2. Impacts of the NCEP Recommendations

This chapter contains an analysis of results from NEMS simulations representing recommendations of the NCEP.¹⁴ The analysis compares results from cases representing NCEP recommendations with results from EIA’s AEO2005 reference case. The cases examined include: two GHG cap-and-trade policy cases (Cap-Trade and No-Safety); a residential and commercial standards case (Bldg-Std); a new corporate average fuel economy standard case (CAFE); a tax incentives and deployment proposals case (Incent), which also includes the recommended natural gas price guarantee for the construction of an Alaska natural gas pipeline; and a case that combines all the policies (NCEP). Additional high technology sensitivity analyses are described in Chapter 3.

All sections provide comparative results that include the NCEP and Cap-Trade cases. In addition, the emissions section discusses the other cases with the NCEP’s GHG intensity reduction program. The oil and gas supply section discusses the CAFE case, the residential and commercial section focuses on the Bldg-Std case, the transportation section focuses on the CAFE case, the electricity section focuses on the Incent and Bldg-Std cases, and the macroeconomic section focuses on the CAFE case.

Emissions Impacts

Representing the NCEP’s Greenhouse Gas Emissions Cap-and-Trade Program

To represent the NCEP’s GHG emissions reduction program, the energy, energy-related CO2, and economic projections from the AEO2005 reference case together with emission projections for other covered GHGs (methane from coal mining, nitrous oxide from adipic acid and nitric acid manufacturing, and high global warming potential gases) were used to develop a covered GHG emissions reference trend. Projections for the other GHG emissions, including the covered non-CO2 gases, were based on the U.S. EPA Business-as-Usual (BAU) case cited in the White House Greenhouse Gas Policy Book Addendum¹⁵ released with the Climate Change Initiative.

In the emissions cap-and-trade cases, NEMS endogenously calculated changes in energy-related CO2 emissions and used abatement cost curves to simulate the emissions changes expected for other covered GHGs. The emissions reduction opportunities for GHGs other than CO2 are embodied in marginal abatement cost (MAC) relationships that indicate the quantity of emission reductions that would be expected to occur given the value of an emissions permit. While emissions of the non-CO2 covered gases are a relatively small share of total U.S. GHGs (3.5 percent in 2003), EPA believes that there is a substantial potential for reductions at relatively low permit prices (Table 2). The methodology for representing the opportunities for reducing the emissions of other GHGs is discussed in more detail in EIA’s analysis of the Climate Stewardship Act of 2003.¹⁶

MACs^17,18,19 for other gases, which were developed by the EPA based on engineering and economic analysis, are used in this analysis because they are the only consistent and relatively complete source for such emissions estimates.²⁰ EIA adjusted the original MACs so that the reductions that are assumed to be economical at zero or “negative” permit prices are instead priced at $1 per ton carbon ($0.30 per ton CO2 equivalent). Because the MACs are engineering cost estimates, they do not reflect real-world factors that may affect the behavior of decisionmakers. As a result, the MACs summarized in Table 2 may overestimate the non-CO2 emissions reductions that would actually be attained at each specified permit price level.

The simulation of the emissions cap-and-trade policy in NEMS was used to estimate the price of GHG permits over time. The cost of using each fossil fuel was adjusted to include the cost of the GHG permits needed to cover the emissions produced and released into the atmosphere when the fuel is consumed, in addition to the market price of the fuel. These adjustments influence energy demand and energy-related CO2 emissions. The GHG permit price also determines the reductions in the emissions of other GHGs. With emission permit banking, NEMS solves for the time path of permit prices such that cumulative emissions match the cumulative target, provided the permit price remains below the safety-valve permit price. Once the safety-valve permit price is attained and the previously banked permits are exhausted, annual GHG emissions exceed the target.²¹

Emissions, Greenhouse Gas Permit Prices, and Banking

This section focuses on the results of the following three policy cases to illustrate the GHG emissions-related effects of the NCEP programs:

• The NCEP case simulates all the NCEP policies that were modeled using NEMS.

• The Cap-Trade case simulates the emissions cap-and-trade policy by itself without the other NCEP-recommended policies.

• The No-Safety sensitivity case also simulates an emissions cap-and-trade policy by itself, but it omits the safety-valve permit price provision to show an unconstrained market based solution that meets the emissions targets. This case is included for illustrative purposes and does not reflect a recommendation by the NCEP.

The cases with the GHG cap-and-trade program differ in terms of the degree to which, and the time frame over which, the emissions target is achieved, whether the safety-valve permit price is binding, and the patterns of permit banking. Fully meeting the GHG intensity target would require a cumulative reduction of 10.5 billion metric tons CO2 equivalent from 2010 to 2025, or about 8 percent of total reference case covered emissions over that time frame. However, the policy’s emissions reductions are phased in gradually, with a 1-percent reduction in covered emissions required to meet the 2010 target and a 17-percent reduction required to meet the 2025 target. As a result, the target is relatively easy to meet initially but becomes increasingly stringent over time.

Figure 1 illustrates the level of GHG emissions achieved in the reference, NCEP, Cap-Trade, and No-Safety cases. In the NCEP case, GHG emissions are reduced by 964 million metric tons CO2 equivalent below the reference case but are 557 million metric tons CO2 equivalent higher than the implied NCEP target level.

The projected permit prices in the NCEP case are initially lower than in the Cap-Trade case (Figure 2), as the efficiency programs and other policies in the NCEP case result in emissions reductions independent of the permit-based incentives. The permit price is not projected to reach the safety-valve price until 2019, compared with 2016 in the Cap-Trade case. The emissions
intensity targets for the first phase of the GHG policy (2010-2019) are achieved on a cumulative basis. Under the second phase (2020-2025), with more stringent emissions targets, and the projected cumulative emissions remain above the target. While the CAFE and building codes and standards in the NCEP case make significant contributions toward meeting the emissions intensity target, the permit price needed to bring covered emissions to the target level would need to be between the safety-valve price and $35 per metric ton CO2 equivalent. The permit price would need to be even higher to meet the emissions target if the assumed supply of non-CO2 reductions proved to be too optimistic.

In the Cap-Trade case, the permit price reaches the safety-valve permit price in 2016 (Figure 2). The annual emissions are projected to be below the target from 2010 to 2012, and a small balance of banked permits is projected to accrue (Figure 3). The banked permits are depleted from 2013 to 2015 as annual emissions rise above target. Beginning in 2016, permits are priced at the safety-valve permit price level, and the emissions remain above the target (bank balance shown as negative). Cumulative emissions reductions in the Cap-Trade case are projected to meet the targets from 2010 through 2015, while the permit price remains below the safety-valve permit price. However, without the additional policies recommended by the NCEP or a higher safety-valve permit price, the emissions targets would not be achieved over much of the projection period (2016-2025). Substantial low-cost emissions reductions would occur, however, slowing the overall growth of emissions through 2025.

In the No-Safety sensitivity case, cumulative emissions from 2010 to 2025 meet the cumulative emissions targets through a cap-and-trade program with no limit on the emissions permit price. Permit prices are projected to be two to four times higher than the NCEP’s safety-valve permit price. With permit banking, emissions are projected to be below the yearly targets through 2018, as a balance of banked permits accumulates. From 2019 to 2025, the projected emissions are above the target, and the bank balance of permits is gradually depleted to meet the difference.

Composition of Emissions Reductions

While the NCEP’s energy-related policies reduce energy-related CO2 emissions, a large share of the emissions reductions is projected to be from other GHGs (Figure 4). In the NCEP case, 43 percent of the cumulative emissions reductions projected from 2010 to 2025 are from other GHGs, with the share decreasing from 50 percent in 2015 to 35 percent in 2025. As shown in Table 2 above, significant reductions of other GHGs are assumed to be economical at permit prices below the safety-valve permit price. As permit prices increase, the share of reductions from energy-related CO2 increases. In the Cap-Trade case, where all the emissions reductions are driven by the emissions permit program, the share of cumulative reductions from other GHGs is higher (64 percent, compared to 43 percent in the NCEP case). In the No-Safety case, the permit prices are two to four times higher than in the Cap-Trade case, inducing larger reductions in energy-related CO2 emissions while eventually exhausting the low-cost opportunities for reductions in other GHG emissions.

In all the GHG cap-and-trade policy cases, the greatest share of the reductions in energy-related CO2 emissions occurs in the electric power sector (Figure 5). Compared to the other consuming sectors, more opportunities exist in the electric power sector to switch to fuels that emit less or no net CO2 at relatively modest cost. These options include using less coal and more natural gas, renewable fuels, nuclear power, and sequestering CO2. Reductions in electricity demand also contribute to the CO2 reductions in the power sector, and many of the NCEP policy proposals promote more efficient electricity use. In the NCEP case, large reductions also occur in the transportation sector, which are attributable to the assumed increases in CAFE standards. Together, the GHG emissions reductions attributed to electricity and to other GHGs constitute 72 percent of the total projected reductions from 2010 to 2025 in the NCEP case (compared to the reference case), and transportation emission reductions account for 24 percent.

Energy Use Patterns in the Cap-and-Trade Cases

The main discussion of energy use impacts is provided in the sections below that consider impacts in each of the main energy-using sectors; however, it is useful to highlight some of the differences between the GHG cap-and-trade policy cases (Table 3). Among the three GHG capand trade policy cases, primary energy consumption is lowest in the combined NCEP case, followed closely by the No-Safety sensitivity case. The lower energy consumption in the NCEP case reflects the lower end-use petroleum and electricity consumption resulting from the CAFE and buildings efficiency policies and the additional broader reductions resulting from the GHG cap-and-trade policy. The No-Safety case achieves the GHG policy by increasing GHG penalties until the delivered fuel prices are high enough to cause fuel switching from fuels with high carbon content to fuels with lower or no carbon content, as well as some reductions in end-use consumption.

Primary energy consumption in the NCEP case is 2.26 quadrillion Btu lower than in the reference case in 2015, compared to reductions of 1.58 quadrillion Btu in the No-Safety case and 0.66 quadrillion Btu in the Cap-Trade case. In 2025, primary consumption in the NCEP case is 6.73 quadrillion Btu lower than in the reference case, compared to 3.78 quadrillion lower in the No-Safety case and 1.61 quadrillion Btu lower in the Cap-Trade case. While primary consumption is lowest in the NCEP case, fossil fuel consumption is lowest in the No-Safety case because of the unrestricted permit price and its emphasis on reducing the use of fuels with high carbon content.

Coal use is reduced the most in the No-Safety case (7.8 quadrillion Btu in 2025, compared to 3.0 quadrillion Btu in the NCEP case and 2.7 in the Cap-Trade case). Most of the reductions occur in the electricity generation area where, for example, coal-fired generation is reduced by 810 billion kilowatthours in 2025 in the No-Safety case and is displaced by 114 billion kilowatthours of additional nuclear, 534 billion kilowatthours of additional renewable, and about 43 billion kilowatthours of additional natural-gas-fired generation. In contrast to the No-Safety case, the lower safety-valve price in the Cap-Trade and NCEP cases reduces coal-fired generation by about the same levels, slightly over 300 billion kilowatthours in 2025.

Impacts on Primary Energy Supply

This section focuses on the results of the following policy cases to illustrate the supply-related effects of the NCEP policy recommendations:

• The NCEP case simulates all the NCEP policies that were possible to model using NEMS.

• The CAFE case simulates the impacts of a 36-percent increase in the CAFE standard for light-duty vehicles (LDVs).

• The Incent case simulates the impact of the tax and deployment incentives on energy supply. This case combines the proposed extension and changes of the production tax credit, the $4 billion in incentives to deploy up to 10 gigawatts of IGCC, $3 billion to build and deploy 4 gigawatts of carbon capture and sequestration, $2 billion to support the development and construction of 1 gigawatt of advanced nuclear capacity, and a price guarantee for construction of an Alaska natural gas pipeline for natural gas produced on the North Slope of Alaska.

• The Bldg-Std case simulates the impact of new building codes and efficiency standards.

With respect to domestic oil production and consumption and oil imports, the recommended increase in CAFE standards is the most important policy. The other non-GHG policies modeled in NEMS do not significantly affect petroleum consumption beyond the changes seen in the CAFE case. The most important policies for natural gas are the Bldg-Std and Incent cases. The Bldg-Std case primarily reduces electricity demand in the residential and commercial markets and hence natural gas demand for generation, while the tax and deployment incentives policy in the Incent case encourages all generation technologies except natural-gas-fired technologies.

Total Primary Consumption Patterns

The impacts of individual NCEP policies on total primary energy consumption (Figure 6) are nearly additive. For example, in 2015, primary energy consumption in the Cap-Trade case is 0.7 quadrillion Btu lower than in the reference case; the Bldg-Std case reduces primary energy consumption by 0.7 quadrillion Btu relative to the reference case; the CAFE case reduces primary energy consumption by 1.2 quadrillion Btu relative to the reference case; and in the Incent case, primary energy consumption is 0.6 quadrillion Btu higher than in the reference case, because the increased use of IGCC generating capacity increases coal use by 0.3 quadrillion Btu, and the PTC increases renewable generation. When the results for the individual cases are added together, the total difference from the reference case projection of primary energy consumption in 2015 is a reduction of 2.0 quadrillion Btu, as compared with a reduction of 2.3 quadrillion Btu in the NCEP case. In 2025, the difference between the combined results of the individual cases and the NCEP case projection is only 0.1 quadrillion Btu. The CAFE case has the single biggest impact on primary energy consumption.

Petroleum

Compared to the reference case, the NCEP case results in a 3.4-percent reduction in total petroleum demand (830,000 barrels per day) in 2015 and 7.4 percent (2.1 million barrels per day) in 2025. Petroleum imports are reduced by about 0.8 million barrels per day in 2015 and 1.8 million barrels per day in 2025. As a result, the import share of total petroleum supplied in 2025 decreases from 68.4 percent in the reference case to 66.8 percent in the NCEP case (Table 4).

About 80 percent of the petroleum demand reduction in 2025 in the NCEP case relative to the reference case is attributable to the increases in CAFE standards for LDVs—10 miles per gallon (mpg) for cars and 8 mpg for light trucks (Figure 7). The NCEP recommendation on the GHG cap-and-trade policy (Cap-Trade case) has much less impact on overall petroleum supply than the CAFE requirement. In addition, the GHG policy more evenly affects petroleum demand across all sectors than does the CAFE requirement, which affects only the transportation sector.

The impact of increased CAFE standards on gasoline demand has minor implications for ethanol as well. Essentially, ethanol consumption declines with the decline in overall fuel consumption by LDVs. The economic competitiveness of ethanol production improves under the NCEP’s GHG policy; nevertheless, assuming reference case costs for ethanol production, the variation in production of ethanol is small under any combination of NCEP recommendations.

Natural Gas

The only NCEP-recommended natural gas supply incentive is the price guarantee for construction of an Alaska natural gas pipeline for natural gas produced on the North Slope of Alaska. Other NCEP programs, however, such as the GHG cap-and-trade, increased CAFE, buildings efficiency, and the various deployment programs, also lead to changes in demand for natural gas, with corresponding impacts on supply markets.

In the NCEP case, the 2015 average lower-48 natural gas wellhead price (in 2003 dollars) is lower than the reference case price by $0.50 per thousand cubic feet. The difference narrows considerably toward the end of the forecast and by 2025 the price in the NCEP case exceeds that in the reference case, even with reduced consumption levels, as lower prices in the middle years of the forecast result in less exploration and production activity and, therefore, less capacity to produce in the later years of the forecast. The capacity to import liquefied natural gas (LNG) is also lower, as projects that might have come on earlier with higher prices are delayed.

GHG emission restrictions in the NCEP case raise natural gas consumption by electricity generators as they move away from fuels with higher GHG emissions levels. Consumers with less fuel flexibility respond to the higher natural gas prices (with permit costs included) by reducing their natural gas consumption, but without fuel substitutes the response is limited. Total natural gas consumption, and therefore supply, in the NCEP case are slightly lower than in the reference case, by about 0.45 trillion cubic feet in 2015 and about 1.13 trillion cubic feet in 2025. While both domestic production and imports are reduced or increased in accordance with the consumption change, the impact on natural gas imports is significantly greater. On a cumulative basis across the forecast, about 80 percent of the change in natural gas consumption in the emissions cases versus the reference case is reflected in a change in import levels. When prices fall in response to demand reductions, some LNG import facilities are not built that would have been built otherwise.

Policy combinations that include tax incentives and deployments and improved building efficiencies reduce levels of total natural gas consumption (Figure 8). In general, the combinations of policies examined that reduce consumption have a combined impact somewhat less than the sum of the impacts of the measures taken individually. In addition, the increase in natural gas consumption by electricity generators due to imposing emissions restrictions is less when implemented in combination with the other policies that lower demand for electricity, resulting in a reduction rather than an increase in total natural gas consumption.

The natural gas consumption response to building efficiency improvements is seen largely in the electric power and residential sectors, and it is insignificant in the commercial and industrial sectors. Total natural gas consumption is reduced in the Bldg-Std case relative to the reference case by nearly 0.5 trillion cubic feet per year on average from 2010 to 2025. Under the tax incentive and deployment (Incent) case, natural gas consumption by electricity generators is steadily reduced across the forecast relative to the reference case values, whereas the other primary sectors show slightly increased consumption around 2015 to 2020.

The impact on imports versus domestic production is varied across the assortment of cases, which include tax incentives and deployment and building efficiency measures, partially because of the relative role that an Alaska natural gas pipeline plays in the supply picture. The timing of the completion of the pipeline has a noticeable impact on the resulting natural gas wellhead price path, as well as on natural gas imports and domestic production levels. In the reference case, the pipeline is completed in 2016. In cases incorporating a tax incentive for North Slope natural gas, an Alaska natural gas pipeline is expected to be constructed as soon as possible, or 2014. As a result, the average natural gas wellhead price in these cases, which is already reduced in response to a demand reduction due to other tax incentives and deployments, is further reduced in 2014 and 2015 with the earlier introduction of the Alaska natural gas pipeline.

Coal

Coal consumption is reduced the most in cases that incorporate the mandatory GHG cap-andtrade program, e.g., the Cap-Trade case and the NCEP case. Coal consumption is relatively unaffected by the new CAFE standard alone (Figure 9). In 2025, coal consumption in the CapTrade case is 2.74 quadrillion Btu below the reference case projection, and in the NCEP case it is 2.97 quadrillion Btu below the reference case level. In each of these cases, the principal policy factor that drives the reduction is the cap-and-trade program. The addition of the policy on increased building codes and efficiency standards further reduces the demand for electricity, which results in even less coal-fired generating capacity being built or used for generation.

Energy Consumption Impacts of NCEP Policies by End-Use Sector

Residential and Commercial Sector Impacts

The assumed building codes and efficiency standards are effective in significantly reducing residential and commercial energy demand, because they eliminate the opportunity to purchase less efficient equipment available in the reference case.²²

When the CAFE policy is combined with the building efficiency standards, tax incentives and deployments, and GHG policy, i.e., the NCEP case, total residential energy demand is projected to be about 3 percent (0.7 quadrillion Btu) lower than the reference case level in 2015 and 5 percent (1.5 quadrillion Btu) lower in 2025 (Figure10 and Table 5). Projected total commercial energy use shows comparable reductions in the NCEP case, decreasing by about 2 percent (0.4 quadrillion Btu) in 2015 and 4 percent (1.0 quadrillion Btu) in 2025.

Electricity use decreases more than the use of any other fuel in the NCEP case. Electricity delivered to the buildings sector in 2025 is 6 percent (0.8 quadrillion Btu or 224 billion kilowatthours) lower than the reference case projection. Projected buildings sector natural gas demand decreases by about 3 percent (0.3 quadrillion Btu), and buildings petroleum use is reduced by 3 percent (0.1 quadrillion Btu) in 2025 compared to the reference case. Projected delivered electricity and natural gas prices to the buildings sector are about 6 percent higher in 2025 than in the reference case, due primarily to the permit price that results from the GHG policy in the NCEP case. The higher natural gas and electricity prices combine with new efficiency standards to further decrease energy demand. Despite higher projected natural gas and electric prices, annual per-household non-transportation energy expenditures in 2025 fall slightly (by about $6) relative to the reference case as a result of demand reductions. Projected price increases outweigh demand reductions in the commercial sector in the NCEP case, causing projected commercial energy expenditures in 2025 to increase by 2 percent ($3.1 billion) relative to the reference case.

When measured on a delivered basis, space heating is the largest single use of energy in the residential sector. This use declines the most in both 2015 and 2025 in the NCEP case, as efficiency standards, building codes, and price increases spur reductions in demand relative to the reference case (Table 6). Taking into account the fuels used to generate electricity, water heating and miscellaneous electricity use account for the biggest residential energy reductions in 2025, as aggressive standards for electric water heaters and standby power reduce total residential demand for these uses by 12 percent and 8 percent, respectively. Residential electric water heater stock efficiency increases by 40 percent in 2025, relative to the reference case, as standards requiring heat pump technology instead of the less efficient resistance technology are mandated in 2010.

Commercial energy use for lighting is projected to decline the most in absolute terms in the NCEP case, relative to the reference case (Table 7). In the NCEP case, equipment efficacy standards and building codes are projected to reduce total primary energy demand for commercial lighting by about 3 percent (0.1 quadrillion Btu) in 2015 and 11 percent (0.5 quadrillion Btu) in 2025 relative to the reference case.

For commercial end uses, 2010 efficiency standards for refrigeration equipment provide the greatest percentage increase in efficiency in the NCEP case, with average stock efficiency improving by 9 percent in 2015 and 16 percent in 2025, relative to the reference case. Stringent standards are proposed for all types of commercial refrigeration equipment, ranging from the refrigeration systems found in grocery stores to walk-in coolers to ice machines and refrigerated vending machines.

The combination of proposed energy- and emissions-related policies in the NCEP case decrease projected CO2 emissions attributable to residential energy demand by 4 percent in 2015 and 10 percent in 2025, relative to the reference case. Emissions related to residential electricity use account for 94 percent of the 57-million-metric-ton reduction in 2015 and 90 percent of the 153 million-metric-ton reduction in 2025. CO2 emissions attributable to commercial energy demand in the NCEP case are decreased by 3 percent (42 million metric tons) in 2015 and 9 percent (139 million metric tons) in 2025, relative to the reference case projections. Reductions in projected emissions related to electricity use are responsible for 97 percent of the decrease in 2015 and 95 percent of the decrease in 2025. Figure 11 summarizes CO2 emissions in 3 policy cases.

When only the building codes and efficiency standards are implemented (the Bldg-Std case), projected commercial total lighting energy use declines by about 2 percent (0.1 quadrillion Btu) in 2015 and 6 percent (0.3 quadrillion Btu) in 2025, relative to the reference case. Although proposed efficiency standards target most commercial end uses, commercial energy use for lighting is projected to decline the most in absolute terms, primarily because proposed building codes affect commercial lighting in addition to lighting efficacy standards that take effect in 2010 and 2020. The proposed commercial building codes include a limit on lighting power density²³ in 2015 that may affect the amount of light provided as well as the amount of power used for lighting. Lower electricity demand resulting from all the proposed building codes and standards contributes to slightly lower electricity prices (by less than 1 mill per kilowatthour).

When the incentive and deployment proposals in the Incent case (that is, the price guarantee for an Alaska natural gas pipeline, tax incentives for nuclear power, IGCC, and sequestration, and the PTC extension) are combined with the new building code and efficiency standards in the Bldg-Std case, the price of electricity falls by about 2.5 mills per kilowatthour in 2015 and about 1 mill per kilowatthour in 2025, relative to the reference case. The net impact of adding the additional tax incentives and deployments proposal is to slightly decrease the price of electricity (increased IGCC reduces natural gas consumption and prices for power generation) and slightly increase electricity demand above what it would have been without the incentives and deployment proposal. For commercial lighting, this means that projected total electricity demand declines by about 1 percent in 2015 and 5.5 percent in 2025 in the combined NCEP case relative to the reference case.

Transportation Sector Impacts

The Commission did not provide a specific recommendation for a revised CAFE standard. Instead, it recommended that the National Highway Transportation Safety Administration (NHTSA) study the matter and determine a plausible increase in CAFE. The CAFE standard used in this study was based on guidance provided by Senator Bingaman’s committee staff. This proposal simulates a 36-percent increase in the CAFE standard for cars and light trucks by 2015, corresponding closely to an increase of 10 mpg for automobiles, with an equivalent percentage improvement for light-duty trucks, amounting to about 8 mpg. The CAFE case does not include any other NCEP-recommended policies, but it does assume that all LDV manufacturers adhere to the new CAFE standards, which forces an increase in the sale of hybrid vehicles.

The NCEP and the CAFE cases have similar impacts on petroleum consumption and imports, because the other NCEP technology policies have little impact on petroleum consumption, as previously noted. Further, the NCEP and CAFE cases share other similarities—the LDV efficiencies achieved and the incremental costs of new LDVs are virtually identical in the two cases (see Table B-2 in Appendix B). Relative to the CAFE case, total vehicle miles traveled are slightly lower in the NCEP case because of the increased cost of driving that results from higher fuel costs due to the permit price on the fuel. The NCEP case, because of its higher fuel prices, reduces fuel consumption beyond the reductions induced by the new CAFE policy alone (Figure 12). The impact of the CAFE proposal on net petroleum imports, transportation consumption, and vehicle efficiency is largely additive when combined with the other NCEP policies modeled in NEMS. Consequently, the analysis in this section focuses on the CAFE and NCEP cases.

The 36-percent increase in the CAFE standard for cars and light trucks by 2015 has a significant impact on LDV fuel consumption. The reduction in LDV energy demand is directly attributable to the increased fuel economy of new LDVs in the CAFE case relative to the reference case. In the CAFE case, LDV fuel consumption is reduced by 6 percent (1.2 quadrillion Btu) in 2015 and 13 percent (3.0 quadrillion Btu) in 2025, relative to the reference case (Figure13). The NCEP case, which combines the CAFE standards with other proposed efficiency standards, tax incentives, and GHG emission target with a safety-valve price, reduces LDV energy consumption by an additional 1 percent (0.2 quadrillion Btu) in 2025.

The current CAFE standard is 27.5 mpg for cars and 21.0 mpg for light trucks. In the reference case, the CAFE standard for light trucks increases to 22.2 mpg by 2007. The NCEP CAFE proposal, at 36 percent higher than today’s standard, results in efficiency levels of 37.5 mpg for cars and 30.3 mpg for light trucks by 2015. The CAFE proposal has a significant impact on increasing LDV fuel economy over the reference case. However, projected new LDV fuel economy is substantially higher than the projected average fuel economy of the LDV stock. Average LDV stock fuel economy is lower due to continued use of older vehicles not effected by the new CAFE standards (stock turnover) and the fact that on-road fuel economy performance is typically 20 percent lower than the fuel economy achieved in the EPA fuel economy tests. In the CAFE case, new LDV fuel efficiency is 26 percent (6.8 mpg) higher in 2015 and 23 percent (6.3 mpg) higher in 2025, relative to the reference case (Figure 13). Combining this with the slow stock turnover and fuel economy degradation factors causes average stock fuel efficiency to increase by only 7 percent (1.4 mpg) in 2015 and 19.5 percent (4.1 mpg) in 2025, relative to the reference case. Compared to the CAFE case, the NCEP case produces no further change in LDV fuel efficiency.

The CAFE proposal plus the increase in sales of hybrids have an impact on the average price of new LDVs. It costs more to produce these higher fuel economy vehicles, resulting in higher average prices for LDVs. In the CAFE case, the average price of a new LDV increases by 5 percent ($1,400 in 2003 dollars) in 2015 and by 4 percent ($1,200) in 2025, relative to the reference case.

The CAFE proposal and resulting increases in the vehicle price has an impact on LDV sales. In both the NCEP and CAFE cases, LDV sales are lower relative to the reference case, with the sales impact approximately the same. In the CAFE case, new LDV sales decline by 5 percent (910,000 vehicles) in 2015 and by 4 percent (896,000 vehicles) in 2025 relative to the reference case.

For the CAFE case, increased sales of hybrid light trucks, which displace sales of conventionally powered light trucks, enable manufacturers to meet the CAFE standard. In the CAFE case, new hybrid vehicle sales increase by 327 percent (1.3 million vehicles) in 2015 and by 255 percent (1.3 million vehicles) in 2025 relative to the reference case. On the other hand, sales of new conventionally powered vehicles decline by 21 percent (1.6 million vehicles) in 2015 and 17 percent (1.5 million vehicles) in 2025 relative to the reference case.

The CAFE proposal results in a slight increase in vehicle miles traveled, due to the decrease in the cost of driving associated with the increase in the average LDV stock fuel economy. In the CAFE case, the real cost of driving is 7 percent (0.5 cents per mile) lower in 2015 and 18 percent (1.3 cents per mile) lower in 2025 relative the reference case. In the CAFE case, total LDV miles traveled are 1 percent (38 billion miles) higher in 2015 and 4 percent (172 billion miles) higher in 2025 relative to the reference case. CO2 emission reductions from the imposition of the new CAFE standard are significant. In the CAFE case, transportation CO2 emissions are reduced by 3 percent (82 million metric tons) in 2015 and 8 percent (215 million metric tons) in 2025 relative to the reference case.

The CAFE and NCEP cases have a slight impact on freight truck fuel use, efficiency, and vehicle miles traveled. In both the NCEP and CAFE cases, changes in freight travel are due to changes in economic activity—specifically, industrial output. The slight reduction in heavy vehicle fuel economy in these cases relative to the reference case is based on the reduction in fuel price. The new CAFE standard for LDVs does not appreciably change economic activity or fuel prices and therefore negligibly changes consumption and prices. Industrial output reductions in the NCEP case are slightly more significant than in the CAFE case. The delivered fuel prices to freight transportation, which include the GHG permit price, are higher than in the CAFE case. Change in heavy vehicle fuel economy between these cases is based on variation in fuel price among cases.

The current version of NEMS does not represent the product mixes of each vehicle manufacturer. Therefore our analysis does not address the potential of major CAFE changes to affect the competitive position and profitability of each manufacturer in a non-uniform manner.

Industrial Sector Impacts

There are no special policies directed toward the industrial sector in the NCEP recommendations; however, the industrial sector is affected by the limitations on CO2 emissions and is indirectly affected by the price and macroeconomic effects of policies targeted to other sectors. Because of the limitations on GHG emissions and the macroeconomic impacts of the recommendations, energy consumption in the industrial sector is reduced by up to 0.8 quadrillion Btu in the NCEP case relative to the reference case, most of which is coal use in boiler applications and purchased electricity.

Electricity Generation and Fuel Use

The NCEP recommendations have significant impacts on power sector CO2 emissions, generation by fuel, generating technology selection, electricity sales, and electricity prices. A shift in the fuels used to generate electricity and a reduction in the overall demand for electricity contribute to a 108-million-metric-ton (3.9-percent) reduction in power sector CO2 emissions in 2015 and a 331-million-metric-ton (10.0-percent) reduction in 2025 in the NCEP case (Figure 14). The key policy recommendations driving these reductions are the proposed GHG cap-andtrade program and the revised buildings sector efficiency standards. The recommended increase in CAFE standards and the various technology deployment programs do not have a significant impact on power sector CO2 emissions.

Reduced use of coal and natural gas and increased use of renewable fuels are key factors in the reduced power sector CO2 emissions. Relative to the reference case, coal-fired generation is 20 billion kilowatthours (0.9 percent) lower in 2015 and 306 billion kilowatthours (10.6 percent) lower in 2025 in the NCEP case (Figure 15). Even with these changes, however, total coal-fired generation in 2025 is 614 billion kilowatthours (31.1 percent) higher than in 2003 in the NCEP case. The NCEP recommendations slow the expected growth in coal use but do not eliminate it.

The key recommendations leading to lower coal use are the GHG cap-and-trade program and the revised buildings sector efficiency standards. The revised buildings sector standards lower consumer electricity needs, while the GHG cap-and-trade program makes it more expensive to use coal. In the NCEP case, the effective price of using coal (the price of coal plus the cost of emissions permits) delivered to power plants is $0.54 per million Btu (43.4 percent) higher in 2015 and $0.74 per million Btu (56.4 percent) higher in 2025 than in the reference case.

The projected effects of the NCEP recommendations on natural-gas-fired generation are similar to the effects on coal-fired generation. Relative to the reference case, gas-fired generation is 113 billion kilowatthours (9.5 percent) lower in 2015 and 138 billion kilowatthours (9.0 percent) lower in 2025 in the NCEP case than in the reference case (Figure 16). However, the various NCEP recommendations influence gas-fired generation in opposite directions. By itself, the GHG cap-and-trade program would lead to an increase in gas-fired generation, because it makes it more economical to use natural gas rather than coal. Conversely, the revised buildings sector efficiency standards and the various deployment incentives, including the PTC for renewables and the $4-billion program for advanced coal technologies, both lead to lower gas-fired generation. Again, as was the case for coal, the NCEP recommendations are expected to slow the growth of natural-gas-fired generation but not eliminate it. In 2025, gas-fired generation is 694 billion kilowatthours (109.8 percent) higher than in 2003 in the NCEP case.

In contrast to coal and natural gas, renewable fuel use for power generation is stimulated by the NCEP recommendations. Relative to the reference case, renewable generation is 18 billion kilowatthours (4.1 percent) higher in 2015 and 114 billion kilowatthours (23.3 percent) higher in 2025 in the NCEP case (Figure 17). The GHG cap-and-trade and the extended PTC for non-GHG-emitting technologies (included in the Incent case) stimulate increased electricity production from renewables. Among renewable generation options, increased generation from dedicated biomass plants, which can operate as baseload plants, is expected to show the largest change. Smaller increases are expected for geothermal and landfill gas generation, because they have a limited number of available economical sites. Wind-powered generation is also expected to increase, but because it is not a baseload technology, it cannot displace coal-fired generation as effectively as biomass can.

Consistent with the expected changes in generation by fuel, the NCEP policies also influence the types of generation capacity added to meet growing electricity demand. In the NCEP case, overall coal capacity additions are lower than in the reference case, but the additions of advanced coal IGCC plants are expected to be larger. In the NCEP case, 37 gigawatts of IGCC capacity are added, 21 gigawatts more than are added in the reference case (Figure 18). The shift toward IGCC is stimulated by the $4-billion deployment program to develop 10 gigawatts of IGCC capacity over 10 years. The early deployment of 10 gigawatts of IGCC capacity stimulates cost reductions that lead to further capacity additions in later years. Of these, 4 gigawatts (as called for in the deployment program) also have carbon capture equipment. As shown in the Incent case, the impact of this program would be larger if it were implemented without the GHG capand-trade program, which dampens overall additions of coal-fired capacity.

Renewable capacity additions are stimulated by both the GHG cap-and-trade and non-GHGemitting technology PTC recommendations. In the NCEP case, renewable capacity additions are expected to increase to nearly 33 gigawatts, almost 3 times the level seen in the reference case, in 2025. In contrast, the early deployment of a 1-gigawatt nuclear unit is not expected to bring the costs of future units down enough to stimulate further development, and no additional plants are projected.

In addition to shifting fuel use, lower electricity demand resulting from the NCEP policies is also a significant contributor to lower power sector CO2 emissions. Relative to the reference case, electricity sales are 92 billion kilowatthours (2.1 percent) lower in 2015 and 249 billion kilowatthours (4.8 percent) lower in 2025 in the NCEP case (Figure 19). The revised buildings sector efficiency standards are the key recommendation affecting electricity sales. The new standards force many consumers to choose more efficient appliances and improve the shell efficiency of their buildings beyond the levels seen in the reference case. Consumers are also expected to reduce their electricity consumption in response to higher electricity prices caused by the GHG cap-and-trade program.

In the NCEP case, electricity prices in 2015 are virtually unchanged from those in the reference case, but in 2025 they are 0.4 cents per kilowatthour (5.8 percent) higher than in the reference case (Figure 20). The revised buildings sector efficiency standards and the various technology deployment and tax incentive programs tend to cause electricity prices to be slightly below reference case levels, but their impact is offset by the GHG cap-and-trade program, which causes power companies to turn to more expensive generation sources and pass on the costs of holding emissions allowances to their customers.

Revenue Implications and Macroeconomic Impacts

The NCEP policies, which include a tradable emissions permit system with a safety valve on the emissions price, create additional costs that are reflected first in the wholesale and retail prices of energy and, in turn, in the consumer price index. This price impact is reflected in the Cap-Trade case. The Government retains from 5 to 10 percent of the GHG emissions credits, depending on the year, and auctions them off. It also provides additional permits at the safety-valve permit price as needed. In the Cap-Trade case, all proceeds from Government emissions permit sales go to the U.S. Treasury as additional revenue.

The NCEP case, which includes the NCEP’s GHG policy as well as other policy proposals including financial incentives, price guarantees, and CAFE and efficiency standards, introduces increased Federal expenditures into the picture. Here, one question centers on the degree to which those expenditures are balanced by the additional revenue collected. Another question centers on how to reflect the additional economic consequences of a set of non-price policies, such as CAFE standards.

The discussion of the macroeconomic consequences of the NCEP policies flows from their impacts on Federal revenue and expenditures, together with their impacts on the consumer price for energy. The relationship between energy use and the full-employment long-run potential output path for the economy is first explored, followed by a discussion of the impacts of the policies on the aggregate economy throughout the entire forecast period from 2005 through 2025.

Revenue and Expenditures

In the Cap-Trade case, the emissions permit system generates revenue for the Government from the auctioned permits and from additional permits sold at the safety-valve permit price. Projected annual permit revenue ranges from $1.5 billion in 2010 to $13.8 billion in 2025 (2003 dollars). Revenue growth occurs in part because the auctioned share increases from 5 percent in 2010 to 10 percent in 2022. More significantly, revenue from safety-valve permit sales is projected to grow rapidly after 2016, eventually exceeding the auction revenue. The projected cumulative undiscounted permit revenue from 2010 to 2025 is $101.5 billion, or 0.04 percent of real GDP over the same period. On a 2003 present value basis (discounting at 4 percent, the same rate used in the NCEP analysis), the permit revenue in the Cap-Trade case is $51.9 billion, with no offsetting expenditures for other policies represented.

Projected permit prices and auction revenue in the NCEP case are somewhat lower than in the Cap-Trade case through 2019, when the safety-valve permit price is reached. The energy efficiency and deployment programs in the NCEP case reduce emissions independently of the permit program, the sole source of CO2 emissions reductions in the Cap-Trade case. As a result, the auction price is below the safety-valve price through 2018, and fewer permits are sold at the safety-valve permit price after 2018 in the NCEP case. The delay in permit prices reaching the safety-valve price reduces projected undiscounted revenue in the NCEP case. Projected cumulative undiscounted revenue is $77.6 billion in the NCEP case, compared with $101.5 billion in the Cap-Trade case. The present value of the revenue is $39.7 billion in the NCEP case, compared with $51.9 billion in the Cap-Trade case. The NCEP’s estimated policy expenditures from 2006 to 2015 total $35.3 billion in 2003 dollars, or $26.4 billion on a present-value basis.²⁴ This suggests that the NCEP’s goal to recoup the policies’ expenditures through permit sales would be more than realized through 2025, with revenue uncertainty depending on the level of the safety-valve permit sales. Accumulating discounted revenue and expenditures over time reveals the time frame necessary for the programs to achieve fiscal neutrality (Figure 21). In the NCEP case, the projected cumulative discounted revenue equates with cumulative expenditures in 2022.

Prices

In 2010, when the tradable permit system is put in place in the Cap-Trade case, the producer price index (PPI) for fuels and related products and power is projected to increase by 3.5 percent; the consumer price index for energy (CPI-Energy) rises by 2 percent; and the overall consumer price index (CPI) rises by 0.2 percent relative to their values in the reference case. Over the following 15 years, all these price indices are projected to diverge continuously from the reference case. In 2025, the PPI for fuels and related products and power is 7.2 percent above the reference level, the CPI-Energy is 5 percent above the reference level, and the CPI is 0.5 percent above the reference level. However, the average annual inflation rate, as measured by the average annual growth rate of the CPI, remains essentially unchanged for the 2010-2025 period.

With the addition of the financial incentives, CAFE regulations, and building efficiency standards in the NCEP case, the demand for natural gas and electricity is moderated starting in 2010. In addition, the price guarantee for natural gas delivered through an Alaska natural gas pipeline is projected to bring it online by 2014, displacing some more expensive domestic natural gas supplies and natural gas imports. Consequently, the natural gas wellhead price is relatively stable between 2010 and 2018, with some minor variations, which are reflected in electricity prices. The PPI for fuels and related products and power is expected to drop very slightly from the reference case level before 2010, rise to 2.7 percent above the reference case level in 2010 when the emissions permit system is introduced, fall back to the reference case level by 2015, and rise to 7.0 percent above the reference case level in 2025. The sharp increase in the last 10 years of the forecast is due mainly to the forecast of a sharp rise in electricity and natural gas prices. The CPI-Energy (Figure 22) follows a similar profile, first diverging from the Cap-Trade result, and then rising in the later years to about the same level as the Cap-Trade case. However, throughout most of the period, the CPI-Energy in the NCEP case is below that in the Cap-Trade case. Again, there is virtually no impact on the average annual inflation rate over the period from 2005 to 2025.

Energy Use and Potential GDP

The aggregate supply potential of the economy is embodied in a concept identified as “potential GDP.” The estimate of this concept relies on a production function view of the economy that combines factor input growth and improvements in total factor productivity. Factor inputs equal a weighted average of labor, business fixed capital, public infrastructure, and energy.25 The concept of potential GDP reflects the trajectory of the long-term growth potential of the economy at full employment, unlike the concept of real GDP (sometimes referred to as actual GDP), which reflects the trajectory of the actual economy as it adjusts to the long-run path. The impacts of these policies on real GDP can be expected to be, on average, considerably higher than on potential GDP until the adjustment process plays out over time.

In the Cap-Trade case, higher energy costs reduce the amount of energy used. Although this reflects a more efficient use of energy, it tends to lower slightly the productivity of other factors in the production process. As shown in Figure 23, there is a decline in labor productivity resulting from the imposition of the permit price mechanism, and there is a long-run loss in the “potential” output of the economy. The combination of price (permit fee) and non-price (including standards) policies leads to a further reduction in energy use and an even greater loss in potential GDP. In 2025, potential GDP is projected to be 0.04 percent lower than the reference case level in the Cap-Trade case and 0.26 percent lower than the reference case level in the NCEP case.

The Aggregate Economy

In the Cap-Trade case, with GHG credit prices added to the production cost of fuels, delivered energy prices are higher than in the reference case, and real income of households is lower. This not only reduces energy consumption but also indirectly reduces real spending (due to lower purchasing power) for other goods and services. Lower aggregate demand for goods and services results in lower real GDP relative to the reference case (Figure 24). On the production side of the economy, higher energy costs imply a movement toward energy-saving production techniques that entail dislocations and unemployment of resources in the short to medium term as the economy moves toward a different optimal use of capital, labor, and energy.

The economy is immediately affected in the first 2 years of the emissions policy implementation. Real GDP is reduced by $19 billion in 2000 dollars (0.14 percent) in 2011. The negative impact on real GDP is expected to remain around 0.10 to 0.15 percent throughout the remainder of the forecast period. In 2025, real GDP in the economy is approximately $27 billion (0.13 percent) less than in the reference case; however, the overall annual growth rate of the economy between 2003 and 2025, in terms of both real GDP and potential GDP, is not materially altered. The average loss in consumption per household over the period from 2006 to 2025 is $78, expressed in 2000 annual dollars.

In addition to the GHG cap-and-trade program, the NCEP case includes increases in Government expenditures to fund selected energy programs. The increase in Government expenditures leads to a slight rise in real GDP in the near term. As the economy responds to the other policies and energy price fluctuations, real GDP is expected to be 0.1 percent ($10 billion) lower in 2010 and 0.4 percent ($79 billion) lower in 2025 relative to the reference case. The loss in consumption per household averages $205 per year (2000 dollars) for the entire period in the NCEP case compared to the Cap-Trade case because of the combination of new CAFE standards, efficiency standards, and the GHG emissions permit prices; however, the overall annual growth rate of the economy between 2003 and 2025, in terms of both real GDP and potential GDP, is not materially altered. Peak consumption losses per household occur in 2025, at $132 per household in the CapTrade case (a loss of 0.1 percent relative to the reference case) and $465 per household in the NCEP case (a loss of 0.5 percent relative to the reference case).

Comparison with Analyses by the National Commission on Energy Policy

Because the Commission’s technical appendices²⁶ reported analyses of the impacts of its proposed policies individually (or in combinations that were not requested for EIA’s analysis in this report), direct comparisons could not be made, with the exception of the GHG cap-and-trade program. However, since the NCEP technical appendixes used the AEO2004 reference case as the starting point for the analyses, the following conclusions can be drawn:

• The differences between the two reference cases appear to account for most of the differences in impacts on energy and GHG emissions between the two analyses of modeled NCEP policies.

• When the assumptions used were comparable, as in the building codes and efficiency standards and the CAFE cases, the savings were also comparable.

• Differences in the impacts of the cap-and-trade cases are directly attributable to the differences in the two reference cases. AEO2005 has a higher GDP and lower GHG emissions, thus making it slightly easier to meet the NCEP target than the studies in the NCEP’s technical appendixes.

• In the CAFE case, EIA’s assumptions differed by 2 miles per gallon for light trucks, because with the menu of technologies available in AEO2005, sufficiently advanced technologies were not available to meet the CAFE target for light trucks of 10 miles per gallon by 2015. The NCEP used a slightly different menu of light truck technologies to achieve the standard.

• Other differences in the price paths for oil and natural gas between the two cases also influenced the projections for primary energy consumption.

Notes