Executive Summary
Introduction
The analysis in this report was undertaken at the request of
Senators James M. Jeffords (I-VT) and Joseph I. Lieberman (D-CT) to analyze
the potential impacts of limits on four emissions from electricity generators,
sulfur dioxide (SO2), nitrogen oxides (NOx), carbon
dioxide (CO2), and mercury (Hg). In July 2001, the Energy Information Administration
(EIA) published the report Analysis of Strategies for Reducing Multiple
Emissions from Electric Power Plants: Sulfur Dioxide, Nitrogen Oxides, Carbon
Dioxide, and Mercury and a Renewable Portfolio Standard.1 In that report, EIA analyzed the impacts of a number of different limits for
SO2, NOx, CO2, and Hg emissions from electricity generators, which varied
by level and start year, and a renewable portfolio standard. The analysis
was conducted relative to the reference case of the Annual Energy Outlook
2001 (AEO2001),2 published in December 2000, using EIA’s National Energy Modeling System
(NEMS).
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For this analysis, Senators Jeffords and Lieberman requested
that EIA consider the impacts of technology improvements and other market-based
opportunities on the costs of emissions reductions from electricity generators.
Using 2002 as a start date for emissions reductions, the request specifies
that by 2007 NOx emissions from electricity generators are to be
reduced to 75 percent below 1997 levels, SO2 emissions to 75 percent
below the full implementation of the Phase II requirements under Title IV
of the Clean Air Act Amendments of 1990 (CAAA90), Hg emissions to 90 percent
below 1999 levels, and CO2 emissions to 1990 levels (Figure
ES1). These emissions limits are applied to all electricity generators,
excluding cogenerators, which produce both electricity and useful thermal
output and account for less than 10 percent of total generation. (Throughout
this report cogenerators are excluded when reference to electricity generators
is made.) The impacts of these limits are analyzed against four different
cases with varying levels of energy demand: the reference case from AEO2001,
a case combining the high technology assumptions for end-use demand, supply,
and generating technologies from AEO2001, and the moderate and advanced
policy cases from Scenarios for a Clean Energy Future (CEF),
a publication of an interlaboratory working group, published in November 2000 (Table ES1).3 In general, the emissions limits are achieved through a combination of reductions
in energy demand, shifts from coal-fired electricity generation to nuclear,
natural gas, and renewable generation, and additional emissions control equipment.
Within the time frame of the emissions limits, economical technologies to
capture and sequester CO2 are unlikely. Sequestration technologies
are included in the analysis but do not penetrate because they are not economical.
The cost to electricity generators of meeting the emissions
limits by installing emissions control equipment or purchasing emissions permits
is included in the price of electricity, to the extent to which these costs
can be passed through to consumers. CO2 emissions permit costs
are effectively included in the price of the fossil fuel to electricity generators.
For the other three emissions, the permit costs are included in the electricity
price based on the cost incurred by the marginal generator. All cases assume
a marketable emissions permit system with an allocation of permits based on
historical emissions.
In accordance with the request from Senators Jeffords and Lieberman,
this study is based on the reference case of AEO2001. In accordance
with the requirement that the EIA reference case projections be policy-neutral,
the AEO2001 projections generally assume that all Federal, State, and
local laws, regulations, policies, and standards in effect as of July 1, 2000,
remain unchanged through 2020. Potential impacts of pending or proposed legislation,
proposed standards, legislation or regulations for which all specifics were
not yet defined, or sections of existing legislation for which funds had not
been appropriated prior to the preparation of AEO2001 are not included
in the projections. The reference case also assumes the transition to full
competitive pricing of electricity in those States with specific restructuring
plans.
Several revisions have been made to the AEO2001 reference
case for this study to update to more current energy markets, including higher
estimated natural gas consumption and prices for 2000 and 2001. The new appliance
efficiency standards issued by the U.S. Department of Energy (DOE) in January
2001 for residential and commercial equipment are also included, as modified
by the Bush Administration. Finally, in order to allow for the analysis of
Hg emissions and control technologies, modifications have been made to both
the electricity generation and coal supply portions of NEMS since AEO2001.
The reference case projections in this analysis represent business-as-usual
forecasts, given known trends in technology development and demographics,
current laws and regulations, and the specific methodologies and assumptions
used by EIA. Results from any model or analysis are highly uncertain. Energy
models are simplified representations of complex energy markets. The results
of any analysis are highly dependent on the specific data, assumptions, behavioral
characteristics, methodologies, and model structures included. In addition,
many of the factors that influence the future development of energy markets
are highly uncertain, including weather, political and economic disruptions,
technology development, and policy initiatives. The results of the various
cases should be considered as relative changes to the comparative baseline
cases.
Future technology development cannot be known with certainty,
and even the technology improvements assumed in the reference case are likely,
but not certain. The more rapid technology development assumed in the EIA
advanced technology case and in the cases incorporating the policies of CEF are more uncertain and represent a higher level of risk for the ultimate success
and timing of the technology improvements. It is possible that even more rapid
technology development than assumed in the advanced technology case or breakthrough
technology development could occur. In particular, Hg emissions control technologies
are relatively new and untested on a commercial scale. As a result, their
cost and performance are highly uncertain.
The projected price of natural gas is also subject to uncertainty.
Nearly all new electricity generation capacity is expected to be fueled by
natural gas. If the price of natural gas were to be higher than projected
in this analysis, coal-fired generation would become more economic, which
would, in turn, cause the emissions limits to be more costly to achieve.
In addition, electricity markets are undergoing a transition
from average-cost regulated pricing to market-based pricing. This analysis
assumes that wholesale generation markets will function competitively and
that the costs of achieving the emissions limits that increase the operating
costs at plants setting the market price of electricity will be passed to
consumers. If the markets function in a different manner, the costs and prices
could be different.
Impacts of Emissions Limits on the Reference and Advanced
Technology Cases
Reference Case
In the reference case without emissions limits, total energy
consumption is projected to increase at an average annual rate of 1.4 percent
between 1999 and 2020, reaching 128 quadrillion British thermal units (Btu) (Table ES2). This is based on projected
economic growth of 3.0 percent per year. Due to efficiency improvements in
the use of energy and a shift in the economy from more energy-intensive industries,
the energy intensity of the economy, measured as energy use per dollar of
real gross domestic product (GDP), is projected to decline at an average annual
rate of 1.6 percent.
Introducing the emissions limits in the reference case raises
the projected average delivered price of electricity by 33 percent in 2020
relative to the reference case (Figure ES2).
Electricity prices are higher because of the additional costs for emission
control equipment, the costs of obtaining emissions permits, and higher fossil
fuel prices to electricity generators.
Overall, the higher electricity prices reduce the projected
demand for electricity (Figure ES3), although
the impact is dampened by the higher projected natural gas price, which results
from higher demand for natural gas. Coal-fired electricity generation is expected
to be reduced with the imposition of the emissions limits, and, due to the
retirement of coal-fired generators, generation from natural gas, renewable,
and existing nuclear technologies is higher, even with lower generation requirements (Figure ES4). As a result of higher energy
prices, energy expenditures are projected to be higher than in the reference
case without emissions limits.
The total cost of supplying electric power, which is called
the resource cost, includes the cost of fuel, operations and maintenance costs,
investments in plant and equipment, and costs of purchasing power. The resource
cost does not include the costs of emissions allowances, which are included
in the price of electricity. From 2001 through 2020, the cumulative resource
costs of electricity generation are projected to be $177 billion (undiscounted
1999 dollars), or 9 percent, higher with the emissions limits (Figure
ES5).
Natural gas consumption is expected to be higher, primarily
for electricity generation by generators subject to emissions limits as they
reduce coal-fired generation. Higher demand for natural gas is also expected
in the commercial and industrial sectors as they increase the cogeneration
of electricity, which is assumed not to be subject to the emissions limits.4
Advanced Technology Case
The reference case assumes continued improvements in technology
for energy consumption, electricity generation, and fossil fuel production,
based on historical rates of improvement. The advanced technology case analyzed
in this study combines the high technology assumptions for end-use demand,
electricity generation technologies, and fossil fuel supply in AEO2001.
For the high technology cases in AEO2001, the reference case technology
assumptions are modified to include earlier years of introduction, lower costs,
higher maximum market potential, or higher efficiencies than assumed in the
reference case or a combination of these assumptions.
To represent more rapid technology development in the electricity
generation sector, the costs and efficiencies of advanced fossil-fired and
new renewable generating technologies are assumed to improve from reference
case values. In the advanced technology case, the aging-related cost increases
for nuclear power plants are assumed to be lower than those in the reference
case. For oil and gas supply, the assumed rate of technological progress is
accelerated relative to the reference case, increasing supplies and reducing
production costs. More rapid technology development in coal production is
assumed by increasing labor productivity and reducing labor and equipment
costs, relative to the reference case.
All of these assumptions for more rapid improvements in technology,
based on higher levels of research and development funding than assumed in
the reference case, result in the successful development of the technologies.
More rapid technology development could be possible with higher funding or
breakthrough developments. The levels of funding necessary for the successful
achievement of the technology characteristics assumed in the advanced technology
case are not known, nor are the environmental benefits quantified. However,
the simultaneous success of all technology research is highly unlikely. History
has shown that funding levels for research and development cannot be tied
directly to the successful development of new technologies. Because the reference
case is based on historical levels of funding and technology development,
the technology trends assumed in the reference case are considered to be the
most likely trends.
As a result of rapid technology development in the advanced
technology case without emissions limits, total energy consumption is projected
to be reduced by 7 quadrillion Btu in 2020, or 6 percent, relative to the
reference case without emissions limits, due to the earlier adoption of more
efficient technologies in the end-use demand sectors. Overall, the energy
intensity of the economy is projected to decline at an average annual rate
of 1.9 percent between 1999 and 2020, compared with 1.6 percent in the reference
case without emissions limits. Projected consumption of all fossil fuels and
electricity is lower than in the reference case; however, the use of existing
nuclear power and renewable technologies is projected to be higher due to
the assumed cost and performance improvements. Because of reduced energy consumption
and the shift in the fuel mix to more renewables and nuclear power, projected
CO2 emissions in 2020 are reduced by 8 percent.
Partly due to lower projected consumption but primarily due
to the more rapid technology development assumed for the production of fossil
fuels, the prices of both natural gas and coal are expected to be reduced. Because
the price of crude oil is assumed to be set on world markets, the projected
price of oil does not change.5 Lower projected prices for natural gas and coal, combined with lower electricity
demand that reduces the need for new capacity, contribute to lower electricity
prices. However, the impact of the lower prices on energy consumption is small
relative to the impact of the more rapid technology improvement in the energy-consuming
sectors. Projected energy expenditures are lower relative to the reference
case due to lower energy demand and prices.
Imposing the emissions limits on the advanced technology case
raises the projected average delivered price of electricity by 22 percent
in 2020, less than the increase in the reference case. Lower projected demand
for electricity and the use of less carbon-intensive fuels in the advanced
technology case relative to the reference case reduce the effort needed to
meet the emissions limits. Among the four emissions that have limits in these
cases, CO2 emissions tend to be the most costly to reduce, largely
through the premature retirement of existing coal plants and the increased
use of natural gas and renewable technologies. CO2 sequestration
is included in NEMS, but currently there are no economical technologies to
sequester CO2 emissions from generation plants, unlike the technologies
available for the removal of the other three emissions.
Because the advanced technology case without limits has lower
CO2 emissions than the reference case, fewer shifts in electricity
generation are required to meet the CO2 limits when the limits
are imposed. In addition, because reductions in CO2 emissions also
reduce SO2 and Hg emissions, it is more costly to achieve reductions
of these emissions in the advanced technology case than in the reference case.
Additional investments in emissions control equipment are required to meet
the limits. Similar to the reference case, NOx allowance prices
are projected to decline to zero in the advanced technology case with emissions
limits.
When the emissions limits are imposed in the advanced technology
case, the higher electricity prices reduce the projected demand for electricity,
but the reduction is less than projected in the reference case when the emissions
limits are imposed, because the projected demand for electricity is already
lower in the advanced technology case even without the limits, and because
the projected increase in the electricity price is less than in the reference
case. Similar trends in the generation mix are expected, although the magnitudes
of the changes differ as the result of lower generation requirements and the
higher level of renewable and nuclear generation already expected in the advanced
technology case without emissions limits. Similar to the reference case, demand
for natural gas is expected to be higher when emissions limits are imposed
in the advanced technology case, due to fuel switching by electricity generators
and increased cogeneration in the commercial and industrial sectors. Higher
projected prices result in higher energy expenditures in the advanced technology
case when the limits are imposed.
From 2001 through 2020, the incremental cumulative resource
costs of complying with the emissions limits in the advanced technology case
are projected to be $142 billion (an 8-percent increase), compared with $177
billion (a 9-percent increase) in the reference case.
Impacts of Emissions Limits in 2007 on the Reference
and Advanced Technology Cases
Emissions reductions are assumed to begin in 2002, reaching
the full limits in 2007. In the reference case with emissions limits, average
delivered electricity prices in 2007 are projected to be 32 percent higher
than in the reference case (Table ES3).
The higher electricity price results from the purchase of emissions permits
and investments in emissions control equipment. Between 2006 and 2007, when
the emissions limits are fully imposed, the price of electricity is expected
to increase by 6 percent.
As the limits are imposed on the reference case, coal-fired
generation is projected to decline and natural gas and renewable generation
are projected to increase, with a slight increase in generation from existing
nuclear power plants as well in 2007. As a result, the projected natural gas
price in 2007 is 17 percent higher when the emissions limits are imposed on
the reference case.
There are implications for the economy as a result of the emissions
limits and the projected higher energy prices. Consumers and business both
would spend more for energy, causing increases in the prices of goods and
services throughout the economy. Real GDP in 2007 is projected to be reduced
by 0.8 percent in the reference case when the emissions limits are imposed.
However, these impacts become smaller as the economy adjusts to higher prices.
In 2010 and 2020, GDP in the reference case with emissions limits is projected
to be 0.3 percent below the level in the reference case, as the economy adjusts
to the higher prices.
In the advanced technology case, energy consumption is expected
to be lower than in the reference case, resulting in smaller impacts from
the emissions limits. In the advanced technology case with emissions limits,
projected average delivered electricity prices in 2007 are 30 percent higher
than in the case without the limits. In the advanced technology case with
emissions limits, the projected average delivered electricity price increases
by 7 percent between 2006 and 2007.
When the limits are imposed on the advanced technology case,
shifts in generation similar to those in the reference case are projected
to occur. The natural gas price is expected to be 17 percent higher in 2007.
As a result of higher energy prices, real GDP in 2007 is projected to be reduced
by 0.7 percent in the advanced technology case when the emissions limits are
imposed. In 2010 and 2020, the reductions in GDP in the advanced technology
case with emissions limits are projected to be 0.2 percent and 0.1 percent,
respectively, from the levels in the advanced technology case.
Impacts of Emissions Limits Using the Clean Energy
Futures (CEF) Policies
CEF
The CEF study was commissioned by DOE’s Office
of Energy Efficiency and Renewable Energy. The report was prepared by an interlaboratory
working group from Argonne National Laboratory, Lawrence Berkeley National
Laboratory, the National Renewable Energy Laboratory, Oak Ridge National Laboratory,
and Pacific Northwest National Laboratory. The purpose of CEF was to
analyze the impacts of various energy policies and programs that would promote
“clean energy technologies,” which include reducing the energy intensity
of the economy, reducing the CO2 intensity of the energy used,
and integrating the sequestration of CO2 into energy production
and delivery.
CEF analyzed business-as-usual, moderate, and advanced
cases. The business-as-usual case, which assumed current energy policies and
programs as of the time CEF was prepared and continued technological
improvement, was based on the reference case from the Annual Energy Outlook
1999 (AEO99), the most recent Annual Energy Outlook available
at the time the CEF analysis was initiated. The CEF working
group developed a revised version of NEMS (referred to as CEF-NEMS).
The most significant changes in the business-as-usual case were revisions
to three of the energy-intensive industries in the industrial sector, which
reduced projected primary energy consumption in 2020 by 1 quadrillion Btu,
and a reduction in the costs of nuclear plant refurbishment and relicensing,
resulting in fewer nuclear plant retirements and making it easier to reduce
CO2 emissions.
The policies in the moderate and advanced cases in CEF included fiscal incentives, voluntary programs, efficiency standards, regulations,
and increased research and development funding. In general, the advanced case
included additional or extended programs relative to the moderate case. The
advanced case also included a domestic CO2 trading system that
was assumed to equilibrate at a permit value of $50 per metric ton carbon
equivalent, which would be announced in 2002 and implemented in 2005. As requested,
this analysis incorporates the CEF policies where possible. However,
several general issues are noted:
- Many of the CEF policies are based on additional funding for technology
research and development, totaling $1.4 billion (1997 dollars) per year
in the moderate case and $2.8 billion per year in the advanced case, with
costs shared between the public and private sectors. It is difficult,
however, to quantify the impact of increased funding on specific improvements
in technology development, as noted for the advanced technology case. Because
these funding increases are questionable and the link between funding and
technology development is tenuous, the technology improvements in CEF based on these research and development policies are also questionable.
Although the environmental benefits, which are not quantified, could be
higher in the advanced case than in the moderate case, the associated costs
would also be higher.6
- Many CEF policies, particularly in the industrial sector, relied
on voluntary and information programs whose impacts are difficult to quantify.
- Some of the CEF policies required legislative or regulatory actions
that may not be enacted at all or may be enacted at later dates than assumed
in CEF. These included tax credits for certain high-efficiency vehicles
and renewable generation technologies, new equipment standards, national
electricity industry restructuring, a renewable portfolio standard (which
requires a specified percentage of electricity sales to be generated from
renewable sources other than hydropower), new particulate standards, and
pay-at-the-pump motor vehicle insurance.
- Certain technology cost reductions in the CEF analysis appear
unrealistic. For example, in the residential sector, the cost of the most
efficient unit for some appliances was reduced to the cost of the least
efficient unit. It seems unlikely that either research and development or
voluntary programs could reduce technology costs to that level. Other technology
assumptions also appear unrealistic—for example, the assumption that
generating plants using CO2 sequestration technology would achieve
the same efficiency as those that do not.
- In the residential and commercial sectors, consumer hurdle rates were
significantly reduced. These hurdle rates represent the willingness of consumers
to invest in energy-efficient equipment. Although the hurdle rate reductions
in the CEF analysis were attributed to voluntary programs and other
policies, they appear to be very optimistic in their valuation of consumer
desire for energy efficiency.
- In the CEF analysis, the growth rates of miscellaneous electricity
uses in both the residential and commercial sectors were significantly reduced.
These modifications were largely attributed by the CEF authors to
voluntary programs, State market and, in the advanced case, a 2004 commercial
transformer standard. The reductions in the growth rates appear unrealistic
because it is unlikely that the use of some of the equipment in these categories,
such as automated teller machines, medical and telecommunications equipment,
and small appliances, would be greatly reduced. Although there is the potential
for some efficiency improvements, it is unlikely that efficiencies could
improve enough to reach the consumption levels achieved in CEF. Some
of these small appliances include heating elements that cannot readily incorporate
increased efficiency.
- From a macroeconomic perspective, the crucial assumption underlying the CEF study was that the economy is not currently using its resource
base efficiently; i.e., the economy is not on the production possibilities
curve. The study assumed that overcoming large-scale market failures can
place the economy on this frontier with less energy use and fewer emissions.
However, many of the presumed market failures are actually rational, efficient
decisions on the part of consumers given current technology, expected prices
for energy and other goods and services, and the value they place on the
time they would take to evaluate their options. As Henry Jacoby points out,
“The key difference between market barriers and market failures is
that correcting failures may sometimes produce a net benefit, whereas overcoming
barriers always involves cost.”7
CEF projected that the policies in the moderate case
could reduce total energy consumption by 8 percent in 2020 relative to the
business-as-usual case. Total energy consumption was projected to increase
at an average annual rate of 0.7 percent between 1997 and 2020, compared with
1.1 percent in the business-as-usual case.
In the advanced case, CEF projected that the more aggressive
policies would reduce total energy consumption by 19 percent in 2020 relative
to the business-as-usual case. Total projected energy consumption increased
at an average rate of 0.4 percent per year through 2010, then decreased from
2010 through 2020 at an average rate of 0.3 percent per year. An actual decrease
in energy consumption as projected in CEF would appear unlikely without
significant increases in energy prices. In both cases, CEF projected
lower fossil fuel consumption, fewer nuclear power retirements, and more renewable
energy than in the business-as-usual case.
The request for this analysis to EIA specified that two cases
be analyzed “assuming the moderate [advanced] supply and demand-side
policy case of the Clean Energy Futures study.” However, there have been
significant changes to the model and to the assumptions for AEO2000 and particularly AEO2001. One of the most significant changes that
occurred between AEO99 and AEO2001 is the assumed rate of economic
growth. In AEO99, the U.S. economy was projected to grow at an average
annual rate of 2.0 percent between 1999 and 2020; however, the growth rate
in AEO2001 is projected to be 3.0 percent. The more rapid projected
growth in GDP impacts the projected growth in other key economic drivers,
such as commercial floorspace, industrial gross output, and real disposable
personal income. In addition, the growth rate for electricity demand was reevaluated
in AEO2001, particularly for computers, office and other electrical
equipment and appliances, and miscellaneous energy uses, in accordance with
recent trends.
The primary energy intensity of the U.S. economy is projected
to decline at an average annual rate of 1.6 percent in AEO2001, compared
with 1.0 percent in AEO99, due in part to the effects of Executive
Order 13123, signed in June 1999, mandating reduced energy use in Federal
facilities, a new fluorescent ballast standard promulgated in September 2000,
and a reevaluation of industrial energy intensity improvements for AEO2001.
Other changes in the projections and assumptions between AEO99 and AEO2001 include higher projected natural gas and electricity prices,
which affect the economics of technology adoption and penetration, and changes
in technology assumptions. In some cases, the CEF policies overlap
with or have been overtaken by changes that have occurred over time or within
NEMS. For example, some policies were expected in the CEF analysis
to be instituted in 2000 or 2001, which is no longer plausible. Also, residential
equipment standards proposed in CEF were modified for this analysis
to account for the standards announced in January 2001, as modified by the
Bush Administration. Modeling enhancements have also been made to NEMS since
the AEO99 version, some of which have noticeable impacts on the projections
in AEO2001 or in the application of the CEF policies.
The cases implementing the CEF moderate and advanced
policies in the current version of NEMS for this analysis are denoted as the CEF-JL cases (Clean Energy Futures – Jeffords/Lieberman).
Where possible, the CEF policies were explicitly represented in the
current version of NEMS, such as tax credits and efficiency standards. Many
policies in CEF, including research and development and voluntary programs,
were analyzed separately by the CEF analysts, and the results were
introduced into NEMS through changes in parameters and assumptions, such as
technology costs and performance and hurdle rates. For this study, EIA analysts
generally implemented the same changes, on a percentage basis, in the current
version of NEMS. Where CEF policies are date-dependent, due to the
passage of time, as noted above, the CEF policies were adjusted for
the year of implementation, which has an impact on the level of penetration.
In the request for this analysis, EIA was asked to assume the CEF scenarios in order to analyze the impacts of the emissions limits
on projections with lower energy demand. In accordance with the request, the
impacts of the policies from CEF were implemented for this analysis.
The results of the CEF-JL cases should not be interpreted as an EIA
analysis of the CEF policies, because, as noted above, EIA does not
necessarily agree with the assumptions and level of impacts resulting from
the policies in the CEF analysis. In addition, many of the CEF policies are dependent on increases in research and development funding or
require investments in more efficient or less carbon-intensive equipment by
the public and private sectors. The total cost of achieving those policies
is not quantified in this analysis but is likely to be significant.
Impacts of the CEF Policies
on the Reference Case
Incorporating the impacts of the CEF policies as presented
by the CEF authors has a significant impact on energy markets, even
without the imposition of emissions limits. Overall, primary energy consumption
in 2020 is projected to be reduced from 128 quadrillion Btu in the reference
case to 120 quadrillion Btu and 109 quadrillion Btu in the CEF-JL moderate
and advanced cases, respectively (Table
ES4). In the reference case, the projected decline in primary energy intensity
between 1999 and 2020 averages 1.6 percent per year, which accelerates to
1.9 percent per year and 2.4 percent per year in the CEF-JL moderate
and advanced cases, respectively. In the residential and commercial sectors,
a number of CEF policies are aimed at reducing the demand for electricity,
which has the largest projected demand reduction in both sectors. Because
the CEF-JL advanced case includes a $50 per ton carbon fee, projected
electricity prices in 2020 are higher than in the reference case, further
reducing electricity demand.
In the electricity generation sector, coal-fired generation
in 2020 in the reference case for this analysis is projected to be similar
to that in the CEF-JL moderate case, but it is sharply reduced in the
advanced case due to policies that encourage the use of natural gas and renewable
generation, including the $50 per ton carbon fee and the CEF policy
to reduce particulate matter emissions by reducing the SO2 emissions
level mandated in the Clean Air Act Amendments of 1990. Projected natural-gas-fired
generation in both cases is lower than in the reference case primarily due
to the reduced projected demand for electricity, reducing the requirements
for new generation capacity that is largely natural gas fired. In 2020, generation
from existing nuclear power plants is projected to have a higher share of
the generation market in the CEF-JL cases, but nuclear generation declines
slightly across the cases due to the lower electricity demand. In 2020, renewable
generation is projected to be higher than in the reference case, particularly
in the advanced case. In the CEF-JL moderate case, natural-gas-fired
plants remain more economical than renewable sources; however, in the CEF-JL advanced case, portfolio standard, the extension of production tax credits
for renewables, and the $50 carbon fee encourage additional renewable generation.
Projected petroleum consumption is reduced largely due to CEF policies that are intended to reduce light-duty vehicle travel and improve
the efficiency of all vehicles in the transportation sector, which is almost
entirely dependent on petroleum. In 2020, total natural gas consumption is
projected to be lower due to assumed efficiency improvements in the end-use
sectors that reduce the demand for natural gas and electricity, leading to
reductions in natural gas generation. Total projected coal consumption is
also lower due to reduced coal-fired generation. Renewable sources are the
only energy sources for which projected consumption is higher in the CEF-JL cases
than in the reference case, mainly due to more renewable electricity generation
but also due to higher use of renewables in the industrial sector in the advanced
case.
Due to reduced demand, production and prices for both natural
gas and coal are projected to be lower in the CEF-JL cases than in
the reference case. Because oil prices are assumed to be set on world markets,
the average crude oil price is not projected to change. Average electricity
prices are expected to be lower in the CEF-JL moderate case than in
the reference case in 2020, due to the lower price of fossil fuels and lower
generation requirements, but to be higher in the CEF-JL advanced case
due to the impact of the $50 carbon fee. Due to the reduced demand, projected
energy expenditures are lower in the CEF-JL cases than in the reference
case.
Compared to the reference case, total projected CO2
emissions in 2020 are reduced by 6 percent and 21 percent in the CEF-JL moderate and advanced cases, respectively, due to the lower demand for fossil
fuels. Projected emissions of SO2, NOx, and Hg by electricity
generators are also generally reduced due to lower projected coal consumption
and, in the advanced case, the policy to reduce emissions of particulate matter.
Impacts of Emissions Limits on the CEF-JL Cases
Average delivered electricity prices are expected to be higher
in 2020 in the CEF-JL moderate case when emissions limits are imposed—7.2
cents per kilowatthour compared with 6.0 cents per kilowatthour—because
of the cost of allowance permits and emissions control equipment (Figure
ES6). As a result of higher electricity prices, total projected electricity
consumption in 2020 is reduced (Figure ES7).
However, electricity demand is essentially unchanged in the advanced case
with the addition of the emissions limits, because the price is unchanged.
In the advanced case with emissions limits, the CO2
allowance price is essentially the same as in the advanced case without the
limits, which assumes a $50 carbon fee across all energy markets. The projected
costs for NOx permits decrease to zero by 2020 in the CEF-JL advanced case as the actions taken to reduce CO2 emissions result
in NOx emissions within the limits.
Between 2001 and 2020, the cumulative incremental resource
costs to electricity generators to comply with the emissions limits are projected
to be $162 billion and $129 billion in the moderate and advanced cases, respectively—increases
of 9 and 8 percent (Figure ES8). The lower
costs of compliance projected in the advanced case are due to the availability
of more efficient generating technologies compared with the moderate case.
In addition, because lower SO2 emissions are assumed in the CEF-JL advanced case even without the emissions limits to simulate the impact of
particulate controls, the addition of the emissions limits can be achieved
at a lower relative cost.
Because the CEF-JL advanced case already includes a $50
carbon fee, there is little additional reduction in energy demand in
that case when limits are imposed, and energy expenditures are only slightly
higher. In the CEF-JL moderate case with emissions limits, higher projected
prices for coal, natural gas, and electricity are projected to reduce energy
consumption in the residential and commercial sectors, compared to the case
without limits, and to increase total energy expenditures. In the industrial
sector, projected energy consumption in 2020 is essentially unchanged because
higher demand for natural gas for cogeneration offsets lower demand for purchased
electricity.
In the electricity generation sector, projected coal-fired
generation in 2020 is reduced in the moderate and advanced cases, with the
addition of the emissions limits (Figure ES9).
The impact is less in the advanced case, however, because the advanced case
without the limits already includes a $50 carbon fee and a reduction in particulate
emissions. Generation from natural gas, existing nuclear power plants, and
renewable sources is projected to be higher in both cases when the emissions
limits are imposed, because the limits raise the cost of coal-fired generation.
Cogeneration of electricity is also higher in the commercial and industrial
sectors in the CEF-JL moderate case when emissions limits are imposed.
Total projected CO2 emissions in 2020 are reduced
by 12 percent and 4 percent in the CEF-JL moderate and advanced cases
with emissions limits, respectively, compared to the cases without the limits,
primarily due to lower levels of coal-fired generation.
Impacts of Emissions Limits in 2007 on the CEF-JL Cases
In the CEF-JL moderate and advanced cases with emissions
limits, average delivered electricity prices in 2007 are projected to be 27
percent and 11 percent higher, respectively, than in the cases without emissions
limits (Table ES5). Between 2006 and 2007, the average delivered price of electricity in the CEF-JL moderate case with emissions limits is expected to increase by 7 percent;
however, in the CEF-JL advanced case, the expected increase is only
3 percent. The lower expected price increase results from the lower demand
in the CEF-JL advanced case and the fact that the advanced case includes
a $50 carbon fee even without the emissions limits.
In both CEF-JL cases, there is projected to be a decrease
in coal-fired generation in 2007 when the limits are imposed, with an increase
in natural gas and renewable generation and a slight increase in nuclear generation.
As a result, the projected natural gas price in 2007 is higher by 12
percent and 23 percent in the CEF-JL moderate and advanced cases than
in the respective cases without limits.
In the CEF-JL moderate case, projected GDP in 2007 is
reduced by 0.8 percent when the emissions limits are imposed. However, these
impacts are reduced to 0.2 percent in 2010, and GDP is expected to return
to the same level as in the case without limits by 2020. Because energy consumption
is lower in the CEF-JL advanced case and there is a smaller increase
in energy prices between 2006 and 2007 when the limits are imposed, GDP in
the CEF-JL advanced case is projected to have approximately half the
impact in the CEF-JL moderate case in 2007 and 2010, with GDP returning
to the same level as in the case without emissions limits by 2020.
Conclusion
Reducing energy demand by encouraging the development and adoption
of more energy-efficient technologies or lowering the demand for energy services
makes the emissions limits less costly to achieve. However, in each of the
four cases in this analysis, the total cumulative resource cost of generating
electricity is projected to increase by 8 to 9 percent when the emissions
limits are imposed.
Imposing the emissions limits on each of the four cases raises
the projected demand for natural gas due to higher demand by electricity generators
that are subject to the emissions limits. Natural gas demand is also projected
to be higher for commercial and industrial cogeneration in all cases except
the CEF-JL advanced case, which is the exception because of the $50
per ton carbon fee assumed in that case even without emissions limits. As
a result of higher projected natural gas demand, natural gas prices are projected
to be higher in all four cases when the emissions limits are imposed.
Because the CEF-JL advanced case includes a $50 per
ton carbon fee and also include a policy to reduce particulate emissions,
coal consumption is sharply reduced in that case and electricity prices are
higher relative to the reference case, even without the emissions limits.
Because of the $50 per ton carbon fee, imposing emissions limits only results
in a small additional reduction in total energy demand, 1.0 percent in 2020,
in the CEF-JL advanced case with emissions limits.
The assumed emissions limits are expected to have measurable
short-term impacts on the economy when the limits are fully imposed in 2007.
However, the impact is significantly reduced even by 2010, as the economy
adjusts to higher energy prices. In all cases except the reference case, the
macroeconomic impacts of the emissions limits are essentially eliminated by
2020.
Notes and Sources |
