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Carbon price to have little impact on US power sector output: IMF

11 November 2020 Keiron Greenhalgh

Were the US to introduce a carbon price, there would be a "substantial decarbonization" of the power sector and very little impact on its output, according to International Monetary Fund analysis.

In a World Economic Outlook report, part of the IMF's studies zeroed in on the mitigation of climate change, including taking a closer look at decarbonization of the electricity sector.

With a $50/mt carbon price introduced gradually over 10 years alongside a front-loaded subsidy for renewable generation, the revenues - roughly 0.2% of GDP - would be enough to finance the subsidy, the IMF said.

The price would discriminate based on the carbon intensity of the different technologies, it said, disadvantaging power production using coal and "to a lesser extent" natural gas.

With a decline in renewable prices due to the subsidy, the change in relative prices would lead to a rebalancing of the generation stack away from coal and toward renewables, and electricity sector emissions would decline by 35% relative to baseline by 2030. The decline of gas-fired output would be softened by its role as a backup for renewable electricity, according to the IMF.

The subsidy would trigger a surge in investment in renewables, offsetting a "large portion" of the decline in coal sector investment. "Therefore, the policy mix greatly reduces emissions, while economic damage is mitigated (output declines below baseline by 0.5% over 10 years) as the economy adjusts by reallocating labor and investment from coal toward renewables," it said.

"Storage technology for renewable electricity, which could become feasible in the near term, would amplify the penetration of renewables resulting from the carbon price," it added.

Such a policy would be "highly effective" at curbing emissions at a modest macroeconomic cost, the IMF said, and therefore it questioned why current plans for phasing out coal plants fall short of what is needed to avoid irreversible climate change.

Among US industry sectors, representatives of the power and gas industries such as the Edison Electric Institute and Natural Gas Supply Association have already backed carbon pricing, but no legislation has yet to pass through Congress despite being proposed by lawmakers from both sides of the aisle.

However, such a carbon price would have less impact on emissions in Europe, the IMF said.

While ahead of the US in its transition to decarbonization, the EU has less room when it comes to cutting coal-fired generation or expanding output from renewable facilities. In addition, gas-fired plants' share of the generation stack is smaller than in the US, making the grid less able to flexibly accommodate a renewable expansion.

The EU already has a carbon trading system, the Emissions Trading Scheme, which is set to enter is fourth phase in January.

Posted 11 November 2020 by Keiron Greenhalgh, Editor, Climate & Sustainability Group, IHS Markit

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