Background

Carbon emissions come from a number of sources.Two-thirds comes from fossil-fuel electricity generation and the tailpipes of vehicles. In electricity generation, coal represents 80% of Australia’s production. That makes it king of the hill when it comes to climate damage in Australia. The Australian Coal Association (ACA) recommends that coal-fired power plants be replaced after 45 years. Therefore, it's easy to get an idea of the replacement cycle.

"Uranium Mining, Processing and Nuclear Energy -- Opportunities for Australia?," Office of Prime Minister and Cabinet, 2006

Australia’s fleet of coal-fired power plants can broken down into four groups: plants overdue for retirement (1.6% of current capacity), plants needing replacement by 2020 (17.5% of capacity), plants needing replacement by 2030 (66.2% of capacity) and plants needing replacement by 2040 (98%)

Existing coal-fired power plants should pay in full for carbon permits. However, any 'peaking power' they provide should not require carbon permits. This ensures a competitive base load power market for renewables, while providing coal-fired power an ongoing role in the Australian energy system as a backup source of power to guard against blackouts. This is a sensible solution.

Providing 'free' peaking power permits to coal-fired power premium revenue to legacy coal-fired power plants operators while easing the industry's transitionto changing economic realities. If consumers are also charged peak rates for peak power, it shifts the financing burden of the 'free' permits from all energyusers to profligate energy users. This is desirable.

An argument against using coal for peaking power is that coal-fired power plants can't ramp up output easily, and thus are best suited to base load power markets. This is true, to an extent. A coal-fired power plant operating below full capacity can, with reasonable notice (an hour or two) ramp up output. With the enticement of 'free' permits for peaking power, coupled with premium prices, arational strategy for a coal-fired power plant would be to operate below maximum capacity during warm weather. This is desirable since it will allow solar power, which works best in hot, sunny weather, to take up the slack inbase load markets without having to compete against unfairly advantaged (via 'free' permits) coal-fired power. Using weather forecasting and yield management techniques, coal-fired capacity could easily meet reasonablyexpected peak power, provide extra revenue to coal-fired power producers and a more level-playing field for renewables. Everyone wins.

Another benefit of limiting free emissions permits for coal to peaking power is that it puts strong incentives on the coal industry to rapidly prove up and implement carbon capture and storage. That’s because it makes rapid application of carbon capture and storage critical for the coal industry to continue to compete in base load power markets. That's a good market signal.

Giving away free permits merely creates a 'corporate welfare' relationship between the coal industry and government. It doesn't encourage the coal industry to rapidly develop carbon capture and storage, or punish the industry for foot-dragging. If the coal industry can't deliver carbon capture and storage technologyquickly, the market can then move on to investing in and expanding capacity
of already-proven, clean energy renewables that are rapidly falling in price without worrying that less environmentally-friendly power sources will be given an unfair advantage in future power markets due to fossil fuel industry capture
of government.

More detail on this can be obtained by reading ASFEE's submission to the Rudd Government's Carbon Pollution Reduction Scheme Green Paper.

In order to avoid the worst ravages of climate change, carbon dioxide must be capped at 450 parts per million in the atmosphere. That means huge cuts in coal emissions.

Source: Khosla Ventures