 22.35 € </li></ul>
  46. 49. Price of US Kyoto-II AAU <ul><li>1 € = US$ 1.4445 ( 30 Sept 08) </li></ul><ul><li>Converted proxy EUA € price into US$ for use as proxy US Kyoto-II AAU price </li></ul>
  47. 50. Kyoto-II Reduces US Fossil Electricity's Cost Advantage <ul><li>Table # 4 below shows the amount by which the after carbon cost of US fossil electricity is less (more) than MI wind electricity </li></ul><ul><li>Cost of generation is the levelized cost of generation; not the wholesale price (discussed below) </li></ul><ul><li>Cost of carbon is from Table # 3 above </li></ul>
  48. 51. Kyoto-II Reduces US Fossil Electricity's Cost Advantage <ul><li>Total is the sum of the cost of generation and the cost of carbon </li></ul><ul><li>Fossil < wind is amount that MI fossil electricity total cost is less (more) than total cost of MI wind electricity </li></ul><ul><li>Hydro column without data requires further study </li></ul>
  49. 53. Cost of Generating Electricity <ul><li>No public domain data (IEA, EIA) on the actual cost of generating EU (or US) fossil, wind and hydro electricity </li></ul><ul><li>Cost of generating electricity not transparent </li></ul><ul><li>Without transparent costs, the efficient market hypothesis (EMH) does not hold in these wholesale electric markets </li></ul>
  50. 54. Cost of Generating Electricity <ul><li>Table # 5 below shows EU and US cost of coal, gas and wind generation converted from proxy € values published in January, 2008 Wind Power Monthly (WPM) article and graphs </li></ul><ul><li>Used WPM 8% cost of capital € values </li></ul><ul><li>Readers can use their own values </li></ul>
  51. 55. Fossil cost < wind cost
  52. 56. Reliable Cost Data
  53. 58. The Carbon Tax Architecture <ul><li>Under Kyoto-II, US can also use a carbon tax to cap carbon </li></ul><ul><li>Tax is $/t-CO 2 </li></ul><ul><li>The carbon content ( t-CO 2 /MWh) of fossil electricity is taxed </li></ul><ul><li>Must convert tax into $/MWh </li></ul>
  54. 59. The Carbon Tax Architecture <ul><li>Table # 6 below uses a tax equal to above proxy price of Kyoto-II AAU $32.29/AAU (22.35 €/EUA) </li></ul>
  55. 60. Carbon Tax Computation
  56. 61. Carbon Tax Summary <ul><li>Kyoto-II carbon tax is as efficient as C & T but historically unpopular in USA </li></ul><ul><li>No financial drivers behind it </li></ul><ul><li>Tax/MWh is the reduction in MI fossil electricity cost advantage over MI wind electricity </li></ul><ul><li>Carbon tax also very good for MI wind </li></ul><ul><li>Tax also reduces cost advantage of MI fossil electricity over MI wind electricity </li></ul>
  57. 62. The Conclusion <ul><li>EU-ETS has not been able to reduce its carbon emissions to the % from the base year level required under Kyoto-I </li></ul><ul><li>Current carbon status quo only reduction of 0.6% by 2010 </li></ul><ul><li>New steps in EU-ETS will need to take to reduce GHG by 20% in 2020 </li></ul>
  58. 63. Some More Conclusions <ul><li>Other “EU non C & T” Kyoto-I carbon reduction drivers have reduced EU fossil electricity's very large cost and institutional advantages </li></ul><ul><li>EU accelerating the increase in wind and other non-carbon electricity </li></ul>
  59. 64. Some “Non EU ETS” C & T Wind + & - & - Drivers <ul><li>ETS country specific wind feed in tariffs (example DK, DE, IT, ES wind feed tariff) ++++++ </li></ul><ul><li>Political parties with Green agenda +++++++++++++++++++++ </li></ul><ul><li>Wind transmission dispatch & bottlenecks -------- </li></ul><ul><li>Rising cost of wind turbines ------ </li></ul>
  60. 65. Wind Transmission Dispatch <ul><li>Merit dispatch of electric power is currently least costly generation including congestion pricing </li></ul><ul><li>Not enough transmission to handle all wind plants </li></ul><ul><li>Congestion pricing; paying economic rents </li></ul><ul><li>Merit dispatch should also be defined in terms of least carbon generation </li></ul>
  61. 66. Wind Facts to consider by MI when planning for Kyoto-II <ul><li>World’s first wind feed-in-tariff was in California U S A under the first Governor Jerry Brown </li></ul><ul><li>EU transmission and siting regulations supported by EU Green Parties have allowed EU ETS wind to develop </li></ul>
  62. 67. MI Government Policies to Help MI Wind During “Kyoto-II” <ul><li>Wind feed-in-tariffs </li></ul><ul><li>Community wind plants </li></ul><ul><li>Wind friendly grid access tariffs </li></ul><ul><li>Green siting statutes for wind plants </li></ul><ul><li>MI carbon cap with consequences </li></ul>
  63. 68. More LAU-Indiana Dunes U S A US ladybug wishes you good luck!
  64. 69. Download Lecture Handout <ul><li>My website: </li></ul><ul><li>User Name: Detroit2009 </li></ul><ul><li>Password: Mi1837 </li></ul><ul><li>Must use capital D & M </li></ul>
  65. 70. My Contact Information <ul><li> </li></ul><ul><li>[email_address] </li></ul><ul><li>312-832-1631 </li></ul><ul><li>432 N Clark St., Suite 204, </li></ul><ul><li>Chicago, IL 60610 USA </li></ul><ul><li>3 March 2009 </li></ul>