Jim de Bree: Economics of carbon emissions

Jim de Bree
Jim de Bree

On April 22, The Signal published a column by Cher Gilmore entitled “Hope for the planet on Earth Day.”

The gist of the article is that many other countries are taking the lead in reducing their carbon footprint. I agree with Ms. Gilmore’s conclusions that there is reason to conclude future global CO2 emissions will be reduced.

In this column, I seek to analyze the situation from an economic perspective.

My Earth Day reading included “Trends in Global CO2 emissions: 2016 Report,” which can be found at https://edgar.jrc.ec.europa.eu/news_docs/jrc-2016-trends-in-global-co2-emissions-2016-report-103425.pdf.

The report tracks fossil fuel CO2 emissions from 1990 to 2015. During that period, such emissions increased globally from 22 billion tons to 36 billion tons.  Domestic C02 emissions peaked at about 6 billion tons in 2005. In 2005 China’s CO2 emissions were comparable to U.S. levels.

Ten years later, U.S. emissions have dropped by about 10 percent while China’s have increased to approximately 11 billion tons. In spite of all of its environmental efforts during this period, the EU’s carbon emissions have remained relatively flat.

According the report, 46 percent of global CO2 emissions from the consumption of fossil fuels comes from burning coal. Furthermore, 85 percent of coal emissions come from two countries—China and India.

That means that the consumption of coal by China and India accounts for around 39 percent of global CO2 fossil fuel emissions.

Given the tremendous smog issues in China and India, they are faced with not only having to reduce carbon emissions – they also have to devise a plan to reduce toxic emissions that cause smog. Consequently, they are highly incentivized to do so quickly.

They also have a need to significantly increase their power production capacity, which we do not.

Thus, developing countries, including China and India, have much greater financial incentives to expand alternative energy production. The biggest bang for the buck in terms of reducing global carbon emissions comes from converting coal consumption to some other form of energy production.

Thus, from a global perspective, it makes the most sense for China and India to take the lead, since they are the biggest users of coal.

Our domestic situation largely involves the shifting of power production to processes having a smaller carbon footprint. Since we are shifting (rather than adding) production capacity, it is more expensive for us to convert to alternative sources. Shutting down the conventional sources being replaced is expensive.

Currently, burning coal costs about 6 cents per kilowatt-hour (KWH). The cost of alternative energy is dropping below that price, making it economically feasible to use alternative sources in places like China and India.

Energy-production costs using other fossil fuels range from 3 cents per KWH to 5 cents per KWH. Presumably, when the costs of alternative energy plus the cost of decommissioning conventional sources drops below those amounts, we will see a larger shift of our domestic energy production to renewable sources.

In the computer world there is an axiom known as Moore’s Law, which states that the number of transistors in a dense integrated circuit doubles approximately every two years. Moore pointed out that, over time, computing ability increases exponentially with an accompanying reduction of cost.

Applying Moore’s Law to the technology of renewable energy suggests that the cost of renewable energy will become increasingly competitive.

We still need fossil fuels for some applications, such as rocketry, because alternative energy sources cannot produce the power needed to successfully complete a task.

My engineer friends tell me that we will need a breakthrough in battery technology to overcome this limitation.

Another economic issue is energy subsidies. According to the Congressional Budget Office, the federal government spends $3.2 billion annually subsidizing the extraction of fossil fuels. It also spends $7.3 billion subsidizing the installation of renewable energy sources.

It is hard to compare the cost per KWH generated because it is not known how much energy will be produced by the subsidized renewable energy sources.

Critics of the CBO report maintain that it understates the levels of federal fossil fuel subsidies because it does not consider the government’s environmental and health care costs resulting from the combustion of fossil fuels.

Irrespective of the policies pursued by Congress and the Trump administration with respect to subsidies, it is likely that the marketplace will ultimately determine the source of future energy production.

As demonstrated by the EU, politicians who wish to impose carbon taxes to influence or accelerate this trend will probably slow it down.

Regardless of what the politicians do, it is likely that we will see a future reduction in carbon emissions from fossil fuels. The fastest way to achieve these reductions is to allow marketplace forces to act.



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