What Would it Really Cost to Reduce Carbon Emissions?

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Power plant near Page, Ariz. | Ralf Broskvar

Can the United States meaningfully reduce carbon dioxide emissions without crippling the economy? A new policy model suggests it’s not only possible but also less costly than many think. The model, developed by Stanford Graduate School of Business accounting professor Stefan Reichelstein and research associate Stephen Comello, sets a stringent limit for new natural gas power plants on CO2 emissions – just 80kg/MWh – then gives electricity producers 10 years to develop and deploy carbon capture technology to meet the standard, with tax credit incentives for early adoption.

Basic carbon capture, in which “scrubbers” installed in a chimney selectively capture carbon dioxide emissions, has been used in industrial applications for decades, though never on commercial-scale power plants. “The technology is expensive because it hasn’t been fully developed for power plants, so there are few people who want to do it,” says Comello. “Large-scale carbon capture has been caught in a cycle of high cost, low acceptance, and there has been no mechanism to help break it out of that.”

In the hypothetical policy, the Environmental Protection Agency would issue the new 80kg/MWh CO2 emissions standard for power plants built in 2017 or thereafter, mandating compliance by 2027. Investors in power plants would then need to decide whether to employ new carbon capture technology immediately or build according to the old standard and retrofit before the 2027 deadline. While the first plants to build to the more stringent standard initially would bear significantly higher capital and production costs, the policy model offers tax credits to offset increased costs and incentivize early adoption of carbon capture technology.

To develop their cost metric, Reichelstein and Comello used empirical engineering cost data on natural gas power plants from the U.S. Department of Energy’s National Energy Technology Laboratory (NETL) and extrapolated it over the 10-year horizon.

“The surprises when we analyzed the data were that the tax incentives needed were not that large – substantially less than what solar and wind receive at the moment,” says Reichelstein. “And the anticipated learning effects from early technology adoption would bring the cost of energy production down to something very manageable by 2027.”

The tax incentives proposed are of the types used today to support the adoption of solar and wind technology: an investment tax credit to offset increased capital costs and a production tax credit refunded per kilowatt-hour generated. In the policy model, credits are substantial for the first two years, but decrease to zero over time as carbon capture technology cost declines with widespread deployment. Total incentive cost is projected to be $6.6 billion over 10 years. (In 2013 alone, wind and solar received approximately $5.4 billion in energy-related tax preferences.)

“The incentives are temporary to motivate power producers to get ahead of the curve,” says Reichelstein. At the same time, early adoption will spur industry to master the process at a large-scale commercial level, “so that in the future it is available to everybody on a cheaper basis,” he says. According to their analysis, if every plant built starting in 2017 used carbon capture (rather than retrofitting), and thus technology cost fell rapidly, tax incentives could diminish to zero by 2026.

At the same time, CO2 emissions would be reduced by 80% over today’s natural gas power plants, and the cost of generating a kilowatt-hour of electricity would be 7.8 cents in 2027 (in today’s dollars), just 1.2 cents more than today’s average cost. “To put that into perspective, if the utility were to pass the entire increase on to consumers, you could expect a 10 to 12% increase in the cost of electricity,” says Comello.

Reichelstein and Comello believe that, if anything, their estimates are on the conservative side. They have looked only at the United States in an isolated scenario, not accounting for the impact that widespread adoption of carbon capture abroad could have on the price of the technology. And they haven’t incorporated the potential for monetizing the captured carbon, which is presently sold for industrial uses, such as enhanced oil and gas recovery, creating an additional revenue stream.

In terms of the political will to enact such a policy, Reichelstein says that, Washington gridlock aside, business leaders are interested in early adoption of carbon reduction technology as an insurance policy. “There is a general expectation in the global business community that, sooner or later, there are going to be serious regulations on carbon emissions,” he says. “So having mastered a technology like this and brought its cost down is going to put you in a much better position for the future.”

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Stefan Reichelstein is the William R. Timken Professor of Accounting at Stanford GSB and the faculty research director of the Steyer-Taylor Center for Energy Policy and Finance, where Stanford GSB research associate Stephen Comello is a research fellow. The Steyer-Taylor Center is joint initiative between Stanford Law School and Stanford GSB. The paper discussed here is forthcoming in the journal Energy Policy.