A North Carolina power company received approval to install a new coal fired power plant this week.
What tool does the North Carolina Utilities Commission employ to reduce the externalities associated with power generation in the state? Can you think of an approach that may be more effective than that described in the article? Post your comments here, referring to the four methods of externality reduction studied in class.
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The Commission reduces negative externalities by ruling that if Duke wants to produce this one single unit it would have to shut down the other four existing units that it has and as well pay 1% of revenue from electrical sales to programs that help with energy effieciency. The Duke firm wanted to set the new company up to meet with the consumer demand in Northern Carolina. The method used by the Commission is effective already but if the tax were to be increased more than 1% of the revenue, this would reduce the pollution generated by the Duke Corporation because if they tried to increase production or maximize profits, they would also have to pay more to energy efficieny programs.
According to the article, the North Carolina Utilities Commission has employed a number of methods to internalize the externalities associated with the building of a power generator. The first method is permits. Although Duke, the company building the power generator, sought out to build two 800-megawatt generators, they were only granted the permit to build one power generator. In addition, the North Carolina Utilities Commission and Duke agreed that Duke may only build its new power generator if it retires four existing units (which are not as efficient as the new one). In addition, Duke is now required to invest one percent of its annual revenues to “energy efficiency programs.”
However, a lot still needs to be accomplished if the North Carolina Utilities Commission wishes to effectively internalize the externality cost. Firstly, the commission should place corrective taxes on Duke. In other words, Duke will be taxed for the pollution it makes; the more it pollutes, the more it will be taxed. As profit-maximizers, Duke will seek to reduce their pollution, in order to decrease the loss it incurs through taxation. Furthermore, it will encourage Duke to research and develop cleaner methods of production, so that it can produce at high levels while making less pollution. Secondly, the commission should issue permits for pollution: if Duke wishes to produce, it must have a permit from the commission. By controlling the number of permits it issues, the commission then can control the amount of pollution Duke can make. In this way, the commission will be able to place an on-going method to control the pollution Duke makes (as of now, the Duke may build the power generator and pollute as much as it wishes).
The North Carolina Utilities Commission attempts to reduce the externalities associated with power generation by limiting the numbers of units that the Duke Energy Corp. can build to one, while retiring its four existing units, for not choosing a more environmental friendly method to generate electricity. In addition, it also has to invest one percent of its revenues in energy efficiency programs.
An more effective way could be just tax the firm more for using coal, so in order for the firm to maximize profits, they would choose to switch to more environmentally friendly methods of generating electricity. Even if they still choose to use coal, the taxes collected could be used to clean up the pollution they created. However, it could be difficult to decide how much taxes should be imposed on the firm.
In this article the government internalized externalities by using a mixture of regulations and pollution permits. The regulations the state imposed on Duke was that in exchange for the opening of it's new coal energy plant it had to close down it's older plants (which were probably more polluting than the new one) and also that Duke had to use one percent of it's revenue for energy efficiency programs.
Overall the amount of pollution will probably decrease in the long term as the four old plants are shut down and the new plant becomes energy efficient but there will always be some amount of pollution. However if the plant is able to acquire pollution permits then the decrease in pollution will be less significant because the plant would then have the right to pollute. Also, the plant might choose to pollute anyway if the cost of the fine is less then the benefit of polluting.
A better way for the state to reduce pollution would be to create a regulation stating that most power plants had to use a renewable energy source as well as their normal method of energy production
This as attempt by the government to internalize the previously external costs of Duke Energy Corp. Even if the Duke Energy Corp only does build one coal-fired generator, it will not make a total loss, because their lack of supply in future will have the corporation charging higher prices for their good in order to make profit. The lack of demand after the increase in price in the long run will cause consumer to switch to goods that run on cheaper energies. Therefore this is an effective move by the government to decrease the negative externality of pollution.
The North Carolina Utilities Commission only allowed the opening of one plant. The proposed 2 plants would have pumped 11.5 million tons of carbon dioxide into the atmosphere each year. Duke was also required to shut down 4 of their smaller plants. Along with these punishments, the company is required to invest 1 percent of its annual retail revenues from electricity sales in energy efficiency programs.
This consequently has caused Duke Corp. stocks to drop significantly. The company has taken a huge hit and a more effective way would be perhpas to punish them slower, but to consider the long term. The punishments should be less severe but would be carried out through the long run. A more effective tax would probably to enfore collective taxes, in which the company is taxed based upon the amount of pollution.
I think an evaluation needs to be made here. Is the energy that the generator would supply more important or is keeping the earth clean more important? In the short run, the energy will seem much more useful, since it solves immediate problems. However, many people fail to see the long term effects of pollution, causing global warming and health problems which may require more money in the future. Most scientists agree that global warming is mainly a man-caused problem, thus this energy station would contribute to the problem. This cost for the future would technically shift the supply curve in, thus the real equilibrium should be at a higher price and a lower quantity produced.
Maybe the better solution to this problem should be thinking about ways to preserve energy, and creating more efficient engines rather than creating more energy stations.
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