3. Impacts of Alternative Technology and Resource Assumptions

Introduction

This chapter focuses on the NCEP recommendations, considered in the context of the AEO2005 high technology sensitivity cases. Each sensitivity case starts from one of the two high technology cases developed in AEO2005, either the integrated high technology case or the oil and natural gas rapid technology case, and incorporates additional NCEP assumptions that simulate the impacts of various policies.

EIA is acutely aware that the rate at which the future cost and performance characteristics of energy-using and producing technologies change is highly uncertain. While the EIA reference case incorporates significant improvements in technology cost and performance over time, it may either overstate or understate the actual pace of improvement.

The two AEO2005 high technology cases are sensitivity cases that reflect assumptions of faster technological progress than is assumed in the reference case. Neither case is based on a specific level of investment in R&D. The integrated high technology case, designated here as the high demand technology case (HiTech), is a combination of the high technology assumptions for the residential, commercial, transportation, industrial, and power generation sectors. In each of these sectors, advanced technologies are assumed to be available sooner, at lower cost, and often with better performance characteristics. The oil and gas rapid technology case, designated as the high supply technology case (RTP), assumes that the effect of technological improvement on the costs, finding rates, and success rates for the exploration and production of crude oil and natural gas is 50 percent greater than in the reference case.²⁸

Pursuant to the initial service report request and subsequent elaboration (see Appendix A), the EIA’s analysis focused on three policy cases:

• The NCEP-HiTech case incorporates NCEP’s GHG cap-and-trade policy using HiTech assumptions coupled with tax and deployment incentives and the new light duty vehicle CAFE standards.

• The RTP-IC-ETH case combines the RTP case with the tax and deployment incentives, the new CAFE standards, and assumptions on more rapid ethanol cost reductions.

• The HiTech-IC case incorporates HiTech assumptions coupled with tax and deployment incentives²⁹ and the new light-duty vehicle CAFE standards.

The discussion below focuses on the first two of these policy cases. The impact of the third case is reflected in the results of the first.

Basis for Comparisons

Two alternative comparisons can be used to gauge the effects of the NCEP policy suite under high technology assumptions. The first, which focuses on the change in energy and economic performance between the HiTech and NCEP-HiTech cases, implicitly assumes that the enactment of the NCEP policy suite does not affect the set of available technologies, only what and how much is chosen from that set. The second compares the NCEP-HiTech case against the standard reference case. This comparison implicitly assumes that the NCEP policies are directly responsible for creating technologies with the cost and performance characteristics of EIA’s high technology suite, which would not be available in their absence.

Analytical judgment and recognition of inherent modeling limitations are needed to assess which approach is most likely to more closely reflect the actual effect of “high technology” on the impact of the NCEP’s policy proposals. While the imposition of more stringent efficiency standards for appliances, buildings, and vehicles included in the NCEP policy recommendations could spur targeted R&D activity in selected sectors, the limited impact of the NCEP’s policy suite on delivered energy prices suggests that there would be only a modest across-the-board incentive through the price mechanism to stimulate R&D on new technologies to increase energy efficiency or reduce GHG intensity. The NCEP’s policy recommendations also include a doubling of Federal funding for energy R&D; however, the relationship between increased Federal authorizations for R&D and actual technology outcomes is not well-defined, for reasons discussed in the text box below.

Provided that the NCEP recommendations do not have a large impact on the set of technologies available before 2025, the implications of having a “better” technology menu on the estimated effects of the modeled elements of the NCEP proposals are best assessed by comparisons that use same technology menu for both the reference and policy cases. To the extent that the NCEP proposals are actually responsible for improving the menu as well as influencing technology choices, comparisons of this type would understate the impacts of the policy package.

The other available approach (comparing the high technology case with NCEP policies to the standard reference case) will tend to overstate impacts of the NCEP recommendations. This would be true even under the extreme assumption of an exclusive causal link between the NCEP policies and the availability of the high technology menu, given that NEMS does not capture the costs of technology development. Moreover, NEMS does not explicitly represent the role of nonenergy-related R&D activities in supporting the baseline economic growth in its macroeconomic component. Therefore, NEMS cannot represent the macroeconomic impact of diverting R&D effort away from other sectors toward energy-related technologies. Such shifts in R&D effort would erode baseline growth to the extent that scarce R&D resources and technological progress in other areas of the economy were reduced.

The analysis of these effects continues to be an active area of academic research. Based on a reading of the available literature, EIA believes that the first approach is most likely to provide estimates of economic impacts that are closest to the actual economic effects under a high technology scenario and has therefore focused on such comparisons in recent service reports that estimate the impacts of policies under such a scenario.³⁰ The presentation below generally follows that practice, while also providing information that can be used to make the alternative comparison.

Additional Issues Regarding Technology Scenarios

Two additional issues related to technology assumptions also merit attention here. One is the possibility that one or more technologies superior to those identified in the high technology case could become available within the time frame of this analysis. While the high technology case assumptions are optimistic by design, there is always a potential for undiscovered or unanticipated technological developments to occur. The contribution of such technologies within the time frame of this analysis is likely to be limited by delays that often arise in the market penetration of new energy technologies, particularly when the new technologies are not readily compatible with existing infrastructure.

The other important issue is the global nature of technology. Because technologies can diffuse globally, technologies available in the high technology cases that penetrate the market in the United States are also likely to be applied in other national markets, with possibly important effects on world energy supplies and prices. Because NEMS does not have the capability to consider the impacts of technological spillover beyond the U.S. economy, such effects are not considered in this report.

Greenhouse Gas Emissions Comparison

Technological progress affecting energy-using equipment usually increases energy efficiency and, all else being equal, lowers energy consumption and the resulting CO2 emissions. By 2025, covered GHG emissions in the HiTech case are 591 million metric tons CO2 equivalent (7 percent) lower than in the reference case (Table 8), illustrating the importance of the assumptions about technological progress. The HiTech case provides about 39 percent of the GHG reductions needed to meet the NCEP’s GHG intensity target without any additional policies. In the HiTech scenario, there is less to be done to achieve the NCEP intensity target. Figure 27 illustrates the GHG emissions for key policy proposal combination. Relative to the HiTech case, the NCEPHiTech case reduces GHG emissions by 254 million metric tons CO2 equivalent (3.4 percent) in 2015 and 639 million metric tons (7.8 percent) in 2025.

Projected prices for emissions permits in the NCEP-HiTech case are lower than in the NCEP case, as expected given the greater efficiency improvement and more optimistic patterns of technological adoption assumed. Permit prices in the NCEP-HiTech are projected to remain below the safety-valve price throughout the projection period, and the GHG emissions targets from 2010 to 2025 are met on a cumulative basis (i.e., with the use of permit banking), because there is less to be done to achieve the intensity target (Figures 28 and 29). The NCEP-HiTech case accumulates a balance of permits during the less stringent, early phase of the program and then depletes them gradually through 2025.

As Figures 30 and 31 illustrate, a large portion of the accumulated bank of permits is from non CO2 GHG gases. The non-CO2 share of emissions reductions in the NCEP-HiTech case relative to the HiTech case is 66 percent in 2010, declining to about 52 percent in 2015 and 2025. In contrast, the non-CO2 share of emissions reductions in the NCEP case relative to the reference case is 63 percent in 2010, declining to 50 percent in 2015 and 37.5 percent in 2025. Given that non-CO2 GHGs account for a significant share of overall GHG reductions under the NCEP recommended cap-and-trade program, the results regarding permit prices and other effects depend heavily on the baselines and abatement cost curves for non-CO2 GHGs supplied by the EPA for use in this analysis. Therefore, the caveats raised in earlier chapters regarding the representation of non-CO2 GHG abatement should be kept in mind when considering these results.

Composition of Emissions Reductions

Reductions are projected for both energy-related CO2 emissions and emissions of other covered GHGs (Figure 30). In all the cap-and-trade cases, large shares of the projected emissions reductions are made up by other GHGs, especially when permit prices are relatively low. As indicated in Table 2 in Chapter 2, significant reductions in emissions of other GHGs are assumed to be economical at permit prices below the safety-valve price. As a result, reductions of other GHGs are projected to occur starting in the first year of the policy. As permit prices increase, the share of reductions from energy-related CO2 emissions increases.

In all the cap-and-trade policy cases, the greatest share of reductions in energy-related CO2 emissions occurs in the electric power sector, because opportunities exist in that sector to switch to fuels that emit less or no net CO2 at a lower cost than in other sectors (Figure 31). These options include sequestering CO2 and using less coal and more natural gas, renewable fuels, and nuclear power. Reductions in electricity demand also contribute to the CO2 emissions reductions in the power sector, and many of the NCEP policies would promote more efficient use of electricity. In the NCEP and NCEP-HiTech cases, large emissions reductions occur in the transportation sector as a result of the assumed increases in the CAFE standards. Together, the reductions in total GHG emissions attributable to changes in energy consumption for electricity generation and to reductions in other GHG emissions account for 70 percent of the total GHG emissions reductions in the NCEP-HiTech case relative to the HiTech case from 2010 to 2025 as compared with 72 percent of the total GHG emissions reductions projected to occur from 2010 to 2025 in the NCEP case relative to the reference case. Figure 32 shows the cumulative emission reduction shares for CO2 and non-CO2 gases from 2010 to 2025 in the NCEP-HiTech relative to the HiTech case and in the NCEP case relative to the reference case. In the NCEP-HiTech case, about 52 percent of the cumulative reductions are reductions in emissions of non-CO2 GHGs.

Revenue Implications

The NCEP-HiTech case represents the same set of policies as the NCEP case but with the assumption of more rapid technological progress in all end-use sectors and the power generation sector. The GHG intensity goal is achieved in the NCEP-HiTech with less adverse impact on the economy than in the NCEP case. Any incremental costs associated with achieving the assumed rates of technological progress are not addressed in this study.³¹

With the use of high technology and efficiency assumptions in the NCEP-HiTech case, the emissions permit price never reaches the safety-valve level within the forecast horizon (Figure 28). Revenue collected from the tradable permit system is expected to increase from $0.6 billion in 2010 to $4.6 billion in 2025. The cumulative revenues through 2025 are $35.1 billion and their present value is $18.2 billion. By 2025, the permit revenue collection is not sufficient to cover the expenditures of the full program (Figure 32).

Buildings Sector Impacts

The impacts of the NCEP-HiTech case are similar to but more pronounced than the impacts of the NCEP case. That is, the advanced technologies become economical and are adopted sooner, which leads to greater reductions in energy use and CO2 emissions than in the NCEP case (Figure 33 and Table 9). It should be noted that buildings energy consumption and CO2 emissions in the HiTech case are roughly comparable to, although slightly higher than, those in the NCEP case in both 2015 and 2025.

The addition of the NCEP’s policies in the NCEP-HiTech case leads to slightly greater reductions in projected CO2 emissions in the buildings sector when compared with the HiTech case. Projected CO2 emissions attributable to the residential sector in the NCEP-HiTech case are 2 percent (27 million metric tons) lower in 2015 and 3 percent (51 million metric tons) lower in 2025 than projected in the HiTech case. Projected CO2 emissions attributable to the commercial sector in the NCEP-HiTech case are 2 percent (26 million metric tons) lower in 2015 and 3 percent (42 million metric tons) lower in 2025 than projected in the HiTech case.

Transportation Sector Impacts

Petroleum consumption in the NCEP-HiTech case is lower than in the NCEP case (Figure 34). The incremental cost of new vehicles is also much lower in the NCEP-HiTech case due to fuel economy improvements resulting from the increased penetration of advanced conventional technologies, allowing the fuel economy standards proposed by the NCEP to be met without increasing sales of diesel or hybrid vehicles (as occurs in the NCEP case). As a percent of new vehicles sold, hybrid and diesel vehicle sales decrease slightly in the NCEP-HiTech case compared to the HiTech case, because the improved fuel economy of conventional vehicles reduces the competitive advantage of hybrid and diesel vehicles in the market.

By improving conventional technologies, the HiTech case reduces LDV fuel demand by 3 percent (0.6 quadrillion Btu) in 2015 and 5 percent (1.2 quadrillion Btu) in 2025, relative to the reference case. With the new CAFE proposal in the NCEP-HiTech case, LDV fuel consumption declines by another 4 percent (0.9 quadrillion Btu) in 2015 and 10 percent (2.4 quadrillion Btu) in 2025 relative to the HiTech case. Nearly all of the reduction in transportation petroleum demand achieved in the NCEP-HiTech case can be attributed to improved LDV fuel economy.

As a result of reduced transportation energy demand, projected GHG emissions are also lower in the HiTech and NCEP-HiTech cases than in the reference case. GHG emissions in the HiTech case are 2 percent (50 million metric tons CO2 equivalent) lower in 2015 and 5 percent (130 million metric tons CO2 equivalent) lower in 2025 than in the reference case. GHG emissions in the NCEP-Hitech case are 3 percent (74 million metric tons CO2 equivalent) lower than in the HiTech case in 2015 and 7 percent (184 million metric tons CO2 equivalent) lower in 2025.

In the NCEP-HiTech case, new LDV fuel economy increases by 22 percent (6.1 miles per gallon) in 2015 and 19 percent (5.5 miles per gallon) in 2025, relative to the HiTech case (Figure 35). The fuel economy of the LDV stock increases by only 7 percent (1.4 miles per gallon) in 2015 and 17 percent (3.7 miles per gallon) in 2025 relative to the HiTech case, because of slow stock turnover. As a result of the higher fuel economy of the LDV stock in the NCEP-HiTech case, the cost of driving is reduced, which induces greater travel demand. Compared to the HiTech case, LDV travel in the NCEP-HiTech case is 1 percent (41 billion miles) higher in 2015 and 3 percent (141 billion miles) higher in 2025.

The changes in average LDV prices, sales, and vehicle miles traveled in the NCEP-HiTech case and HiTech case are smaller than those in the CAFE case. The average price of a new LDV is projected to increase by $800 (3 percent) in 2015 and $600 (2003 dollars) (2 percent) in 2025 in the NCEP-HiTech case, compared with increases of $1,400 in 2015 and $1,200 in 2025 in the CAFE case, because the NCEP-HiTech case makes use of lower cost, more efficient conventional technologies in the HiTech case to meet the CAFE standard. New LDV sales in the NCEP-HiTech case, as compared with the HiTech case, decline by 365,000 vehicles (2 percent) in 2015 and 414,000 vehicles (2 percent) in 2025, because the new CAFE standard in the NCEPHiTech case increases the cost of new LDVs. Because of the lower technology costs, however, the uptake of advanced LDV technologies increases the new and stock average fuel efficiencies relative to those in the NCEP case.

Primary Energy Use Patterns

Total Primary Energy Use

Total energy consumption in 2025 in the HiTech case is 126.2 quadrillion Btu, 7.0 quadrillion Btu less than in the reference case (Table 8 and Figure 36). Primary energy consumption in the HiTech case is slightly lower than the NCEP case projection of 126.5 quadrillion Btu in 2025, illustrating the importance of the technological change assumptions on the impact of potential policies. The high technology assumptions combined with the NCEP modeled policies lower primary energy consumption by another 3.9 quadrillion Btu from the HiTech case.

Although the projections for primary energy consumption in the NCEP and HiTech cases are comparable, the mix of fuels is different in the two cases. The new CAFE standards and the new building and efficiency standards in the NCEP case, relative to the HiTech case, cause lower petroleum and electricity consumption. The mandatory GHG cap-and-trade program of the NCEP increases renewable fuel use and reduces emissions of GHGs other than CO2 and thus reduces the pressure for fuel switching away from coal in the power generation sector. As a result, coal use is higher in the NCEP case than in the HiTech case. However, CO2 emissions in the HiTech case are slightly higher than in the NCEP case, and with no emissions cap-and-trade policy, total GHG emissions are much higher in the HiTech case than in the NCEP case (by 374 million metric tons CO2 equivalent).

In the NCEP-HiTech case, all delivered energy prices except the price of coal are lower than those in the HiTech case in 2015. The price guarantee for the Alaska natural gas pipeline reduces natural gas wellhead prices in the period following its construction in 2014. The new CAFE standard reduces petroleum consumption and slightly lowers world oil prices. In 2015, the minemouth and wellhead fuel price reductions are greater than the increases caused by the addition of the permit price to the delivered fuel cost. By 2025, however, only delivered petroleum products are below the Hitech delivered prices, as increases in the permit prices generally overtake the reductions in natural gas wellhead prices and minemouth coal prices.

Petroleum

The NCEP-HiTech case results in a significant reduction in petroleum consumption relative to the HiTech and reference cases; however, the reduction in petroleum consumption in the NCEP case relative to the reference case is larger than the corresponding reduction in the NCEP-Hitech case relative to the HiTech case. For example, petroleum consumption in the NCEP case is 1.61 quadrillion Btu lower than in the reference case in 2015, whereas in the NCEP-HiTech case it is 1.23 quadrillion Btu lower than in the HiTech case in 2015. The differences are greater in 2025: petroleum consumption in the NCEP case is 3.98 quadrillion Btu lower than in the reference case, and in the NCEP-HiTech case it is 2.87 quadrillion Btu lower than in the HiTech case. The differences result primarily from the higher-efficiency and lower-cost transportation technologies assumed in the HiTech case, which boost new car fuel economy by 2.4 mpg above the reference case level in 2025, and from the lower permit price projected in the NCEP-HiTech case compared to the NCEP case. Consequently, the improvement in LDV fuel economy between the HiTech and NCEP-HiTech cases is smaller than the improvement between the NCEP and reference cases. The CAFE policy by itself reduces petroleum consumption in 2025 by 3.08 quadrillion Btu. The smaller efficiency difference, combined with the lower permit price in the NCEP-HiTech case, narrows the difference in consumption between the NCEP-HiTech and HiTech cases compared to the difference between the NCEP and reference cases.

Changes in net petroleum imports are almost linearly related to the changes in petroleum consumption between the cases, because petroleum imports are the marginal source of supply for U.S. energy markets. A decrease in U.S. petroleum consumption of 1 barrel relative to the reference case is projected to lead to a reduction in oil imports of approximately 0.94 barrel.

Ethanol

If the HiTech case were combined with only the NCEP’s proposed CAFE standards for LDVs, motor gasoline consumption by LDVs (and consequently demand for ethanol for fuel blending) would be reduced. However, under the assumptions provided by Senator Bingaman’s committee staff for crop yield improvements and manufacturing cost declines, cellulose ethanol production increases to well over 10.7 billion gallons in 2025 in the RTP-IC-ETH case—10.3 billion gallons higher than in the reference case.

The RTP-IC-ETH case includes tax and deployment incentives, the new CAFE standard for LDVs, and an ethanol R&D program, which is assumed to substantially reduce the cost of ethanol from cellulose relative to the reference case. The assumed cost reductions and yield improvements for cellulosic ethanol more than offset the effects of the new CAFE standards, resulting in large increases in ethanol production from cellulose compared with the reference case. Some growth in corn ethanol production that would have happened in the reference case is displaced by cellulosic ethanol in the RTP-IC-ETH case. The net result is a large overall increase in transportation ethanol use, from 4.5 billion gallons in the reference case to 14.5 billion gallons in the RTP-IC-ETH case (Figure 37).

Natural Gas

In general, the high technology assumptions result in lower natural gas prices and more natural gas consumption than in the reference case. In the RTP case, the assumed impact of technological improvement for oil and natural gas exploration and production is 50 percent greater than in the reference case, resulting in total natural gas consumption that is 2.4 trillion cubic feet (7.8 percent) higher in 2025 than in the reference case and average delivered natural gas prices that are about $0.50 per thousand cubic feet (in 2003 dollars) lower than in the reference case.

In the RTP-IC-ETH case, which combines the same higher rates of technology improvement with the NCEP’s proposed tax incentive and deployment and CAFE policies, the impact of lower natural gas prices far outweighs the lower level of consumption that would result from the NCEP’s proposed policies. In comparing the RTP-IC-ETH case and the Incent case, the greatest difference in consumption can be seen in 2025, when the average delivered natural gas price is $0.50 per thousand cubic feet lower in the RTP-IC-ETH case than in the Incent case, and natural gas consumption is 1.9 trillion cubic feet higher. Compared with the reference case, natural gas consumption in the RTP-IC-ETH case is 1.2 trillion cubic feet higher in 2025, largely because of the lower average delivered price of natural gas ($0.46 per thousand cubic feet). Across all the cases examined in this study, the average lower-48 natural gas wellhead price is lowest in the RTP-IC-ETH case. In addition, the RTP-IC-ETH case consistently results in more domestic natural gas production than is projected in the reference case (8 percent or 1.7 trillion cubic feet higher in 2025) and lower net import levels (6 percent or 0.5 trillion cubic feet lower in 2025).

Power Generation Sector Impacts

The high technology assumptions in the consuming sectors of the economy in the HiTech and NCEP-HiTech cases lead to much lower electricity demand (Figure 38) and petroleum consumption, as discussed previously. Some of the impacts of the NCEP’s proposed policies in the NCEP-HiTech case are similar to the results in the NCEP case. Coal-fired generation in the NCEP-HiTech case is lower and renewable generation is higher, but much of the difference in emissions results from the high technology assumptions in the NCEP-HiTech case rather than from the proposed policies. As an example, the NCEP case reduces electricity generation by 105 billion kilowatthours in 2015 relative to the reference case while generation in the NCEP-HiTech case is 35 billion kilowatthours lower than the HiTech case. In 2025, generation in the NCEP case is 263 billion kilowatthours lower than the reference while the NCEP-HiTech is 135 billion kilowatthours lower than the HiTech case. The lower level of energy demand in the NCEP HiTech case also leads to lower natural gas prices than in the reference case. The combination of lower electricity demand, which reduces the need for new power plants, and lower natural gas prices, which make new natural-gas-fired plants more attractive, leads to much lower coal use in the NCEP-HiTech case.

The lower demand for electricity, petroleum, natural gas, and coal in the NCEP-HiTech case makes it easier to meet the GHG intensity target recommended by the Commission. For example, CO2 emissions in the NCEP case are 107 million metric tons lower than in the reference case in 2015 and 330 million metric tons lower in 2025. The NCEP-HiTech case CO2 emissions are 60 million metric tons lower than the HiTech case in 2015 and 88 million metric tons lower in 2025. In fact, power-sector CO2 emissions in the HiTech case are approximately equal to the level of CO2 emissions reached in the NCEP case (within 5 million metric tons) in 2025. The reduction in total energy-related CO2 emissions between the HiTech and reference cases (591 million metric tons CO2) is about 39 percent of the total GHG reduction needed (1,522 million metric tons CO2 equivalent) to meet the NCEP’s GHG intensity target in 2025. As a result, the GHG emissions permit price required to achieve the NCEP’s target in the HiTech case is below the safety-valve permit price.³²

Notes