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CO2 Pricing Study Reveals Consumption Efficiencies

Establishing a Price for Carbon Emissions in the U.S. Would Spur Immediate Reductions in Energy Consumption and More Efficient Use of Power Generators, Study by Carnegie Mellon Researchers Shows

Simulation of Short-Term Effects of $35 Cost Per Metric Ton of CO2 Indicates Up To Ten Percent Cut in Emissions Possible

As recent judicial, political and industry developments appear to continue to move the United States toward a mandatory price for carbon dioxide (CO2) emissions, new analysis by Carnegie Mellon University researchers provides the clearest picture yet of the possible short-term effects of establishing such a cost. The research, published recently by Environmental Science & Technology, suggests that even a modest price would, almost immediately, result in up to 10 percent reductions in emission levels by prompting changes in both power company investments and consumer behavior.

Simulating the impact of a price on CO2 emissions from the existing fleet of U.S. power plants in three regions using marginal costs for generators and hourly electricity load data from 2006, the researchers considered the short-term effects on electricity price and demand even before any new, more efficient generation facilities could be built. They identified that a price as low as $35 per metric ton of CO2 would likely cause a reduction of consumer electricity use, as well as a change by grid operators in the order in which generators are economically dispatched, depending on their emissions levels and marginal fuel prices.

In fact, the researchers predict that as much as ten percent reduction in emissions would be the result, although the level of reduction is heavily dependent upon the availability of alternative and less carbon-intensive power generation technologies in a particular region. For example, facilities in the Northeast and Midwest would see a higher drop in emissions resulting from the price, while emissions in Texas – with relatively larger numbers of natural gas facilities – would be affected significantly less.

While this study predicts the impact and demand elasticity for an instantaneous price increase, the researchers believe that any price imposed will likely phased in gradually or done via a cap-and-trade system. “Any price structure for emissions would hopefully have a clear timetable that would allow utilities and consumers to make informed investment decisions,” said M. Granger Morgan, Lord Chair Professor in Engineering in the Department of Engineering and Public Policy at Carnegie Mellon. “In addition to the changes in resource allocation by utilities, consumers would pay more attention to their energy consumption or switch to more energy efficient appliances.”

In addition, the study supports and expands on prior research about how a CO2 emissions price would spur greater investment by power generators in new, more efficient technologies. “Our findings indicate that significant reductions in CO2 can and would be observed in the near-term, even before more efficient power generation technologies are deployed on a wide scale,” said Jay Apt, associate research professor at the Tepper School of Business at Carnegie Mellon and co-author of the study.

The study, titled “Short Run Effects of a Price on Carbon Dioxide Emissions from U.S. Electric Generators,” appeared in the May 1st issue of Environmental Science & Technology. The research was by Adam Newcomer, a PhD candidate in the department of Engineering and Public Policy; along with Professors Apt and Morgan, Professor Lester B. Lave of the Tepper School of Business at Carnegie Mellon; and Professor Seth Blumsack of Penn State University. The research was supported by the Carnegie Mellon Electricity Industry Center, established in August 2001 to work with industry, government and other stakeholders to address the strategic problems of the electricity industry, making it more competitive and its systems more reliable.

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