Cap and Trade Rules
Cap-and-Trade Shuts Down U.S. Coal Plants

By Adam Stein
January 4, 2009

Jubilant environmentalists trade high fives, carbon permits

We tend to see a lot of handwringing over the fact that Europe has a
carbon cap in place, yet they’re still adding coal to the mix. But
stories like this never seem to get reported the other way. Did you
hear the good news? Dynergy scuttled six coal plants because of the
U.S. carbon cap:

“The development landscape has changed significantly since we
agreed to enter into the development joint venture with LS Power
in the fall of 2006,” said Bruce A. Williamson, Chairman,
President and Chief Executive Officer of Dynegy Inc. “Today, the
development of new generation is increasingly marked by barriers
to entry including external credit and regulatory factors that
make development much more uncertain. In light of these market
circumstances, Dynegy has elected to focus development activities
and investments around our own portfolio where we control the
option to develop and can manage the costs being incurred more closely.”

“Regulatory factors” refer to a host of potential legal obstacles,
but the chief among them is the anticipated passage of a federal
cap-and-trade bill sometime in the next several years. Unlike some
market observers, energy developers aren’t watching for the price of
carbon to pass the magical point at which clean coal or solar or
whatever becomes cost-competitive. Rather, they’re looking ahead
many years, performing scenario analysis, comparing cash flows, and
making investments accordingly.

“External credit factors” refer, in part, to the ongoing financial
crisis. But the credit squeeze affects other forms of energy
development much as it does coal-fired plants, so Dynergy may also
be referring to the fact that banks were tightening lending for
projects with massive carbon exposure long before the crisis hit.
And again, this tightened credit is a direct result of
(as-yet-unwritten) federal cap-and-trade legislation.

Needless to say, many factors may have played into the decision to
shut down those coal plants: grassroots pressure, lawsuits (real or
threatened), disastrous publicity from the sludge spill, the
imminent changing of the guard at the EPA, state-level permitting
difficulties, etc. But as long as we’re handing out credit, let’s
not forget the most obvious and compelling factor. In a
carbon-constrained economy, no one wants to double down on coal.
Image by Flickr user DanieVDM.


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