Carbon Capture and Storage

Introduction

Coal Mining

Economics of Coal Mining

Coal is a fossil fuel primarily used for electricity production. Any solution has impacts economy wide. There are towns that were created around a coal mine. There are states, like WV, that are coal states. Despite the economic reliance on coal, there is also a social movement against coal surrounding the environmental impact. Of the possible solutions, one discussed is the use of Carbon Capture and Storage. (CCS)

CCS and Cap and Trade

Cap and trade functions by capping the emissions and bringing the cap down over time. Each company would be given a certain number of allowances. Some emitters will be able to reduce their emissions at a lower cost and will do so. Others will not be able to reduce their emissions at a lower cost, and will have to buy more allowances from the ones that can. As a result, the buyers and sellers will create a market.

Example

The buyers and sellers would benefit from this market. One projection for the price of using CCS to abate a ton of carbon is $25 by 2030. [1] Not all companies will be able to abate for this cost. Pretend there are two companies with the ability to abate for $25 and $28. The company that can abate at the lower cost will abate more than their share. These extra credits can then be sold to the higher cost abater. The cost they will settle on will be between $25 and $28.

They both benefit from trading. The $25 abater would get a profit for their dedication to reducing their carbon footprint. The $28 abater will be able to reach their reduction level at a price cheaper than if they were required to abate on their own.

Spurs Innovation

The low and high cost abaters recognize that there is an incentive to reduce their emissions at the lowest cost possible. The desire for lower costs and the declining cap will make it necessary for new cheaper ways to be created to abate carbon. As a result, money will be invested in perfecting and cheapening CCS technology.

Possible Consequences

The market is imperfect and subject to fluctuations. Although there is an economic incentive, implementing cap and trade with CCS technology could have obstacles to overcome. Since cap and trade with CCS would be a new factor in the US market, people could have issues with complying at first. The investment in perfecting CCS technology could have a slow start. If the investment does not come as planned and the cap keeps increasing the amount companies have to pay for coal, it could have economy wide consequences.

“Buffett sees Burlington Northern as a growth vehicle to earn more on the billions in cash Berkshire has on its books carrying coal, wheat and other resources across the nation.”[2] This quotation refers to Warren Buffett’s purchase of Burlington Northern, a rail road. One of the possible consequences of an increase in the cost of coal is a decrease in the demand for it. If there is a decrease in the demand for coal, then there is a decreased need for the railroad to move it. As a result, not only will the coal industry be hurt, but also the railroad and transportation industry.

Charlie