A Senate subcommittee has approved legislation to put in place a cap-and-trade system for carbon dioxide. The New York Times and AP have detailed writeups. The cap-and-trade system would attach a cost to carbon emissions, internalizing the great externality of fossil fuel energy production that is able to pump carbon emissions into the atmosphere, placing environmental and health costs on the globe. While Senatorial Democratic leaders hope the measure will be passed by the Senate before the end of the year, chances in the House are far less certain.
Under a cap-and-trade system, energy producers would be able to purchase carbon credits to offset their expected pollution production. The dirtier the energy production, the more credits would be required, which would in turn drive drive up the cost of fossil fuel energy while ostensibly reducing the premium for clean energy. The Times has an excellent graph displaying the relative costs of energy production from different sources as the price increases from zero to $50 per metric ton.
All carbon is not, however, created equal. The issue of “closet carbon,” or carbon emissions hidden in the extended production process, is not clearly addressed in the legislation. Would solar energy companies get billed for the fossil energy needed to make the photovoltaic cells? Would corn ethanol growers get charged for the petrochemicals used to cultivate it? On the flip side, would companies producing energy in a carbon neutral way be awarded extra credits that they could sell off?
The carbon trading market is developing quickly, and everyone from energy producers to energy consumers are thinking about what a carbon-conscious market would do to their enterprise. A carbon cap-and-trade system would dramatically alter the bottom line of the energy industry. Coupled with oil hovering at just under $100 a barrel, dirty energy is getting expensive quickly.