Executive Summary
This report responds to a request from Senator Ken Salazar that the Energy Information
Administration (EIA) analyze the impacts of implementing alternative variants of an
emissions cap-and-trade program for greenhouse gases (GHGs). The program is
patterned after one recommended by the National Commission on Energy Policy
(NCEP), a nongovernmental, privately-funded entity, in its December 2004 report
entitled, Ending the Energy Stalemate: A Bipartisan Strategy to Meet America��s Energy
Challenges.1 An April 2005 EIA report, Impacts of Modeled Recommendations of the
National Commission on Energy, provided analysis of the complete NCEP program and
its cap-and-trade component for GHGs alone.2
Senator Salazar asked EIA to re-analyze the emissions cap-and-trade component of the
NCEP proposal using a range of alternative values for the emissions intensity reduction
goal that defines the target emissions level and the permit price safety-valve that caps the
cost of emissions permits. Generally speaking, higher intensity reduction goals lower the
target emissions level, requiring more changes in the energy system to reach the target,
while higher safety-valve prices raise the increase in delivered energy prices that can
occur before the emissions target is implicitly relaxed to limit impacts on energy prices
and the energy system.
The cases considered in this report are based on the Annual Energy Outlook 2006
reference case (AEO2006), which differs significantly from the Annual Energy Outlook
2005 used in our April 2005 report.3,4 Key changes incorporated in the AEO2006 include
higher prices for oil, coal, and natural gas, extension of the analysis through 2030, and
representation of some provisions of the Energy Policy Act of 2005 (EPACT2005).
Taken together all of these factors contribute to lower energy use and lower greenhouse
gas emissions in the AEO2006 reference case compared to the AEO2005 version. For
example, in 2020, projected total consumer energy use is 4 percent lower in the AEO2006
reference case, while total greenhouse gas emissions are 5 percent lower. The
combination of lower projected baseline GHG emissions and higher fossil fuel prices in
the AEO2006 reference case tend to reduce projected GHG permit prices under a given
GHG cap-and-trade program relative to the same program evaluated starting from the
AEO2005 reference case.
As in the original NCEP cap-and-trade program, the intensity reduction goals considered
in this report are implemented in two stages, with faster intensity reduction rate targets
beginning after 2020. The second stage intensity reduction targets range from 2.8 percent, as in the original NCEP proposal, to 4.0 percent. The implied 2030 GHG
emissions targets in the cases examined vary from 4 percent below to 14 percent above
the 2004 emissions level, well below the 39-percent increase in GHG emissions projected
in the reference case. The safety-valve prices in 2010, expressed in 2004 dollars per
metric ton of carbon dioxide-equivalent (CO2 equivalent) range from $6, as in the original
NCEP proposal to $31. Safety-valve prices in 2030, also in 2004 dollars, range from $10
to $49.
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The emissions cap and safety-valve combinations in all the cases examined lead to
reductions in GHG emissions relative to the reference case. However, the GHG intensity
reduction goals are not fully achieved in cases where the safety-valves are triggered at
some point in the projection period. Relative to the reference case, total GHG emissions
are reduced by 5.2 percent to 13.6 percent in 2020 and by 8.7 percent to 27.9 percent in
2030 (Figure ES1). In all cases except the most stringent one, GHG emissions continue
to increase over the entire 2004 through 2030 period. In the most stringent case, GHG
emissions increase slowly through 2018 and then fall until they are only 0.5 percent
above the 2004 emission level in 2030. The GHG permit prices range from $8 to $24
(2004 dollars) per metric ton CO2 equivalent in 2020 and from $10 to $49 per metric ton
CO2 equivalent in 2030 (Figure ES 2).
Reductions in both energy-related carbon dioxide (CO2) emissions and other greenhouse
gas emissions in all sectors play a role in the lower GHG emissions. Reductions in other
greenhouse gas emissions are important in all cases, particularly in the less stringent
cases where they account for a large share of the overall GHG emissions reductions. If
the market response in the industries that produce these gases is not as large as
represented in the engineering-based abatement curves supplied by the Environmental
Protection Agency (EPA) that are used in this analysis, more pressure will be put on
energy markets to reduce their emissions raising the GHG permit prices, unless permit
prices are constrained by the safety-valve mechanism.
Because the cost of GHG permits under the cap-and-trade program raises the cost of
using fossil fuels, all sectors of the energy economy respond with lower overall energy
use and a shift away from fossil fuels where economical. Because of coal's relatively
high CO2 content per unit of energy content and its relatively low price in the reference
case, GHG permit prices have a larger impact on the cost of using coal than they do on
the other fossil fuels. For example, delivered coal prices - including the costs of holding
GHG emission permits �� are between 51.9 percent and 156.8 percent higher in 2020 and
between 57.4 percent and 305.6 percent higher in 2030. Motor gasoline prices are $0.06
per gallon to $0.19 per gallon (3.0 percent to 9.3 percent) higher in 2020 and $0.08 per
gallon to $0.41 per gallon (3.7 percent to 18.9 percent) higher in 2030.
By far, the largest changes in GHG emissions and fuel use are projected in the power
sector, which accounts for over 90 percent of reference case coal use and can switch to
technologies that can generate electricity using a variety of other energy sources.
Relative to the reference case, coal generation is projected to be between 4.8 percent and
27.2 percent lower in 2020 and between 15.8 percent and 64.5 percent lower in 2030. In the two less stringent program cases, coal generation still grows between 2004 and 2030,
though at a slower rate than in the reference case. In the two most stringent program
cases, coal generation in 2030 is expected to be between 9.5 and 39.2 percent below the
2004 level. New coal plants with carbon capture and sequestration equipment are added
in these two cases, but their generation is not large enough to offset the impacts of coal
plant retirements and lower generation from the remaining coal plants.
In contrast to coal, the power sector is projected to increase its use of nuclear and
renewable fuels in the cap-and-trade cases. While 6 gigawatts (GW) of new nuclear
plants are added between 2004 and 2030 in the reference case, between 25 and 123 GW
are added in the program cases. The 2030 share of generation accounted for by nuclear
plants falls to 14.7 percent in the reference case, but ranges from 17.6 percent to 31.8
percent in the program cases. Renewable fuels, particularly wind and biomass, also
account for a larger share of generation in the program cases. In the reference case, the
share of generation accounted for by nonhydroelectric renewable generation grows from
2.2 percent to 4.3 percent, while in the program cases it increases to between 7.3 percent
and 20.6 percent. Wind capacity grows from 7 GW to 20 GW in the reference case, but
grows to between 27 and 86 GW in the program cases. Similarly, biomass capacity
grows from 6 GW to 12 GW in the reference case, but grows to between 30 and 101 GW
in the program cases.
In the residential sector, relative to the reference case, delivered energy consumption is
between 0.6 percent and 1.7 percent lower in 2020 and between 0.9 percent and 3.5
percent lower in 2030. Similarly in the commercial sector, delivered energy consumption
is between 1.3 percent and 3.0 percent lower in 2020 and between 1.8 percent and 5.8
percent lower in 2030. Despite the reductions in energy consumption, higher delivered
energy prices lead to higher energy bills for consumers. Relative to the reference case,
annual per household energy expenditures (excluding motor fuels costs) are $61 to $169
(3.8 to 10.5 percent) higher in 2020 and $91 to $336 (5.4 percent to 20.0 percent) higher
in 2030.
Similar responses are projected in the industrial and transportation sectors. Relative to
the reference case, delivered industrial energy consumption is between 2.0 percent and
3.2 percent lower in 2020 and between 4.5 percent and 7.9 percent lower in 2030. In the
transportation sector, energy consumption is between 0.7 percent and 2.2 percent lower in
2020 and between 1.2 percent and 4.9 percent lower in 2030, when compared to the
reference case.
In the transportation sector, the higher energy prices in the program cases lead to reduced
travel and slightly higher penetration of hybrid and diesel cars. However, the increase in
gasoline prices, at most $0.41 per gallon higher than in the reference case, is not enough
to cause a large shift in the mix of vehicles purchased. Because of lower projected coal
use in the power sector, relative to the reference case, rail transportation in the program
cases is much lower.
Higher delivered energy prices lower real income to households. This reduces energy
consumption and indirectly reduces real spending (due to lower purchasing power) for
other goods and services. Relative to the reference case, discounted total real gross
domestic product (GDP) over the 2010 to 2030 time period ranges from $244 billion to
$800 billion (0.10 to 0.32 percent) lower, while discounted real consumer spending is
between $248 billion and $772 billion (0.15 to 0.46 percent) lower in the program cases.
Table ES-1 summarizes the key parameters that define the program cases considered in
this report. Tables ES-2a and ES-2b summarize key results for 2020 and 2030
respectively. As with all analyses that look forward more than a few years, there is
considerable uncertainty in these projections. It is particularly difficult to foresee how
existing technologies might evolve or what new technologies might emerge as market
conditions change, particularly when those changes are fairly dramatic. This analysis
suggests that to comply with increasingly stringent GHG emissions limits, all energy
providers, particularly electricity producers, will rely increasingly on technologies, such
as nuclear power, wind, and biomass, that play a relatively small role today or have not
been built in the U.S. for many years.
If the development of these technologies is limited for one reason or another, power
providers will have two choices. First, they can turn to other low-GHG or non-GHG
technologies, such as new fossil generators with carbon capture and sequestration
equipment. Such technologies also face cost and development challenges. Second, they
can purchase a larger number of permits at the safety-valve price to allow for continued
reliance on current fossil-fired generation to a greater extent than projected in the
program cases. To the extent this occurs, projected reductions in GHGs would be
reduced. One way or another, significantly reducing energy-related GHG emissions
would require a shift away from fossil energy sources that currently account for 86
percent of US energy consumption. The costs of such a shift are inherently very
uncertain.
Executive Summary Tables 
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