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Fuel-switching and Deep Decarbonization

by Christian Stoll on Friday March 15, 2019

Humanity has used up two thirds of the carbon emission budget compatible with the goal of limiting global warming to 2 °C. Global mean temperature has increased by 0.9 °C, and out of the last twenty years, eighteen were among the warmest since 1880. As emissions continue to rise, limiting global warming below 2 °C is widely considered to require substantial policy intervention. As a result, 195 countries agreed to take respective actions in 2015 in Paris.

To reduce carbon emissions, economic theory suggests use of carbon pricing as the most cost-efficient policy instrument. From a welfare perspective, carbon pricing, in the form of a carbon tax or cap-and-trade mechanism, reduces emissions at the lowest cost. However, in practice, policy makers increasingly resort to phase-out mandates to achieve committed emission reductions. As climate policy research focuses on carbon pricing as the first-best option, research into the effects and design of phase-out mandates has lagged behind.

To decarbonize the power sector, the public debate has increasingly focused on phasing out coal power plants. Promoters of coal phase-outs highlight the expected climate benefits of fuel-switching from coal to gas. For every year of coal displacement, fuel-switching to gas adds 1.4 to 2.4 years until depletion to the carbon budget, as gas combustion emits less than half the CO2 of coal. Therefore, gas may act as a bridge-fuel until zero-emission technologies are available at scale.

Research has suggested that phase-outs are politically more feasible than carbon pricing at sufficiently high levels, and highlighted their ability to destroy existing structures while creating space for innovation. Phase-out policies are touted as transparent, simple, and influential in creating anti-fossil norms. An example is the nuclear phase-out in Germany, which has been credited with triggering more R&D spending on renewable resources than the Renewable Energy Act (EEG).

And yet, a view that focuses on coal and gas appears too narrow-minded, as it ignores central factors required for answering the question of which fuel-switching strategy is cost-optimal in order to remain on a politically agreed decarbonization pathway. In particular, zero-carbon resources inevitably become necessary at a certain point to remain on the decarbonization pathway, yet existing infrastructure carries the risk of long-term lock-in of high-carbon technologies. This potential lock-in has its roots in power plants that continue operations as they become stranded.

I present a simple model to find the least-cost resource mix, which is consistent with the committed climate targets. Firstly, I explain the intuition and logic of the model. This includes an explanation of how a capacity planner can determine the resource mix in order to cover load demand at least-cost, how climate targets constrain the task, and how carbon constraints switch the roles of fuel types. Secondly, I mathematically formulate the problem so as to numerically determine the least-cost resource mixes which satisfy distinct targets along the decarbonization pathway. Lastly, I solve the model, drawing on the example of Germany.

The case-study, based on the example of Germany, reveals counter-intuitive results that go against conventional opinions on the role of coal. The findings suggest that, when considering stranded assets, a decarbonization pathway that involves the expansion of renewables and includes a continued, but gradually declining role for coal, turns out to be less expensive than a strict coal phase-out.

Committed decarbonization targets can still be achieved by adding only minimal new gas capacity. It is more cost-effective to initially keep existing coal resources in the market, and expand zero-carbon technologies. The costs in a scenario with a politically forced coal phase-out are significantly higher, as additional gas resources have to fill the supply gap.

 

References

Stoll, Christian, 2019, "Fuel-switching and Deep Decarbonization." MIT CEEPR Working Paper 2019-005.

 

Further Reading: CEEPR WP 2019-005

 

About the Author:

  Christian Stoll is a Ph.D. candidate at the TUM Center for Energy Markets of the Technical University of Munich. His research focuses on decarbonization from an economic point of view. Christian has been a CEEPR visiting student repeatedly in the past, and will continue joint research with CEEPR in the future. Contact: cstoll@mit.edu.