Notes

Executive Summary

1 Energy Information Administration, Annual Energy Outlook 2007, DOE/EIA-0383(2007) (Washington, DC, February 2007), web site: www.eia.doe.gov/oiaf/aeo/index.html.

2 A temporary drop in the 2024 allowance price in the No International case occurs during a short interval when allowance banking is not economical. Prices fluctuate over such intervals and may even decline if the cap becomes less costly, such as when new carbon-neutral electricity plants come on line.

3 Energy prices are from Table ES1 and are reported in 2005 dollars.

4 The generation numbers cited include end-use sector generation.

5 The AEO2007 high technology case assumes earlier introduction, lower costs, and higher efficiencies for energy technologies in the end-use sectors, as well as improved costs and efficiencies for advanced fossil-fired, nuclear, and renewable generating technologies in the electric power sector.

1. Background and Scope of the Analysis

6 Energy Information Administration, Annual Energy Outlook 2007, DOE/EIA-0383(2007) (Washington, DC, February 2007), web site: www.eia.doe.gov/oiaf/aeo/index.html.

7 The bill requires that all of a covered entity’s emissions are subject to allowance requirements—not just the emissions of the facilities with emissions in excess of the threshold.

8 This provision requires any borrowed emission credits to be returned with an additional 10 percent of future allowances for each year borrowed. This relatively high “real” rate of interest would discourage the use of borrowing allowances.

9 The emissions caps for 2012 and 2020 cited in the bill match the 2004 and 1990 aggregate emission levels, respectively, for the four covered sectors as reported in the Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2004, EPA 430-R-06-002 (Washington, DC, April 2006), Table 2-14.

10 As an incentive for early action, entities reducing their emissions below 1990 levels by 2012 may be granted an increased limit of 40 percent of allowances from alternative compliance sources from 2012 to 2017.

11 Environmental Protection Agency, Global Anthropogenic Non-CO2 Greenhouse Gas Emissions: 1990-2020, (Washington, DC, June 2006), www.epa.gov/nonco2/econ-inv/downloads/GlobalAnthroEmissionsReport.pdf.

12 See Appendix C for a discussion of updates to the AEO2007 reference case.

13 Environmental Protection Agency, Global Mitigation of Non-CO2 Greenhouse Gases. (Washington, DC, June 2006), web site: www.epa.gov/nonCO2/econ-inv/international.html.

14 The 8-percent real rate assumes that investors will demand a rate of return that reflects some of the financial risk of holding allowances. This assumption effectively determines the growth rate of allowance prices and influences the amount of emissions banking that will occur. As a sensitivity case, a rate of 4 percent (real) is assumed, a rate representing a required return on a risk-free, or fully diversified (zero-beta) portfolio.

15 The calculation is described in Energy Information Administration, Documentation for Emissions of Greenhouse Gases in the United States 2004, DOE/EIA-0638(2004) (Washington, DC, December 2006), pp. 35-38, www.eia.doe.gov/oiaf/1605/ggrpt/documentation/pdf/0638(2004).pdf.

16 Ellerman, Denny A. and Montero, Juan-Pablo, The Temporal Efficiency of SO2 Emissions Trading, Joint Center of the Department of Economics, Laboratory for Energy and the Environment, and Sloan School of Management, September 2002, web.mit.edu/ceepr/www/2002-003.pdf.

2. Energy Market Impacts of Reduction Greenhouse Gas Emissions

17 In theory, a low discount rate approximating a risk-free return would be adequate for investors able to fully diversify allowance investments, assuming variation in allowance prices is uncorrelated with market returns. However, it is unclear whether GHG allowance markets will exhibit such behavior.

18 While entities in the commercial and industrial sector with emissions greater than 10,000 metric tons of CO2 are covered by the bill’s allowance program, EIA assumed in the S. 280 Core case that no commercial entities are covered and that all industrial entities, with the exception of agriculture and construction, are covered.

19 The prices that do not include allowances costs are for fossil fuels used by non-covered entities in the residential, commercial, and industrial sectors, which do not need to submit allowances.

20  Unless otherwise noted, the reported delivered fossil fuel prices include the costs of greenhouse gas allowances.

21 The main S. 280 cases are the S. 280 Core case, the Fixed 30 Percent case, and the No International case.

22 Delivered energy does not include losses associated with the conversion and distribution of electricity.

23 Very few buildings have electricity or thermal requirements large enough to support CHP systems that would trigger the 10,000 metric ton emission size cutoff for coverage.

24 For this analysis, the agriculture and constructions portions of the industrial sector are not “covered” sectors within the meaning of S. 280.

25  Note that unlike other dollar-denominated values in this report, industrial output is defined as value of shipments in 2000 dollars.

26  The cement data used in this section are from Hendrik G. van Oss, “Cement,” 2005 Minerals Yearbook, February 2007, U.S. Geological Survey, minerals.usgs.gov/minerals/pubs/commodity/cement/cemenmyb05.pdf.

27 The calculation is described in Energy Information Administration, Documentation for Emissions of Greenhouse Gases in the United States 2004, DOE/EIA-0638(2004)(Washington, DC, December 2006), pp. 35-38,,http://www.eia.doe.gov/oiaf/1605/ggrpt/documentation/pdf/0638(2004).pdf. For additional information about the cement production process and CO2 emissions, see Hendrik G. van Oss and Amy C. Padovani, “Cement Manufacture and the Environment,” Journal of Industrial Ecology, Volume 6, Number 1 (2002), pp. 89-105.

28 Energy Information Administration, Emissions of Greenhouse Gases in the United States 2005, DOE/EIA-0573(2005)(Washington, DC, November 2006), p. 22, www.eia.doe.gov/oiaf/1605/ggrpt/pdf/057305.pdf.

29 California Department of Transportation, Climate Action Program at Caltrans 2006, December 2006. The typical concrete mix is about 25 percent fly ash …” , p. 14, www.dot.ca.gov/docs/ClimateReport.pdf.

30 The figures cited on combustion-related CO2 emissions include indirect emissions from electricity generation. Under S. 280, the allowance requirement for the cement industry would be based on direct emissions only.

31 Energy Information Administration, Emissions of Greenhouse Gases in the United States 2005, DOE/EIA-0573(2005)(Washington, DC, November 2006), p. 28, www.eia.doe.gov/oiaf/1605/ggrpt/pdf/057305.pdf.

32  Consumption lime by consuming industry is given in M. Michael Miller, “Lime,” 2005 Minerals Yearbook, June 2006, U.S. Geological Survey, www.minerals.usgs.gov/minerals/pubs/commodity/lime/lime_myb05.pdf.

33 A 4 percent discount rate was used.

34 All dollar values reported in this section and beyond are expressed in real 2000 dollars unless otherwise stated.

Appendix C: Updates to Reference Case

35 University of Campinas, Sao Paulo, Brazil, Study of the Possibilities and Impacts of the Production of Large Quantities of Ethanol with the Aim to Partially Replace Gasoline in the World.