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Representation of New Environmental Rules and Regulations The reference case for this analysis excludes several potential environmental actions, such as new regulations affecting regional haze, for which States are developing implementation plans; the implementation of new National Ambient Air Quality Standards (NAAQS) for fine particulates, which is still being reviewed by the U.S. Environmental Protection Agency (EPA) and the courts; and the possible ratification of the Kyoto Protocol. In addition, no effort is made to predict the outcome of ongoing studies of the need to reduce power plant Hg emissionsa or the resolution of lawsuits against the owners of coal-fired power plants accused of violating the Clean Air Act (CAA). In June 1999, the EPA issued regulations to improve visibility (reduce regional haze) in 156 national parks and wilderness areas across the United States. It is expected that these rules will have an effect on power plants, but the degree to which they will be affected is not known. Power plant emissions of SO2 and NOx, which contribute to the formation of regional haze, may have to be reduced to improve visibility in some areas. The regulations call for States to establish goals and design plans for improving the visibility in affected areas; however, State implementation plans (SIPs) are not required until 2004 or later and therefore are not represented in this analysis, because they have not yet been promulgated. The revised NAAQS, issued by the EPA in 1997, created a standard for fine particles smaller than 2.5 micrometers in diameter (PM2.5). As with regional haze, power plant emissions of SO2 and NOx are a component of fine particulate emissions. At the request of the President (memorandum July 16, 1997), the EPA is now reviewing scientific data on fine particulate emissions to determine whether to revise or maintain the standard. The review is expected to be completed in 2002. If the standard is maintained, States will be required to submit plans to comply by 2005. In December 1997, 160 countries met to negotiate binding limitations on greenhouse gas emissions for the developed nations. CO2 emissions from fossil-fired power plants are a key component of greenhouse gas emissions. The developed nations agreed to limit their greenhouse gas emissions to 5 percent below the levels emitted in 1990, on average, between 2008 and 2012. The target for the United States is 7 percent below the 1990 emission level for all greenhouse gases. Reductions would be required if the U.S. Senate ratified the protocol. However, the President has indicated that the United States will not support the approach called for in the Protocol. At this time, while 39 countries have ratified the protocol, only one Annex I (developed) country, Romania, has ratified the agreement. In addition, various elements of the Protocol are still under negotiation. The Clean Air Act Amendments of 1990 (CAAA90), Section 112(n)(1)(A), required that the EPA prepare a study of hazardous air emissions from steam generating units. The report was submitted to Congress on February 24, 1998. Its key finding was that Hg emissions from coal-fired power plants posed the greatest potential for harm. The EPA is now collecting and analyzing data on Hg emissions from specific power plants. The data, together with continuing studies on the health effects of Hg, will be used to determine the extent to which emissions need to be reduced. The EPA will be developing proposed regulations for reducing Hg emissions over the next 3 years. On November 3, 1999, the Justice Department, on behalf of the EPA, filed suit against seven electric utility companies, accusing them of violating CAAA90 by not installing state-of-the-art emissions control equipment on their power plants when major modifications were made. CAAA90 requires that when major modifications are made to older power plants they must also be upgraded to comply with the emissions standards for new power plants. The EPA is arguing that the seven companies and the Tennessee Valley Authority made major modifications to 32 power plants but did not add the required emissions control equipment. The continued pursuit and outcome of these cases is uncertain at this time. aOn December 15, 2000, the EPA announced that Hg emissions need to be reduced, and that regulations will be issued by 2004. |
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The EIA report Analysis of Strategies for Reducing Multiple Emissions from Electric Power Plants: Sulfur Dioxide, Nitrogen Oxides, Carbon Dioxide, Mercury and a Renewable Portfolio Standard was released in July 2001, in response to a request from the Subcommittee on Energy Policy, Natural Resources, and Regulatory Affairs of the U.S. House of Representatives Committee on Government Reform. The Subcommittee requested that EIA analyze the impacts of coordinated efforts to reduce power plant emissions of NOx, SO2, CO2, and Hg together with a 20-percent renewable portfolio standard. The analysis was prepared in two parts. The first part, which analyzed NOx, SO2, and CO2, was released in December 2000. The report released in July 2001 extended the analysis to include the impacts of Hg emission reductions and the renewable portfolio standard. The July 2001 EIA report examined the impact of the proposed emissions requirements on fuel use by electricity generators, capacity expansion and retirement decisions, electricity prices, and consumer demand for electricity. It also included discussion of the price and supply impacts on coal, natural gas, and renewable technologies. As requested by the Subcommittee, cases were prepared to examine the impacts of Hg emissions targets and a renewable portfolio standard separately, as well as when all of the emissions limits were combined with the standard. The “integrated cases” included cases reducing CO2 emissions to 1990 levels and to 7 percent below 1990 levels. The key findings of the analysis included the following:
aIn accordance with the Subcommittee request, this study assumed that there would be no construction of new nuclear plants. |
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Considerable uncertainty exists about the ability of various types of emissions control equipment to remove Hg and, to a lesser extent, NOx. Many factors affect the level of Hg emissions from a particular power plant, including the Hg content (by speciation—elemental Hg versus various Hg-containing compounds), chlorine content, and other chemical constituents of the coal used; the rank of the coal (i.e., bituminous or subbituminous); the boiler temperature and firing type and the flue gas temperature; and the types of existing control equipment for NOx, SO2, and particulates. In recent years data collection and analysis efforts have focused on these factors so that better estimates of current power sector Hg emissions could be developed; however, substantial uncertainty remains. As additional tests are performed, factors currently unaccounted for may turn out to be important. Data collected by the Environmental Protection Agency in 1999 showed considerable variation in the content of Hg in the coal used by power plants and in the amount of Hg that was removed by the existing equipment at those power plants. On average the sample data show that the Hg content of coal shipped in 1999 was 7.3 pounds per trillion British thermal units (Btu), or approximately 0.2 pounds of Hg per thousand short tons of coal; however, there was considerable variation among coals from different seams, even within a given coal supply region. For example, the 1999 data indicated that coal shipments from the Pittsburgh seam in Northern Appalachia had an average Hg content of 8.2 pounds per trillion Btu, whereas shipments from the Upper Freeport seam averaged 16.4 pounds Hg per trillion Btu. Even within the same coal seam, the tested shipment data show considerable variation in Hg content. For example, although the average Hg content for the Pittsburgh seam was 8.2 pounds per trillion Btu, the minimum for shipments from that seam was 0.1 pounds per trillion Btu and the maximum was 73.1 pounds per trillion Btu. In statistical terms, the standard deviation for Hg content at the Pittsburgh seam is 4.04, indicating that most samples should have Hg contents between 0.1 and 16.3 pounds of Hg per trillion Btu. The Hg removal rates for the various coal plant configurations also showed significant variation. The 1999 data show that, on average, a cold-side electrostatic precipitator (CSE)—a particulate removal device— removes 31 percent of the Hg that passes through it. However, the variation among plants with CSEs was large, ranging between 0 percent and 87 percent removal. The situation was similar for facilities with fabric filters—another type of particulate removal device. On average they removed 69 percent of the Hg passing through them, but, after excluding plants that actually reported increases in Hg after passing flue gas through the fabric filter, the removal rate ranged between 54 percent and nearly 100 percent. In addition, there is very little information on the impact of new NOx control devices—selective noncatalytic reduction (SNCR) and selective catalytic reduction (SCR) equipment—on Hg emissions. Although many plant owners plan to add them in the near future, only a few are using them now. With respect to NOx, SCRs are assumed to reduce emissions by 75 to 80 percent on average; however, because so few plants have SCRs today, the true cost and performance of the technology are not known at this time. With respect to Hg, this study assumes that, when combined with an SO2 scrubber, an SCR enhances Hg removal with an emissions modification factor of 0.65 (increases Hg removal by 35 percent); however, no additional removal is assumed for plant configurations that have an SCR but do not have an SO2 scrubber. Some pilot-scale tests suggest that SCRs would increase Hg removal for some system configurations, but the magnitude of the impact is not known at this time. |
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Macroeconomic Effects of Alternative Implementation Instruments All the cases considered assume a marketable emission permit system, with a no-cost allocation of the permits based on historical emissions. In meeting the targets, power suppliers are free to buy and sell allowances at a market-determined price for the permits, which represents the marginal cost of abatement of any given emission. An alternative form of permit system would auction the permits to power suppliers. The price paid for the auctioned permits would equal the price paid for traded permits under the no-cost allocation system used for this study. However, the two systems imply a different distribution of income. In the no-cost allocation system, there would be a redistribution of income flows between power suppliers in the form of purchases of emission permits. There would be no net burden on the power suppliers as a whole, only a transfer of funds among firms. While all firms are expected to benefit from trading, the burden would vary among firms. With a Federal auction system, in contrast, there would be a net transfer of income from power suppliers to the Federal government. The key question at this juncture turns on the use of the funds by the Federal government. If the funds were returned to the power suppliers, the effect would be the same as in the no-cost allocation scheme, but with the Federal government establishing the permit market mechanism. Another use of the funds might be to return them to consumers either in the form of a lump-sum transfer or in the form of a personal income tax cut, compensating consumers for the higher prices paid for energy and non-energy goods and services.a Relative to the no-cost allocation of permits, an auction that transfers funds to consumers in a lump sum would help to maintain their level of overall consumption. With the transfer, however, total investment would decline relative to the allocation system. The two effects would tend to counterbalance each other, but not completely. Returning collected auction funds to the consumer would tend to have a slightly more positive effect than the negative effect on investment for the first few years, but investment would tend to rebound faster and contribute increasingly to the recovery. As a result, real GDP would be expected to recover to reference case levels faster under the no-cost allocation system. Over the entire period, however, the net impacts on real GDP are expected to be similar in both magnitude and pattern under the two potential allocation schemes. Another approach is to recycle the auctioned revenues to either consumers or businesses through a reduction in marginal tax rates on capital or labor. Unlike the no-cost allocation or the lump-sum payment to consumers, this approach may lower the aggregate cost to the economy by shifting the tax burden away from distortionary taxes on labor and capital toward the taxation of an environmental pollutant. Most often research on this topic is based on a general equilibrium approach, where all factors are assumed to be utilized fully, as in the work by Goulder, Parry, and Burtraw.b Revenue recycling benefits may also apply in a setting where transition effects on the economy, such as considered in the current EIA study, are the focus.c aFor a discussion of the relative merits of alternative instruments, see Perman, Ma, and McGilvray, “Pollution Control Policy,” in Natural Resource and Environmental Economics (Addison Wesley Longman, 1996). bL.H. Goulder, I.W.H Parry, and D. Burtraw, “Revenue-Raising Versus Other Approaches to Environmental Protection: The Critical Significance of Pre-existing Tax Distortions,” RAND Journal of Economics, Vol. 28. (Winter 1997), pp. 708-731. cSee also Energy Information Administration (EIA), Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity, SR/OIAF/98-03 (Washington, DC, October 1998), Chapter 6, “Assessment of Economic Impacts” and EIA, Analysis of Strategies for Reducing Multiple Emissions from Electric Power Plants: Sulfur Dioxide, Nitrogen Oxides, Carbon Dioxide, and Mercury and a Renewable Portfolio Standard, SR/OIAF/2001-03 (Washington, DC, July 2001), Chapter 4, “Fuel Market and Macroeconomic Impacts.” |
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Production Possibilities and the U.S. Macroeconomy A key finding of the CEF study was that “there are large-scale market and/or organizational failures, in addition to potentially substantial transaction costs, that prevent consumers and firms from obtaining many energy services at least cost.” Moreover, “interpreted in a macroeconomic context, the . . . economy is not on its aggregate production-possibilities frontier.”a The production possibilities curve describes the alternative combinations of final goods and services that can be produced in a given time period with all available resources and technologies (see figure below).b Points on the curve (points A and B in the figure) represent the maximum level of output that can be produced with a given set of inputs and technology. However, there are multiple ways in which these inputs can be combined to produce any given set of products or services. Movement along the curve introduces another concept, opportunity cost. The opportunity cost reflects a tradeoff in the production of the economy, i.e. to produce more of a product, given a fixed set of inputs, the economy must produce less of something else, or a combination of other goods and services. Points inside the curve (point C) mean that the economy is not fully utilizing its resources and that more goods and services can be produced from the given set of inputs. Points along the curve are said to be “efficient” in the use of a given set of inputs and technologies, while points inside the curve are “inefficient.” Production outside of the curve (point D) is not attainable given current resources and technology (see Production Possibilities Curve graph). As Appendix E-4 of the CEF study stated, “. . . many of the criticisms of studies like the CEF are a disagreement with the extent to which the economy is inside its aggregate production frontier, the effectiveness of policies to overcome this situation, or both.” The debate also relates to movements along the curve which represent the opportunity cost of changing the mix of goods and services in the economy. The crucial assumption underlying the CEF study was that the economy is not currently on its production possibility curve, i.e., the economy is not using its resource base efficiently. Moreover, the study assumed that a least-cost technology modeling approach can yield a measure of the energy cost savings which permits the economy to move outward to the production possibilities curve frontier. However, to do so requires overcoming “large-scale market and/or organizational failures, in addition to potential substantial transaction costs, that prevent consumers and firms from obtaining many energy services at least cost.” Therefore, by assumption, CEF presumed that the economy is operating at a position which is not on the stylized “production possibilities curve” and that overcoming market failures in the use of energy can both make the economy more energy efficient (to the position defined as the moderate case) and actually increase GDP at the same time. This assumption was flawed by CEF assumptions that energy markets currently are not behaving efficiently and that any of the market barriers that may exist are, in fact, market failures instead, as discussed below. The distinction is important, because 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.”c However, as discussed in presenting the energy market assessment in this study, 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 their time to evaluate options. Consumer preferences for certain attributes of energy-consuming equipment, for example, larger cars or houses with increasing use of miscellaneous electric appliances, are consistent with making efficient household decisions. These may represent “barriers” to the adoption of certain energy technologies, but this does not constitute a market failure which prevents the economy from operating on the efficient portion of the production-possibilities curve.d Also, many of the programs which are promoted to overcome a market failure overstate the case. Incorrect information can indeed lead consumers to make wrong choices, but benefits of information programs and voluntary initiatives are difficult to quantify. It is also appropriate to consider a movement along the production-possibility curve to a position that society may deem to be more desirable, for example, one with a lower level of emissions. This is done most often through a change in energy prices vis-a-vis other goods and services, which changes the mix of production and consumption in the economy. However, the carbon trading fee that attains this mix is dependent on the location of the economy relative to the production-possibilities curve. If one presumes that the economy has an alternative reference case with lower emissions, the task of attaining a lower emissions target is lessened. By making this assumption, the CEF authors effectively lowered the projected cost of meeting the more stringent emissions targets.
aInterlaboratory Working Group, Scenarios for a Clean Energy Future, ORNL/CON-476 and LBNL-44029 (Oak Ridge National Laboratory, Oak Ridge, TN, and Lawrence Berkeley National Laboratory, Berkeley, CA, November 2000), Appendix E-4, “Estimating Bounds on the Macroeconomic Effects of the CEF Policy Scenarios,” web site www.ornl.gov/ORNL/Energy_Eff/CEF-E4.pdf. bB.R. Schiller, The Macro Economy Today, Eighth Edition (New York, NY: McGraw-Hill, 2000), pp. 7-10. cH. Jacoby, “The Uses and Misuses of Technology Development as a Component of Climate Change Policy,” presentation to the America Council for Capital Formation, Center for Policy Research (October 1998). dFor a good discussion of the distinction between market failures and market barriers, see H. Jacoby, “The Uses and Misuses of Technology Development as a Component of Climate Change Policy,” presented to the American Council for Capital Formation, Center for Policy Research (October 1998). |
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