2. Energy Market Impacts of Alternative Greenhouse Gas Intensity

Reduction Goals

As discussed in Chapter 1, this analysis focuses on the four Cap-Trade cases with alternative GHG intensity reduction targets and permit price safety-valves, and several additional cases that explore the impacts of alternative assumptions. These cases reflect the cap-and-trade mechanism recommended by the NCEP and were designed to span the set of alternative parameters identified by Senator Salazar. Discussion of the additional cases is provided where necessary to highlight important findings or illustrate the sensitivity of the analysis findings to key assumptions.

Updating to AEO2006

The main analysis cases in this report are based on the reference case from the AEO2006. EIA’s earlier analysis of the NCEP recommendations was based on the reference case from the AEO2005. The update to the AEO2006 impacts the analysis because of important changes in the AEO2006 projections. The key changes include significantly higher prices for oil, coal, and natural gas, extension of the analysis through 2030, and representation of some key provisions of the Energy Policy Act of 2005 (EPACT2005), the Clean Air Interstate Rule (CAIR), and the Clean Air Mercury Rule (CAMR). For this analysis, EIA also updated the assumed baseline for non-CO2 GHGs based on the most recent historical data on these gases as well as updated projections from a "no-measures" case provided by the EPA in July 2005.

Compared to the AEO2005 reference case, world oil prices, natural gas wellhead prices, and coal minemouth prices are 55, 6, and 15 percent higher, respectively, in 2020 in the AEO2006 reference case. These higher fossil fuel prices together with new energy efficiency standards and various technology incentives called for in EPACT2005, and slower expected growth in non-energy-related GHG emissions, contribute to lower overall energy use and lower GHG emissions. In 2010, projected total energy use is 5.6 percent lower in the AEO2006 reference case, while total greenhouse gas emissions are 2.5 percent lower. As a result, relative to EIA’s April 2005 analysis based on AEO2005, the emissions target implied by any GHG intensity reduction goal using the AEO2006 reference case as a starting point is lower. Over the 2010 to 2025 time period, the difference in targets generally ranges between 200 and 300 million metric tons CO2 equivalent, or 2.5 to 3.5 percent.

However, notwithstanding the lower emissions targets, the required emissions reduction to reach those targets is smaller in this analysis than in the April 2005 version, as the reduction in projected outyear emissions between the AEO2006 and AEO2005 reference cases (Figure 2) is greater than the reduction in implied emissions targets. For example, in the earlier analysis, total greenhouse gas emissions in 2025 had to be reduced by 1,522 million metric tons from the reference case level. Using the AEO2006 reference case as a starting point, the required reduction from the 2025 projected level is much smaller, only 1,187 million metric tons. Figure 3 presents the level of the targeted emissions reduction in 2025 for the Cap-Trade 1 (NCEP) program parameters for both the AEO2005 and AEO2006 baselines, as well as the targeted emission reductions for the Cap-Trade 2 though Cap-Trade 4 cases using the current (AEO2006) baseline only.

The smaller emissions reduction requirement and the higher fossil fuel prices in the AEO2006 reference case tend to reduce the projected GHG permit prices. The higher fossil fuel prices make non-fossil alternatives relatively more attractive and a lower GHG permit price is needed to encourage GHG emissions reductions. However, when the safety-valve prices recommended by the NCEP are incorporated, as in the Cap-Trade 1 case, the projected permit prices are the same after 2018 whether the analysis is carried out using the AEO2006 or AEO2005 reference case as the baseline, because the safety-valve is triggered in both cases. Without the safety-valve, permit prices in both cases would be substantially higher (Figure 4).

Greenhouse Gas Emissions and Permit Prices

Relative to the reference case, complying with the alternative GHG intensity reduction goals and permit safety-valve prices in the Cap-Trade cases will lead to significant reductions in total GHG emissions (Figure 5). However, because the GHG permit safety-valve is triggered in each of these cases, total covered emissions exceed the covered emissions goals. In 2020 total GHG emissions range from 5 to 14 percent lower across the Cap-Trade cases (Tables 2a and 2b). This change grows even larger by 2030, ranging from 9 to 28 percent lower GHG emissions than in the reference case. Except for the Cap-Trade 4 case, total GHG emissions are generally projected to increase over time following an initial dip in 2010, albeit more slowly than in the reference case. By 2030, total GHG emissions in the Cap-Trade 4 case are projected to be just slightly above the 2004 emissions level.

The impact of the permit safety-valve price on GHG emissions can be seen by comparing variants of the Cap-Trade 3 case with the same GHG intensity reduction goal, but alternative permit safety-valve prices, to the Cap-Trade 2 case, which has a less stringent intensity reduction goal but the same safety-valve prices as the Cap-Trade 3 Low Safety case (Figure 6). As a result of the different GHG permit safety-valve prices, GHG emissions in the two Cap-Trade 3 variants range between 7 percent and 11 percent below the reference case level in 2020 and between 13 percent and 20 percent lower in 2030. The Cap-Trade 3 Low Safety and the Cap-Trade 2 cases, which have identical safety valves, have very similar emissions profiles in Figure 6, and nearly identical energy market impacts (Tables 2a and 2b) once the safety-valve takes effect. One continuing difference between the Cap-Trade 2 and Cap-Trade 3 Low Safety cases is in the amount of permits purchased through the safety-valve mechanism, and in government revenues from sales of such permits, since fewer permits are given to emitters under the more stringent emissions intensity reduction goals of the Cap-Trade 3 Low Safety case than under the Cap-Trade 2 case.

The greenhouse gas permit price varies significantly across cases depending on the stringency of the GHG intensity reduction goal and the permit safety-valve price (Figure 7). In 2020, the permit prices range from $8 per metric ton CO2 equivalent in the Cap-Trade 1 case to $24 per metric ton CO2 equivalent in the Cap-Trade 4 case. This range widens to $10 to $49 per metric ton CO2 equivalent in 2030. In each of the Cap-Trade cases the GHG permit price increases steadily until its growth is slowed by each case’s permit safety-valve. The year where the permit safety-valve becomes limiting in each case is shown in Figure 7 by a vertical hash mark on each line. For example, the GHG permit safety-valve price becomes limiting in 2028 in the Cap Trade 4 case, 2025 in the Cap-Trade 3 case, 2018 in the Cap-Trade 2 case and 2019 in the Cap-Trade 1 case. Without the safety-valves the GHG permit prices would continue to rise in each of the cases until the GHG intensity reduction targets were reached. However, the annual emissions targets implied by the intensity rate reduction goals would not necessarily be complied with in each year because of year-to-year emissions banking and trading.

The market responses to a GHG intensity reduction program are sensitive to assumptions about technological improvements and the potential for emissions reductions in non-CO2 GHGs. More rapid technological improvements, such as those incorporated in the AEO2006 integrated high technology case, could lead to lower GHG emissions when an intensity reduction program is introduced (Figure 8). Relative to the reference case, the technology assumptions in the integrated high technology case lead to 4 percent lower GHG emissions in 2020 and 7 percent lower GHG emissions in 2030. When the Cap-Trade 3 GHG intensity reduction program is introduced under these assumptions, as in the Cap-Trade 3 High Tech case, the required emissions reductions are projected to be achieved without triggering the GHG permit safety-valve (Figure 9).

On the other hand, if the emissions reduction opportunities for non-CO2 GHGs are less than indicated by engineering-based marginal abatement curves prepared by the EPA that are used in this analysis, the safety-valve will be triggered earlier than under reference case assumptions, and higher GHG emissions could result. In 2020, the GHG permit prices among the cases shown in Figure 9 range from $13 per metric ton carbon equivalent to $25 per metric ton carbon dioxide equivalent.

Emissions reductions in the alternative cap-and-trade cases considered in this analysis are projected to occur in all of the GHGs (Figures 10 and 11). Reductions in GHG emissions other than energy-related CO2, particularly the high global warming potential gases, are most important in the earlier years and the less stringent cases. The abatement curves, taken from EPA analyses, suggest that there are numerous opportunities to reduce the emissions of these gases, and they play a particularly important role in the least stringent cases, such as the Cap-Trade 1 case, where they account for 57.8 percent of the reductions in 2020 and 40.9 percent of the reductions in 2030. In the more stringent Cap Trade 4 case, they account for 26.8 percent of the reductions in 2020 and 16.1 percent of the reductions in 2030.

Energy-related CO2 emissions reductions play a large role in each of the Cap-Trade cases, but their contribution to the total GHG emissions reductions increases over time and with the stringency of the reduction requirement. In the Cap-Trade 1 case, they account for 42.6 percent of the GHG emissions reductions in 2020 and 59.1 percent in 2030. In the Cap-Trade 4 case, they account for 73.2 percent of the GHG emissions reductions in 2020 and 83.9 percent in 2030.

Under alternative assumptions about technological improvement and the availability of emissions reductions from the other GHGs, the level and mix of reductions could vary. For example, with more optimistic assumptions about technology improvements, as in the Cap-Trade 3 High Tech case, larger reductions in energy-related CO2 emissions occur. In 2020 and 2030, energy-related CO2 emissions reductions are 19.2 percent and 10.4 percent higher, respectively, in the Cap-Trade 3 High Tech case than they are in the Cap-Trade 3 case. The larger reduction in energy-related CO2 emissions expected in the Cap-Trade 3 High Tech case allows the greenhouse intensity reduction goal to be achieved without triggering the permit safety-valve. In 2020, energy-related CO2 emissions are also higher in the Cap-Trade 3 Low Other case than they are in the Cap Trade 3 case. This occurs because lower reductions in other greenhouse gases lead to a higher GHG permit price which stimulates greater reductions in energy-related CO2 emissions. By 2030, the reductions in energy-related CO2 emissions in the Cap-Trade 3 Low Other and Cap-Trade 3 cases are less than 1 percent different because the permit safety-valve has been triggered in both cases. In the Cap-Trade 3 Low Other case, the safety-valve is triggered earlier than it is in the Cap-Trade 3 case, limiting the pressure to further reduce energy-related CO2 emissions to offset the impact of lower reductions in other greenhouse gases.

Relative to the Cap-Trade 3 case, emissions reductions in both energy-related CO2 emissions and other GHGs are much lower in the Cap-Trade 3 Low Safety case. In fact, the emissions reductions projected in the Cap-Trade 3 Low Safety case are almost the same as those projected in the Cap-Trade 2 case. This occurs primarily because the cases share the same assumed permit safety-valve prices. If a relatively stringent GHG intensity reduction goal is paired with a relatively low permit safety-valve, the government will end up selling larger numbers of permits at the safety-valve price, implicitly relaxing the targeted intensity reduction goal.

The reductions in energy-related CO2 emissions are projected to come from all sectors of the economy, but the electric power sector, with its diverse fuel mix, accounts for the majority of these reductions in all cases (Figures 12 and 13). Across the Cap-Trade cases, the electric power sector accounts for between 65.9 percent and 84.6 percent of the total energy-related CO2 emissions reductions in 2020 and between 67.6 percent and 84.5 percent of the total energy-related CO2 emissions reductions in 2030. The share of reductions accounted for by the electricity sector grows over time as new non-fossil generating plants are built in the Cap-Trade cases because of the increase in fossil fuel prices. The share of energy-related CO2 emissions reductions accounted for by the other sectors is fairly small in all cases except for the Cap-Trade 3 High Tech case. In that case, more optimistic technology assumptions in the industrial and transportation sectors increase their contribution to the energy-related CO2 emissions reductions.

The costs of GHG emission permits lead to much higher delivered fossil fuel prices in the Cap-Trade cases. Relative to the reference case, average coal minemouth prices are actually lower in the Cap-Trade cases than in the reference case. However, when the
costs of holding permits to cover the emissions are included, delivered coal prices are much higher (Figure 14). For example, in the reference case, coal delivered to the power sector is projected to cost $1.39 per million Btu in 2020, while in the Cap-Trade cases it costs between $2.12 per million Btu and $3.55 per million Btu. As the GHG permit price continues to rise over time, the cost of using coal also increases. By 2030, the cost of coal in the Cap-Trade cases ranges from $2.37 per million Btu to $5.84 per million Btu, from just over one and half to almost four times the reference case price. Relative to the reference case, average delivered coal prices in 2020 are between 52.2 percent and 154.6 percent higher in the Cap-Trade cases. By 2030, this difference grows to between 57.0 percent 286.6 percent higher than in the reference case.

Electricity Sector Emissions, Generation and Prices

Implementing a GHG intensity reduction program could have significant impacts on power sector CO2 emissions, generation by fuel, generating technology selection, electricity sales, and electricity prices. In the Cap-Trade cases the power sector shifts away from its long-term reliance on coal-fired generation, towards increasing reliance on nuclear and non-hydroelectric renewable generation. These changes lead to lower emissions. However, together with the cost of holding emissions permits for remaining fossil-fired generation, they also increase electricity prices.

CO2 Emissions

In the reference case, total power sector CO2 emissions are projected to increase 44.3 percent between 2004 and 2030 as the industry increases its use of fossil fuels, particularly coal (Figure 16). In the Cap-Trade cases, power sector CO2 emissions are expected to be 4.5 percent to 25.7 percent below the reference case level in 2020 and 10.4 percent to 59.2 percent below the reference case level in 2030. In the most stringent cases, the Cap-Trade 3 and Cap-Trade 4 cases, power sector CO2 emissions in 2030 are projected to be 10.6 percent to 41.1 percent below the 2004 emissions.

Generation by Fuel

To reduce its CO2 emissions, the power industry, including generators in the industrial and commercial sectors, is expected to shift away from its historical reliance on coal generation (Figure 17). Total coal generation in 2020 is projected to be between 120 billion kilowatthours and 681 billion kilowatthours (4.8 to 27.2 percent) below the reference case level in the Cap-Trade cases. By 2030, the reduction in coal generation relative to the reference case grows larger, ranging from 536 billion kilowatthours and 2,180 billion kilowatthours (15.8 to 64.5 percent) in the Cap-Trade cases. These reductions are so large that in the more stringent cases, the Cap-Trade 3 and Cap-Trade 4 cases, projected coal generation in 2030 is below coal generation in 2004. In the reference case, coal accounts for 57.1 percent of total generation in 2030, but its share falls to between 21.7 percent and 49.1 percent in the Cap-Trade cases.

The higher coal costs in the Cap-Trade cases significantly reduce the demand for new coal plants, particularly in the two most stringent cases. In the reference case, 174 gigawatts of new coal capacity is projected to be added between 2005 and 2030. The amount added over the same period ranges between 10 gigawatts and 96 gigawatts in the Cap-Trade cases. In the two most stringent cases, the only coal plants added other than those already under construction, are plants with carbon capture and sequestration equipment. By 2030, 17 gigawatts of coal capacity with carbon capture and sequestration equipment are added in the Cap-Trade 4 case.

In contrast to the situation for coal generation, nuclear generation is projected to increase significantly in the Cap-Trade cases (Figure 18). In the reference case, nuclear generation is projected to increase from 789 billion kilowatthours in 2004 to 871 billion kilowatthours in 2030, as existing plants are upgraded and 6 gigawatts of new capacity, stimulated by incentives in the EPACT2005, are added. The amount of new nuclear capacity added in the Cap-Trade cases varies from 25 gigawatts to 123 gigawatts. As a result of the additions, the share of generation accounted for by nuclear plants in 2030 increases from 14.7 percent in the reference case to between 17.6 percent and 31.8 percent in the Cap-Trade cases.

As for nuclear generation, renewable generation is also expected to see significant growth in the Cap-Trade cases (Figure 19). In the reference case, renewable generation is projected to increase from 358 billion kilowatthours in 2004 to 559 billion kilowatthours in 2030. Part of this growth is stimulated by tax incentives for certain renewable technologies in EPACT2005. In the Cap-Trade cases, renewable generation is projected to grow to between 542 billion kilowatthours and 1,068 billion kilowatthours in 2020 and between 728 billion kilowatthours and 1,455 billion kilowatthours in 2030. Most of the increase in renewable generation is expected to be from non-hydroelectric renewable generators, mainly wind and biomass. As a result, the non-hydroelectric renewable share of generation, currently 2.2 percent, increases significantly in the Cap-Trade cases. By 2030, the share ranges from 4.3 percent in the reference case to between 7.3 percent and 20.6 percent in the Cap-Trade cases.

Oil and natural gas generation are also impacted by efforts to reduce power sector GHG emissions, but to lesser degrees than coal, nuclear, and renewables. Oil generation, already a very small part of electricity market, falls even further in the Cap-Trade cases. Relative to the reference case, natural gas generation in 2030 is between 9 percent and 17 percent higher in the Cap-Trade cases.

Electricity Prices

The shift away from coal to increased use of nuclear and renewable fuels, together with the costs of holding emissions permits, affects electricity prices (Figure 20). In the reference case, electricity prices fall from 7.6 cents per kilowatthour in 2004, to 7.2 cents per kilowatthour in 2020, and then increase slowly to 7.5 cents per kilowatthour in 2030 as fuel prices rise. In the Cap-Trade cases,2020 electricity prices range from 7.7 cents per kilowatthour to 8.3 cents per kilowatthour, an increase of 6.0 percent to 15.0 percent over the reference case level. As the GHG permit price continues to rise between 2020 and 2030 in the Cap-Trade cases, the cost of using fossil fuels also continues to grow, and electricity prices grow with them. By 2030, electricity prices in the Cap-Trade cases range from 8.2 cents per kilowatthour to 9.7 cents per kilowatthour, which is between 8.0 percent and 28.6 percent above the reference case level. Consumers' total electricity bill in 2020 in the Cap-Trade cases is between $16 billion and $40 billion (4.7 to 11.8 percent) higher than in the reference case. By 2030, the increase in consumer bills above the reference case level in the Cap-Trade cases grows to between $28 billion and $91 billion (7.0 to 22.8 percent).

End-Use Energy Consumption

Residential and Commercial

Residential and commercial consumers are expected to use less energy if a GHG cap and trade program is implemented. Relative to the reference case, total delivered residential energy consumption in the Cap-Trade cases is between 0.6 percent and 1.7 percent lower in 2020, and between 0.9 percent and 3.5 percent lower in 2030 (Figure 21). Similarly, for the commercial sector, total delivered energy consumption in the Cap-Trade cases is between 1.3 percent and 3.0 percent lower in 2020 and between 1.8 percent and 5.8 percent lower in 2030.

These changes result from consumer responses to higher costs for all fossil fuels and electricity in the Cap-Trade cases. These costs include the purchase price of the fuels together with the costs of permits needed to cover the GHG emissions associated with their use. For example, relative to the reference case, the average delivered price of natural gas is between $0.44 per thousand cubic feet and $1.08 per thousand cubic feet (6.1 and 15.1 percent) higher in 2020 in the Cap-Trade cases. By 2030, this difference grows to between $0.55 per thousand cubic feet and $2.49 per thousand cubic feet (6.7 and 30.2 percent). For distillate fuel oil and electricity the projected percentage changes in average prices are similar to those for natural gas.

Even with lower energy consumption, households are projected to see higher energy bills. Relative to the reference case, annual per household energy expenditures in 2020 are 3.8 to 10.5 percent ($61 to $169) higher in the Cap-Trade cases. By 2030, the difference increases, with annual per household energy expenditures ranging from 5.4 percent to 20.0 percent ($91 to $336) higher in the four cases.

Where possible, homeowners will increase their use of non-fossil energy. For example, relative to the reference case, the number of homes with solar photovoltaic (PV) systems increases between 17.4 percent and 78.2 percent across the four cases by 2030. However, even with large percentage changes, the stock of homes with PV systems remains small. The 78.2 percent increase, results in about 0.1 percent of the homes having PV systems by 2030. As in the residential sector, the impact of higher energy prices outweighs the impact of reductions in commercial energy consumption, resulting in an $8 billion to $20 billion (4.6 to 11.5 percent) increase in commercial energy expenditures in the Cap-Trade cases in 2020, relative to the reference case. The increase in expenditures is greater by 2030, ranging from $14 billion to $47 billion (6.6 to 21.8 percent) higher than commercial sector energy expenditures in the reference case.

Also, as in the residential sector, commercial consumers are expected to increase their use of non-fossil fuels in response to a GHG cap and trade program. Across the CapTrade cases, total commercial sector PV capacity is from 3 percent to 12 percent higher in 2020 than in the reference case. By 2030, commercial sector PV capacity in the CapTrade cases ranges from 30 to 164 percent higher than in the reference case.

The GHG cap and trade program also stimulates commercial users to increase their investments in natural gas-fired combined heat and power plants (CHP). These facilities can be very efficient and higher fossil fuel prices make investments in them more attractive. Overall, commercial natural gas-fired CHP capacity is from 2 percent to 3 percent higher in 2020 in the Cap-Trade cases, when compared to the reference case. By 2030, the increase relative to the reference case increases to between 11 percent and 37 percent.

Industrial

Industrial consumers also reduce their energy consumption in response to higher energy prices, particularly their consumption of coal. Relative to the reference case, delivered industrial energy consumption in the Cap-Trade cases is between 2.0 percent and 3.2 percent lower in 2020, and between 4.5 percent and 7.9 percent lower in 2030 (Figure 22). The largest percentage reductions occur in industrial coal and purchased electricity. Relative to the reference case, both metallurgical and general industrial coal use fall by between 1.2 percent and 4.5 percent in 2020 in the Cap-Trade cases. This change grows to a decline of 1.4 percent to 8.1 percent by 2030. Total industrial coal consumption, which includes coal used in CTL production, decreases even more in the Cap-Trade cases. Relative to the reference case, total industrial coal use is between 16.8 percent and 22.9 percent lower in the Cap-Trade cases in 2020 and between 36.3 percent and 48.5 percent lower in 2030. The use of coal in CTL plants, 19 gigawatts of which are added in the reference case, is eliminated in the two most stringent Cap-Trade cases. Purchased electricity consumption in the industrial sector is between 1.6 percent and 3.6 percent lower in 2020 in the Cap-Trade cases and the difference widens to between 2.5 percent and 7.4 percent lower in 2030.

While energy consumption falls in the industrial sector in the Cap-Trade cases, total industrial energy expenditures rise. Relative to the reference case, industrial energy expenditures increase by between $10 billion (5.4 percent) and $26 billion (14.5 percent) in 2020 and by between $16 billion (7.2 percent) and $47 billion (28.0 percent) in 2030 in the Cap-Trade cases. Industrial output, measured in year 2000 dollars, is also reduced relative to the reference case by $56 billion (0.6 percent) to $237 billion (2.5 percent) in 2030 in the Cap-Trade cases.

Transportation

Responding to higher gasoline, diesel, and jet fuel prices, transportation consumers also reduce their energy consumption (Figure 23). Relative to the reference case, these higher prices lead to 0.7 percent to 2.2 percent lower transportation sector energy consumption in 2020 and 1.2 percent to 4.9 percent lower transportation sector energy consumption in the Cap-Trade cases.

The lower transportation energy consumption results from a combination of reduced travel and increased purchases of more efficient vehicles. In 2020, the reduction in light duty vehicle miles traveled from the reference case level ranges from 23 billion miles to 60 billion miles (0.6 to 1.7 percent) in the Cap-Trade cases. By 2030 this difference grows to between 32 billion miles to 146 billion miles (0.7 to 3.4 percent). Freight truck travel is also slightly lower in the Cap-Trade cases because of lower industrial output.

Though accounting for a much smaller share of the change in transportation energy usage, railroad usage is expected to be significantly lower in the Cap-Trade cases, because of large reductions in coal use (Figure 24). Relative to the reference case, 2020 rail-ton miles traveled are 50 billion ton miles to 247 billion ton miles (2.5 to 12.4 percent) lower in the Cap-Trade cases. As the usage of coal continues to slow relative to the reference case, 2030 rail ton miles are 175 billion ton miles to 690 billion ton miles (7.3 to 28.7 percent) lower in the Cap-Trade cases than in the reference case. Because of the lower coal use, in the Cap-Trade 4 case, total railroad usage is only 11.3 percent above the 2004 level in 2030, an average annual growth rate of just over 0.4 percent per year. This compares to the 1.7 percent annual growth projected between 2004 and 2030 in the reference case.

Improved fuel economy also contributes to the lower transportation sector energy consumption. The higher fuel prices in the Cap-Trade cases stimulate consumers to shift away from light trucks and purchase more hybrid and diesel vehicles. However, even the largest increase in gasoline prices in 2030, $0.41 per gallon, is not enough to stimulate a dramatic shift in the mix of vehicles purchased. The changes that do occur are gradual, but by 2030, the percent of new light vehicle sales that are cars increases from 42.6 percent in the reference case to between 44.0 percent and 48.0 percent the Cap-Trade cases. Sales of hybrid vehicles in 2030 grow from 11.5 percent of new light vehicle sales in the reference case to between 11.7 percent and 12.5 percent of new light vehicle sales in the Cap-Trade cases. In the Cap-Trade 4 case, hybrid and diesel vehicle sales are both about 100,000 vehicles higher than in the reference case in 2030. Because of the shift in vehicle purchases in the Cap-Trade cases, new light duty vehicle fuel economy is between 0.3 miles per gallon (mpg) to 1.3 mpg (0.9 to 4.4 percent) higher in 2030 than in the reference case.

Fuel Supply

Natural Gas

In general, relative to the reference case, total natural gas consumption is lower in the Cap-Trade cases, but the differences are very small, 5 percent or less (Figure 25). The change in consumption occurs mainly in the electric power sector, but most other sectors show similar small changes. The one exception is the industrial sector which shows a slight increase in natural gas consumption in the Cap-Trade cases as increased investments in CHP plants offset reductions in natural gas use in other industrial areas. The supply response comes from a combination of lower domestic gas production and lower net imports, with a slightly greater share of the reduction coming from domestic production when the GHG intensity reduction goal is less stringent, and from imports when the GHG intensity reduction goal is more stringent. Cumulatively from 2005 through 2030, gas production is reduced by between 2.7 and 10.4 trillion cubic feet relative to the reference case in the Cap-Trade cases. Over the same time period, relative to the reference case, net natural gas imports are reduced by between 2.2 and 12.5 trillion cubic feet. The two supply sources most affected by a greenhouse gas intensity reduction program are unconventional natural gas supplies and liquefied natural gas. Domestic unconventional sources (tight gas sands, gas shales, and coalbeds), show the largest changes, with cumulative reductions between 2.4 and 7.6 trillion cubic feet in the Cap-Trade cases. Seventy-five percent or more of the cumulative reduction in net imports is attributable to lower liquefied natural gas imports.

Coal

Because of large reductions in coal use in the electric power sector, coal production is much lower in the Cap-Trade cases (Figure 26). Relative to the reference case, total coal production is between 74 million tons and 379 million tons (5.4 and 27.9 percent) lower in 2020 and between 274 million tons and 1,081 million tons (16.1 and 63.5 percent) lower in 2030 in the Cap-Trade cases. In the Cap-Trade 3 and Cap-Trade 4 cases, coal production in 2020 and 2030 is actually below 2004 coal production. Both eastern and western coal production are lower in the Cap-Trade cases, but the impact is larger in the west because that is where coal production is projected to grow in the reference case.

Petroleum

In 2020, total oil imports in the Cap-Trade cases are between 0.27 and 0.53 million barrels per day (1.9 to 3.7 percent) lower than in the reference case. By 2030, the difference ranges from 0.05 to 0.76 million barrels per day (0.3 to 4.4 percent) lower than in the reference case, with about two thirds of the reduction coming from product imports and the remainder from crude oil imports.

Ethanol production and E85 consumption are relatively unaffected by the greenhouse gas permit price. Although the price difference between E85 and gasoline on a per gallon basis increases by as much as about $0.25 per gallon in 2030 in the most stringent case, E85 remains uneconomical on an energy content basis. That is, the price of E85 in the reference case is 25 percent higher than the gasoline price in 2030. In the Cap-Trade 4 case, the price of E85 still remains over 20 percent higher than the gasoline price ± closer, but still uneconomical on a national level.

Economic Impacts

Implementing a GHG emissions cap and trade program based on a targeted rate of reduction in emissions intensity in which some emissions permits will be auctioned15 and others will be sold if the safety-valve is triggered will impact the economy through two mechanisms. First, efforts to reduce GHG emissions and the requirement to hold permits for all remaining GHG emissions will raise energy prices, particularly those for fossil fuels. Second, the auctioning of permits and the sale of additional permits if the safety-valve is triggered will increase revenues to the government. In turn, higher energy prices and increased government revenues will impact aggregate economic growth.

Prices

Relative to the reference case, the consumer price index for energy (CPI-Energy) in 2020 ranges from 4.6 percent to 11.7 higher in the Cap-Trade cases (Figure 27). By 2030, this difference grows to between 5.9 percent and 25.2 percent higher than in the reference case. These higher energy prices in the Cap-Trade cases contribute to increases in the All-Urban Consumer Price Index (CPI), a measure of aggregate consumer prices in the economy. In the Cap-Trade cases, the CPI is between 0.6 percent and 2.6 percent higher than in the reference case in 2030.

Government Revenues

The projected government revenues collected each year in the Cap-Trade cases is a function of the GHG permit price, the number of permits auctioned, and the number of permits (if any) sold at the safety-valve price. In 2030, the projected government revenue collected ranges from $15 billion to $40 billion (2000 dollars) in the Cap-Trade cases. The discounted value in 2010, using a 4 percent discount rate, of the cumulative revenue collected between 2010 and 2030 in the Cap-Trade cases ranges from $78 billion to $187 billion (2000 dollars) (Figure 28).

Alternative assumptions about the availability of abatement opportunities for GHGs other than energy-related CO2 and alternative settings for the permit safety-valve price affect the amount of revenue that the government might collect. For example, in the Cap-Trade 3 case the cumulative discounted revenue collected is projected to reach $187 billion. However, in the Cap-Trade 3 Low Other case, this value increases to $235 billion. In the Cap-Trade 3 Low Other case, the reduced availability of other greenhouse gas abatement opportunities leads to an earlier triggering of the permit safety-valve causing the government to sell more permits. Conversely, in the Cap-Trade 3 Low Safety case, the total cumulative government permit revenue is only $135 billion, much lower than the level expected in the Cap-Trade case. The lower revenue collection occurs because of the government sells permits at the lower safety-valve price in the Cap-Trade 3 Low Safety case. The revenue collected in the this case is much closer to $114 billion collected in the Cap-Trade 2 case that uses the same safety-valve prices and also has very similar energy market impacts.

Government Revenues

The projected government revenues collected each year in the Cap-Trade cases is a function of the GHG permit price, the number of permits auctioned, and the number of permits (if any) sold at the safety-valve price. In 2030, the projected government revenue collected ranges from $15 billion to $40 billion (2000 dollars) in the Cap-Trade cases. The discounted value in 2010, using a 4 percent discount rate, of the cumulative revenue collected between 2010 and 2030 in the Cap-Trade cases ranges from $78 billion to $187 billion (2000 dollars) (Figure 28).

Alternative assumptions about the availability of abatement opportunities for GHGs other than energy-related CO2 and alternative settings for the permit safety-valve price affect the amount of revenue that the government might collect. For example, in the Cap-Trade 3 case the cumulative discounted revenue collected is projected to reach $187 billion. However, in the Cap-Trade 3 Low Other case, this value increases to $235 billion. In the Cap-Trade 3 Low Other case, the reduced availability of other greenhouse gas abatement opportunities leads to an earlier triggering of the permit safety-valve causing the government to sell more permits. Conversely, in the Cap-Trade 3 Low Safety case, the total cumulative government permit revenue is only $135 billion, much lower than the level expected in the Cap-Trade case. The lower revenue collection occurs because of the government sells permits at the lower safety-valve price in the Cap-Trade 3 Low Safety case. The revenue collected in the this case is much closer to $114 billion collected in the Cap-Trade 2 case that uses the same safety-valve prices and also has very similar energy market impacts.

Real GDP and Consumption

The higher delivered energy prices in the Cap-Trade cases lowers real output for the economy. They reduce energy consumption, but also indirectly reduce real consumer spending (due to lower purchasing power) for other goods and services. The lower aggregate demand for goods and services in the Cap-Trade cases results in lower real GDP relative to the reference case (Figure 29). Relative to the reference case, total discounted real GDP over the 2010 to 2030 time period ranges from $244 billion to $800 billion (0.10 to 0.32 percent) lower in the Cap-Trade cases. Over the same time period, discounted real consumer spending is between $248 billion and $772 billion (0.15 to 0.46 percent) lower than in the reference case in the Cap-Trade cases.

Uncertainty

All long-term projections engender considerable uncertainty. 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 increasingly rely on technologies that play a relatively small role today or have not been built in the United States in many years.

Non-hydroelectric renewable generators currently provide 2.2 percent of the electricity generated. In the reference case, their share is expected to grow to 4.3 percent in 2030. In the Cap-Trade cases their share grows to between 7.3 percent and 20.6 percent of generation by 2030. To supply the amount of non-hydroelectric renewable generation projected in the most stringent case, the capacity of wind and biomass plants would have to grow to 13 and 16 times, respectively, the amount of capacity existing in 2004. While this level of growth is certainly possible, it comes with a lot of uncertainty. It is possible that such growth might lead to significant reductions in the costs of these technologies. On the other hand it is also possible that costly hurdles such as siting resistance, higher than expected transmission interconnection costs or fuel supply limits could arise that limit their development.

Similarly, this analysis suggests that the power sector would significantly increase its reliance on nuclear power in order to reduce GHG emissions. However, the last nuclear order in the United States was placed in 1978 and the last nuclear plant to enter service began operating in 1996. In the reference case, nuclear capacity is projected to increase by 9 gigawatts, including 3 gigawatts of uprates at existing plants and 6 gigawatts of new nuclear plants, about 4 to 6 new plants. In the Cap-Trade cases, nuclear capacity is projected to grow by between 28 gigawatts and 125 gigawatts. In the most stringent case, nuclear capacity would have to more than double from the 2004 level. As for wind and biomass, it is possible that such growth in nuclear power might lead to significant cost reductions. On the other hand, costly hurdles, such as unexpectedly high construction costs, public resistance to the siting of facilities, or waste disposal concerns could arise to limit their development.

Energy Market Impacts of Alternative Greenhouse Gas Intensity Tables

Notes and Sources