President Obama’s first serious test is …

President Obama’s first serious test is whether he is going to require coal plants to include equipment to capture and sock away carbon emissions underground.

About 25 coal plants are under construction across the United States, more than in the past two decades. Another 20 projects have been permitted or are near construction and more than 60 have been announced or are in the early stages of development.

EPA ruling over climate jeopardizes coal plants | Environment | Reuters

The reason this question is so important is because:

  • Any postponement of capital projects at these plants will have a major ripple effect to both the economy and employment. Delaying major construction projects affects not only the local employment around the plants but the equipment manufacturers located throughout the country.
  • Many people believe the country’s electrical generating capacity is already in a precarious supply position. The lack of excess generating capacity is going to be especially difficult during the summer months when we see peak electrical demand.
  • If the final decision is to require plants to install the capture equipment, the electrical rates will sky rocket as plants recapture their costs. Although President Obama maintains that this will bankrupt the coal companies, it will probably have effects he did not anticipate. Companies dependent on reliable electrical power will spend the capital to protect themselves by installing their own generating equipment. This will provide an incentive to the green economy but the price will be steep. The rate increases caused by energy cost shifting will primarily borne primarily by the people who can least afford it.
  • Although the stimulus to the green economy may help in the long term, it will not overcome the direct effects of lower capital spending, lower employment, and higher electrical rates before the next election cycle.
  • This will be a difficult political decision. If President Obama allows the projects to proceed without carbon dioxide capture, he will probably disillusion many of the people who voted for him. If he requires carbon dioxide capture equipment he will fulfill his green economy promise but he could be looking at a potential worst case scenario like:
    1. The companies required to install the capture equipment significantly increase their project costs to compensate for regulatory confusion and the engineering uncertainty with capturing and storing carbon dioxide.
    2. A significant portion of the electrical companies decide to delay their projects as they question the project economics in a dismal economy. This contributes to higher unemployment and fuels the green economy versus the general economy debate.
    3. All of the utility companies with surpluses start extracting significantly higher rates selling their excess capacity on the open market. Since we are looking at a market with a shortage, everybody will see higher electrical rates. 
    4. Politicians try to reduce rate increases by increasing regulatory authority with disastrous effects. I remember that when our country tried to regulate natural gas prices many years ago, this caused more unintended problems than it solved.
    5. The agile consumers protect themselves by generating their own power. The less agile customers will bear the brunt of the rate increases. This was a situation I saw in Houston as chemical companies increasingly generated their own electrical power and residential customers were left to pay the bill for the new generating plant construction.
    6. We start to see an increasing number of power outages due to failures at the plants and with the transmission lines. The issues we saw this summer with oil refineries and gasoline distribution provide us with a market example.
    7. The average person finds out that they are bearing the brunt of the green economy policy and starts complaining about electrical rates and reliability. The economists start writing about the impact of higher costs and an unreliable power supply to a struggling economy. The benefits of the green economy come under serious questioning.
    8. A majority of the scientists start to believe that we are entering into a global cooling phase and that although capturing carbon dioxide is a worthy scientific effort, they wonder whether this is a waste of precious economic resources. The scientists pull the scientific justification rug out from underneath the politicians.

Under this worst case scenario the average person will likely blame their local politician for their plight and extract revenge the only way they know how by voting them out. This political decision has the potential of becoming as unpopular as a gas tax hike and will shorten the political careers of several incumbents.