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Impacts of Modeled Recommendations of the National Commission on Energy Policy
 

Executive Summary

Background

This report was prepared in response to a December 17, 2004, letter from Senator Jeff Bingaman requesting that the Energy Information Administration (EIA) analyze the energy supply, demand, and fuel import impacts that would result from the recommendations proposed in the 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 entity. In order to provide a timely response to Senator Bingaman, only those energy-related recommendations that could be directly modeled using EIA’s National Energy Modeling System (NEMS) and were thought to have significant potential to affect energy consumption, supply, and prices were analyzed. In some cases, where the NCEP recommendations were general and required further elaboration, Senator Bingaman’s staff
provided additional information regarding assumptions to be used.

The recommendations analyzed include:

  • A program to reduce greenhouse gas (GHG) emissions intensity through an emissions capand-trade mechanism with a safety-valve permit price rising from $6.10 per metric ton of carbon dioxide (CO2) in 2010 to $8.50 per metric ton in 2025 (2003 dollars). The emissions included in the proposed cap are energy-related CO2, methane 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.
  • A 36-percent increase (10 miles per gallon for cars, 8 miles per gallon for light trucks) in the corporate average fuel economy (CAFE) standards for light-duty vehicles (LDVs). The increases are phased in over the 2010 to 2015 period.
  • A $3-billion tax incentives program to promote the adoption of hybrid and advanced diesel vehicles.
  • A $3.25-per-million-Btu minimum price guarantee at the Alberta Hub for natural gas produced from Alaska’s North Slope, to encourage earlier construction of an Alaska natural gas pipeline.
  • New building codes and appliance efficiency standards for residential and commercial buildings.
  • A $4-billion program to stimulate the deployment of coal-fired integrated gasification combined-cycle (IGCC) plants.
  • A $3-billion program to stimulate carbon capture and sequestration technologies.
  • A $2-billion program to promote the deployment of an advanced nuclear power plant.
  • A $4-billion production tax credit (PTC) program for non-GHG-emitting power generation capacity added between 2006 and 2009.
  • Increased research, development, and deployment incentives for renewable transportation fuels.

Summary Impacts of the Modeled NCEP Recommendations

The GHG emissions intensity reduction program, the 36-percent increase in CAFE standards for cars and light trucks, and the new building and appliance efficiency standards are projected to have the largest impacts on energy production, consumption, prices, and fuel imports. The other policies generally affect specific fuels or technologies but do not have large overall energy market impacts. The impacts of the modeled NCEP recommendations, taken together, on energy supply, demand, imports, prices, and GHG emissions, relative to the Annual Energy Outlook 2005 (AEO2005) reference case, are as follows:

  • Primary energy consumption is 2.26 quadrillion Btu (1.9 percent) lower in 2015 and 6.73 quadrillion Btu (5 percent) lower in 2025 as the combination of efficiency programs and new CAFE standards reduces energy demand.
  • Fossil fuel energy consumption is 2.5 quadrillion Btu (2.4 percent) lower in 2015 and 8.1 quadrillion Btu (6.9 percent) lower in 2025. In absolute terms, the use of all fossil fuels is projected to grow from 2003 levels through 2025.
  • Oil consumption is 0.83 million barrels per day (3.4 percent) lower in 2015 and 2.1 million barrels per day (7.4 percent) lower in 2025. The import share of petroleum product supplied declines from 62.4 percent to 61.3 percent in 2015 and from 68.4 percent to 66.8 percent in 2025.
  • Natural gas consumption is slightly lower (0.45 quadrillion Btu or 1. 6 percent) in 2015 and 1.1 quadrillion Btu (3.6 percent) lower in 2025, due mainly to lower electricity demand from the building standards recommendation and the incentives provided to renewable, IGCC, and nuclear deployments that further reduce the size of the generation market.
  • Coal consumption is also slightly lower (0.46 quadrillion Btu or 1.8 percent) in 2015 and 3.0 quadrillion Btu (9.8 percent) in 2025, due mainly to the lower electricity demand and the fuel use shifts that are caused by the GHG cap-and-trade program.
  • Covered GHG emissions are 393 million metric tons CO2 equivalent (5.2 percent) lower in 2015 and 964 million metric tons CO2 equivalent (11 percent) lower in 2025. Covered GHG emissions intensity decreases by 5.1 percent in 2015 and by 10.6 percent in 2025. The absolute level of covered GHG emissions is projected to grow at an annual average rate of 1.1 percent over the 2003 to 2025 period, compared to annual average growth of 1.5 percent in the reference case.
  • Reductions in emissions of non-CO2 GHGs, which are not represented in a detailed fashion in NEMS, account for 63 percent of the covered GHG emissions reductions in 2010 and 35 percent of the covered GHG emissions reductions in 2025. Estimates for non-CO2 GHG emissions were developed using emissions baselines and abatement cost curves based on engineering cost estimates that were supplied by the Environmental Protection Agency (EPA). Real-world factors affecting the behavior of decisionmakers and the use of incomplete cost information may result in an overstatement of the actual level of non-CO2 abatement achieved at each level of the permit price.
  • Because of the safety-valve price mechanism in the cap-and-trade program for GHGs, the GHG intensity targets specified by the NCEP are not reached; total emission reductions fall short by 557 million metric tons CO2 equivalent in 2025.
  • The average petroleum price to all users (including the price of emissions permits) is 2.2 percent higher in 2015 and 1.4 percent higher in 2025 than in the reference case, with the permit prices more than offsetting the lower crude oil prices resulting from the new CAFE standard.
  • The average delivered natural gas price is $0.17 per thousand cubic feet (2.7 percent) lower in 2015, with the wellhead cost reduction partially offset by the increased GHG permit price, and $0.52 per thousand cubic feet (7.6 percent) higher in 2025, largely because of the permit price which is added to the delivered fuel costs.
  • When the costs of emissions permits are included, the average delivered coal price is $0.54 per million Btu (43 percent) higher in 2015 and $0.74 per million Btu (56 percent) higher in 2025 than in the reference case because of the high carbon content of coal.
  • The average delivered electricity price is unchanged in 2015 but is 0.4 cents per kilowatthour (5.8 percent) higher in 2025 because of the mandatory cap-and-trade program.
    • In 2025, because of the early deployment incentives and the GHG cap-and-trade proposal, IGCC capacity more than doubles, and renewable generation increases by 23 percent relative to the reference case.
    • Government expenditures for the recommended tax incentives, research and development, demonstration, and deployment policies occur before significant revenues are recouped from permit sales. However, because expenditures for the incentive programs eventually end and the revenues from permit sales continue to grow over time, cumulative discounted revenues are projected to exceed cumulative discounted expenditures by 2022, using a 4-percent discount rate.
    • Both potential and actual real gross domestic product (GDP) are projected to be reduced slightly. By 2025, potential and actual real GDP are, respectively, about 0.26 percent and 0.4 percent below their reference case levels. These changes do not materially affect average economic growth rates for the 2003 to 2025 period. Real consumption is also reduced over the 2010 to 2025 period, with the impact reaching almost $470 per household (0.5 percent) in terms of year 2000 dollars in 2025.

    Other Key Findings

    GHG Cap-and-Trade Program. The GHG cap-and-trade program causes significant reductions in emissions of GHGs other than CO2 and in emissions of CO2 from the electric power sector. The cap-and-trade system also contributes to higher fossil fuel and electricity prices. When considered alone without other policies, the GHG cap-and-trade program:

    • Achieves total reductions in covered GHG emissions of 281 million metric tons CO2 equivalent (3.7 percent) in 2015 and 621 million metric tons CO2 equivalent (7.1 percent) in 2025—roughly two-thirds to three-quarters the amount achieved when all the modeled NCEP recommendations are taken together. Non-CO2 GHGs account for a preponderant share of these reductions.
    • Reduces total fossil fuel consumption by 1 quadrillion Btu (1 percent) in 2015 and 3.1 quadrillion Btu (2.7 percent) in 2025—roughly one-half the reduction achieved when all the modeled NCEP recommendations are taken together. Oil use is reduced only minimally.
    • Raises effective delivered fuel prices as a result of the permit fee, depending on the carbon content of the fuel. Relative to the reference case, average delivered coal prices to all consumers are 57.3 percent higher in 2025, average delivered petroleum prices are 5 percent higher, average delivered natural gas prices are 8.3 percent higher, and electricity prices are 4.8 percent higher.

    CAFE. The 36-percent increase in CAFE standards for LDVs mainly affects petroleum use and imports, vehicle miles traveled, and vehicle cost. When considered alone without other policies, the key impacts of the increase in the CAFE standard include:

    • A reduction in petroleum consumption of 0.61 million barrels per day (2.5 percent) in 2015 and 1.61 million barrels per day (5.8 percent) in 2025. The import share of petroleum product supplied falls from 62.4 percent to 61.6 percent in 2015 and from 68.4 percent to 67.1 percent in 2025.
    • An increase in the average fuel efficiency of new LDVs of 6.8 miles per gallon (26.2 percent) in 2015 and 6.3 miles per gallon (23.4 percent) in 2025. The increases in measured fuel economy are smaller than the increases in the CAFE standard, because new LDVs are projected to exceed the existing CAFE standard in the reference case.
    • An increase in the average price of new LDVs of about $1,400 in 2015 and $1,200 in 2025 (2003 dollars).
    • A reduction in CO2 emissions of 79 million metric tons (1.1 percent) in 2015 and 242 million metric tons (2.8 percent) in 2025.

    Building Standards. The new building and appliance efficiency standards mainly lower consumer electricity use, which leads to lower coal and natural gas use by power plants. When considered alone without other policies, the key impacts of the change in building and appliance efficiency standards include:

    • Reductions in electricity sales of 77 billion kilowatthours (2 percent) in 2015 and 163 billion kilowatthours (3 percent) in 2025.
    • Reductions in natural gas and coal use: natural gas consumption is reduced by 0.5 quadrillion Btu (1.6 percent) in 2015 and 0.6 quadrillion Btu (1.8 percent) in 2025, while coal use declines by 4 million tons (0.3 percent) in 2015 and 43 million tons (2.9 percent) in 2025.
    • Reductions in CO2 emissions of 34 million metric tons (0.5 percent) in 2015 and 115 million metric tons (1.4 percent) in 2025.

    Tax and Deployment Incentives. Some of the tax and deployment incentive programs stimulate increased or earlier development of particular technologies. For example, relative to the reference case, when evaluated without other policies:

    • The natural gas price guarantee stimulates the construction of an Alaska natural gas pipeline 2 years earlier and results in a lower natural gas wellhead price path, which delays some of the investments that would have been made with higher natural gas prices—e.g., investments in liquefied natural gas (LNG) import facilities.
    • The $4-billion program to stimulate investment in IGCC plants increases their construction by 44 gigawatts from a reference case level of 16 gigawatts by 2025.
    • The $4-billion capped PTC proposal for non-GHG technologies leads to the construction of 4.4 gigawatts of additional renewable generation capacity by 2015 and 7.1 gigawatts of additional renewable capacity by 2025.
    • The $3-billion tax incentive to promote the adoption of hybrid and advanced turbo diesel LDVs does not lead to additional vehicle sales, because the projected sales without the incentive would exhaust the credits available.

    High Technology Sensitivities. While the EIA reference case incorporates significant improvements in technology cost and performance over time, it may either overstate or understate the actual future pace of improvement, since the rate at which the characteristics of energy-using and producing technologies will change is highly uncertain. Relative to the reference case, EIA’s high technology case generally assumes earlier availability, lower costs, and higher efficiencies for end-use technologies and new fossil-fired, nuclear, and nonhydropower renewable generating technologies. Although the NCEP recommends increases in the funding for research and development, EIA, consistent with its established practice in other recent studies, did not attempt to estimate how increased government spending might specifically impact technology development. Instead, to illustrate the importance of technology characteristics in assessing the impacts of the NCEP recommendations, EIA prepared a set of NCEP policy cases using its high technology assumptions. Relative to the AEO2005 high technology case, the high technology case combined with the NCEP recommendations:

    • Reduces fossil fuel use by 1.46 quadrillion Btu (1.5 percent) in 2015 and 4.48 quadrillion Btu (4.1 percent) in 2025.
    • Reduces petroleum consumption by 0.64 million barrels per day in 2015 and 1.48 million barrels per day in 2025 and reduces the import share of petroleum product supplied from 61.6 percent to 60.6 percent in 2015 and from 66.9 percent to 66.1 percent in 2025.
    • Meets the NCEP’s greenhouse gas intensity goals, reducing covered GHG emissions intensity from 480 to 463 metric tons CO2 equivalent per million dollars of GDP in 2015 (3.5 percent) and from 405 to 373 metric tons CO2 equivalent per million dollars in 2025 (7.9 percent). Attainment of the emissions intensity goal depends heavily on estimated reductions of nonCO2 GHG emissions that were developed using information and methodologies that may result in an overstatement of the actual level of abatement achieved at each level of the permit price. Attainment of the goal also relies on the use of banked GHG emissions permits that are exhausted in 2025, at the end of the forecast horizon for this analysis.