1.  The President denied the Keystone XL pipeline to transport oil from Canada to be refined and used in the U.S.

The Obama Administration decided on January 18 that constructing the Keystone XL pipeline was not in the national interest of the United States. The proposed pipeline had the capacity to carry 700,000 barrels of oil to American refineries, as well as deliver 20,000 jobs to a depressed economy. Only in Washington D.C. would this project not be considered an economic miracle and a key part in securing our energy future.

2. The President’s policies have restricted access to domestic energy resources

Despite numerous discoveries of abundant natural resources, only 2 percent of offshore areas are currently leased for oil and natural gas production. That means 98 percent of energy-rich offshore federal lands remain restricted for exploration and development. Furthermore, despite the claims of the Obama administration and his surrogates that U.S. oil and gas production has gone up during his tenure, the reality is that oil and natural gas production on federal lands—for which he could justifiably claim some credit—has decreased by over 40 percent since 2000. Only on state and privately held lands is production increasing, and it is increasing on account of technologies like hydraulic fracturing that the Obama administration wants to restrict.

3. President Obama acknowledges that electricity prices will have to increase under his proposed policies and regulations

Referencing his proposed cap-and-trade energy tax, President Obama had a rare moment of political clarity when he said, “…if someone wants to build a coal plant, they can – it’s just that it will bankrupt them, because they are going to be charged a huge sum…” Unfortunately the President’s crusade against affordable energy didn’t end there.  IER recently noted that new EPA rules and regulations for power plants would shut down roughly 10 percent of our coal electricity production.   The 28 gigawatts of generating capacity that would go dark are the equivalent of shutting down every power plant in the state of Indiana or North Carolina, and, in the administration’s own words, would “necessarily” make our energy prices skyrocket.

The most troubling aspect of the energy debate is that President Obama and his administration are actively pursuing policies that make energy more expensive for consumers and businesses, while sending billions to failed businesses like Solyndra. Taxpayer funded renewable energy is a fantasy, but the pain at the pump is very real.

• EIA is still forecasting a fossil fuel future for the United States with fossil fuels representing 77 percent of energy consumption in 2035, compared to 83 percent in 2010.
• New EPA regulations cause coal-fired generation to decrease its share substantially in the electric generation sector, with increased shares from natural gas-fired and renewable generation.
• Natural gas production increases by 6 trillion cubic feet in the 25 year projection period thanks to hydraulic fracturing technology with the United States becoming an exporter of liquefied natural gas and a net natural gas pipeline exporter.
• Similarly, oil production from onshore lands, mainly privately owned, increases by a million barrels per day by 2020, helping to reduce oil imports from a 49 percent to a 36 percent share by 2035.  Like natural gas, this increase is due in large part to shale formations that are accessed with hydraulic fracturing.
• Energy-related carbon dioxide emissions remain below 2005 levels through 2035.

Slow Energy Demand Growth. In its latest energy outlook, EIA expects energy demand to grow slowly at 0.4 percent per year between 2010 and 2035, reflecting a slow economic recovery, higher energy prices, and greater energy efficiency in end-use technologies.

Energy consumption per capita declines by an average of 0.5 percent per year from 2010 to 2035 due to a prolonged economic recovery and improving energy efficiency. Total U.S. population increases by 25 percent from 2010 to 2035, but energy use grows by only 10 percent.

The energy intensity of the U.S. economy, measured as primary energy use per dollar of gross domestic product, is expected to decline by 42 percent from 2010 to 2035 as the result of a continued shift toward less energy-intensive manufacturing and service industries, rising energy prices, and increased energy efficiency. This is a continuation of its historic decline. From 1990 to 2010, for example, energy use per dollar of GDP declined by 1.7 percent per year, primarily because of shifts within the economy away from manufacturing and towards the service sector, which uses relatively less energy per dollar of GDP.

Moderate Petroleum Demand and Production Increases. EIA expects the demand for transportation fuels to be moderated by higher energy prices and Federal corporate average fuel economy (CAFE) standards. Even so, liquids demand increases by almost 1 million barrels per day, from 19.2 million barrels per day in 2010 to 20.1 million barrels per day in 2035. But even at 20.1 million barrels per day, the United States does not reach the liquids demand level of 2007, the year before high oil prices first surfaced and the recession hit.

Domestic oil production also increases from 5.5 million barrels per day in 2010 to 6.7 million barrels per day in 2020, but then declines to 6.1 million barrels per day in 2035. The 2020 forecasted level of production of 6.7 million barrels per day would be the highest level of output in the United States since 1993. Oil production onshore, mostly on private lands in new shale oil deposits, is expected to produce 4.24 million barrels per day by 2020, over 1 million barrels per day more than in 2010. Offshore oil production reaches a peak of 2 million barrels per day in 2020 and then declines with a low of 1.61 million barrels per day by 2030. Because of moderate demand, increased oil production and increased use of biofuels (mostly ethanol), net oil imports decline from 49 percent in 2010 to 36 percent in 2035.

Natural Gas Production and Consumption Increases. Of the fossil fuels, natural gas demand is projected to increase the most, reaching 26.48 trillion cubic feet in 2035, and an increase of 2.35 trillion cubic feet from 2010 levels. In fact, due to horizontal drilling combined with hydraulic fracturing technology, natural gas production is expected to exceed demand, and the United States becomes a liquefied natural gas (LNG) exporter in 2016 and a net pipeline exporter in 2021. Natural gas production is expected to reach 27.84 trillion cubic feet in 2035, over 6 trillion cubic feet more than produced in 2010. Shale gas is expected to account for 49 percent of total U.S. dry gas production in 2035, compared to 23 percent in 2010.

The EIA revised its technically recoverable shale gas estimates downward from those used in its previous outlook.  However, geologists are questioning the new estimates, saying companies move gas from unproven resources to proven reserves.  According to Greg Wrightstone, vice president of geology at Mountaineer Keystone LLC, companies are driven to prove their resources in order to quickly increase their own value.[ii]

Coal Consumption to Decline in the Near Term.  Coal consumption is expected to decline by 128 million short tons between 2010 and 2015 and then increase, reaching 1,155 million short tons by 2035, 104 million short tons more than in 2010. Reduced demand for coal in the early years of the forecast is due to lower coal-fired generation caused by new EPA regulations, causing coal-fired capacity retirements and the addition of new EPA-required equipment that forces most coal-fired units to be offline for at least 18 months. EIA expects 33 gigawatts of coal-fired capacity to retire by 2035, with the majority (29 gigawatts) retiring by 2015. Retired coal-fired capacity is expected to be replaced by natural gas-fired and renewable capacity.

Electricity Generation Continues to Shift toward Natural Gas. The natural gas share of electric power generation is expected to increase from 24 percent in 2010 to 27 percent in 2035 due to lower capital costs for natural gas fired capacity and relatively low natural gas prices due to hydraulic fracturing that enables production of abundant U.S. shale gas resources.

Coal’s share of generation continues its historical decline. Over the next 25 years, the projected coal share of electricity generation falls to 39 percent from 45 percent in 2010, because of onerous EPA regulation, slow growth in electricity demand, continued competition from natural gas, and mandated renewable plants. The new EPA regulations also affect old oil and natural gas steam units. EIA expects 10 gigawatts of those units to retire by 2015 and a total of 21 gigawatts of oil and gas steam units to retire by 2035. IER estimated retirements for just 2 of EPA’s regulations to be almost 30 gigawatts, double EPA’s estimates, which are almost certainly an underestimate.

EIA estimates that 6 gigawatts of nuclear capacity will be retired by 2035 and are replaced by almost 10 gigawatts of new nuclear capacity and 7 gigawatts of increases to existing nuclear capacity. The 6 gigawatts of retirements occur primarily in the last few years of the projection period and result from nuclear plant owners not applying for and/or receiving license renewals to operate their plants beyond 60 years.

The share of renewable energy is expected to grow from 10 percent to 16 percent between 2010 and 2035 mainly because of Federal tax credits and implementation of state renewable portfolio standards that mandate utilities to purchase power from renewable energy sources.  All renewable technologies increase their capacity levels, with wind power’s capacity increasing by 72 percent (28 gigawatts) over the 25 year forecast period, solar power’s capacity increasing 500 percent (20 gigawatts), biomass capacity increasing 152 percent (10 gigawatts), geothermal capacity increasing 170 percent (4 gigawatts), and hydroelectric capacity increasing 5 percent (4 gigawatts).

Carbon Dioxide Emissions have peaked. U.S. energy-related carbon dioxide (CO2) emissions have peaked—at least through 2035. EIA projects that energy-related CO2 emissions will total 5,806 million metric tons in 2035, more than 3 percent below the 2005 level of 5,996 million metric tons.

Energy-related carbon dioxide emissions remain lower than 2005 levels despite fossil fuels commanding a 77 percent share of energy consumption in 2035, compared to 83 percent in 2010. Electricity-related carbon dioxide emissions, the highest sector-related emissions, are projected to be tempered by lower anticipated economic growth, higher efficiency standards for end-use appliances, State renewable portfolio standards (RPS), increased natural gas use in lieu of coal, and new environmental regulations targeting coal-fired power plants.

Conclusion

As much as we hear about the rise of renewable energy, coal, oil, and natural gas will continue to provide the lion’s share of our energy for the foreseeable future.

U.S. Coal Resources, Production and Consumption

The United States has the largest coal reserves of any country in the world, totaling 261 billion short tons. But its total coal resources are much higher at 10.3 trillion short tons, of which 486 billion short tons have been estimated by the Energy Information Administration (EIA) to be recoverable.

According to the EIA, U.S. coal production in 2010 was 1,084 million short tons. Coal production in 2011 is expected to be slightly higher with coal production for the first 11 months of 2011, 0.3 percent higher than for the same period in 2010. Most of the coal (93 percent) consumed in 2010 was used to generate electricity, producing more electricity than any other generating source. Almost 45 percent of the electricity generated in 2010 was produced by coal-fired plants.[ii] The industrial sector, second to the generating sector in coal consumption, consumed almost 7 percent of total coal consumption in 2010. The remainder was used by the residential and commercial sectors. The United States also exports coal. In 2010, about 82 million short tons of U.S. coal were exported, 38 percent more than in 2010, and almost 8 percent of total coal production.

The largest coal producing state is Wyoming, which is home to the Powder River Basin, containing one of the richest deposits of low-sulfur coal. In 2010, Wyoming produced over 440 million short tons of coal, 41 percent of the total amount of coal produced in the United States that year. The next largest coal producing state in 2010 was West Virginia (137 million short tons, 13 percent of U.S. production), followed by Kentucky (107 million short tons). In 2010, Wyoming produced 100 million short tons more coal than Russia, which holds the world’s second largest known reserves of coal.[iii]

Permit and Lease Activity under the Obama Administration

In 2010, the Obama administration used a roundabout approach to put a halt to new surface mines in Appalachia. They issued new “guidance” on water conductivity that has brought new surface mining permits to a halt in Appalachia, ostensibly in order to protect mayflies.

In a surface mine, the miners remove the dirt and rock from the surface to expose the coal seams below. In mountainous areas, they frequently pile the dirt and rock debris in the surrounding areas or valleys. As water flows through these “fills” it becomes saltier, and more conductive of electricity. Salty water can be harmful to mayflies. This saltier water, however, is not harmful to humans and in fact meets drinking water standards.

Bringing a halt to new surface mines was the result of EPA’s issuance of new water “guidance” concerning water conductivity (i.e. the salt content of the water) and its alleged impact on the mayfly. EPA Administrator Lisa Jackson admitted that there are “no or very few valley fills that are going to meet this standard.”[iv]

EPA’s new standard on mountaintop mining is under legal challenge. However, the agency has stalled surface mining permits in states such as Kentucky and West Virginia causing coal companies and miners to be concerned about their future once they have finished mining their current permits. In September, the EPA denied 19 surface mining permits in eastern Kentucky, impacting nearly 126 million short tons of lost coal production and 950 lost mining jobs over the life of those mines. Under the Clinton and George W. Bush administrations, hundreds of such sites received federal permits.[v]  Between 2000 and 2008, for example, coal companies received permits for 511 valley fills.

Leases of coal are also down due to current federal policy. During the Bush administration, an average of 515 million tons of coal was leased annually between 2002 and 2008. By contrast, over the past 3 years, the amount of coal leased has averaged 272 million tons annually, about half that of the Bush administration. The Bureau of Land Management did not hold lease sales in Wyoming in 2009 or 2010 and has held just four in 2011.

New Regulations Affecting Coal-fired Power Plants

The EPA has also issued new regulations affecting electric generating plants causing over 70 percent of coal-fired capacity to need to be retrofitted with environmental equipment between 2012 and 2015. According to the North American Electric Reliability Corporation (NERC), “environmental regulations are shown to be the number one risk to reliability over the next one to five years”.[vi] That’s because the regulations are to be incorporated during a very short time frame to a large number of coal units. It takes an average of 18 months to add the required environmental equipment to those units that will still be economic once the cost of the environmental equipment is taken into account. Further, NERC projects that beyond the 38 gigawatts of announced plant retirements (23 gigawatts of which are coal-fired), another 36 to 59 gigawatts of capacity will be off-line by 2018 due to 4 EPA regulations considered in its analysis. That is about a quarter of U.S. coal-fired plants, and the first time in U.S. history that coal-fired capacity is expected to decline.

The Institute for Energy Research looked at 2 of the 4 regulations NERC considered and expects almost 30 gigawatts of generating capacity to be retired, nearly 10 percent of all U.S. coal-fired capacity, and twice the number predicted by EPA.[vii]

According to the EPA, these new regulations are needed to improve air quality. But, according to EPA’s own website, air quality has already improved substantially due to regulations already in effect. While population, energy use, and GDP have grown over the past 30 years, pollution emissions have declined by 67 percent.[viii] (See chart below.)

Conclusion

Despite the U.S. having the largest supplies of coal in the world, the Obama Administration has made it clear that coal is not wanted as a major fuel in the United States and its federal agencies have taken actions on both the consumption and the production side to see its future demise. The changes are made in the name of air quality but air quality has already improved dramatically due to existing regulations and new coal-fired units are already required to include the necessary environmental equipment.

Further, EPA has curtailed mountaintop mining permits and the Department of Interior has leased the lowest amount of coal lands in recent history further exasperating future coal production. These changes will mean higher prices for the consumer of electricity to cover the cost of the additional environment equipment on coal-fired plants and the construction of new plants to replace retired units. There will also be fewer coal mining jobs once current mountaintop mining permits are exhausted and the currently leased mines are depleted of coal.

“No coal plants here in America. Build them, if they’re going to build them over there, make ‘em clean because they’re killing you.” — Vice President Joe Biden

The Obama administration has a long, anti-coal, oil, and natural gas track record. According to the North American Electric Reliability Corporation (NERC), their anti-coal, oil, and natural gas zeal will soon start affecting the reliability of the electric grid.

NERC is recognized by the federal government as the leading authority on electric reliability. As the organization that ensures the reliability of the electric grid, NERC recently found that existing and proposed environmental regulations in the United States may significantly affect bulk power system reliability. In fact, according to NERC, “environmental regulations are shown to be the number one risk to reliability over the next one to five years”.[i]

Beyond the 38 gigawatts of electricity capacity that has already been announced to retire, NERC estimates that another 36 to 59 gigawatts of capacity will come off-line by 2018, depending on the “scope and timing” of EPA regulations. Together nearly a quarter of our coal-fired capacity could be off-line by 2018, marking the first time in energy history that installed coal-fired capacity has declined.

NERC’s 2011 Long Term Reliability Assessment

Four major regulations now being proposed or implemented by the Environmental Protection Agency have been found by NERC to expose the U.S. to significant energy vulnerabilities:

• Section 316(b) of the Clean Water Act-Cooling Water Intake Structures
• Maximum Achievable Control Technology (MACT) Standards (Title 1 of the Clean Air Act)
• Cross State Air Pollution Rule (CSAPR), replacing the Clean Air Transport Rule (CATR)
• Coal Combustion Residuals

NERC’s assessment shows there are 4 areas of vulnerability. First, reserve margins, the capacity above what is required to meet normal peak demand, can be severely affected due to either the retirement of plants that do not meet the standards or the de-rating of capacity for plants that add environmental equipment in order to meet the standard.   NERC regional planners would like reserve margins to be at 10 to 20 percent of peak demand to meet surges in power demand caused by weather, outages, or other unexpected occurrences.

Second, while plants are offline to install environmental equipment required to meet the new EPA guidelines, electricity generation will be lowered.  Third, retrofitting the units to meet the standards in the short time frame mandated (2012-2015) will require coordination of plant outages among the industry, requiring a massive effort since it typically takes about 18 months to add environmental equipment to a coal-fired unit.

Finally, because there are a limited number of companies that design and install scrubbers, the time for retrofitting may increase beyond the typical 18-month period, which could cause additional generation to be off-line and further lower reserve margins.

All told, NERC estimates that as many as 677 coal-fired units (258 gigawatts) will need to be temporarily shut down to install EPA-mandated equipment, which constitutes an impact on over 70 percent of our total coal-fired capacity.”

Other Estimates

There are good reasons to believe that EPA’s regulations will force more generating units off line.  According to the Edison Electric Institute, for example, about 48 gigawatts of coal units at 231 plants will be retired between 2010 and 2022. That capacity represents 14 percent of the 339 gigawatts of coal-fired power capacity in 2010, or about 5 percent of total generating capacity.[ii]

Recently, the Institute for Energy Research (IER) compiled a list of all of the generating units that will be closed according to EPA’s model and utilities’ disclosures because of the transport rule (CSAPR and CATR) and the utility MACT rule. IER found that almost 30 gigawatts of electric generating capacity will be taken offline due to these two rules alone.  That amount is about double the number originally predicted by the EPA and represents nearly 10 percent of total coal generating capacity in the U.S.

To put it in perspective: this is the equivalent of closing every power plant in the state of North Carolina or Indiana.[iii]

Some Utility Reactions

Southern Company, a utility that covers states from Mississippi to Georgia, does not believe that EPA’s timeline can be met and believes that electricity rationing is almost inevitable..American Electric Power, operating in 11 Midwest states, also believes that rationing may result if EPA’s standards are not relaxed.[iv]

Another company, Michigan-based Consumers Energy, recently announced plans to “mothball” seven coal-fired units at three plants in 2015.  According to the company spokesman, the units will be taken offline because of the high cost of upgrades required to meet the new EPA guidelines.  Instead, the company is boosting investments in two wind farms with a capacity of 250-megawatts, a fraction of the 830-megawatt capacity of a single coal plant they were planning to build.[v]

What about Air Quality?

So if the U.S. electric grid is made more vulnerable by EPA’s latest regulations, what justifies the administration’s undeterred drive to close coal-fired plants?  Ostensibly, we are told, the new regulations are needed to improve air quality in America. But air quality has already dramatically improved. Even over the past 10 years, air quality has markedly improved, according to the EPA’s own data:

EPA also provides the following graphic that shows that as population, energy use, and GDP have grown over the past 30 years, pollution emissions have fallen by 67 percent. Clearly, something other than clean air and water are driving the administration’s anti-coal policies.

Conclusion

President Obama has made it clear that coal-fired power plants are not wanted and his Environmental Protection Agency is set to ensure their decline.[vi] While estimates vary on how much coal-fired capacity will be affected by EPA regulations, all estimates show that coal-fired capacity in the United States will decrease for the first time in history.

In order to ensure reliability, new gas-fired and renewable power plants will need to be built, costing the consumer more for needed electric power to heat, air condition and light our homes and offices, and to run industrial equipment.  Higher energy costs only serve to hurt our fragile economy further.

Because EPA’s three year timeline is so tight, utility companies are not even sure that they can meet the standards and ensure reliability of the electric system without rationing power to American consumers. So the question remains, is meeting the administration’s ill-conceived green energy goal worth jeorpardizing the reliability of our electric grid and closing hundreds of plants that employ thousands of American workers?

“So if somebody wants to build a coal-fired plant they can. It’s just that it will bankrupt them…”
– Barack Obama speaking to San Francisco Chronicle, January 2008

**UPDATE**  February 7, 2012

In the two months since we released this report, electricity producers have announced another 3.5 GW of impending plant closures as a result of EPA’s upcoming regulations. To see the updated information, click here for the updated report. 

In October, the Institute for Energy Research reported that, according to the Environmental Protection Agency’s (EPA) modeling and announced power plant closures, EPA’s upcoming regulations will shutter almost 28 GW of electricity generation capacity.  At the time, we warned that “this number will grow as plant operators continue to release their EPA compliance plans.”  Now, a mere two months later, our analysis indicates that the amount of generation set to close because of EPA’s regulations has grown to almost 30 GW.

Unfortunately, numerous generators across the country are warning of further retirement announcements.  EPA’s announcement that it has finalized the Mercury and Air Toxics Standards (Utility MACT) will surely be met with a further wave of plant closure announcements in the coming weeks and months as utilities struggle to comply with these burdensome regulations.

Since Our Report was Released Two Months Ago, Another 1.5 GW of Retirements Due to EPA Regulations Have Been Announced

Operators in Michigan, Wisconsin and Georgia have announced new closures since we first published our closure list two months ago.  Additionally, operators in Minnesota announced they would cease plans to convert a coal plant to natural gas, letting the plant retire due to EPA regulations.  In just two short months, retirements related to EPA regulations have grown by 1.5 GW, over 10% of the total retirements predicted by EPA.

Reality Already Shows that EPA’s Modeling is a Gross Underestimate

According to EPA, their modeling of the MACT rule and Cross State Air Pollution Rule (CSAPR) shows that these regulations will only shutter 14.5 GW of electricity generation capacity. But events in the real world already show how EPA’s model is a gross underestimate. Our analysis combined EPA’s modeling with actual announcements and it shows that, so far, EPA’s regulations will shutter twice as much generating capacity as EPA predicts.

NERC is Concerned about Reliability even though It Underestimates the Amount of Closures

It should be further noted that the North American Reliability Corporation’s (NERC) modeling of the MACT rule and CSAPR estimate that under the worst case, or “strict” scenarios, 16,350 GW of electricity capacity will be closed due to the regulations, and the Department of Energy’s (DOE) “stringent” test shows that only 21 GW of generating capacity will be closed. Even though NERC’s estimate is much lower than what our analysis shows, NERC is concerned that the closures will cause electricity reliability problems. How much greater will the reliability problems be, given that retirements appears to be nearly twice as great as NERC estimates?

Announced and EPA Projected Retirements Are Significantly Higher than DOE’s Worst Case Scenarios

The Obama administration’s DOE recently released a study claiming that even under a theoretical “stringent” test, EPA regulations would only close 21 GW of generation.  EPA has since claimed this study proves regulations will not threaten reliability. Our analysis, however, shows that between EPA projections and operator announcements, at least 30 GW of generation will close—almost 9 GW more than DOE’s supposedly ultra-strict test scenario.

Michigan Hit Worst By Latest Announcements

In our updated analysis, the vast majority of new announced retirements will occur in Michigan, where operators announced more than 1 GW of closures due to EPA regulations.  The state, already reeling from record high unemployment, has warned that further closures due to the regulations could threaten reliability in both the Upper and Lower Peninsulas.

Updated List of Powerplant Closures

Here is our updated list of powerplants set to close according to EPA’s modeling and public announcements. The methodology is the same as the previous report.

WASHINGTON – Today, the Institute for Energy Research issues a report (which can be found here) listing the powerplants likely to be closed as a result of the U.S. Environmental Protection Agency’s regulations commonly known as the Utility MACT and the Cross State Air Pollution Rule.

IER President Thomas Pyle said, “These rules will make electricity more expensive and less reliable. They will cost thousands of workers their jobs, require millions of consumers to pay more for electricity, and mean billions of dollars will have to be spent to build replacement power. At least they will fulfill the President’s campaign pledge to make the cost of electricity ‘necessarily skyrocket’.

According to the report, which used EPA’s own modeling, as well as company announcements, to construct a list of coal-fired powerplants likely to retire, EPA regulations will result in the closing of at least 28 gigawatts (GW) of generating capacity (which is the equivalent of closing every powerplant in the state of North Carolina or Indiana).

The 28 gigawatts in closings are about twice as much as the 14.5 gigawatts EPA had originally predicted would close as a result of the rules. It is also more than the worst case scenarios had projected — analysis by the North American Electric Reliability Corporation (NERC) anticipated that CSAPR and the Utility MACT would close 20 GW of generating capacity.

For purposes of comparison, 28 gigawatts is about 2.5% of the total U.S. generating capacity, and represents about 30 times the installed capacity of all solar utility generation in the U.S.

Finally, our work indicates that these EPA regulations will have a dramatic impact on states reeling from economic hardship. For example:

• Ohio: 2,894 MW retired, 8.6% of state total generating capacity.
• West Virginia: 2,448 MW retired, 14% of state total generating capacity.
• Indiana: 2,168 MW retired, 7.5% of state total generating capacity.
• Tennessee: 1,376 MW retired, 6.2% of state total generating capacity.
• Missouri: 1,325 MW retired, 6.3% of state total generating capacity.
• Wisconsin: 902 MW retired, 5% of state total generating capacity.

What the Article Says—And Doesn’t Say

Here is the abstract of the paper:

This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

In the first place, it’s important to clarify what the paper is not saying. A good example of this misinterpretation is a Grist piece entitled, “Coal is the enemy of the human race, mainstream economics edition,” in which the author writes:

Once you strip away the econ jargon, the paper finds that electricity from coal imposes more damages on the U.S. economy than the electricity is worth. That’s right: Coal-fired power is a net value-subtracting industry. A parasite, you might say. A gigantic, blood-sucking parasite that’s enriching a few executives and shareholders at the public’s expense. [Bold and italics in original.]

Actually guys, sorry, that’s not what the paper says. If you had read it all the way through—maybe you got stuck on the “econ jargon” and stopped—you would have seen (on page 21 of the earlier draft available here) that the authors caution:

[W]e note that the finding of a negative adjusted value added does not imply that an industry should be shut down. Rather, it indicates that a one-unit increase in output of that industry has additional costs that are higher than the revenues. This cannot be extrapolated to infra-marginal adjustments.

This follows from the way the authors conducted their analysis. Assuming their numbers are right and that they included all relevant considerations in their model, the authors have found that reducing coal-fired electrical generation a little bit would be economically justified, because the gains in environmental value would offset the losses in electrical output. But if you keep repeating the process—as you make the air cleaner and cleaner, while making electricity more and more expensive—eventually you get to a point where it’s not economically justified to continue. In other words, even on their own terms, the authors are arguing merely that there is too much output from coal-fired power plants—not that these plants are a “parasite” on society.

If our friends at Grist think we’re lying to them, we can look at some other industries in the paper. For example, the authors also find that sewage treatment cause almost three times as much “gross environmental damage” as value-added to the economy. Somehow, I don’t expect the people at Grist to announce, “Sewage treatment an enemy of mankind!! We must stop treating sewage!”

While we’re at it, we should also quote some of the authors’ other reservations:

We note several qualifications about the results. First, our estimates are accounting measures and not measures of economic welfare. The economy has many pre-existing distortions other than those from air pollution – such as taxes, market distortions, and other externalities – and existing accounts do not attempt to incorporate those.…Fifth, we note that the uncertainties are particularly large for three elements: the treatment of the value of life or life- years, the value of CO2 emissions, and the dose-impact effect of small particulates. Sensitivity analyses using alternative values can change the magnitude of the results significantly. [Bold added.]

 As an exercise in humility, it’s important to step back and look at what our intrepid three authors are attempting: They are looking at an entire economy, composed of hundreds of millions of people, and estimating the gross effects of air pollution for various activities, and contrasting them with the value added to the economy in each of those activities. For those familiar with Friedrich Hayek’s Nobel lecture entitled, “The Pretence of Knowledge,” this will appear to be a bold undertaking indeed.

Paul Krugman Jumping to Conclusions

If the economic amateurs at Grist are bad, the Nobel laureate Paul Krugman is hardly better. Here was his reaction to the new paper:

What MMN do is estimate the cost imposed on society by air pollution, and allocate it across industries…

[T]hey find that the costs of air pollution are big, and heavily concentrated in a few industries. In fact, there are a number of industries that inflict more damage in the form of air pollution than the value-added by these industries at market prices.

It’s important to be clear about what this means. It does not necessarily say that we should end the use of coal-generated electricity. What it says, instead, is that consumers are paying much too low a price for coal-generated electricity, because the price they pay does not take account of the very large external costs associated with generation. If consumers did have to pay the full cost, they would use much less electricity from coal — maybe none, but that would depend on the alternatives.

At one level, this is all textbook economics. Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right. What Muller et al are doing is putting numbers to this basic proposition — and the numbers turn out to be big. So if you really believed in the logic of free markets, you’d be all in favor of pollution taxes, right.

Hahahahaha. Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.

What this tells us is that we are not actually having a debate about economics. Our free-market advocates aren’t actually operating from a model of how the economy works; they’re operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good.

As University of Rochester economist Steve Landsburg pointed out, Krugman is conveniently leaving out the fact that once we leave Econ 101, there is a whole body of literature inspired by Ronald Coase showing that pollution taxes or tradable permits might not be the best way to solve problems of “negative externalities.” Landsburg also notes that Krugman has a knee-jerk defense of government intervention; we’re not having a debate here over alternative social institutions for tricky problems like air pollution.

Government Failure and Market Solutions

Let me close by giving two simple examples of how the regulatory government approach might lead to an inefficient outcome, compared to the market. Suppose there is a factory emitting particulate matter that causes serious impacts on human health within a fifty-mile radius. However, the products of the factory are also very valuable. Initially, the factory is located next to a large city, where millions of people are subjected to the pollutants.

Under the Krugman Econ 101 approach, environmental economists engage in (necessarily) crude calculations and estimate that the factory imposes (say) $10 in damage to human health for every unit of its output. The government therefore imposes a direct tax on the factory’s output at $10 per unit. Facing the new tax, the factory slashes production by (say) several thousand units. Consumers are worse off because of the lower physical output, but—argues Krugman and other environmental economists—the residents of the nearby city are more than compensated by improved air quality.

However, as Ronald Coase’s analysis leads us to investigate, it’s possible that there is an even better outcome. What if the factory had simply moved away from the city, to a region with low population density? Then it could continue to crank out the physical production as before, but now its localized air pollution wouldn’t affect very many people. We would thus achieve perhaps a greater reduction in environmental damages, without suffering from a loss of the physical production.

Even though pollution taxes and tradable emission permits are more efficient than direct command-and-control approaches (which would have the government mandating particular emission targets or perhaps technologies to individual firms), the Coasian framework shows that it’s possible that the euphemistically labeled “market-based” regulation would still lead to inefficiencies. The problem is that when environmental economists calculate the “social cost” from an additional unit of production, they are assuming that the economy is configured in its current state. They might miss solutions such as a relocation of a factory, which would cause the “marginal social cost” from localized pollution to drop drastically.

“Fair enough,” the fan of pollution taxes might say, “but how would a free market effect such an outcome? Would the millions of people in the city have to make side payments to the factory owner to relocate? Surely those transaction costs are too high.”

This typical objection once again shows a failure to seriously give markets a chance. For one thing, large insurance companies would bear much of the costs of health problems. If there really were large amounts of “money on the table” from reducing exposure to air pollutants, then the insurers could come together and make offers to large companies responsible for pollution.

Another major consideration is that people are willing to pay more to live in areas with fresh air, as opposed to areas with high levels of smog. Financiers could construct arrangements where investors benefit from rising property values in a large area because of reduced air pollutants, and the initial emitters are compensated out of the gains.

Conclusion

The point with my above musings isn’t to offer a definitive solution to the difficult problems of air pollution. Rather, I am showing that it’s not enough for Krugman and the writers at Grist to identify problems with the existing set of property rights, and then conclude that taxes or emission permits are the “logical” response.

Instead, Krugman et al. would need to show the outcomes of both political and market reactions to these alleged externalities, and then explain why the former would be more efficient. To take one issue: Krugman links with derision to Rick Perry’s thoughts on the EPA. Krugman seems to think that Perry’s comments somehow bolster the case for government regulation.

Yet on the contrary, Krugman is showing that in the real world, we will never achieve “scientific” regulation of externalities through the political process. Krugman writes almost daily on the allegedly unscientific and corrupt Republican Party. Does Krugman think Democrats will be in the White House for the rest of time?

Rather than focusing exclusively on alleged market failure, while completely ignoring real-world government failure, economists should be open-minded in their attempts to include environmental issues in standard economic analysis.

Rather than giving government yet another source of tax revenue and regulatory control, a more efficient reform could be better definitions of property rights and the removal of legal hurdles to the types of transactions that might mitigate pollution damages through contractual agreements.

Despite their public show, I don’t think Krugman & Friends actually take these numbers seriously, or at least they recognize that independent parties wouldn’t be convinced. For example, Table 2 in the study indicates that coal-fired power plants cause $34 billion in gross environmental damages, which is supposedly 1.41 times their value-added. Taking those numbers at face value (i.e. disregarding the issues of “inframarginal units” discussed above), that works out to about $10 billion in “money on the table.” Suppose major health insurers stuck a deal with utility companies, paying them to reduce their emissions, and that such a deal captured just 1 percent of this economic surplus: that’s still $100 million. Since the political route doesn’t look promising right now, are the people at Grist and Paul Krugman shopping the study to health insurers? If Krugman et al. really believe these numbers, there are potentially hundreds of millions of dollars waiting to be plucked. So right now Krugman and friends are sending emails and making calls, right? To quote a Nobel laureate, “Hahahahaha.”

Introduction

China is currently the largest producer and consumer of coal in the world, outstripping the United States by a factor of more than 3[ii]. In fact China’s growth in coal consumption is so great that it needs to import coal to satisfy its demand even though it ranks third in coal reserves in the world[iii].  China became a net importer of coal in 2009, buying almost 151 million tons[iv] from coal exporting countries, including the United States and Australia. That number is expected to increase substantially in the years to come. The Chinese use coal, the primary fuel spurring its economic growth, in most sectors of the economy, but particularly in the electric power and industrial sectors.  China’s economic growth is so phenomenal that it expects to have 350 million people, more than the entire population in the United States,[v] living in cities that do not yet exist within the next 15 years,[vi] which will require additional electrical capacity of an amount almost equal to the total electrical capacity of the United States.[vii]

Environmentalists in the United States, who have actively worked to stop the construction of new coal-fired plants here in order to lower future greenhouse gas emissions, are now faced with a dilemma. Those same greenhouse gases still will be emitted just elsewhere as the developing world is seeking reliable forms of fossil energy to continue to fuel their economic growth.

China’s Coal Demand

Since 2000, China’s coal consumption has grown by 12 percent per year. The country now consumes 46 percent of the world’s coal consumption, compared with 13 percent for the United States.[viii] In 2009, China’s coal consumption was almost 3.5 billion short tons, up 16 percent from the year before, while the United States consumed 1.0 billion short tons in 2009, down 11 percent from the year before.[ix]

Source: Energy Information Administration, International Statistics

According to data from Daiwa Capital Markets and the U.S. Energy Department, China added about 51 gigawatts of coal-fired capacity in 2009,[x] and most likely added about the same amount in 2010. According to calculations based on official data, in the first quarter of 2010, China used coal to generate 86 percent of its electricity.[xi]

According to the general manager of the State Grid Corp of China, generating capacity is expected to reach 1,440 gigawatts by 2015 and 1,760 gigawatts by 2020, 75 percent more than the current capacity in the United States. According to the National Energy Administration in China, generating capacity at the end of 2010 was 950 gigawatts, so China expects capacity to grow by 52 percent over the next five years. China’s thermal capacity, most of which is coal, is expected to increase by between 260 and 270 gigawatts over the next five years.[xii]

The International Monetary Fund expects China’s gross domestic product to grow by 9.6 percent in 2011, needing reliable sources of energy to fuel that growth.[xiii] China’s Energy Research Institute indicates that China will need an additional 2 billion tons of coal over the next 10 years to fuel the country’s industrial development,[xiv] which means that in the next 10 years, China will increase its coal consumption by almost 60 percent.

According to a Chinese official, the country’s transportation system is the only serious limitation on how fast Chinese power companies can increase their use of coal. China’s main reason in building light-rail systems for passenger traffic is to get that traffic out of the way of coal trains.[xv]

China’s Coal Production

China’s coal production in 2009 was almost 3.4 billion short tons, 44 percent of the world’s total coal production[xvi], and slightly short of its coal demand, requiring it to import coal. While China has 14 percent of global coal reserves[xvii], ranking third in the world, it is having trouble expanding production, mainly due to transportation infrastructure problems.[xviii] Because China’s rail lines are already overburdened by coal transport, it has had to use truck to transport coal from fields in Inner Mongolia to Beijing creating enormous traffic jams as roads need to be repaired from the heavy coal traffic. This past summer, traffic congestion of 100 kilometers (about 60 miles) lasted over a week on a major highway between Inner Mongolia and Beijing.[xix] For this reason, China is contemplating putting limits on coal production of 3.6 to 3.8 billion tons in its next Five Year Plan, which begins this year.[xx] That may, however, only result in greater coal imports.

Source: Energy Information Administration, International Statistics

China’s Coal Imports

China’s net coal imports, its coal imports minus its coal exports, in 2009 were over 112 million tons[xxi] and increased 27 percent to 143 million tons in 2010.  They are projected to increase 63 percent to 233 million tons this year.[xxii] China imports coal for various reasons, including obtaining better quality coal, the proximity of its coal-burning factories to overseas shipments, and the transportation infrastructure problems noted above.

China’s coal contains high amounts of sulfur and is largely untreated resulting in high levels of pollution. Coal from the Powder River Basin of Montana and Wyoming, for example, is low in sulfur and would allow power plants to burn more without exceeding local pollution limits. Also, much of China’s coal is inland while the coal-burning factories are along its coast where it is often easier to receive shipments from abroad. Obtaining lower-sulfur coal imports would help its pollution problem but only to a very small extent since China’s levels of imports are just a drop in the bucket compared to its own coal production.[xxiii]

The price of export coal has doubled over the past 5 years.[xxiv] Higher prices for export coal have arisen due to a variety of factors, including the increase in coal demand coming primarily from China and India, supply constraints in some coal exporting countries, transportation infrastructure limitations, and weather problems. In the coal exporting countries of Indonesia, Columbia, and Australia, supply disruptions resulted from heavy rain and flooding at mines.  In South Africa, coal export growth has been hampered by a lack of rail capacity.[xxv]

U.S. Coal Exports to China

In the first six months of 2009, the United States exported 2,714 tons of coal to China, according to the United States Energy Information Administration. That figure increased to 2.9 million tons in the first six months of this year—a factor of more than 1000, but a small fraction of China’s total coal imports.[xxvi]

The United States currently exports its coal via Vancouver, Canada, but that route is limited because of large amounts of metallurgical coal exports being shipped out of Canada. Coal exporters in the United States are interested in developing a port in the state of Washington for the export of coal to Asian markets.

Millennium Bulk Ventures is planning to build a coal export terminal in Cowlitz County, Washington, to export Powder River Basin coal, but environmental groups have recently appealed it.  A coalition of five groups filed the appeal, challenging a shoreline development permit issued to the project by Cowlitz County commissioners. The appeal requests that a state environmental impact study be conducted that includes consideration of greenhouse gas emissions produced by the coal shipped overseas and contests a decision to assess planned dredging of the Columbia River. The appeal would push the construction date into late this year, but Millennium Bulk Ventures hope to have it running by 2012.[xxvii] They realize that China will burn coal regardless who exports it, emitting the same amount of greenhouse gases.

Conclusion

China intends to use coal to fuel its power plants and its industrial establishments, regardless of the emissions that result from the combustion of coal because the fuel is both plentiful and reliable. China is already the largest consumer of coal, consuming almost 3.5 billion short tons in 2009, 3.5 times the amount the United States consumes. It is expected to consume an additional 2 billion short tons over the next ten years to fuel new power plants and industrial development- – a 60 percent increase. And, it will most likely need to continue to import coal even though it ranks third in global coal reserves. That means it will continue to increase its greenhouse gas emissions, regardless of the actions of other countries.

[i] GreenBeat, Energy secretary Chu declares “Sputnik” moment on green race against China, November, 30, 2010, http://www.venturebeat.com/2010/11/30/what-energy-secretary-chu-says-on-solyndra-the-decline-in-green-investing/

[ii] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=7&aid=1 and http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=2

[iii] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=7&aid=6

[iv] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=3

[v] U.S. Census Bureau, http://www.census.gov/main/www/popclock.html

[vi] Washington Post, China has seen the future, and it is coal, December 30, 2010, http://www.washingtonpost.com/wpdyn/content/article/2010/12/29/AR2010122902899.html?hpid=opinionsbox1

[vii] Ibid.

[viii] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=1&pid=1&aid=2&cid=regions&syid=1980&eyid=2009&unit=TST

[ix] Ibid.

[x] Bloomberg, Coal Imports May Rise 78% to China, India, Drive Up Prices: Energy Markets, December 14, 2010, http://www.bloomberg.com/news/2010-12-14/coal-imports-may-rise-78-to-china-india-drive-up-prices-energy-markets.html

[xi] Radio Free Asia, China Mulls Coal Limit, September 7, 2010, http://www.rfa.org/english/energy_watch/coal-09072010113430.html

[xii] Reuters, China power sector to boom as oil sector goes slower, January 6, 2011, http://www.reuters.com/article/idUSTRE7052JT20110106

[xiii] Ibid.

[xiv] Ibid.

[xv] Washington Post, China has seen the future, and it is coal, December 30, 2010, http://www.washingtonpost.com/wpdyn/content/article/2010/12/29/AR2010122902899.html?hpid=opinionsbox1

[xvi] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=1&pid=7&aid=1&cid=regions&syid=1980&eyid=2009&unit=TST

[xvii] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=7&aid=6

[xviii] The New York Times, Does China Face A “Peak Coal” Threat, December 14, 2010, http://green.blogs.nytimes.com/2010/12/14/does-china-face-a-peak-coal-threat/?hp

[xix] AOL News, Coal May Be Behind China’s Monster Traffic Jam, August 25, 2010, http://www.aolnews.com/2010/08/25/coal-may-be-behind-chinas-monster-traffic-jam/

[xx] Radio Free Asia, China Mulls Coal Limit, September 7, 2010, http://www.rfa.org/english/energy_watch/coal-09072010113430.html

[xxi] Energy Information Administration, http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=CH

[xxii] Bloomberg, Coal Imports May Rise 78% to China, India, Drive Up Prices: Energy Markets, December 14, 2010, http://www.bloomberg.com/news/2010-12-14/coal-imports-may-rise-78-to-china-india-drive-up-prices-energy-markets.html

[xxiii] The New York Times, Booming China is Buying Up World’s Coal, November 22, 2010, http://query.nytimes.com/gst/fullpage.html?res=9C0DEFDD153FF931A15752C1A9669D8B63&pagewanted=2

[xxiv] The New York Times, Booming China is Buying Up World’s Coal, November 22, 2010, http://query.nytimes.com/gst/fullpage.html?res=9C0DEFDD153FF931A15752C1A9669D8B63&pagewanted=2

[xxv] Bloomberg, Coal Imports May Rise 78% to China, India, Drive Up Prices: Energy Markets, December 14, 2010, http://www.bloomberg.com/news/2010-12-14/coal-imports-may-rise-78-to-china-india-drive-up-prices-energy-markets.html

[xxvi] Energy Information Administration, http://tonto.eia.doe.gov/cneaf/coal/quarterly/html/t7p01p1.html

[xxvii] Platts, Review of Washington state coal terminal permit is a test case: developer, December 15, 2010, http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Coal/6676017

Source: Energy Information Administration, http://www.eia.doe.gov/oiaf/environment/emissions/carbon/index.html

Shift in Countries Generating Carbon Dioxide Emissions

In 1990, the developed countries produced 65 percent of the world’s carbon dioxide emissions. Currently, those countries are producing less than 43 percent of the world’s carbon dioxide emissions. During that period, the developed countries have cut their emissions by 10 percent while the developing countries have more than doubled their carbon dioxide emissions.[vii] Developing nations were not affected by the recession as much as developed nations, and while making improvements in energy technology, developing nations are still not using energy as efficiently as developed countries.

China’s Dependence on Coal

According to the Energy Information Administration, China consumed 46 percent of the world’s coal consumption in 2009, an amount 3.5 times more than the United States consumed.[viii] In 2009, China became a net importer of coal when it imported 113 thousand more tons than it exported.[ix] While China ranks third to the United States and Russia in coal reserves, it holds only 14 percent of the world’s total.[x] Because of its reserve level and its large coal consumption, China is purchasing coal from Canada, Australia, South Africa, Indonesia, Columbia, and the United States. And, its imports of coal are growing. The United States alone exported over 1,000 times more coal to China In the first 6 months of 2010 (2.9 million metric tons) than it did in the first 6 months of 2009.[xi] These rising imports are to fuel China’s coal consumption that has grown by 180 percent between 2000 and 2009.[xii] This trend of China’s growing coal usage at over 10 percent annually does not bode well for the future of carbon dioxide emissions since China already is the largest emitter of carbon dioxide emissions and coal is the highest in carbon content of the three fossil fuels. 

Source: Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=1&pid=7&aid=1&cid=&syid=1980&eyid=2009&unit=TST

In the three years to September 2010, Chinese companies spent $20.96 billion on coal-sector acquisitions overseas.[xiii] For Australia, coal exports to China grew to $5.6 billion in 2009 from $508 million in 2008. Australia’s largest export contract, $60 billion, was signed this summer with China Power International Development to supply coal to power stations in China beginning in 2013. The coal will come from mines in the Australian outback. Colombia, whose coal exports fell in 2008 and 2009 due to the economic recession, is expected to export 10 million tons of coal to Asia this year.[xiv] The United States, who is currently shipping its coal to China via Canadian ports, is contemplating building a port in the state of Washington as China is considering limiting its future growth in coal production to conserve its own coal resources.[xv]

India’s Coal Usage Is Also Growing

India is another emerging customer, whose coal usage is rising and must rely on its growing import market. According to the Energy information Administration, India’s coal consumption has been increasing at 6 percent per year since 2000,[xvi] and its net coal imports in 2009 were 74,000 short tons,[xvii] about two-thirds of China’s level. Although India is endowed with less coal reserves than China, with 7 percent of the world’s total,[xviii] its growing dependence on coal consumption will make it a growing contributor to carbon dioxide emissions.

The Sierra Club, who claims to have blocked 139 proposed coal plants in the United States, is not happy about Asia’s increased coal use. According to David Graham-Caso of the Sierra Club, “We don’t want this coal burned here, but we don’t want it burned at all. This is undermining everything we’ve accomplished.” [xix]

Source: Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=1&pid=7&aid=1&cid=&syid=1980&eyid=2009&unit=TST

Conclusion

Regardless of what the developed world does to reduce carbon dioxide emissions, the developing countries, particularly China and India, will continue their reliance on coal, the largest fossil fuel emitter of carbon dioxide. And, even if these countries do not have sufficient coal resources of their own, they will import from countries that have the coal resources. Thus, it makes no sense for the American public to be deprived of one of the most efficient sources of electricity: coal. It is time for environmental groups to stop blocking the construction of coal-fired plants in the United States since the coal will only be burned elsewhere.

[i] The Global Project Team was established in 2001 to track global carbon dioxide emissions and to perform research on the earth’s carbon cycle.

[ii]AP News, “Weak world economy reduces carbon pollution”, November 21, 2010, http://hosted.ap.org/dynamic/stories/U/US_SCI_CARBON_POLLUTION?SITE=FLSTU&SECTION=HOME&TEMPLATE=DEFAULT

[iii] Ibid.

[iv] Energy Information Administration, U.S. Carbon Dioxide Emissions in 2009: A Retrospective Review, May 5, 2010, http://www.eia.doe.gov/oiaf/environment/emissions/carbon/index.html

[v] Energy Information Administration, Monthly Energy Review, http://www.eia.gov/mer/pdf/pages/sec7_5.pdf and http://www.eia.gov/mer/pdf/pages/sec1_7.pdf

[vi] Energy Information Administration, U.S. Carbon Dioxide Emissions in 2009: A Retrospective Review, May 5, 2010, http://www.eia.doe.gov/oiaf/environment/emissions/carbon/index.html

[vii]AP News, “Weak world economy reduces carbon pollution”, November 21, 2010, http://hosted.ap.org/dynamic/stories/U/US_SCI_CARBON_POLLUTION?SITE=FLSTU&SECTION=HOME&TEMPLATE=DEFAULT

[viii] Energy information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=2

[ix] Energy information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=4 and http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=3

[x] Energy Information Administration, International Energy Outlook 2010, Table 10, http://www.eia.doe.gov/oiaf/ieo/index.html

[xi] Energy Information Administration, Quarterly Coal Report, http://tonto.eia.doe.gov/cneaf/coal/quarterly/html/t7p01p1.pdf

[xii] Energy information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/iedindex3.cfm?tid=1&pid=1&aid=2&cid=&syid=2000&eyid=2009&unit=TST

[xiii] The Wall Street Journal, China’s Coal Crisis, November 16, 2010, http://online.wsj.com/article/SB10001424052748704312504575617810380509880.html?mod=googlenews_wsj

[xiv] The New York Times, Nations that Debate Coal Use Export It to Feed China’s Need, November 21, 2010, http://www.nytimes.com/2010/11/22/science/earth/22fossil.html?_r=4&ref=todayspaper

[xv] The Wall Street Journal, China’s Coal Crisis, November 16, 2010, http://online.wsj.com/article/SB10001424052748704312504575617810380509880.html?mod=googlenews_wsj

[xvi] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=2

[xvii] Energy Information Administration, http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=4 and http://tonto.eia.doe.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=1&pid=1&aid=3#

[xviii] Energy Information Administration, International Energy Outlook 2010, Table 10, http://www.eia.doe.gov/oiaf/ieo/index.html

[xix] The New York Times, Nations that Debate Coal Use Export It to Feed China’s Need, November 21, 2010, http://www.nytimes.com/2010/11/22/science/earth/22fossil.html?_r=4&ref=todayspaper

Obama’s Major Energy Policy Goals

President Obama wants to reduce our over-reliance on fossil fuels, and he has made that his top priority for 2011. He wants to achieve that goal by reducing greenhouse gases and promoting renewable energy. The Obama administration’s preference is a cap-and-trade bill and a renewable electricity mandate. A cap-and-trade bill will put a limit on emissions of greenhouse gases and allow companies to trade credits so that those who can comply at lower cost would sell credits to other companies who would use them towards meeting their reductions. Many such bills have been proposed, and, in fact, the House of Representatives passed one this spring, though it was stalled in the senate. Included in some of those proposals was a renewable electricity standard that requires electric generating companies to produce a required amount of electricity from renewable sources of energy by a certain date or purchase credits from other companies that find it easier to comply.

If legislation doesn’t work, the Obama Administration has already set in motion a regulatory scheme to regulate greenhouse gases. The Environmental Protection Agency (EPA) is ready to control greenhouse gas emissions through the Clean Air Act. Beginning January 2011, the EPA will require facilities that need to obtain New Source Review permits for other pollutants based on the Clean Air Act to include greenhouse gases in those permits if they increase their emissions of those gases by at least 75,000 tons of carbon dioxide equivalent per year. Six months later, beginning July 1, 2011, the rule will be extended to additional facilities. The rule is “tailored” to be primarily aimed at power plants, refineries, and large industrial establishments, exempting smaller establishments such as farms, schools, and restaurants. According to EPA, the rule will encompass facilities that are responsible for 70 percent of the greenhouse gases from stationary sources.[ii] Although EPA wants to finalize the rule before January 2, 2010, there are a number of legal challenges to the rule, and it is anticipated that there will be legal delays.

How Is China Dealing With These Issues?

China has for a long time stated that they would not agree to fixed targets for greenhouse gas emissions reductions, but instead, they would reduce greenhouse gas intensity. Greenhouse gas intensity is the amount of greenhouse gas emissions per unit of Gross Domestic Product (GDP). Last year, China pledged it would cut the intensity of its carbon (the largest component of greenhouse gases) by 40 to 45 percent by 2020 from its 2005 level.[iii] One way to lower it is to increase energy efficiency and reduce energy intensity, the amount of energy used per unit of GDP. In 2005, China’s 11^th Five Year Economic Plan included a goal of reducing energy intensity by 20 percent between 2005 and 2010, which they most likely have exceeded, according to forecasts from the Energy Information Administration.[iv] The United States has been reducing its energy intensity for decades, having reduced it by over 40 percent between 1980 and 2008.[v]

China is willing to become more energy efficient as long as it does not hurt its economy. Reducing greenhouse gas emissions requires increasing the cost of fossil fuel-burning technologies through technology modifications that are not yet commercial or through the substitution of more expensive technology, which may also result in making some perfectly good existing technologies obsolete. The extra costs are passed onto consumers through their purchase of goods from manufacturing companies, power plants, and industrial facilities. Firms that cannot handle the increased cost based on their competition, at home and overseas, will either go under or move offshore where energy costs are more affordable.

China’s Energy Path

China is building renewable technologies, particularly hydropower and wind power, but it is also building coal-fired and nuclear power plants. In 2009, China built about 13 gigawatts of wind turbines, 3 gigawatts more than the United States, but they also built almost four times more total capacity than the United States, with the other technologies being mainly hydropower and coal. So while wind turbines represented about 55 percent of all of the new capacity built in the United States in 2009, it represented less than 20 percent of China’s new capacity.

The Chinese government has a target of building 300 gigawatts of hydroelectric capacity by 2020. That is almost four times the hydroelectric capacity the United States has currently or expects to have by 2020. China’s Three Gorges Dam project, which many at one time thought was not doable because of its engineering complexity, was completed in 2008 and now China plans to increase the capacity at that facility to 22.4 gigawatts by 2012, an additional 4.2 gigawatts. China also has projects on the Jinsha and Yalong rivers, scheduled to be completed within the next 5 years.[vi]

China has a goal, not a mandate, to produce 15 percent of its energy from non-hydroelectric renewables by 2020.[vii] China’s wind construction program has been aided by the Clean Development Mechanism of the United Nations, where wealthy countries can earn credits for greenhouse gas reductions by funding qualified renewable projects in developing countries. China was the main beneficiary of the U.N.’s program for many years.[viii] In fact, about 30 percent of their wind capacity is not operational because it is not connected to their electric grid.[ix]

China is the world’s largest consumer of coal, using more than three times the amount of coal that the United States uses. In 2009, China’s steel industry, which is fueled mainly by coal, increased by an estimated 13 percent. While China’s coal reserves are the third largest in the world, behind those of the United States and Russia, its production is not sufficient to meet its growing demand, and it must import coal from overseas and inland from Mongolia and Russia. To make coal imports more cost competitive, China removed its coal import tariffs, is planning to build strategic coal stocks to protect against volatility in coal import availability and prices, and is obtaining an influx of dry bulk carriers to lower the cost of freight shipments.[x] It surely does not look like China will be giving up consuming coal, the fossil fuel with the greatest carbon emissions, any time soon.

China currently has 24 nuclear plants under construction and more starting construction soon.[xi] Four AP 1000 reactors are under construction at 2 different sites: Haiyang and Sanmen.[xii] These are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building in order to ensure compliance with NRC requirements before they can be constructed in the United States.[xiii] China expects to achieve a total nuclear capacity of 80 gigawatts by 2020, and 200 gigawatts by 2030,[xiv] double the total nuclear capacity of the United States.

China has become the world’s largest market for new vehicle sales, surpassing that of the United States. In 2009, light-duty vehicle sales reached 13.6 million in China, 3.3 million more than in the United States. Car sales in China grew by 50 percent in 2009, aided by government subsidies and incentives for small car purchasers and buyers in rural areas.[xv] To fuel its expanding fleet of vehicles, China needs to have an adequate supply of oil imports, because its own oil reserves represent only 1.5 percent of the world’s total.[xvi] To do that, it has invested widely in foreign countries with oil potential. China has spent nearly $200 billion on oil deals during the past few years, joining with more than 19 countries—including Russia, Turkmenistan, Kuwait, Yemen, Libya, Angola, Venezuela, and Brazil—and paying for exploration, production, and infrastructure construction, as well as extending “loans for energy.”[xvii]China lends money to countries to build power plants, highways, and other projects that will be repaid in the future with crude oil. Most recently, state-owned Sinopec (China Petroleum & Chemical Corporation) invested $7.1 billion in Brazil’s Repsol, giving China a 40 percent stake in that business and access to Brazilian offshore sub-salt oil fields.[xviii]

Conclusion

China’s economy is booming, even while much of the rest of the world is finding it difficult to recover from the global recession. China knows it needs affordable energy to continue its economic growth, so it is not mandating renewable standards nor is it in favor of cap-and-trade programs to reduce greenhouse gas emissions. Rather, it is ensuring oil supplies through its “energy for loans” program, has removed import tariffs on coal and plans to stockpile it as a hedge on availability and price, is setting goals for constructing all sorts of power plants to ensure an adequate electricity supply, and like us, is reducing its energy intensity. We might want to follow China’s lead in pursuing all forms of energy rather than promoting policies that will limit the most affordable energy sources, reducing our ability to compete globally.

[i] The Washington Post, Policy on energy could change, September 29, 2010

[ii] The New York Times, EPA Issues Final ‘Tailoring’ Rule for Greenhouse Gas Emissions, May 13, 2010, http://www.nytimes.com/gwire/2010/05/13/13greenwire-epa-issues-final-tailoring-rule-for-greenhouse-32021.html

[iii] U.N. Climate Head: World Must Find Common Ground, Oct. 4, 2010, http://www.cbsnews.com/stories/2010/10/04/tech/main6925140.shtml

[iv] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[v] Energy Information Administration, Annual Energy Outlook 2010, Figure 39, http://www.eia.doe.gov/oiaf/aeo/demand.html

[vi] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[vii] USA Today, “China Pushes Solar, Wind Power Development”, http://www.usatoday.com/money/industries/energy/environment/2009-11-17-chinasolar17_CV_N.htm

[viii]CNN, U.N. halts funds to China wind farms, December 2, 2009, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html

[ix] Energy Information Administration, International Energy outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[x] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[xi] World Nuclear Power Association, Nuclear Power in China, August 20, 2010, www.world-nuclear.org/info/inf63.html

[xii] Westinghouse News Releases, “Westinghouse and the Shaw Group Celebrate First Concrete Pour at Haiyang Nuclear Site in China”, September 29, 2009, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=200

[xiii] Westinghouse Statement Regarding NRC News Release on AP1000 Shield Building, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=203

[xiv] World Nuclear Power Association, Nuclear Power in China, August 20, 2010, www.world-nuclear.org/info/inf63.html

[xv] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[xvi] Ibid.

[xvii] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb

[xviii] Money Morning, China Continues Game-Changing Energy Moves with Sinopec’s $7 Billion Brazil Buy, October 4, 2010, http://moneymorning.com/2010/10/04/sinopec/