Honey Lake’s giving us a new way to do what we do best: take energy that would otherwise be wasted and convert it into clean power and processed steam, i.e., recycling energy. Whether recycling heat that would otherwise be thrown away at a metals plant or recycling biomass waste that would clog landfills, the principal is the same.

We’re going to put our capital and our team’s extensive clean energy expertise to work enhancing the plant’s efficiency and production. These enhancements could reduce California CO2 emissions by 44,000 metric tons per year. That’s the equivalent of taking more than 8,000 cars off the road. Sweet.

Sean Casten writes, “The Waxman-Markey proposal to reduce CO2 emissions by 17 percent over ten years is constrained only by its ambition.”

Cutting CO2 emissions by 20 percent could be realized with our existing assets — by ramping up our nation’s gas-powered electricity generators and ramping down our coal-fired generators.

Read more about how we can shift our electricity production away from a dirty resource to a clean one.

In 2006, CHP produced more than 12 percent of total U.S. power generation. The report calls for high-deployment policies that would generate $234 billion in new investments and create nearly 1 million new highly-skilled, technical jobs throughout the U.S. In this scenario, more than 60 percent of the projected increase in CO2 emissions between now and 2030 would be avoided.

Read more about how CHP can help create jobs and decrease global warming.

First, let me define my terms. By “free market”, I’m referring to the market of Econ 101 textbooks: no barriers to entry, no barriers to exit, no one entity can independently affect price, etc. By “mature”, I refer to industries wherein the next investment is unlikely to produce a product with a significantly lower cost structure than the industry average. Finally, by “capital-intensive”, I refer to any industry where the majority of the annual cost goes to capital recovery.

Economists have spent a lot of time figuring out how to structure markets to get as close as possible to that free market ideal. Much of the most interesting work in that vein has been in the design of auctions, especially in the electric sector. A host of models have emerged that seek to drive costs down the marginal cost of the highest-cost supplier necessary to meet supply needs. For the most part, these auctions have been successful. Yes, there are some high-profile screw-ups (see: Enron), but they are the exceptions that prove the rule — the absence of front-page stories on 99.99% of the world’s auctions is a testament to their effectiveness.

But here’s the rub: no one invests capital to cover their operating costs. We invest capital to earn profits in excess of our operating costs. And there are no profits if you’re only covering your marginal production cost. Robert Solow won a Nobel prize for noticing that the presence of profits (and its result: economic growth) is de facto proof of the absence of free markets. Solow’s conclusion was that the persistence of economic growth must therefore result from technological innovation. So long as opportunities exist for technological advance that allow one to produce widgets at a discount to the market clearing price, companies will make those investments, capture profits and reinvest in further growth.

But what happens when those opportunities don’t exist anymore? When’s the last time someone built a new integrated steel mill in response to a free-market price signal? Oil refinery? Cement plant? Might the deindustrialization of the United States result in part from an economic model that drove prices for manufactured goods down to their marginal cost once those industries reached maturity?

Moreover, as we look for places where we have invested in large capital projects in mature industries, a consistent feature emerges of heavy subsidization and distortion of free market principles. China has invested in basic infrastructure by government mandate. Regulated utilities build power plants on the back of rate-payer guarantees and monopoly franchises. Wind turbines have been built in response to technology-specific tax incentives and RPS mandates.

This becomes problematic when we look at what we are currently expecting markets to do. We have designed electric capacity markets to clear at the marginal cost of capacity services, but expect them to bring new investment forward. Greenhouse gas cap & trade markets will fail utterly if they fail to incentivize investments in CO2 reduction…but they too are being set up within the framework of auctions and marginal clearing prices. Market purists fall back on just-so stories when confronted with these failures, noting that the lack of investment in response to these markets suggests nothing more than that the investment wasn’t needed. Maybe they’re right. But if they’re wrong, we’re in dangerous waters — and since the economic theory upon which these markets are based is supposed to drive price down to the margin, why should we expect it to induce new investment?

This isn’t to suggest that we all turn socialist, but simply that we acknowledge the limitations of the tool. Markets structured to drive costs down to the margin are great at rationalizing production and forcing discipline on business managers. But asking them to also encourage new investment may be like trying to catch a deer with a fishing pole. In cases where new investment is needed — as is most obviously the case with any effective GHG regulation — we may need more tools.

Read more of Sean’s thoughts on markets and capital investment.

1. Use less downstream energy. Turn down the thermostat, ride your bike to work, move to a smaller home, etc.

2. Switch upstream fuels. Favor coal in the name of national security. Favor nuclear in the name of CO2. Favor wind in the name of green jobs. Etc.

3. Use less upstream energy. Insulate your home, build CHP plants, recycle your plastic and aluminum waste, etc.

All three have a critical role to play, but note that only the third creates social benefits and can be guaranteed to increase our overall standard of living. In the famous Amory Lovins-ism, no one gives a damn about how much coal, oil or gas they use — they care about how hot their shower is and how cold their beer.

Ergo, we ought to make maximal use of anything that fits into that third bucket as a matter of public policy. Which raises the question: how big is that third bucket? Or, framed another way: how much energy does the U.S. currently waste? Any increase in our efficiency of energy conversion (from upstream fuel to downstream energy) is implicitly a reduction in our energy waste. Tell me how much we waste and you will tell me the maximum size of that third bucket.

How Much do we Consume?

As it turns out, there’s very little good data on how much energy we waste. DOE estimates that we use about 100 quadrillion btus (“quads”) of primary energy per year. But they too often present that data in charts like this one that seem to assume a perfectly efficient economy. As that great philosopher Homer Simpson said, “In this house, we obey the laws of thermodynamics!” And I’m pretty sure thermo says that you can’t get 100 percent of the energy you put in out in a useful form. DOE charts to the contrary notwithstanding…

Nonetheless, this does bound our analysis. If we put 100 quads of primary energy in, we must get 100 quads out somewhere. At the very least, it implies that there can’t be more than 100 quads of wasted energy presently available in the system.

Solid Waste

EPA estimates that the average American produces 1,130 lbs of trash per year.  At 4,500 btu/lb and just over 307 million people, that’s 1.6 quads of energy in our trash.  Add in 6.5 million metric tons of solid waste in our sewage per year at 10,000 btu/dry ton and that’s another 0.1 quads.  So in total, all our solid waste is about 1.7 quads of total energy waste, or 1.7 percent of all our primary energy use.

Industrial Waste

Lawrence Berkeley National Lab has estimated that the US could produce 96 GW of electric power from energy that is currently wasted by the US industrial sector.  (This waste includes a host of different materials, from paper sludge to waste heat.)  RED‘s internal analysis suggests that this may be conservative, but let’s use the LBNL data.  Assuming 25 percent fuel-to-power generation efficiency (and assuming further that this represents 100 percent of all energy wasted by the US industrial sector, and not simply the economically recoverable/LBNL-identifiable fraction) that works out to an additional 11.4 quads.

Power Generation Waste

In 2008, we generated 3,806,611 GWh from fossil-fired thermal power plants. Those plants, on average, operate at 33 percent fuel efficiency, meaning that for every 1 unit of electric power generated, 2 units of waste heat were thrown away in cooling towers, rivers and streams. That’s 2 x 3,806,611 GWh of wasted heat, or 26.4 quads up in smoke.

Transportation Waste

The total US transportation sector uses some 28.6 quads of fuel per year. For rather obvious reasons, there’s not a lot of good data on how much of that goes out the tailpipe vs. a more productive use. But conservatively, let’s assume that we get 30 percent of the useful energy out of that fuel (this is considerably higher than a passenger car over normal driving cycles, but probably low for rail, shipping and long-haul trucking on an efficiency per ton-mile basis.) Clearly, this is the least accurate of the numbers, but even at 30 percent, that implies an additional waste of 0.7 x 28.6 or 20 quads of waste, going into tail pipe exhaust, hot brakes, burnt tires, etc.

Total Identifiable Waste

Add those all up and we’ve got 100 quads of primary energy and 60 quads of waste energy. For all the reasons noted above, the waste energy is probably much higher, but even at this level, it is a massive opportunity. Recovering just half of this total would reduce every issue associated with fossil fuel use by one third with no detriment to our standard of living. Getting this waste out of the system ought to be a priority of our national energy and environmental policy.

Note: This first appeared on Grist.