Tuesday, April 06, 2010

Pick Your Poison: CO2 from Coal or No Lights in Africa

"The Obama administration, caught in an awkward bind between its own ambitions on climate change and Africa’s pressing energy needs, is facing the first test of its new guidelines discouraging coal-fired power projects in developing nations." quoted here .

To quote Lenin, "what is to be done?"

To semi-quote John Lennon, "give the residual claimant a chance"

Suppose that the World Bank said to African nations; "You can have a $X dollar coal fired power plant that will produce 100 units of power but consider this alternative. The coal fired power plant will produce 200 units of carbon each year. For every ton of carbon you choose not to produce, we will give you $50. So, if you build a wind turbine system rather than the coal fired power plant, we will give you 200*$50" each year."

Now, I'm making up the "200" number but not the $50 number. In cap and trade discussions, serious people say that the price per ton of carbon should start at $35 a ton but suppose that we paid African nations $50 per ton of carbon avoided. This would provide them with a strong incentive to choose the "green option". This is like the "nega-watt" that Amory Lovins would champion.

Note that under my offer, the African nations could still build the coal fired power plant but they would lose out on the payment for not polluting. So this isn't a carbon tax, it is a "carbon subsidy". I'm giving the African nation the property rights to pollute but they have the opportunity to sell this right (at a price of $50 per ton) back to the World Bank.

Now, the World Bank would need to finance this but the developed nations would transfer resources to the developing countries while giving them the choice of whether they want "to go green" or not.

PERVERSE INCENTIVES? Of course, the smart African nation will try to manipulate the baseline and say that they would build a "really dirty" power plant and thus by building the green windturbines that they deserve an enormous payoff --- there would need to be some thinking about how to set the baseline (i.e imputing what the African nation's carbon release would have been had it built the coal fired power plant) because the nation has an incentive to over-state this to increase their payoff.