Highlights

Background

On July 30, 2003, Senator James M. Inhofe requested “the Energy Information Administration to undertake analyses of S.843, The Clean Air Planning Act of 2003, introduced by Senator Thomas Carper, and S.485, Clear Skies Act of 2003.” Senator Inhofe also asked the Energy Information Administration (EIA) to analyze S. 485 without the mercury provisions and S. 843 without the mercury and carbon dioxide provisions. This service report responds to both requests.

The emissions caps and implementation timetables for S. 485 (Clear Skies) and S. 843 (Carper) are summarized in Table H1. Both bills implement emissions caps on power sector emissions of nitrogen oxides (NOx), sulfur dioxide (SO2) and mercury (Hg). For NOx, the final emissions caps are the same for both bills, but the Carper bill calls for greater reductions earlier than the Clear Skies bill. For SO2 and Hg, the Carper bill calls for both earlier and more stringent reductions. For Hg, both bills use a cap-and-trade system, although the Carper bill requires a minimum level of removal from all plants. The Clear Skies bill also contains a “safety valve” feature that caps the price that power companies would have to pay for Hg, SO2, and NOx allowances – should one or more of these “safety valves” be triggered, the corresponding cap on emissions would be effectively relaxed. The Carper bill also requires power sector reductions in carbon dioxide (CO2) emissions. Power companies can meet their CO2 targets by directly reducing emissions within the sector or by purchasing approved greenhouse gas (GHG) reductions from international trading programs or domestic projects outside the power sector. An independent review board is set up to establish the rules governing use of international or domestic emission offsets.

Highlights of the S.485 (Clear Skies Bill) Analysis

• Power generators are expected to rely primarily on the addition of emissions control equipment to comply with the emissions caps.
• Fuel switching from coal to natural gas is projected to play a secondary role. Coal generation in 2020 is projected to be 6 percent below the Reference case level while natural gas generation is 9 percent higher. Despite the reduction in coal generation, coal generation is expected to grow 24 percent between 2001 and 2020.
• The Clear Skies cap on mercury affects the regional composition of coal use due to the higher cost of removing mercury from subbituminous coals. While use of western coal falls slightly below Reference case levels in the Clear Skies case, it increases above Reference case levels in a sensitivity case that assumes no Clear Skies mercury provisions and no imposition of Maximum Achievable Control Technology (MACT) standards under existing law requiring all plants to achieve specified mercury removal levels.
• The safety valve for the mercury allowance price is triggered, so mercury emissions remain above the targets in Table H1. Mercury emissions in 2010 are expected to be 31 tons, compared to 53 tons in the Reference case and 45 tons in a sensitivity case where only the NOx and SO2 caps are imposed. Mercury emissions are projected to reach 29 tons in 2025.
• Although the Clear Skies bill also establishes safety valves for the SO2 and NOx allowance prices, this analysis projects that neither will be triggered.
• To reduce SO2 emissions, 85 gigawatts (GW) of capacity are expected to add scrubbers by 2020. Selective catalytic reduction (SCR) equipment is projected to be the key NOx emission reduction technology, with 171 GW added by 2020. In addition, mercury compliance requires 6 GW of supplemental fabric filters with activated carbon injection by 2020.
• In 2020, under Clear Skies, NOx allowance prices in the East are projected to reach $2,354 per ton (all values given in 2001 dollars), while NOx allowance prices in the West are $1,722 per ton. In 2020, SO2 allowance prices are projected to be $966 per ton, while mercury allowance prices are limited to $35,000 per pound by the safety valve. In a sensitivity case without the mercury safety valve, mercury allowance prices in 2020 are projected to be $68,000 per pound.
• Resource costs, the amount that power companies spend on fuel, capital, and operations and maintenance, are projected to be higher under Clear Skies than in the Reference case. Over the 2005 to 2025 time period, the discounted change in resource costs and mercury safety valve payments is projected to be $24.4 billion more than that of the Reference case. Of this amount, approximately $3.5 billion is attributable to safety valve payments. Discounted resource costs over the 2005 to 2025 period increase by 1.7 percent relative to the Reference case.
• Electricity prices are also projected to be higher under Clear Skies. In 2020, the national electricity price is projected to be 2.5 percent above that in the Reference case, but still below the real price in 2001.

Highlights of the S. 843 (Carper Bill) Analysis

• The role of fuel switching – from coal to natural gas and renewables – is projected to be much more important in the Carper bill than in the Clear Skies bill. This reflects the more restrictive emissions limits for SOx, NOx, and Hg, and the additional limits on CO2 emissions under the Carper bill. However, the results are very sensitive to the availability and cost of greenhouse gas offsets from outside the U.S. power sector. Three alternative cases with different assumptions about the availability of greenhouse gas offsets were prepared.
• Coal generation in 2020 is projected to range between 12 percent and 32 percent below the Reference case in the three Carper cases with alternative assumptions about the availability of greenhouse gas offsets, while gas generation in 2020 is projected to range between 18 percent and 24 percent above the Reference case level in the three cases.
• The Carper bill caps on mercury and CO2 emissions affect the regional composition of coal use due to the relatively high carbon content of coal and the higher cost of removing mercury from subbituminous coals. Total coal production in the Carper cases is projected to be between 12 percent and 30 percent below the Reference case level in 2020, depending on the availability and cost of greenhouse gas offsets from outside the U.S. power sector.. However, the impact on western coal use is projected to be larger, because it is generally more difficult to remove mercury from subbituminous coals. In 2020, western coal production is projected to be between 19 percent and 38 percent below the Reference case level.
• Renewable fuels are also expected to play a large role in the three Carper cases. In 2020, renewable generation is projected to be between 6 percent and 89 percent above the Reference case level in the three cases. The renewables expected to see the largest growth in these cases are biomass and wind.
• Under the Carper bill, NOx, SO2 and mercury allowance prices are very sensitive to the availability and cost of CO2 offsets. CO2 allowance prices in 2020 are projected to range from $20 per metric ton carbon equivalent to $127 per metric ton carbon equivalent. In general, NOx, SO2 and mercury allowance prices tend to be lower when CO2 allowance prices are higher because of reduced coal use, In 2020, NOx allowance prices are projected to range from $0 to $1,914 per ton (all values given in 2001 dollars), while SO2 allowance prices range from $1,126 per ton to $1,483 per ton and mercury allowance prices range from $12,855 per pound to $23,501 per pound. The relatively low mercury allowances prices are due to reduced coal use and the requirement in the Carper bill that all coal plants remove at least 70 percent of the mercury in the coal they use after 2012.
• The change in discounted resource and offset purchase costs over the 2005 to 2025 time period in the three cases ranges from $64.5 billion to $156.1 billion ($ 2001).
• Electricity prices in 2020 in the three Carper cases are projected to range between 3.9 percent and 6.4 percent above the Reference case.
• In a sensitivity case where only the NOx, SO2, and Hg caps in the Carper bill are imposed (Carper 3-P sensitivity case), power generators are projected to rely primarily on the addition of emissions control equipment rather than fuel switching. Coal generation in 2020 in this case is projected to be 5 percent below the Reference case level while natural gas generation is 6 percent higher. Although the emissions targets in this sensitivity are generally more stringent than those in the Clear Skies bill, there is less fuel switching because the allowance allocation scheme in the Carper bill reduces the incentive for generating companies to reduce their output.
• While the more stringent SO2 cap in the Carper bill tends to make low-sulfur western coal more attractive, the more stringent mercury cap has an opposite and larger effect. As a result, western coal production under the Carper 3-P sensitivity case is projected to be 14 percent lower than in the Reference case in 2020, while eastern coal production is projected to be 4 percent above the Reference case level. Even with these changes from the Reference case, both eastern and western coal production in 2020 are expected to be about the same or above current levels of production.
• To reduce SO2 emissions, 72 to105 GW of capacity are expected to add SO2 scrubbers, while 140 to 166 GW are expected to add SCRs, primarily for NOx removal, and 129 to137 GW of supplemental fabric filters with activated carbon injection are added by 2020.
• In the Carper 3-P sensitivity case, the NOx allowance price in 2020 is projected to be $1,935 per ton, roughly in between the east and west regions’ NOx allowance prices under Clear Skies. In 2020, SO2 allowance prices are projected to be $1,249 per ton, nearly $300 per ton higher than under Clear Skies because of the tighter SO2 target in the Carper bill. In the full Carper bill cases the NOx, SO2, and mercury allowance prices tend to be lower than in this sensitivity case because the CO2 emission target leads to lower coal use.
• The Hg allowance price in the Carper 3-P sensitivity case is projected to be $29,692 per pound in 2020, higher than the range of Hg allowance prices in the Carper cases with CO2 limitations where there are larger reductions in coal use, but lower than the Hg allowance price in the Clear Skies analysis, even though Carper has a more stringent Hg emissions limit and no safety valve. The Carper bill requirement that all coal plants achieve at least 70 percent Hg removal after 2012 drives this outcome.
• In the Carper 3-P sensitivity case, the discounted change in resource costs over the 2005 to 2025 time per are projected to be $51.7 billion. In the same case, electricity prices in 2020 are projected to be 1.9 percent higher than in the Reference case. Due to the output-based allowance approach used in the Carper bill, the projected impact on electricity prices for this case is lower than that for the Clear Skies bill that caps the same three pollutants, even though Carper has more stringent caps and timetables.

Additional Context for the Report

• As in all projections, considerable uncertainty exists.
• There have been few full-scale demonstrations of some of the plant configurations that are necessary to meet the requirements of the proposed bills.
• The measurement of and cost of controlling mercury emissions is an important area of uncertainty in this analysis. In recent years, significant resources have been devoted to studying the factors that influence coal plant mercury emissions and technologies that could be used to reduce them. However, many questions remain to be answered.
• The potential availability and cost of greenhouse gas offsets is an important area of uncertainty when analyzing the impacts of the Carper bill with its limit on CO2 emissions. There is uncertainty both about what offsets might cost and what sorts of rules and regulations the independent review board called for in the Carper bill would establish for acceptable international trading programs and offset projects.
• The Reference Case used in this report includes final regulatory action under existing laws. However, consistent with standard EIA practice requiring policy neutrality in baseline projections, it does not include pending or proposed actions, such as the maximum achievable control technology (MACT) standards for mercury emissions from power plants. The implementation of such actions could affect emissions, generator costs, and electricity prices during the projection period even if there is no new legislation.
• The EIA analysis contained in this report, like other EIA analyses, focuses on the impact of the two bills under review on energy choices made in all energy-using 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 emissions reductions.