When it comes to Climate Change the main pollutant to consider is carbon dioxide and in New England the major source of carbon dioxide from electricity production is natural gas. While natural gas produces less than half the carbon dioxide per kWh of energy as coal, natural gas in New England is a much larger energy source. In fact in 2012, which is the most recent year that Belmont Light has published its energy sources, natural gas supplied 44.6% of our electricity and coal supplied 2.7% of our electricity. So while world-wide coal is a much greater source of greenhouse gasses, in New England natural gas is a much greater problem. In much of the world replacing coal as an energy source with natural gas would contribute to decreasing greenhouse gas production. In New England, however, our job will be replacing natural gas as an energy source with wind, solar, hydro, and—depending on your viewpoint— nuclear sources. (Nuclear energy will be discussed in other posts.) As former Secretary of Energy and Nobel Prize winner, Steven Chu, said, “Natural gas is part of the problem and part of the solution.” In New England, however—at least in terms of electricity production–it is the major problem.
How should we proceed in calculating the damages done by emissions produced in the procurement of energy by Belmont Light? The monetization of damages done by CO2 pollution is called the social cost of carbon and is given in dollars per metric ton of CO2 emissions. It is a crucial step in driving climate change policy. The number is often given as a range since it involves the prediction of damages done in the future and so is uncertain. A middle-of-the-road value used by the Environmental Protection Agency is $37/metric ton. Many environmental groups think the number to use should be much higher. Ways of calculating the social cost of carbon will be considered in another post but for now let’s use EPA’s $37/ton value.
Next we need to know how many tons of CO2 emissions are produced in a year procuring electricity for Belmont Light. By taking a look at its annual report we find that Belmont Light sells about 130 million kWh of electricity in a year. About 50% of this electricity comes from natural gas. (I am doubling the 2.7% from coal and adding it to the 44.6% from natural gas to get “natural gas equivalents.”) 50% of 130 million is 65 million kWh of electricity from natural gas generators. Natural gas turbines produce about 0.8 to 1.2 lbs of CO2 for each kWh produced. We’ll use 1 lb to make the math simple. That means 65 million lbs or about 30 metric tons of CO2 are produced each year to provide Belmont Light with its electricity needs.
Using $37/metric ton for the social cost of carbon we come up with $1,100,000 worth of damages to future generations by a year’s worth of procurement of electricity by Belmont Light.
These natural gas generators, however, did pay about $4.50/metric ton CO2 for permits to pollute under the Regional Greenhouse Gas Initiative. This would cover about $140,000 of the damages leaving $950,000 of uncovered damages.
How can we understand this number? It means that future generations will have to pay $950,000 to clean up the climate change damage caused by the CO2 emissions from the procurement of a years worth of Belmont Light’s electricity. The Municipal Light Advisory Board often considers issues like this in terms of cross-subsidies; using this language one could consider this $950,000 a cross-subsidy from future generations to fossil fuel electricity generators. The fossil fuel generators create the pollution that causes the damages and should pay for it. The future generations who have to deal with the damages of climate change will end up paying for it. That is the cross-subsidy.
Climate Change policy options are discussed in a separate post but for now we can consider a few of the things we in Belmont can do to respond to the damages our energy procurement causes and keeping this $950,000 figure in mind will serve as a guide.
The primary way ratepayers in the rest of state account for this cross-subsidy is by paying incentives to new clean energy generation sources helping to slowly decarbonize the economy. Some people think of these incentive payments as negative taxes. This incentive system involving Renewable Energy Certificates is discussed here. The amount of money it would cost Belmont Light to pay the same amount of clean energy incentives as the Investor Owned Utilities is discussed here. It is worth noting that we could meet the Massachusetts RPS standard and still not completely account for the cross-subsidies to fossil fuel plants.
Besides directly incentivizing renewable energy by buying RECs we can encourage clean energy by buying energy from renewable sources in ways that encourage their construction. This is the idea behind the net metering solar tariff. Net metering may or may not be an completely accurate way of valuing solar electricity but it is definitely easy for potential solar hosts to understand and it has been an important way of encouraging residential solar across the United States.
It turns out that at low solar penetrations—when only a small amount of energy comes from residential solar—accurate valuation of solar is not that important. That is because any possible cross-subsidy that might occur from a possible overvaluation of solar is tiny compared to the $950,000 cross-subsidy going to fossil fuel plants. There are currently 20 homes with solar panels in Belmont producing about 150,000 kWh of electricity per year. If there were, for instance, a 10 cents per kWh cross-subsidy the annual cross-subsidy would come to $15,000—small potatoes compared to the nearly $1,000,000 of cross-subsidies going to fossil fuel plants.