The Cost of Cutting Carbon

Will putting a price on carbon increase the use of renewables?

The cheapest way to reduce carbon dioxide emissions is probably to put a price on them. One way to do that is a direct tax (see “Q&A”). Another is a cap-and-trade system, where the government sets an overall cap on emissions, but indi­vidual businesses trade emission allowances. But surprisingly, a carbon penalty may do little to increase reliance on renewable energy or reduce petroleum consumption.

Putting a price on carbon would certainly reduce the use of conventional coal-fired power plants. Coal emits more carbon dioxide than other fossil fuels, and its price would more than double. But natural gas would see only a modest change in price: in the short term, it would proba­bly replace coal as the chief source of power. Oil prices wouldn’t change much, either.

But unless the costs of wind and solar power come down or nuclear energy proves politi­cally viable, the cheapest way to reduce emissions in the long term would be to capture carbon dioxide from coal plants and sequester it underground, according to a study by MIT’s Joint Program on the Science and Policy of Global Change. Coal would again become the domi­nant source of electricity.

If the goal is to increase the use of renewable energy, says Sergey Paltsev, principal research scientist at the MIT joint program, governments may have to mandate its use. Unfortunately, that would increase energy costs much more than market-based approaches to carbon regulation would.

Projected sources of U.S. power, 2005-2050
Even with a carbon penalty, coal-fired plants that sequester emissions remain more effective than alternative fuels.

1Based on average 2007 prices 2For electrical utilities 3All blends
Source: Energy Information Administration/Gilbert Metcalf (prices); MIT Joint Program on the Science and Policy of Global Change (power sources)

Charts by Tommy McCall

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