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Energy and Economic Impacts of H.R.5049, the Keep America Competitive Global Warming Policy Act
 

Executive Summary

Background

This report responds to a request from Congressmen Tom Udall and Tom Petri for an economic and industry analysis of the greenhouse gas (GHG) emissions regulations specified in H.R.5049, the Keep America Competitive Global Warming Policy Act.  The legislation, introduced March 29, 2006, establishes a market-based emission allowance program to cap GHG emissions at their 2009 projected level and to limit the potential impacts of the bill on energy prices through the sale of additional allowances at a “safety-valve” price.  The safety-valve provision, if triggered, implicitly relaxes the emissions cap.

H.R. 5049 specifies guidelines for allocating tradable emission allowances to compensate affected parties, provide transition and low-income assistance, fund research and development programs, and assist with emissions reduction projects in developing countries. Up to 10 percent of the emission allowances are to be allocated for free to the oil, natural gas, and coal industries, which must submit allowances equal to the carbon dioxide (CO2) emissions from their fuel sales.  The rest of the allowances are allocated to State governments, the electric power industry, energy-intensive industries, and the U.S. Departments of State, Energy, and Treasury.  Although not explicitly stated in the bill, these recipients are presumed to sell the allowances to entities that are required to hold them to cover emissions associated with their activities.

The GHG provisions of the bill were modeled using the National Energy Modeling System and compared to the reference case projections from the Annual Energy Outlook 2006 (AEO2006).  Four alternative analysis cases were prepared.  The H.R.5049A case assumes the nominal safety-valve price growth matches the Consumer Price Index (CPI) plus an increment of 1 percentage point per year. The H.R.5049B case assumes a 2 percentage point increment to the CPI for the safety-valve escalation rate.  The H.R.5049C is similar to the H.R.5049A case, but assumes 50 percent lower market response to emissions abatement opportunities for the non-CO2 gases than the emissions abatement supply curve for those gases provided by the Environmental Protection Agency (EPA).  The No-Safety case simulates a hypothetical version of the bill without its safety-valve provision, using the original EPA-supplied emission abatement curves for non-CO2 gases.

The modeled impacts of H.R. 5049 are summarized as follows:

Emissions and the Allowance Price

  • The legislation leads to lower CO2 emissions than in the reference case, particularly in the electric power and industrial sectors, slows the growth of GHG emissions other than CO2, and increases carbon sequestration in forestry and agriculture. 
  • Compared to the AEO2006 reference case, the allowance program achieves a combination of reductions in GHG emissions and increases in sequestration totaling 827 million metric tons CO2 equivalent (10 percent) in 2020 and 1,105 million metric tons CO2 equivalent (11 percent) in 2030 in the H.R.5049A case.
  • Beginning in 2018, (2016 in the H.R.5049C case), the market price of an allowance reaches the safety-valve price and triggers additional allowance sales, allowing covered emissions, net of carbon sequestration offsets, to exceed the emissions cap.  In the No-Safety case, the allowance price continues to grow throughout the projection, reaching $30 per metric ton carbon dioxide equivalent (2004 dollars) in 2030, compared to the $8 per metric ton price in the H.R. 5049A case and $10 per metric ton price in the H.R. 5049B case. 
  • Less than half of the projected emissions impacts are due to reductions in energy-related CO2, but the share of energy-related emissions reductions in total emissions reductions grows over time.  The combination of a reduction in non-CO2 gases and an increase in carbon sequestration accounts for between 74 and 80 percent of the total GHG impacts in 2020, and between 54 and 64 percent in 2030, the range based on variations in the assumed market response to emission abatement opportunities in the H.R.5049A and H.R.5049C cases.

Energy Markets

  • With the added cost of GHG allowances, projected prices of fossil fuels and electricity increase relative to the reference case.  In the H.R.5049A case, the average delivered coal price is 46 percent above the reference case price in 2030, while gasoline is priced 3 percent higher, natural gas is 5 percent higher, and electricity is 6 percent higher in 2030. 
  • In the electric power sector, projected changes in the policy cases include shifts in the types of new power plants added, with an increased reliance on natural gas, renewable energy, and nuclear power to supply electricity and less reliance on coal and petroleum.   In the H.R.5049A case, reductions in CO2 emissions in the electricity sector account for 68 percent of the total energy-related CO2 reductions in 2030.
  • The projected demand for industrial coal is 14 percent lower in 2020 and 26 percent lower in 2030 in the H.R.5049A case than in the reference case.   In the AEO2006 reference case, industrial coal use is projected to grow rapidly in the latter half of the projection as coal-to-liquids plants are introduced.  Under the policy cases, the cost of coal reduces the economic potential for these plants, curtailing the associated growth in coal use, along with the associated CO2 emissions.  As a result, domestic petroleum supply from coal-to-liquids plants is 445 thousand barrels per day lower in 2030 in the H.R.5049A case, compared to the reference case. 

Allowance Revenues

  • The projected revenue from sales of allowances is a function of the market price of the allowances, the number of allowances issued by the EPA, and the number of additional allowances sold by the U.S. Treasury if the safety valve price is triggered.  In H.R.5049A, the safety valve is triggered in 2018.
  • In the H.R.5049A case, projected revenue for the allowances increases from $0.6 billion in 2009, the implementation year, to $59.3 billion in 2017, the last year before the safety valve is exceeded.  In 2030, projected revenue for the allowances is $103.6 billion and that for the additional safety-valve allowances is $17.8 billion, totaling $121.4 billion.
  • In the H.R.5049B case, the safety-valve price increases by 2 percentage points above the previous year’s change in the CPI, compared with 1 percentage point in the H.R.5049A case.  The higher safety-valve case generates higher revenue.  In 2030, projected revenue reaches $145.9 billion.
  • With fewer abatement opportunities for other greenhouse gases, allowance prices in the H.R.5049C case are higher in the first few years of implementation.  The allowance price is projected to reach the safety-valve price by 2016, 2 years earlier than in the H.R.5049A case.  In 2030, the projected allowance revenue is estimated to be $124.7 billion, similar to that in the H.R.5049A case.

Prices and Economic Activity

  • As a direct consequence of the emission allowance costs, aggregate energy prices in the U.S. economy are expected to rise by approximately 6 percent by 2020.
  • Ultimately the consumer sees higher prices directly through the final prices for energy goods and services, plus the indirect price increases that come about as intermediate goods and services prices rise.  The impact on consumer prices, measured by the All-Urban CPI, is approximately 0.6 percent above the reference case in 2020 and remains approximately at this percent difference through 2030.
  • In the H.R.5049A case, the loss in gross domestic product (GDP) relative to the reference case grows through 2017, but then the loss in GDP moderates as the allowance price triggers the safety valve and the impact on prices moderates.  By 2020, the loss in GDP is $27 billion (0.15 percent) relative to the reference case level1.  By 2030, the loss in GDP increases to $38 billion (0.16 percent) relative to the reference case level.
  • Measured over the 2009 to 2030 period, the average annual loss in GDP is approximately $20 billion out of an average annual $17.5 trillion economy.  This represents a loss of 0.11 percent in the cumulative GDP over the 22-year period.  The bill’s safety-valve provision is important in limiting the economic impacts:  in the hypothetical No-Safety case, the estimated average annual GDP loss is over twice as high at $43 billion (0.24 percent.)
  • The H.R.5049B case, with a higher safety-valve permit price than the H.R. 5049A case, shows slightly larger GDP impacts over the entire 22-year period.  The average impact on GDP in the H.R.5049B is $23 billion (0.13 percent).  For the H.R.5049C case, the loss in GDP is slightly higher than for the H.R.5049A case through 2017 reflecting the higher permit price early on, but then the impacts moderate.  Overall, the average annual loss in GDP is $21 billion (0.12 percent). 

Consumer Spending

Whereas GDP is a measure of what the economy produces, consumers are interested in purchasing goods and services (consumption).  In general, losses to consumption increase faster until 2017, when the safety valve begins to moderate price increases.

  • By 2030, consumption losses range from $38 to $46 billion.  The average impact between 2009 and 2030 for H.R.5049A case is $19 billion, while for the other two cases it is between $21 and $22 billion.
  • Another way to look at the impact on the consumer is to calculate the loss in consumption on a per capita basis.  By 2020, the per capita loss in consumption is between $71 and $83, while the loss in 2030 ranges between $103 and $126 for the three cases.

Industry Output and Employment

  • The implementation of H.R.5049 impacts all production activities.  The purchase of allowances increases the production costs of the emitting sectors and the increase in energy prices raises the factor input cost for all industries, requiring industries to adjust their production to changing final demands for their products.
  • In the H.R.5049A case for the period 2009-2030, production of the energy-intensive manufacturing sector is projected to be reduced by an average of 0.64 percent relative to the reference case, non-energy-intensive manufacturing by an average of 0.43 percent, non-manufacturing industries by 0.26 percent, and services by 0.11 percent.
  • Among the detailed energy-intensive industries, aluminum production, which is an electric-intensive process, is expected to fall by 4.7 percent on average.  Production of glass, iron and steel, and basic inorganic chemicals are also expected to fall by more than 1 percent.  The largest sector in this group, food processing, is only marginally affected.

The average loss of total employment for the period 2009-2030 is projected to be 58 thousand, or 0.04 percent relative to the reference case.  Estimated average job loss in the manufacturing and non-manufacturing industries is 70 thousand, or 0.28 percent.  Part of this loss is compensated for by an increase in the service sector employment.

Notes and Sources