Hirs: How the Cost of Carbon Avoidance Bolsters Nuclear Power

Nuclear power plants that do not generate a profit for producers may still provide a net benefit to the economy once the benefit of reduced CO₂ emissions is taken into account. Because the U.S. has not yet adopted an emissions pricing mechanism, there is not a market-based solution for policymakers. They can make one.

Carbon pricing is implicit in the Inflation Reduction Act. States and the EU have introduced nascent carbon pricing schemes with taxes, tax benefits and offsets. It isn’t unreasonable to assume that carbon pricing will become increasingly tangible.

The social cost of carbon, or SCC, is a measure that considers the economic impacts of rising sea levels, volatile and more extreme weather, and the economic costs of migration. Many homeowners and businesses are facing these costs via higher insurance premiums today.

The EPA’s current estimate of the SCC is $190 per metric ton (mt), hence the levels of tax benefits and subsidies contained in the Inflation Reduction Act. Nobel prize winner William Nordhaus estimates the SCC at $80/mt today, an estimate that increases substantially in the decades ahead. 

The increasing social cost of carbon over time means that the payoff for acting today also increases over time. 

Longtime oil and gas banker Karl Pettersen likens the imposition of carbon pricing on industry to an unfunded liability, albeit one that is imposed by society. Corporations can choose to make an offsetting capital investment to reduce emissions (same as paying down principal), or they can purchase carbon offsets annually (incurring highly punitive interest).

With the SCC steadily increasing, many corporations will spend ever more to purchase the offsets without addressing their own emissions, ultimately reaching net zero by way of bankruptcy court.

Wind farms, solar farms and batteries can help in the interim, but these solutions require volatile pricing to provide returns to investors with the added risk of volatile service. On this basis—and a few others—the Federal Reserve Bank of Dallas suggests that building more nuclear plants can be a cost-effective solution to improve the shaky reliability of the Texas grid and reduce wholesale price volatility in Texas.

Carbon pricing

The carbon emissions from a 1,000-megawatt (MW) combined-cycle natural gas power plant amount to approximately 800 pounds per hour to 900 lb/hr, or about 3.7 MMmt/year for a plant running 24/7. Therefore, a carbon tax of $100/mt would generate approximately $370 million in costs for the combined-cycle gas power plant, or in additional tax revenues for the federal government. A simple cycle gas turbine power plant that produces approximately 1,100 pounds per megawatt hour of CO₂—4.4 MMmt/year—would have an annual carbon tax of $440 million.   

While China is routinely condemned for having more than 100 coal power plants under construction, it is also building more than 100 nuclear power plants. Several of the new nuclear plants are based on the standard design of the Westinghouse AP1000, with a capacity of 1,110 MW at an estimated cost of less than $5 billion each. If China were to impose a $100/mt carbon tax, the payback in avoided taxes would take less than 15 years. The expected operating life of a nuclear power plant is growing, and the Nuclear Regulatory Commission has extended the licenses of a few plants to operate for a total of 80 years. 

France, which generates 70% of its daily electricity requirements from its nuclear power plant fleet, is replacing and upgrading its standardized nuclear portfolio with the EPR2 design, which will generate 1,600 MW of electricity. The estimated cost of the six planned 1,600-MW power plants is €67.4 billion or about $72.4 billion at the current exchange rate.

Each EPR2 power plant avoids approximately 6 MMmt/year of CO₂ emissions. With EU carbon credits currently trading at €65/mt (US$69.61), the annual savings would be €390 million (almost $421 million in U.S. currency), or €31 billion ($33.4 billion) over an 80-year operating lifespan.

In the U.S., corporations are beginning to embrace nuclear power as an alternative to depending on increasingly shaky electricity grids. Dow Chemical is building four small modular reactors, capable of generating 80 MW each, at the company’s Seadrift, Texas chemical plant.  Dow estimates that switching to nuclear will avoid the release of 440,000 mt/year of CO₂-equivalent, at an estimated $1.5 billion to $2 billion capital investment.

CO₂ emissions for the U.S. in 2022 were a net 5,489 MMmt, with electricity production responsible for approximately 25% of the total. Making a dent in emissions with the current technologies for direct air and point-source capture is going to be difficult as a practical matter.  It is better not to produce CO₂ in the first place, and nuclear power plants are the economically viable option.