Goldman Sachs: "New Carbon Market Presents Major Opportunity"

August 6, 2009 | Breakthrough Fellow,

A Goldman Sachs report on the Waxman-Markey climate bill, recently issued to Goldman Sachs' clients, confirms Breakthrough Institute analysis showing the legislation would result in one of the largest commodity markets in the world subject to significant speculation by financial firms, and would have relatively marginal impacts on the renewable power industry.

Titled "Carbonomics: Measuring impact of US carbon regulation on select industries" (not publicly accessible), the report concludes that "A new carbon market presents a major opportunity for exchanges and clearinghouses, especially as more allowances and offsets trade over time."

In a section titled "Carbon exchanges -- build it, and they will (must) come to trade," it estimates the bill would grow the global carbon market to become one of the largest in the world, with trading volume of 175 to 263 million contracts per year -- larger than the oil and gas markets combined and approximately the third largest commodity market in the world after U.S. interest rates and stock indexes. The analysts estimate the profit margin for financial firms resulting from this new carbon market could reach $2 billion per year globally.

The report also examines potential impacts of the legislation on the power sector, concluding that the carbon price expected from Waxman-Markey would not make most renewables competitive, and many regions might pay the compliance fee for the renewable electricity standard instead of deploying renewables:

Even with carbon credits of $11-17/ton, most renewables (except geothermal) remain uncompetitive without tax incentives and only become so if (1) construction costs decline significantly, as expected for solar, (2) carbon costs rise significantly, or (3) fossil fuel input costs increase dramatically. Many regions -- instead of incurring renewable costs of generation -- may simply pay the compliance penalty of $25/MWh for amounts below the renewable mandate -- a cost that is below the incremental LCOE level for new wind/solar generation.

Goldman is relatively bullish about the amount of renewable energy investments required to comply with the federal Renewable Electricity Standard (RES) included in the Waxman-Markey bill, claiming that "[s]ignificant capital spending is needed to meet RES standards by 2020, even if requirements approved are lower than proposed in Waxman-Markey."

However, Goldman seems to ignore forecasts for business-as-usual growth of renewable energy generation absent Waxman-Markey's RES. As Breakthrough, the Southern Alliance for Clean Energy, and the Union of Concerned Scientists all conclude, business-as-usual renewable energy growth is likely to meet or even exceed the weakened requirements set by the Waxman-Markey RES, and the National Renewable Energy Laboratory reaches the same conclusion about the RES included in the Senate's energy bill.

In short, while significant investments are necessary to increase renewable energy generation to 8-12% of our electricity mix by 2020, as the Waxman-Markey RES requires, these investments will already occur absent any RES policy. The U.S. Energy Information Administration's already conservative BAU forecasts project 10% renewables by 2020, and, as Goldman notes, direct deployment incentives in the form of the federal tax credits (PTC and ITC) are the major drivers of this projected growth.

Finally, the Goldman Sachs report also confirms Breakthrough Institute analysis on the potential impacts on coal electricity, noting that the impact on most coal plants could actually be positive or neutral given the free distribution of allowances to merchant coal plants, and the dynamics of the power markets within which they operate:

"Given an expected increase in power prices from carbon costs on all MWh generated, along with the significant levels of allocations, merchant coal plants in markets where natural gas sets the marginal price of power (Texas, the Northeast, etc.) largely remain neutral to this plan, while coal plants in areas where coal often sets the clearing price may actually benefit from carbon regulations..."