1. Background and Scope of the Analysis

This service report was prepared by the Energy Information Administration (EIA), Office of Integrated Analysis and Forecasting (OIAF), in response to a December 17, 2004, letter from Senator Jeff Bingaman (see Appendix A). The letter requested an analysis of the energy production, consumption, price, and fuel import impacts that would result from the recommendations in a December 2004 report, entitled Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges, by the National Commission on Energy Policy (NCEP), a nongovernmental, privately-funded group.¹

In order to provide a timely response, EIA focused its analysis on only those NCEP recommendations that could be directly modeled using its National Energy Modeling System (NEMS)² and that were thought to have significant potential to affect U.S. energy consumption, supply, and prices. The analysis of NCEP’s energy-related proposals is based on cases contained in EIA’s Annual Energy Outlook 2005 (AEO2005), published in February 2005.³ Limited analysis of non-carbon dioxide (CO2) greenhouse gas (GHG) emissions baselines and abatement opportunities was based on information supplied by the Environmental Protection Agency (EPA).

This report, like other EIA analyses of energy and environmental policy proposals, focuses on the impacts of those proposals on energy choices made by consumers in all sectors and the implications of those decisions for the economy. This focus is consistent with EIA’s statutory mission and expertise. The study does not quantify, or place any value on, possible health and environmental benefits of curtailing GHG emissions.

NCEP Recommendations Analyzed

The NCEP recommendations analyzed by EIA are summarized briefly below. In some cases, the NCEP recommendations did not provide sufficient information for analysis. As necessary, Senator Bingaman’s staff provided additional guidance.⁴

Implement a GHG emissions intensity target with a cap-and-trade program. The NCEP recommended a mandatory, market-based, tradable emissions allowance/credit program to reduce U.S. GHG intensity by 2.4 percent per year between 2010 and 2019 and by 2.8 percent per year between 2020 and 2025 relative to the reference case, where GHG intensity is defined as GHG emissions per real dollar of gross domestic product. The proposal would, in effect, set a cap on annual emissions that is a function of anticipated gross domestic product. Emission permits would be allocated to emission sources primarily on the basis of past GHG emissions. Most of the permits (95 percent initially, gradually declining to 90 percent between 2013 and 2022) would be allocated at no cost; the Federal Government would auction the remainder. GHG emission permits would be bankable; i.e., they could be used in the year they are issued or in any year thereafter.

To control the potential cost of the mandatory emissions cap policy, the NCEP recommended that a maximum price, or safety valve, for emissions permits be established, at which price the Federal Government would sell permits on demand. The recommended safety-valve price starts at $7 per metric ton CO2 equivalent in 2010 (nominal dollars) and increases by 5 percent annually up to $14.55 in 2025. In 2003 dollars, the safety-valve permit price would be $6.10 per metric ton CO2 equivalent in 2010 and $8.50 in 2025.

GHG emissions included in the proposed cap are energy-related CO2 emissions, methane emissions from coal mines, nitrous oxide emissions from nitric acid and adipic acid production, and emissions of the high global warming potential gases, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride.

Implement new corporate average fuel economy standards. The NCEP recommended that the National Highway Traffic Safety Administration (NHTSA) strengthen vehicle efficiency standards starting no later than 2010 and phase in stricter standards over 5 years. A target value was not specified, but it was recommended that the process of setting new standards should consider vehicle performance, safety, job impacts, and vehicle efficiency. Based on guidance provided, a 36-percent increase in the corporate average fuel economy (CAFE) standard for new cars and light trucks by 2015 is assumed in this analysis. For cars, this represents an increase of 10 miles per gallon over existing CAFE standards, and for light trucks it represents an increase of 8 miles per gallon.⁵

Provide $3 billion in tax incentives over 10 years to promote domestic manufacturer conversion and consumer adoption of hybrid and advanced diesel vehicles. The incentives would be divided evenly between reducing conversion costs for domestic manufacturers and reducing vehicle costs for consumers.

Provide a price guarantee for natural gas from Alaska’s North Slope. To ensure that North Slope natural gas is brought to U.S. markets at the earliest date possible, the NCEP believes additional incentives are necessary for the construction of an Alaska natural gas pipeline system beyond the recently enacted loan guarantees, accelerated depreciation, and treatment plant tax credits. By assumption,⁶ a floor price, or minimum price guarantee, of $3.25 per million Btu in 2003 dollars was set for natural gas delivered to Alberta. Senator Bingaman’s committee staff also suggested a program requiring payments to the Federal Treasury if the market price of the natural gas delivered to Alberta exceeded $4.80 per million Btu.

Implement new efficiency standards in the building sectors. The NCEP recommended that new efficiency standards be developed for the residential and commercial sectors but did not provide specific requirements. Based on guidance from Senator Bingaman’s committee staff, this analysis uses the standards referenced in the NCEP report’s Technical Appendix.⁷ The standards provide for significant changes to residential and commercial building codes and efficiency standards for equipment purchases. Residential policies include increased efficiency standards in 2010 for natural gas furnaces, room air conditioners, electric water heaters, dishwashers, refrigerator/freezers, torchiere lighting, pool pumps, ceiling fans, and standby power in miscellaneous electric products. In addition, residential building codes are tightened in 2010 and again in 2020. Policies specific to the commercial sector include increased equipment efficiency standards in 2010 for natural gas boilers, packaged and central air conditioners, heat pumps, gas water heaters, ventilation, fluorescent and high intensity discharge (HID) lighting, commercial refrigerator/freezers, ice and vending machines, and standby power in personal computers and other office equipment. The assumptions call for a second increase in efficiency standards for air conditioning and lighting equipment in 2020. In addition, commercial building codes are tightened for the building envelope in 2010 and for lighting power density in 2015.

Double research and development investments for the next 10 years. While increased expenditures for research and development (R&D) are expected to lead to some technology improvements, a statistically reliable relationship between the level of R&D spending for specific technologies and the impacts of those expenditures has not been developed. Furthermore, the impact of Federal R&D is also difficult to assess, because the levels of private sector R&D expenditures usually are unknown and often far exceed R&D spending by the Federal Government. Thus, EIA could not provide an estimate of the impact on technological change of a doubling of Federal R&D spending over a 10-year period.

At the request of Senator Bingaman’s committee staff, this analysis includes several cases using the technology assumptions from the high technology cases in EIA’s AEO2005. These cases are provided for illustrative purposes and should not be seen as representing EIA’s estimate of the potential impact of doubling Federal R&D investments. The integrated high technology case for this study is a combination of the AEO2005 high technology assumptions for the residential, commercial, transportation, industrial, and power generation sectors. In each of these cases, advanced technologies are assumed to be available sooner, at lower cost, and often with better performance characteristics. The high supply technology case for this study is the AEO2005 oil and natural gas rapid technology case, where the cost, finding rate, and success rate parameters for exploration and development are adjusted to reflect 50 percent more rapid improvement than in the AEO2005 reference case.⁸

Provide $4 billion in incentives for deployment of sequestration-ready integrated gasification combined-cycle (IGCC) generating capacity. The NCEP report does not define a “sequestration-ready” IGCC technology. Because the chemical process is similar but different in some important ways, the costs and performance characteristics are unknown. This analysis assumes that the cost and performance of such units will be similar to the standard IGCC units. In that case, the $4-billion program is sufficient to stimulate the development of 10 gigawatts of sequestration-ready coal IGCC capacity between 2009 and 2015.⁹

Provide $3 billion in deployment incentives for carbon capture and sequestration. This analysis assumes that the $3-billion investment will lead to the development of 4 gigawatts of new IGCC plants with carbon capture and sequestration equipment.¹⁰

Provide up to $2 billion to promote advanced nuclear development. This analysis assumes that the nuclear incentives will defray some development, licensing, regulatory, and R&D costs and will provide sufficient funds to deploy one advanced nuclear power plant.

Expand and extend the production tax credit (PTC) for new non-GHG-emitting generation capacity added between 2006 and 2009, with a cumulative payment limit of $4 billion. A uniform investment tax credit of 1.8 cents per kilowatthour for the first 10 years of production is assumed for all qualifying, non-carbon-emitting generation technologies on a first-come, firstpaid basis until the $4-billion credit limit is expended.11 In theory, new nuclear generation would qualify, but the leadtime required would preclude its participation in this program.

Provide $1.5 billion for research, development, and deployment of non-petroleum renewable transportation fuels. The NCEP recommended an expenditure of $1.5 billion over 10 years, evenly divided between R&D on renewable transportation fuels and incentives to promote the use of non-petroleum renewable transportation fuels. At the suggestion of Senate staff, the R&D and other incentives are assumed to reduce the capital costs and improve the efficiency of ethanol production from cellulosic biomass significantly. Using the model provided by the NCEP’s contractors, yields of ethanol from switchgrass are assumed to grow from the current 75 gallons per ton to 105.4 gallons per ton by 2015, reaching 90 percent of estimated maximum yield. Plant capital costs are assumed to fall from today’s $5 per annual gallon to $2.15 per annual gallon by 2015 (in 2003 dollars). Because biodiesel plants already achieve 98 percent of their maximum yield, no further improvements in biodiesel yields are assumed.

NCEP Recommendations Not Included in This Analysis

The NCEP’s recommendations that are not analyzed in this study generally fall into four categories:

1.   Recommendations that cannot be directly assessed using NEMS. For example, NEMS  assumes that the Nation’s electric system will be operated reliably. Therefore, it cannot be used to quantify the benefits of adopting mandatory reliability rules. Other recommendations of this type include:

• Encourage transmission investments and deployment of new technologies to enhance reliability and availability of the grid
• Protect critical infrastructure from accidental failure
• Manage treatment of nuclear threats, proliferation, or waste
• Expand international cooperation on strategic petroleum reserves and oil production
• Protect critical energy infrastructure from terrorist threats
¹²
• Provide additional or new funding for R&D (e.g, hydrates¹³and renewable generation)
• Create voluntary programs and relationships
• Link future U.S. actions to future international responses.

2.   Recommendations that provide authority to set standards or establish specific targets at some future date, without providing specific values. EIA has no basis for speculating on what levels will ultimately be set. An example is promoting international agreements to expand foreign petroleum and natural gas production. Recommendations of this type include:

• Expand collaboration with States or international organizations (GHG-limiting actions)
• Enhance consumer protections in the electricity sector and establish an integrated, multi-pollutant program to reduce power plant emissions
• Support Department of Energy and Federal Energy Regulatory Commission actions
• Pursue cost-effective efficiency improvements in the industrial sector

3.   Recommendations whose impacts are not directly quantifiable or are not expected to significantly affect energy markets. Recommendations of this type include:

• Streamline Federal land permitting practices
• Support a variety of generation resources—including both large-scale power plants, small-scale “distributed” and/or renewable generation—and demand reduction (for both electricity and natural gas) to ensure affordable and reliable energy service for consumers
• Improve coordination among relevant Federal agencies
• Provide expedited environmental and judicial reviews
• Participate in meetings (e.g., international partnerships)
• Provide encouragement and support from the Department of Energy for increases in private-sector R&D
• Share unspecified risks
• Increase incentives for private-sector R&D
• Encourage synergistic relationships with private industry to expand R&D.
• Expand investment in cooperative international energy research, development, demonstration, and early deployment initiatives

4. Recommendations that are already incorporated or assumed in the NEMS reference case, or recommendations whose assumed impacts are already projected to be achieved in the reference case. Recommendations of this type include:

• Reduce barriers for expansion of liquefied natural gas (LNG) imports; NEMS assumes a permissive environment for LNG expansion
• Remove barriers to adoption of advanced nuclear capacity expansion; NEMS assumes no non-market barriers for nuclear capacity expansion
• Fulfill existing Federal commitments (including nuclear waste management); NEMS assumes fulfillment of current Federal policy
• Provide financial incentives for technology adoption; in some cases, current laws and regulations already provide such incentives, e.g., the proposed hybrid vehicle incentive
• Protect critical infrastructure; NEMS implicitly assumes that critical infrastructure is protected.

Cases Analyzed

Senator Bingaman’s staff specifically identified eight policy cases for study. To these, EIA added two additional policy cases. The NCEP case represents all the modeled NCEP recommendations in combination under reference case technology assumptions. The ICE case, which modeled all the non-GHG polices, was considered important because it might reveal the incremental impact of the GHG cap-and-trade policy in the NCEP case. Three baseline cases (Reference, HiTech, and RTP) provide a basis for comparisons with the policy cases (Table 1).

Scope of the Report

While the results of all the model runs for the cases identified in Table 1 are available for download and review from EIA’s web site, this report focuses on the main integrated NCEP case, discussed in Chapter 2, which includes the GHG policy, the tax and deployment incentives, the building codes and efficiency standards, and the new CAFE standards for light-duty vehicles. Subsets of the modeled recommendations are considered, where applicable, to provide supplementary information. EIA could not model the impact of doubling Federal R&D. However, to assess the impact of more rapid technological progress on the analyses of the NCEP policies, Chapter 3 discusses the incremental energy and GHG impacts of the NCEP recommendations under high technology assumptions relative to the AEO2005 high technology
cases.

Methodology and Uncertainties

The analysis of energy sector and energy-related economic impacts of the NCEP recommendations addressed in this report is based on results from NEMS. NEMS, like all models, is a simplified representation of reality. Projections are dependent on the data, methodologies, model structure, and assumptions used to develop them. Because many of the
events that shape energy markets are random and cannot be anticipated (including severe weather, technological breakthroughs, and geopolitical developments), energy market projections are subject to uncertainty. Furthermore, future developments in technologies, demographics, and resources cannot be foreseen with certainty. Nevertheless, well-formulated models are useful in analyzing complex policies, because they ensure consistency in accounting and represent key interrelationships, albeit imperfectly, but often well enough to provide insights.

EIA’s projections are not statements of what will happen but what might happen, given technological and demographic trends and current policies and regulations. EIA’s reference case is based on current laws and regulations. Thus, it provides a policy-neutral starting point that can be used to analyze energy policy initiatives. EIA does not propose, advocate, or speculate on future legislative or regulatory changes within its reference case. Laws and regulations are generally assumed to remain as currently enacted or in force (including sunset or expiration provisions); however, the impacts of scheduled regulatory changes, when clearly defined, are reflected.

Finally, the limited analysis of non-CO2 GHG emissions provided in this report was conducted using baselines and abatement curves supplied by the EPA. Because the abatement curves are based on engineering cost estimates, they do not capture real-world factors that may affect the behavior of decisionmakers. As a result they may overstate the non-CO2 GHG emission reductions that would actually be attained under a cap-and-trade program.

Notes