Kyoto Testimony

Summary of the Kyoto Report

Back To Main
Forcasting Page

[54] Capital costs are assumed to be recovered over the first 20 years of this period.

[55] In NEMS, the capacity factor for a particular plant type is determined by its operating costs. The values presented here are for illustration only.

[56] Depending on the technology type, new power plants differ tremendously in size, from a few kilowatts for the smallest distributed photovoltaic technologies to 500,000 kilowatts (500 megawatts) or more for the largest new coal and nuclear technologies. Throughout this report, when a number of typical plants is provided, a 300-megawatt average plant size is used.

[57] See Energy Information Administration, “An Exploration of Network Modeling: The Case of NEPOOL,” in Issues in Midterm Analysis and Forecasting 1998, DOE/EIA-0607(98) (Washington, DC, July 1998), for a discussion of the impact of plant location on reliability and pricing.

[58] Cost and performance impact estimates provided by Parsons Engineering.

[59] Energy Information Administration, Form EIA-860, “Annual Electric Generator Report.”

[60] Electric Power Research Institute, Technical Assessment Guide. The steam turbine and auxiliary systems account for 10 percent of the plant. If the boiler can also be used, this figure rises to 22 percent.

[61] American Wind Energy Association, International Wind Energy Capacity Projections (Washington, DC, April 1998).

[62] Only 6 percent of the estimated wind resources in region 5 (including Minnesota, Iowa, and the Dakotas) are used in the 1990-7% case; however, the remaining resources are not economically accessible to other regions.

[63] U.S. Environmental Protection Agency, Climate Change Mitigation Strategies in the Forest and Agriculture Sectors (Washington, DC, June 1995), p. ES-5.

[64] This estimate was derived from the following assumptions: biomass yield 6 tons per acre, biomass heat content 17,000,000 Btu per ton, biomass plant heat rate 8,000 Btu per kilowatthour, gas plant heat rate 7,000 Btu per kilowatthour, and natural gas carbon content 14,400 metric tons per trillion Btu.

[65] Energy Information Administration, Geothermal Energy in the Western United States and Hawaii: Resources and Projected Electricity Generation Supplies, DOE/EIA-0544 (Washington, DC, September 1991).

[66] California Energy Commission, Technical Potential of Alternative Technologies (December 2, 1991).

[67] Northwest Power Planning Council, Northwest Power in Transition: Opportunities and Risk, 96-5 (March 13, 1996).

[68] Increases in PV capacity were determined exogenously to reflect small, distributed, and end-user applications. Central-station PV was allowed to compete with other central station generating technologies.

[69] See Energy Information Administration, Annual Energy Outlook 1998, DOE/EIA-0383(98) (Washington, DC, December 1997), for a discussion of competitive pricing.

[70] In all cases the California, New York, and New England regions are treated as competitive.

[71] T.A. Stokes and M.R. Rodriguez, “44th Annual Reed Rig Census,” World Oil (October 1996).

[72] Canadian Gas Potential Committee, Natural Gas Potential in Canada (Calgary: University of Calgary, 1997), Figure 1.2.

[73] Calculated from Natural Resources Canada, Canada’s Energy Outlook 1996-2020 (Ottawa: Natural Resources Canada, 1997), Annex C.

[74] Public Law 102-486, Oct. 24, 1996, Title III, Section 303; Title V, Sections 501 and 507.

[75] In this section, physical quantities of coal are expressed in short tons, a unit of weight equal to 2,000 pounds. Carbon emissions are reported in metric tons, a unit of weight equal to 2,204.6 pounds.

[76] Higher or lower rates of productivity growth could occur in the carbon reduction cases depending on the skill level and motivation of the labor force in a rapidly contracting job market and the rate at which new capital equipment and technology are adopted.

[77] In June 1998, a panel headed by then Prime Minister Ryutaro Hashimoto urged the government to construct an additional 20 new nuclear plants over the next 12 years, with the goal of increasing Japan’s nuclear generation by more than 50 percent between 1997 and 2010. EIA’s International Energy Outlook (IEO98) high nuclear case projects an increase of 12.4 gigawatts (29 percent) in Japan’s nuclear generating capacity over the same period. The IEO98 reference case projects an increase of only 5.2 gigawatts (12 percent) between 1996 and 2010.

[78] The version of the model used is US97A95.

[79] This macroeconomic analysis of the costs of implementing the Kyoto Protocol is limited to the consideration of investment costs that are comparable in magnitude to those in the reference case, as well as direct fuel costs. No consideration is given to the potential incremental costs of investment in technology and infrastructure that would be necessary in each of the specific cases analyzed. Business investments above reference case levels may be required to reduce energy costs in response to increasing energy prices.

[80] A permit auction system is identical to a carbon tax as long as the marginal abatement reduction cost is known with certainty by the Federal Government. If the target reduction is specified, as in this analysis, then there is one true price, which represents the marginal cost of abatement, and this also becomes the appropriate tax rate. In the face of uncertainty, however, the actual tax rate applied may over- or undershoot the carbon reduction target. Auctioning of the permits by the Federal Government is evaluated in this report. The costs of administering the program are not considered. To investigate a system of allocated permits would require an energy and macroeconomic modeling structure with a highly detailed sectoral breakout beyond those represented in the NEMS and DRI models. For a comparison of emissions taxes and marketable permit systems, see R. Perman, Y. Ma, and J. McGilvray, Natural Resources and Environmental Economics (New York, NY: Longman Publishing, 1996), pp. 231-233).

[81] In the DRI model, the aggregate production function (the potential GDP equation) uses the following concepts as important variables: energy, labor, capital stocks of equipment and structures, and research and development expenditures. The aggregate supply is estimated by a Cobb-Douglas production function that combines factor input growth and improvements in total factor productivity. Factor input equals a weighted average of energy, labor, fixed capital (outside the energy-producing sector), and public infrastructure. Factor supplies for the non-energy sector are defined by estimates of the full-employment labor force, the full-employment capital net of pollution abatement equipment, domestic energy consumption, and the stock of infrastructure. Total factor productivity depends on the stock of research and development capital and a technological change trend.

[82] The output measures presented in this chapter are expressed in constant 1992 chain-weighted dollars. The DRI macroeconomic model uses National Income and Products Accounts (NIPA) as an estimating framework. Expressing these output measures in 1992 dollars maintains consistency with the NIPA framework and facilitates comparison with results from other macroeconomic models. For the purposes of recycling the funds, collections and rebates are expressed in nominal dollars, to be consistent with the Federal Government’s tax accounting system.

[83] The Federal funds rate is the rate charged by a depository institution on an overnight sale of Federal funds to another depository institution. This rate influences the trend in behavior for other interest rates in the economy.

[84] In the DRI model for personal taxes only, a lump sum transfer produces the same effects as a cut in the personal income tax rate.

[85] WEFA, Inc., Global Warming: The High Cost of the Kyoto Protocol, National and State Impacts (Eddystone, PA, 1998).

[86] Both the CRA and WEFA studies have been supported to some extent by industry groups, including the American Petroleum Institute.

[87] J.A. Edmonds et al., Modeling Future Greenhouse Gas Emissions: The Second Generation Model Description (Washington, DC: Pacific Northwest National Laboratory, September 1992). Runs using PNNL's SGM model formed the basis for the testimony provided by Dr. Janet Yellen, chairman of the Council of Economic Advisers, on March 4, 1998, before the House Commerce Committee, Energy and Power Subcommittee.

[88] H.D. Jacoby, R. Eckhaus, A.D. Ellerman, et al. “CO₂ Emission Limits: Economic Adjustments and the Distribution of Burdens,” Energy Journal, Vol. 18, No. 3 (1997), pp. 31-58. MIT's analysis is part of a much larger integrated assessment methodology funded by the Office of Energy Research, U.S. Department of Energy.

[89] A.S. Manne and R.G. Richels, “On Stabilizing CO₂ Concentrations—Cost Effective Emissions Reduction Strategies,” Energy and Environmental Assessment, Vol. 2 (1997), pp. 251-265. EPRI's work is self-funded and is part of the research agenda of electric utilities.

[90] Standard and Poors DRI, The Impact of Meeting the Kyoto Protocol on Energy Markets and the Economy (July 1998).

[91] Information used in this chapter was contributed by Dr. Montgomery and Dr. Bernstein of Charles River Associates, Dr. Richels of the Electric Power Research Institute, Dr. Edmonds of Pacific Northwest National Laboratory, and Professor Jacoby of MIT.

[92] The PNNL study uses a dynamic-recursive, computable general equilibrium (CGE) model with neoclassical elements. A model is a “general equilibrium” model if it represents all parts of the economy, both energy and non-energy, and all markets clear (supply equals demand at the prices determined). The model is “computable” if a computer is used to solve for the equilibrium; it is “dynamic” if it keeps track of variables over time. A model is “neoclassical” if the model structure assumes that (1) its economic agents have perfect foresight and knowledge of all past, present, and future events, (2) there is perfect and instantaneous ability of capital and labor to move between uses and sectors, and (3) such transitions are costless and instantaneous.

[93] The PNNL model (SGM) can be run with either perfect or imperfect foresight. Labor and new capital move freely.

[94] A carbon price of $221 per metric ton in 2010 would increase the delivered electricity price by 49 to 69 percent and reduce electricity consumption by 22 percent relative to PNNL's reference case. This implies that, on average, consumers will reduce consumption of electricity by 3.2 to 4.5 percent for every 10-percent increase in the price of electricity. In 2020, a carbon price of $286 per metric ton translates to an electricity price increase of 59 to 66 percent, resulting in a 28-percent reduction in electricity consumption. This implies that consumption will decline by about 4.2 to 4.7 percent for every 10-percent increase in price. (The estimated electricity price changes were derived from comparable EIA cases.)

[95] For example, WEFA's annual electricity growth rate is 1.7 percent and EIA's is 0.9 percent.

[96] The WEFA, CRA, MIT, and DRI models are econometric, general equilibrium, macroeconomic models. WEFA and DRI model the United States, CRA and MIT model the world.

[97] The full employment assumption means that the unemployment rate is unchanged from reference case levels.

[98] The CRA model uses perfect foresight for investment behavior, which may also contribute to underestimating the costs. It assumes that products (like gas and coal) are not perfect substitutes and capital is not perfectly malleable. Further, the demand for energy is only moderately responsive to price changes, compared to the PNNL model. CRA develops its model parameters using the GTAP database from Purdue University and the International Energy Agency (IEA) database.

[99] EPRI's MERGE model is an Aggregate Optimization Model and has perfect foresight. The EPRI model is being rebenchmarked to start in 2000 and should result in higher carbon prices and higher GDP losses in 2010 than are shown in their current analysis.

[100] For PNNL, since the model begins solving in 1985, policy instruments could be introduced as early as 1990. For this study, PNNL reports that the policy instruments for the Kyoto Protocol were phased in beginning in 2001.

[101] Jorgenson and Wilcoxen, “Impact of Environmental Legislation on U.S. Economic Growth and Capital Costs,” in U.S. Environmental Policy and Economic Growth: How Do We Fare? (Washington, DC: American Council on Capital Formation, 1992); “Reducing U.S. Carbon Emissions: An Econometric General Equilibrium Assessment,” Resource and Energy Economics, Vol. 15 (1993), pp. 7-25; and P.M. Bernstein and W.D. Montgomery, “How Much Could Kyoto Really Cost? A Reconstruction and Reconciliation of Administration Estimates” (Charles River Associates, 1998).

[102] The curve shown in Figure 114 in Chapter 6 of this report summarizes the relationship between the level of control and the marginal cost of that level of control. Hence, at each increment of control, the marginal cost is by definition equal to the economic resources that must be forgone in order to achieve the increment in control. It follows, therefore, that the sum of the marginal costs must equal the total cost of the controls that would be internalized in markets. This is the integral of the area under the curve, shown as area A in Figure 114. Conceptually, this is essentially the same effect that is measured by the unavoidable cost in the reduction of potential GDP in the macroeconomic models. As shown in Figure 115, this measure of the unavoidable costs using the results of the NEMS model is nearly identical to the similar estimate from the DRI macroeconomic model.

[103] Furthermore, for the balance of total emissions needed to meet the Kyoto targets, permits would be purchased on the international market. If the marginal cost of control in the United States and the international prices of permits are in equilibrium, then the area B in Figure 114 will represent the total payments for permits, and the sum of the two parts will represent the irreducible losses to the economy under that trading regime to meet the Kyoto requirements.

[104] Standard and Poors DRI recently analyzed three cases for the UMWA-BCOA LMPCP Fund. Case 1 assumed that 8 percent of the necessary carbon reduction in 2010 would be accomplished from sinks and offsets, 15 percent from trading, and 77 percent domestically. Case 2 assumed that sinks and offsets would account for 12 percent of the required reduction from baseline in 2010, 30 percent would be purchased from abroad, and 58 percent would be accomplished domestically. Case 3 assumes that sinks and offsets would generate 16 percent of the required reductions from baseline, 55 percent of the reduction would be purchased from abroad, and 29 percent of the reduction to be accomplished within domestic energy markets. Given that the DRI baseline for 1990 carbon emissions is 1,336 million metric tons, the domestic target for Case 1 in 2010 (1,354 million metric tons) is about 1 percent above 1990 levels, Case 2 (1,452 million metric tons) is about 9 percent above 1990 levels, and Case 3 (1,593 million metric tons) is about 19 percent above 1990 levels.

[105] For simplicity and ease of exposition, it is assumed in this chapter that the carbon price, the price at the margin that the United States is willing to pay to reduce carbon emissions, equals the internationally traded permit price.

[106] In Chapter 6, EIA also considers a social security tax rebate.

[107] Tom Tietenberg, Environmental and Natural Resource Economics, Third Edition (Harper Collins Publishers, 1992).

[108] Other reference case differences that influence the Kyoto analysis include: (1) The DRI reference case projects 3.1 quadrillion Btu lower primary energy consumption and 1.8 quadrillion Btu lower fossil fuel consumption in 2010 than does EIA. By 2020, the differences grow to 4.2 quadrillion Btu of primary energy and 2.4 quadrillion Btu of fossil fuel consumption. Associated carbon emissions are also lower. Consequently, it should be less costly for the economy to achieve the same carbon target (1,452 million metric tons) in the DRI analysis than in the EIA analysis (1,461 million metric tons in 1990+9% case), as Table 31 confirms. (2) The DRI reference case projects higher world oil prices, higher delivered coal prices, and lower gas prices than the EIA reference case and greater coal, lower gas, and lower oil consumption than the EIA reference case for 2010 and 2020. The differences in the mix of fuel consumption are related to the differences in fuel prices in the cases. Because the delivered price that consumers react to is the sum of the fuel costs plus the carbon price, when oil and coal prices are higher (without the carbon price), the additional carbon price required to achieve the same delivered coal and petroleum product prices will be lower. Higher reference case prices imply lower required carbon prices to induce an energy demand or mix change. Lower carbon prices usually result in lower economic losses.

[109] The Kyoto Protocol and the President's Policies To Address Climate Change: Administration Economic Analysis (Washington, DC, July 1998).

[110] According to Table 5, page 53, of the Administration's report, Annex I trading with participation by key developing countries would result in a permit price of $23 per metric ton and irreducible losses of $12 billion. Table 4 on page 52 of the report indicates that the permit price in that case would be reduced by 88 percent and the resource cost would be reduced by 80 percent relative to a “domestic only” case. This means that 12 percent of the carbon price for the domestic only case would be $23, and thus the carbon price in the domestic only case would equal $192 per metric ton. Similarly, 20 percent of the domestic only resource cost would be $12 billion, meaning that the domestic only resource cost would be $60 billion. Using the percentages for Annex I trading in Table 4, the carbon price and the irreducible losses can also be derived for the Annex I trading case.

[111] Interlaboratory Working Group on Energy-Efficient and Low-Carbon Technologies, Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy-Efficient and Low Carbon Technologies by 2010 and Beyond (Oak Ridge National Laboratory, Lawrence Berkeley National Laboratory, Pacific Northwest National Laboratory, National Renewable Energy Laboratory, and Argonne National Laboratory, September 1997).

[112] For the buildings sector (residential and commercial), a spreadsheet model was used for the Five-Lab Study, and it was calibrated to yield the results of the Annual Energy Outlook 1997 (AEO97) for a business-as-usual case. For the industrial sector, the Long-Term Industrial Energy Forecasting model was used, and it was calibrated to the AEO97 results for the business-as-usual case. For the transportation sector, the transportation model of the National Energy Modeling System (NEMS) was used, and the AEO97 baseline was modified based on the judgment of analysts at Oak Ridge National Laboratory to develop the business-as-usual case. For the electricity sector, a new model was developed by Oak Ridge National Laboratory, which assumed a deregulated electricity industry.

[113] Total electricity demand in 2010 in the 50 HE/LC case is projected to be 9.7 percent lower than in the 1990+9% case and 4.5 percent lower than in the 1990+24% case.

[114] J.G. Koomey, R.C. Richey, S. Laitner, A.H. Sanstad, R.J. Markel, and C. Marnay, Technology and Greenhouse Gas Emissions: an Integrated Scenario Analysis Using the LBNL-NEMS Model, LBNL-42054 (Lawrence, CA: Lawrence Berkeley Laboratory, Energy Analysis Department, September 1998).