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Power Plant Economics

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This space has commented ad infinitum on the fiscal disaster that is the College (in terms of fundraising, staffing, and construction). Has the same evident mismanagement spilled over into the College’s energy plan as well.

In a bid to become more environmentally friendly, Dartmouth plans to transition its power plant from dirty No. 6 fuel oil to biomass (likely wood pellets or chips). Moving to a cleaner source of energy is certainly commendable, but what of the expense? A Valley News article suggests that the cost of the conversion and other eco-friendly improvements may reach an eye-watering $100 million. And given the administration’s propensity for cost overruns, the actual tab may be even higher.

Fortunately, we can use the basic economic tool of cost-benefit analysis to examine the worthiness of this project. For this purpose, a back of the envelope calculation will suffice in showing whether the proposed plan is anywhere in the realm of making sense.

The College uses approximately 3.5 million gallons of No. 6 fuel oil each year. According to the EPA, No. 6 fuel oil has a carbon dioxide content of 11.27 kg/gallon, resulting in total carbon emissions of 39.5 million kg or 39,445 metric tons of carbon per year. Using similar calculations, we can find that the plant also emits 1,575 metric tons of methane and 315 metric tons of nitrous oxide every year.

The next step is to find the dollar value of these emissions in terms of the harm that they do to the environment (what economists call the social cost). The EPA pegs the social cost of a metric ton of carbon dioxide at $42, methane at $1,200, and nitrous oxide at $15,000 for the year 2020. Thus, the total social cost for a year of power plant operation is $8.27 million, with a breakdown of $1.66 million from carbon dioxide, $1.89 million from methane, $4.72 million from nitrous oxide. Or, put in other terms, the social benefit of eliminating these pollutants equals that dollar amount.

Given that $100 million annualized is equal to $5 million (or 5%) in endowment draw per year, the proposed plan would seem to pass cost-benefit analysis and actually be worthwhile. However, the price of carbon dioxide per metric ton in the European Union is currently €6.95, or $8.30. In other words, there are a plethora of emitters in the EU who can abate their emissions far more cheaply than the College can.

Theoretically, Dartmouth should be able to achieve the same positive impact on the environment at a lower cost by vacuuming up EU permits equal to the power plant’s carbon footprint and then simply refusing to exercise or sell said permits. This would have the effect of bidding up the price of carbon in the EU and forcing polluters offline, thereby offsetting the College’s carbon footprint.

The aggregate greenhouse gas emissions from the College’s power plant can be converted to 196,500 metric tons of carbon dioxide equivalent. That much in EU permits costs only $1.63 million per year — saving Dartmouth $3.37 million each year going forward — with the same positive environmental impact. In other words, if the goal is to do well by the environment, the College can achieve the same environmental impact for a much lower cost. Or it could spend the entire $5 million on permits and achieve a much greater impact. Either way, building a new power plant doesn’t seem like the most efficient use of capital in the short run.

Addendum: An expert in the field writes in:

This is a nice analysis. Indeed, it might even be too conservative.

Buying and not using an EU carbon permit probably gets you reductions in other greenhouse gases for free. If, for example, marginal carbon emissions in the EU are from an oil burning power plant, then the emission reductions of other gases would be roughly in proportion with our own emissions. If that were true, Dartmouth would only need to buy permits to offset its carbon, i.e. 39.5 million tons rather than 196.5 million tons.

In that case, buying permits would be 15.3 times cheaper than the $100 million project, rather than the 3.1 times cheaper calculated by the author.

Either way, he is making a great point. The whole point of tradeable permits is that they allow abatement to come from those with lower costs. It sounds like we have very high costs of abatement, so, if we want to be carbon-neutral, we should lead by example and do it the correct way.

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