0.17 Energy: global warming change  (Page 8/8)

But there is a need to be careful to avoid the mistakes of the EU’s system. Far too many permits were issued. As a result, prices of permits so far have been too low to discourage much pollution.

China recently adopted a timid form of Cap and Trade. The Californian plan is more ambitious.

The California cap and trade system was created in 2012. Any business that emits more than 25 thousand tons of CO ₂ per year must obtain permits from the state government for those emissions. Most of the permits thus far have been issued free of charge. An auction system was devised to distribute the remainder. From 2012-2014 there have been eight auctions. In the latest, in August 2014, businesses paid $11.50 per ton for permits. A total of $2.27 billion had been raised from the auctions by Fall 2014.

The program has clearly been successful in raising revenues for the state. Whether the program helps to materially reduce emissions has yet to be determined. If the program does work as intended it would have reduced greenhouse gases arising in California by 2% by the end of 2014. Should the program prove successful, it may become a model for other states, or even the National Government.

5. encourage worldwide shifts from coal-fired power plants to natural-gas fired plants

A typical coal plant burns 10 million BTUs of fuel to produce one megawatt hour of electricity, but an efficient natural gas power plant burns only 7 million BTUs to get one M.W. of electricity.

That is a 30% reduction in fuel, and the natural gas yields as much as 50% lower carbon emissions. In addition construction gas-fired plants is cheap relative to those for coal. Gas-fired plants cost to build only $1 million per M.W. hours. So a 650 M.W. plant costs $650 million. But a new coal-fired plant costs $3 million per M.W. hour to build, or triple that for a gas plant.

6. invest in programs to make low carbon energy cheaper

For the short to medium-term, the whole world could carefully consider the example of France which relies heavily on nuclear with relatively few problems. If the U.S. is serious about reducing carbon emissions, nuclear energy there requires a sober, new look. However, because of very high capital costs and long construction periods, new nuclear capacity is not competitive without a carbon tax of at least $20 per ton especially when natural gas is as low as $2.00 or $3.00 per million per BTU (British Thermal Units).

Developed and emerging nations are also beginning to capitalize on opportunities in such non-traditional energy sources including wind, solar and tidal power to ultimately bring their combined share of energy to at least 15% by 2025. Technologies in all three, especially wind, are finally beginning to mature, and the costs of deployment are falling.

Sensible investment in bio-fuels, including bio-diesel produced by algae and even bio-fuel from sugar and plant waste could contribute to reduction in emissions as long as it is recognized that the U.S. program for ethanol from corn is not a sensible answer to any question (except the Iowa caucus in Presidential election years). This is one of the most ill conceived subsidy programs ever. Not only does it not , on balance, provide any significant incremental energy, it greatly pollutes the soil and the ocean.

Appendix chapter 17: project evaluation and sustainability

This appendix reviews concepts on discount rates and NPV and IRR. Note that the terms project appraisal project evaluation and cost-benefit analysis are used interchangeably.

Private Sector Project Evaluation ----Uses market information

1. $\text{NPV}=-K_o+\frac{R_1-C_1}{1+r}+\frac{R_2-C_2}{(1+r{)}^2}+\text{. . .}+\frac{R_n-C_n}{(1+r{)}^n}$

Where:

• K _o = Initial Capital Costs (Front End Loaded Capital Costs)
• R = Revenues accruing to a private firm
• C = Costs to the firm

This is all market information
NOTE: For years 1thru n costs include any capital expenditures in addition to K _o , but not depreciation.

• r = Opportunity cost of capital to firm (the discount rate)

Government investments

2. ${\text{NPV}}_G=-K_o+\frac{B{*}_1-C{*}_1}{1+i}+\frac{B{\text{*}}_2-C{\text{*}}_2}{(1+r{)}^2}+\text{. . .}+\frac{B{\text{*}}_n-C{\text{*}}_n}{(1+r{)}^n}$

Where:

• B* = Measured benefits ($, lives saved, floods prevented etc.)
• C* = ($, plus any costs due to externalities)
• i = Social discount rate when [o<i<r] - Social rate less then private rate. To be explained.

The Stern Review cited in this chapter utilizes the NPV framework to forecast the future net costs of global warming. Example:

${\text{NPV}}_{\mathrm{wm}}=-K_o+\frac{B_1-C{*}_1}{1+i}+\frac{B_2-C{\text{*}}_2}{(1+r{)}^2}+\text{. . .}+\frac{B_n-C{\text{*}}_n}{(1+r{)}^n}$

Where:

• B ₁ , B ₂ , B ₃ = Benefits are assumed to be negligible or middling, depending on the deca2de
• C* = Costs of global warming to society worldwide (costs alternate on sea-level rise, temperature changes, presumed higher level incidences of tropical diseases(dengue fever, malaria etc.)

It is to be noted that the Stern Review uses a very low rate of social discount (0.01%) that with a low discount rate, costs emerging decades from now are unduly magnified. And , the really big costs do not emerge for decades.

*Major point: Stern uses a social discount rate of 0.01%