Clean Energy Loses Out on Carbon Limits

Jack Oswald, the chief executive officer of biofuel company SynGest, had plans to build at least 15 new plants to turn corncobs into nitrogen fertilizer. Now that Democrats have pulled the plug on climate-change legislation, he says he may be able to attract investors for only five.

Senate Majority Leader Harry Reid, facing Republican resistance to measures that might increase household energy costs, on July 28 said he would push scaled-back legislation that provides energy conservation incentives and removes the liability cap for offshore oil leaks. Encouraged by the White House, clean-energy advocates like Oswald had expected that Congress would also pass a bill putting a limit on carbon and authorizing the trading of emission permits. The trading system would have the effect of generating higher prices for carbon, making clean-energy companies more competitive, and producing "green-collar" jobs, according to its backers.

The House passed climate-change legislation in June 2009, and as recently as last month White House Chief of Staff Rahm Emanuel said he believed the Administration could get a bill through the Senate. Reid's announcement dashed those hopes for this year, and possibly beyond, especially if Republicans reduce or end the Democrats' majorities in November. "If we had this climate bill passed, the money would flow immediately," Oswald says. "This is the biggest economic opportunity we have in front of our country, and for some reason our politicians can't get their minds wrapped around it."

Fertilizer is now made with natural gas, a process that releases more heat-trapping carbon into the atmosphere than using corn-based products. If carbon trading commenced, the ability to price those emissions could take away some of the cost advantage of gas. That would enable SynGest to attract financial backing for a "rolling thunder of construction" across the Midwest, Oswald says. Each SynGest plant would create 360 temporary construction jobs, 40 permanent ones, and a local market for corncobs of as much as $10 million, he says.

Putting a price on carbon is "huge" because it would fairly account for the environmental costs of greenhouse gas emissions, says Sunil Paul of Spring Ventures, an investment fund that specializes in clean-tech companies. Accounting for both capital and operating expenses, coal costs an average of $59 a megawatt hour, according to Milo Sjardin, an analyst at Bloomberg New Energy Finance. Onshore wind costs an average of $91 per megawatt hour. If carbon costs $20 per ton in a trading market, as analysts have estimated, the price of coal would increase by $14 a megawatt hour, according to Sjardin, who says the cost difference would close as carbon prices inevitably rise.

In a cruel twist for supporters of cap-and-trade, the Gulf oil spill may have contributed to the bill's undoing. Incentives for more offshore drilling were part of a compromise that Senator Lindsey Graham (R-S.C.) added in exchange for a carbon cap. Once the incentives were stripped out in response to BP's Gulf disaster, all hope of Republican backing evaporated.

The bill's travails have already hurt renewable energy companies. Additions of wind power in the U.S. in the first six months of 2010 sank 70 percent from a year earlier and lagged new coal plants for the first time in three years, according to the American Wind Energy Assn., a trade group. Lewis Hay, CEO of NextEra Energy, the largest U.S. producer of wind and solar energy, says that without a price on carbon and a mandate that utilities buy at least some renewable energy, his company won't invest an additional $2 billion a year in wind, as it had planned to do.

The Bottom Line: The Senate's inaction on climate-change legislation means renewable-energy companies will have trouble competing.

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