Following the Least-Cost Pathway to CO2 Cuts

The least-cost pathway concept acknowledges that as annual electric-sector emissions of CO2 approach zero tons per person, the cost per ton reduced increases.

The least-cost pathway concept acknowledges that as annual electric-sector emissions of CO2 approach zero tons per person, the cost per ton reduced increases. (Image source: IHS Markit)

Global greenhouse gas emissions have increased steadily as China, India and other countries bring new coal-powered electric plants online, but the United States has bucked the trend. In the U.S. electric power sector, CO2 emissions declined 20% between 2007 and 2015.

One might think that California, which is re-restructuring its electric power system to reduce carbon emissions, played a major role in that accomplishment. But it didn’t. In fact, even as the Golden State boosted wind and solar output from 2 percent to 14 percent of in-state electricity production over that period, CO2 emissions held steady. The reason: The share of natural gas-fired generation grew from 50 percent to 60 percent.

Explains IHS Markit, a purveyor of market intelligence and analysis: “This was needed to back up and fill in for intermittent renewables, replace output from prematurely closing nuclear plants, and offset declining hydroelectric generation.”

The economics of CO2 reduction are complex, and not all CO2 reduction strategies are created equal — either in terms of cost or in terms of emissions reduced. As IHS Markit notes in a Wall Street Journal advertorial today, there are more cost-efficient ways to cut greenhouse gases than mandating renewables. “The reductions achieved via [California’s] wind and solar mandates cost 10 times more than the ones achieved through its cap-and-trade programs.”

The idea that cutting greenhouse gas emissions is a compelling national goal is far from universally accepted. Not everyone embraces the more cataclysmic predictions of temperature rise, not everyone believes that an atmosphere richer in CO2 will lead to universally baleful effects, and not everyone agrees with the proposition that cutting CO2 emissions is the best way to respond to a warming climate. But let’s set those reservations aside for a moment and assume that combating global warming and cutting CO2 emissions is a global imperative, and that we’ve all got to do our bit to turn the tide.

IHS Markit employs a concept it calls “the least-cost pathway” to CO2 reduction, which ranks CO2 reduction strategies for the electric power industry by cost-effectiveness — essentially by dollars-per-ton of CO2 saved.

The lowest-cost approach is replacing coal, which emits a large volume of CO2 per unit of electricity generated, with natural gas, which emits about half the volume. That approach is so cost-effective that it has already occurred on a large scale, driven largely by market forces (and Environmental Protection Agency rules that cracked down on emissions of toxic metals from the combustion of coal).

Thanks to the fracking revolution, which has expanded the supply of natural gas and pushed down the price, U.S. electric utilities have shifted dramatically from coal to gas. That’s the reason U.S. CO2 emissions have declined so dramatically. While this approach has not totally run its course, the rate of gas-for-coal substitution is likely to slow significantly, as only the newest, cleanest, most cost-efficient coal plants remain in operation.

Extending the life of aging nuclear power plants is somewhat more expensive, and building new nuclear facilities is significantly more expensive. On the positive side, nukes have zero carbon emissions and they provide a reliable base-load capacity. IHS Markit sums up the pros and cons: “Nuclear power plant extension is cost-effective early on, and new nuclear plants become cost-effective as the curve moves into deeper reduction.”

Energy efficiency is part of the equation, says IHS Markit. However, “encouraging efficiency investments beyond what consumers would do themselves involves increasing costs.”

As for wind and solar, they, too, are part of the solution. “But not as the primary source of generation. … Wind and solar costs are not reaching grid parity when the need to align power output to when consumers want electricity is taken into account. Battery technologies are improving but are still not a cost-effective way to manage variations in electricity demand.”

The comparative economics get murkier when we look into the future. Will natural gas prices increase, and by how much, as the most productive wells are depleted and exports of Liquified Natural Gas soak up excess supply? Will the cost of solar panels and battery technologies continue to decline as in the past, or will the pace of innovation slow? Will the price of building new nuclear plants remain breathtakingly high, or will some combination of new technologies (mini-nukes, anyone?) and relaxation of excessive safety regulations bring down the cost?

As IHS Markit concedes, there is little consensus. Still, the market-intelligence company provides a useful framework for looking at Virginia’s energy future: We should pursue the least-cost pathway to CO2 emissions.

The devil is in the details, of course. We can haggle endlessly over the cost-effectiveness of any given approach. But the idea makes more sense than pre-supposing that any particular approach — coal, gas, extending old nukes, building new nukes, wind, solar, energy conservation — is the way to go. Different energy sources have their own place in the fuel mix as Virginia’s electric power sector moves up the least-cost pathway.