4. End-Use Energy Demand

This chapter summarizes the impacts of S.139 on the four end-use demand sectors—residential, commercial, industrial, and transportation. As discussed in Chapter 2, this analysis assumes that S.139 covers greenhouse gas emissions in the industrial sector (excluding agriculture) and in the transportation sector, through a requirement that petroleum refiners and importers provide emission allowances for transportation fuels sold to the transportation sector. Primary energy use in the residential sector is not covered because it is exempt in the Bill. Primary energy use in the commercial sector is assumed not to be covered since the majority of the sector would not meet the 10,000 metric ton emissions minimum. However, a sensitivity is analyzed to examine the impact of including the commercial sector. Regardless of the coverage of primary energy use, both the residential and commercial sectors are generally expected
to see higher energy prices, particularly electricity prices, through the impact of S.139 on the other sectors. The focus of the discussion in this chapter is on the impact of S.139 in 2025, because that year generally shows the largest differential from the reference case. The projected results for the intervening years are given in Appendix C.

In addition to comparing the S.139 case to a reference case, this chapter also discusses a number of alternative cases relevant to the end-use energy demand sectors, including an S.139 high technology case, a case with full coverage of the commercial sector, and a case in which new nuclear capacity and sequestration technologies are assumed not to be available as an option to limit greenhouse gas emissions. A description of all the cases analyzed in this study appears on pages 60-63 in Chapter 2. The alternative cases are summarized in Appendixes E through J.

Residential Sector

Background

As the largest electricity-consuming sector in the United States, households were responsible for 20 percent of all carbon dioxide emissions produced in 2001, of which 69 percent was directly attributable to the fuels used to generate electricity for the sector. Electricity is a necessity for all households. Because electricity generation is covered by S.139, residential consumers see higher electricity prices. In the reference case, electricity use per household is projected to grow at nearly 1 percent per year through 2010.

The number of occupied households is the most important factor in determining the amount of energy consumed in the residential sector. All else being equal, more households mean more total use of energyrelated services. From 1980 to 2001, the number of U.S. households grew at a rate of 1.3 percent per year, and residential electricity consumption grew by 2.5 percent per year. In the reference case, the number of households is projected to grow by 1.1 percent per year through 2010, and residential electricity consumption is projected to grow by 2.1 percent per year. Strong growth in the South, which features allelectric homes more prominently than do other areas of the country, and the advent of many new electrical devices for the home (e.g., home entertainment systems and security systems) have significantly contributed to high electricity growth since 1980. Although these trends are projected to continue through 2010, efficiency improvements—due in part to recent Federal appliance standards, building codes, and non-regulatory programs (e.g., Energy Star)—should dampen electricity growth somewhat as residential appliances are replaced with newer, more efficient models.

Within the residential sector, all the major end uses (heating, cooling, lighting, etc.) are represented by a variety of technologies that provide necessary services. Technologies are characterized by their cost, efficiency, dates of availability, minimum and maximum life expectancies, and the relative weights of the choice criteria—installed cost and operating cost. The ratio of the weight of installed cost to that of operation cost gives an estimate of the “hurdle rate” used to evaluate the energy efficiency choice.¹¹³ When more emphasis is placed on installed cost, the hurdle rate is higher. The hurdle rates in NEMS for residential equipment, which are based on the observed behavior of residential consumers, range from 15 percent for space heating technologies to more than 100 percent for room air conditioners. The range in part reflects differences in the way consumers purchase the two technologies. In the case of water heaters, for example, purchases usually occur at the time of equipment failure, which tends to restrict the choice to equipment readily available from the plumber. Space conditioning equipment, on the other hand, is not as critical as water heating during some parts of the year, allowing greater latitude in terms of timing the replacement of an older unit. In practice, however, most space conditioning equipment is also replaced when it fails. It is assumed that residential consumers expect future energy prices to remain at the current level at the time of purchase when calculating the future operating cost of a particular technology.

Technological advances and availability play a large role in determining future energy savings and carbon dioxide emission reductions. Even in today’s marketplace, there exist many efficient technologies that could substantially reduce energy consumption and carbon dioxide emissions. However, the relatively high initial cost of these technologies restricts their widespread penetration. Over time, the costs of more advanced technologies are assumed to fall as the technologies mature (one example being natural gas condensing water heaters). In addition, technologies that are not available today, but are nearing commercialization, are assumed to become available in the future. Four technology menus are used in the analysis below: a reference technology menu; a “rebate adjusted” menu, which lowers the cost of the more efficient technologies based on assumptions regarding rebates that will be available through the Climate Change Credit Corporation (hereafter referred to as the Corporation) created by S.139; a high technology menu reflecting more aggressive research and development; and a “rebate adjusted” high technology menu. In both high technology cases, for example, the cost of a condensing natural gas water heater is assumed to fall by almost 38 percent by 2005, relative to the reference case, and a natural gas heat pump water heater becomes available for purchase by 2005.

In response to energy price changes, residential elasticities (defined as the percent change in energy consumed with a 1-percent change in price) range from -0.30 to -0.34 in the short run, depending on the fuel type, to -0.41 to -0.60 in the longer term, which are in the range cited in the literature.¹¹⁴ The elasticities reported here are derived from NEMS by a series of simulations with only one energy price varying at a time, beginning in 2005.¹¹⁵ These price elasticities reflect changes in both the demand for energy services and the penetration rate of more efficient technologies. In the absence of energy price changes, household energy intensity (defined as delivered final residential energy consumption per household) declines at an average rate of 0.1 percent per year through 2025. This non-price-induced intensity improvement reflects the efficiency gain brought about by ongoing stock turnover, equipment standards, new housing stock, and the future availability of new technologies.

Energy consumption, including the combustion of various fossil fuels, is the major source of U.S. carbon dioxide emissions. Energy use in the residential sector is greatly affected by year-to-year variations in seasonal temperatures, particularly in the winter, as illustrated by the decline in delivered energy use in 1998 (Figure 4.1), which was one of the warmest winters on record. The projections in this analysis assume normal seasonal temperatures over the 2004-2025 forecast period.

This section will focus on four cases: the reference case, the S.139 case, the high technology case, and the S.139 high technology case. The two high technology cases are sensitivity cases that incorporate higher levels of technological optimism, in terms of cost reductions and/or increased efficiency, relative to the reference and S.139 cases.

Greenhouse Gas Reduction Cases

Although households are specifically excluded from the emission limits proposed in S.139, secondary effects, such as potential increases in delivered energy prices, could have a significant impact on energy use and expenditures within the residential sector and, as a result, the greenhouse gas emissions associated with energy use. Carbon dioxide emissions associated with electricity generation are the largest component of emissions from the residential sector, in terms of both the levels and projected growth in the reference case, and in terms of the projected declines in the greenhouse gas reduction cases. In the reference case, which does not include legislation limiting greenhouse gas emissions, 80 percent of the projected increase in carbon dioxide emissions related to energy use in the residential sector by 2025 results from increasing electricity use and the fuels used for electricity generation. In the S.139 case, electricity-related carbon dioxide emissions decrease by 69 percent in 2025, relative to the 2001 level, due to a dramatic reduction in carbon intensity and energy conservation (Figure 4.4).

Given the impact of emission constraints on the electric generating sector, electricity prices show the greatest increase in the S.139 case (Figure 4.5). By 2025, residential electricity prices rise by 32 percent in the S.139 case, relative to 2001 levels—a marked departure from the 9 percent decrease in real electricity prices projected in the reference case. In both cases, however, real disposable income per household increases by 57 percent over the same period. The price of petroleum products used in residences, primarily heating oil, are projected to remain about the same across the 3 cases shown in Figure 4.5, while natural gas prices are projected to rise by about 5 percentage points in the S.139 case, relative to the reference case, by 2025 due to the increase in the overall demand for natural gas. However, as shown in Figure 4.6, increased use of more energy-efficient technologies can mitigate projected price increases. As energy efficiency increases and demand for electricity and the fuels used to generate electricity decrease in the S.139 high technology case, relative to the S.139 case, electricity prices increase by 16 percent by 2025—half the increase projected in the S.139 case—causing energy expenditures to decrease on an annual basis relative to the S.139 case.

As prices increase in the S.139 case due to stricter emissions requirements in the electric generation sector, households can expect to pay more in annual energy costs. As noted earlier, projected increases in electricity prices in the S.139 case cause household expenditures for energy to increase as well, while energy expenditures in the S.139 high technology case are suppressed to levels slightly above those projected in the reference case (Figure 4.6). This results mainly from increased household energy efficiency and the resulting lower residential (and overall) electricity demand, causing less upward pressure on electricity prices for both the residential sector and the economy as a whole.

As outlined in S.139, the Corporation has the authority to mitigate the adverse effects of greenhouse gas emission restrictions on non-covered entities. The funds collected by the Corporation through the auction of emission permits can be dispersed to residential energy consumers by various methods, including rebates, subsidies, and general transition assistance to displaced workers. In 2010, 20 percent of this fund must be dispersed for transition assistance, leaving 80 percent of the auction proceeds available for rebates and/or subsidies that must be dispersed on a geographically equal basis across the United States. Because S.139 does not specify a particular method of disbursement, an assumption must be made regarding how and by how much the Corporation might allocate the funds it collects. Since the disbursements must be made on a geographically equal basis, it is assumed that the Corporation will pursue rebates for energy-efficient appliances, as opposed to weatherization or similar programs, which tend to affect those homes with higher heating and/or cooling loads. In order to represent the rebates in this analysis, it is assumed that from 2010 through 2025, half of the incremental cost to purchase more efficient appliances is covered by rebates initiated by the Corporation (Table 4.1). For example, the first row in Table 4.1 details a heat pump available between 2020 and 2025 that achieves a 16 percent increase in efficiency over the least efficient unit available for purchase in the same period. Without the 50 percent rebate on the incremental cost ($191 is 50 percent of $382), the new unit would cost $3,881—11 percent more than the $3,500 cost of the least efficient unit available.

Because the range of efficiency options varies by end-use service, some appliances will have several options for rebates, while others may have only one, or none in the case of cooking and clothes dryers. It should be noted that the costs and efficiencies of the more efficient appliances change over time, depending on the appliance, resulting in different efficiency, cost, and rebate amounts. Between 2010 and 2025, an average of $10 billion annually (in 2001 dollars)—17 percent of the monies collected by the Corporation over this 15-year period—is dispersed by the Corporation in the form of rebates for energy efficient appliances. These rebates spur additional investment in energy-efficient appliances and somewhat mitigate the effect of higher energy prices in the S.139 case.

Changes in energy prices and efficiency have a direct effect on the amount of money spent on energy services by individual households in a given year. Figure 4.7 details the per household energy expenditures for the three major fuels used in the residential sector for two historical years as well as the projections for 2010 and 2025 in the reference case, the high technology reference case, the S.139 case, and the S.139 high technology case. Because electricity is used for more services than either natural gas or distillate, and because electricity is the most expensive form of delivered energy on a Btu basis, the average annual energy bill for electricity is greater than for the other two fuels shown in all years. In 2025, the average annual electricity bill is projected to increase by $249 per household (24 percent) in the S.139 case, relative to the reference case. Expanded and accelerated availability of highly efficient technologies can mitigate some of this increase: relative to the high technology reference case, the average annual electricity expenditures in the S.139 high technology case are only $185 per household higher. In both the S.139 and S.139 high technology cases, petroleum expenditures are lower, relative to the reference case because of lower distillate prices caused by lower world oil prices resulting from lower U.S. demand for petroleum. In 2025, natural gas expenditures are about the same in the reference and S.139 cases, as the lower demand per household in the S.139 is offset by the higher natural gas prices caused by an increase in natural gas demand economy-wide, keeping expenditures about the same.¹¹⁹ In the two high technology cases, natural gas expenditures in 2025 are slightly lower than in the reference case, even though natural gas prices in the S.139 high technology case are higher than those in the reference case.

Because the residential sector is specifically excluded from S.139, there are fewer areas to explore in terms of sensitivities relative to the S.139 case then in other sectors. However, in order to gauge the effects of increased energy efficiency with respect to the implementation of S.139, a S.139 high technology case was analyzed (and has been discussed briefly in the previous section). In the S.139 high technology case, several emerging energy-efficient technologies are introduced earlier in the projection period, generally at a lower cost than projected in the reference case.¹²⁰ As shown in Figure 4.6, the increased energy efficiency projected in the S.139 high technology case, relative to the S.139 case, causes projected energy expenditures to fall nearly to the levels projected in the reference case, notwithstanding the projected 27 percent increase in electricity prices in 2025, relative to the reference case. This implies that increases in energy efficiency and conservation can offset potentially higher energy expenditures resulting from higher prices. Without the effects of higher prices under the S.139 high technology case, residential expenditures in the high technology reference case are lower in total than those in any of the other cases, reflecting projected efficiency gains even without the additional S.139 price incentives.

Projected increases in energy prices, coupled with more aggressive assumptions regarding the cost and availability of more efficient technologies in the future, act to reduce energy demanded by households due to both conservation and energy efficiency in the high technology cases. Figure 4.8 shows the difference in energy consumption by service in the high technology cases, relative to the reference and S.139 cases. For most end-use services, the S.139 high technology case technology assumptions bring about less energy demand in 2025, because technology improvements in the S.139 high technology case have a larger impact than lower energy prices, relative to the S.139 case. Lighting, which has relatively inexpensive energy-efficient technology options, exhibits the greatest percent reduction in demand in the S.139 high technology case. Compact fluorescent bulbs, which are widely available today, can significantly decrease the demand for electricity if used on a wide scale. Water heating, on the other hand, exhibits little opportunity for efficiency improvements in the S.139 high technology case, given the limited technological options and lower delivered energy prices, relative to the S.139 case. This holds true for the “other uses” category as well.

Impacts on All Electric and Mixed-Fuel Homes

Given that electricity prices increase by more than the price of any other fuel delivered to the residential sector in the S.139 case, it is important to differentiate the projected impacts in this case based on the mix of fuels used in the home. Because natural gas and distillate are important fuels for space heating, it is likely that homes that heat with these fuels, as opposed to electricity, will see less projected increases in their energy bills in the S.139 case, since natural gas prices do not increase as much as electricity prices, and distillate prices delivered to the residential sector decline. Likewise, natural gas is a popular fuel for water heating, cooking, and clothes drying, while distillate’s use is mainly for space heating.

For this analysis, detailed results from the NEMS residential sector module were examined to develop prototypical all electric and mixed-fueled single-family homes.¹²¹ For the natural gas home, it is assumed that natural gas is used for space heating, water heating, cooking, and clothes drying, while only space heating is considered for the distillate home.¹²² For both the mixed-fuel and all electric homes, it is assumed that space cooling is present and used at the same level of intensity. Similarly, it is assumed that all other electric services, such as personal computers, color televisions, and refrigerators are used at the same level of intensity across the three prototypes described here.

Figure 4.9 details the increase in expenditures in the S.139 case, relative to the reference case for the all electric home, as well as the two mixed-fuel homes. As expected, expenditures in the all electric home increase more than in the two mixed fuel homes. On average, an all electric single-family home can expect to pay $257 more per year (in 2001 dollars), a 17 percent increase, from 2010 to 2025, in the S.139 case than in the reference case. The natural gas prototype home exhibits the least increase in average expenditures in the period, increasing by $154 per year over the same period, a 10 percent increase over the reference case. Since the distillate prototype home relies on electricity for clothes drying, cooking, and water heating—services that can be provided by natural gas—the average expenditures over the 20102025 period increase more than those for the natural gas prototype home, even with lower delivered energy prices in the S.139 case, relative to the reference case. These homes can expect to pay $169 per year more over the 2010-2025 period, a 9 percent increase over the reference case.

Commercial Sector

Background

The commercial sector consists of businesses and other organizations that provide services. Stores, restaurants, hospitals, and hotels are included, as well as a wide range of facilities that would not be considered “commercial” in a traditional economic sense, such as public schools, correctional institutions, and fraternal organizations. In the commercial sector, energy is consumed mainly in buildings, and relatively small amounts are used for services, including streetlights and water supply.

The commercial sector is currently the smallest of the four demand sectors in terms of energy use, accounting for 12 percent of delivered energy demand in 2001. The commercial sector was also responsible for fewer carbon dioxide emissions than the other sectors (18 percent of total U.S. carbon dioxide emissions) in 2001. The sector has a larger share of emissions than its share of energy use because of the importance of commercial electricity use. The emissions associated with electricity-related losses are included in the calculation of emissions from electricity use. As a result, 77 percent of commercial carbon dioxide emissions in 2001 were indirect emissions associated with electricity use, while 23 percent were from direct fossil fuel use in the commercial sector.

Several factors determine energy use and, consequently, carbon dioxide emissions in the commercial sector. One of the most important is floorspace. Building location, age, and type of activity also affect commercial energy use. Currently, total commercial floorspace in the United States exceeds the area of the State of Delaware and amounts to over 200 square feet for every U.S. resident. Mercantile (retail and wholesale stores) and service businesses are the most common type of commercial buildings, and offices and warehouses are also common.¹²³

Because of the relatively long lives of buildings, the characteristics of the stock of commercial floorspace change slowly. Almost half of the commercial buildings in the United States were built before 1970. The reference case used for this analysis projects that total commercial floorspace will grow at about 1.5 percent annually through 2025. This limits the effects that new, more efficient building practices can achieve in the near term, but as time passes and building stock “turnover” occurs, current and future building practices will have a greater effect on commercial energy use.

The composition of end-use services is another determinant of the amount of energy consumed and the type of fuel used. The majority of energy use in the commercial sector is for lighting, space heating, cooling, and water heating. In addition, the proliferation of new electrical devices, including telecommunications equipment, personal computers, and other office equipment, is spurring growth in commercial electricity use. Electricity use currently accounts for 49 percent of delivered energy consumption in the sector, and that share is projected to grow to 52 percent by 2010. In terms of primary energy use, including electricity losses, electricity accounts for 76 percent of total commercial energy use, growing to 77 percent by 2010.

Consideration of end-use services leads to another determining factor in commercial energy consumption—the effects of turnover and change in end-use technologies. The stock of installed equipment changes with normal turnover as old, worn-out equipment is replaced and new buildings are outfitted with newer versions of equipment that tend to be more energy-efficient. Equipment with even greater energy efficiency is expected to be available to commercial consumers in the future. Energy prices have both short-term and long-term effects on commercial energy use. Fuel prices influence energy demand in the short run by affecting the use of installed equipment and in the long run by affecting the stock of installed equipment.

Legislated efficiency standards also affect energy use, by imposing a minimum level of efficiency for purchases of several types of equipment used in the commercial sector. Two mandates currently affect commercial appliances: the National Energy Policy Act of 1992 (P.L. 102-486, Title II, Subtitle C, Section 342), which specifically targets larger-scale commercial equipment and fluorescent lighting, and the National Appliance Energy Conservation Amendments (NAECA), which affect commercial buildings that install smaller residential-style equipment. Examples include standards for heat pumps, air conditioning units, boilers, furnaces, water heating equipment, and fluorescent lighting.

The degree to which energy-efficient equipment can affect energy consumption, and in turn carbon dioxide emissions, in the commercial sector is limited by the level of efficiency available to commercial consumers and the rate at which more efficient equipment is purchased. Technologies for all the major end uses (lighting, heating, cooling, water heating, etc.) are defined by their installed cost, operating cost, efficiency, average useful life, and first and last dates of availability. These parameters are considered, along with fuel prices at the time of purchase, in the selection of technologies that provide end-use services. Commercial consumers are not assumed to anticipate future changes in fuel prices when choosing equipment. The commercial sector encompasses a wide variety of buildings, and not all consumers will have the same requirements and priorities when purchasing equipment. Major assumptions that take these differences in behavior into account and affect commercial technology choices are described below.

In making the tradeoffs between equipment cost and equipment efficiency, the diversity in purchase behavior of the commercial sector is represented by distributing floorspace over a variety of hurdle rates. The distribution is constructed to allow the model to represent the observed decisions regarding the selection and use of energy-using equipment in the commercial sector. Floorspace is distributed over hurdle rates that range from the 10-year treasury bond rate to rates high enough to cause choices to be made solely by minimizing the costs of installed equipment (i.e., future potential energy cost savings are ignored at the highest hurdle rate).¹²⁴ The distribution of hurdle rates used in all the cases for this analysis is not static: as fuel prices increase, the nonfinancial portion of each hurdle rate in the distribution decreases.¹²⁵

For a proportion of commercial consumers, it is assumed that newly purchased equipment will use the same fuel as the equipment it replaces. This proportion varies by building type and by type of purchase— whether it is for new construction, to replace worn-out equipment, or to replace equipment that is economically obsolete. Purchases for new construction are assumed to show the greatest flexibility of fuel choice, while purchases for replacement equipment have the least flexibility. For example, when spaceheating equipment in large office buildings is replaced, 8 percent of the purchasers are assumed to consider all available equipment using any fuel or technology, while 92 percent select only from technologies that use the same fuel as the equipment being replaced. The proportions used are consistent with data from EIA’s Commercial Buildings Energy Consumption Survey and from published literature.¹²⁶ Considerations such as owner versus developer financing, past experience, ease of installation, and fuel availability all play a role in fuel choice. This assumption also accounts for some of the factors that influence technology choices but cannot be measured. For example, a hospital adding a new wing has an economic incentive to use the same fuel that is used in the existing building.

The availability and costs of advanced technologies affect the degree to which they can contribute to future energy savings and carbon dioxide emission reductions. Many efficient technologies currently available to commercial consumers could significantly reduce energy consumption; however, high purchase costs and the current low level of fuel prices have limited their penetration to date. As more advanced technologies mature over time, their costs are expected to decline (compact fluorescent lighting is an example). New technologies, beyond those available today, may also enter the market in the future. For example, the S.139 high technology case, described below, assumes that by 2005 a triple-effect absorption natural-gas-fired commercial chiller will be available.

The combination of technology and behavior assumptions determines the commercial-sector price elasticity for each of the major fuels—that is, how commercial sector demand projections are affected by changes in energy prices. Specifically, the commercial-sector price elasticity for a particular fuel is the percent change in demand for that fuel in response to a 1-percent change in its delivered price. Short-run price elasticities for fuel use in the commercial sector range from -0.20 to -0.29, representing behavioral changes in the use of equipment, such as adjusting thermostats or turning lights off in unoccupied areas. Long-term price elasticities range from -0.39 to -0.45, reflecting changes in both the use of existing equipment and the adoption rates for more efficient equipment.¹²⁷ These values are within the range cited in the literature.¹²⁸

The reference case projects slightly declining electricity and natural gas prices compared to the relatively high prices experienced in 2001. Commercial electricity and natural gas prices are projected to show an average decline of 0.4 and 0.6 percent per year, respectively, between 2001 and 2025, reducing the incentive for commercial consumers to invest in energy-efficient equipment. Projected commercial prices for petroleum products decline in the near term, and then rise steadily through the end of the forecast, resulting in an average annual increase of 0.3 percent between 2001 and 2025.

S.139 Case

The S.139 case assumes that the commercial sector is not covered by the emissions limits specified in the proposed legislation, although the commercial sector can provide credit for reductions to covered sectors. As discussed in Chapter 2, this assumption is based on the level of the emissions threshold. A commercial coverage case, which assumes that the entire commercial sector is covered, was also examined. The results of this sensitivity case are discussed following the discussion of commercial sector results for the S.139 case. In the S.139 case, commercial sector delivered energy use in 2025 is projected to be 3 percent lower (Figure 4.10), and carbon dioxide emissions attributable to the commercial sector, including emissions from electricity generation, are projected to be 60 percent lower relative to reference case projections, despite 1.5-percent annual growth in commercial floorspace from 2001 to 2025. Commercial energy consumption in the S.139 case is impacted primarily by higher projected electricity prices—46 percent higher in 2025 compared with the reference case. Although the commercial sector is not required to participate in the emissions allowance system under the assumptions for the S.139 case, the power sector is expected to pass a share of the opportunity costs of allowances on to ratepayers. Commercial sector purchased electricity use in 2025 is expected to be 12 percent lower in the S.139 case than in the reference case due to the increased prices (Figure 4.11). Natural gas consumption as a whole is projected to increase in the S.139 case relative to the reference case, exerting upward pressure on projected natural gas prices to the commercial sector. Covered sectors shift toward natural gas use and away from fossil fuels that produce higher emissions. Higher projected electricity prices increase the attractiveness of distributed generation, including combined heat and power, in the commercial sector, contributing to increased use of natural gas.

Floorspace expansion in the commercial sector will lead to growth in energy consumption if other factors remain the same. Figure 4.12 removes the effects of floorspace growth by presenting commercial energy intensity in terms of delivered energy consumption per square foot of commercial floorspace. Delivered energy intensity in the reference case is projected to increase very slightly, 0.1 percent per year, between 2001 and 2025. Projected growth in commercial demand for services is offset by the availability and continued development of energy-efficient technologies, existing equipment efficiency standards, and voluntary programs. In the S.139 case, with higher energy prices, the projection for commercial delivered energy intensity in 2020 is 4 percent below the reference case projection, slightly below its current (2001) level. Reduction in delivered energy intensity relative to the reference case narrows to 2 percent by 2025 due to increased use of natural gas.

When energy prices rise, consumers are expected to reduce energy use by purchasing more efficient equipment and by altering the way they use energy-consuming equipment. In addition to buying more efficient boilers and chillers, commercial customers in the S.139 case are expected to choose more heat pump water heaters and more efficient lighting technologies than they would in the reference case (Table 4.2).

The adoption of more efficient technologies reflects the reaction to rising fuel prices and a change in the way commercial consumers are expected to look at purchase decisions involving energy efficiency if electricity-related carbon dioxide emissions are limited. Most commercial consumers give some consideration to fuel costs when buying equipment. A significant increase in fuel prices is expected to cause consumers to give energy costs greater weight in the purchase decision, by seeking out more information about energy efficiency options and by accepting a longer time period to recoup the additional initial investment typically required to obtain greater energy efficiency. While taking client comfort and employees’ working conditions into consideration, commercial energy consumers would also be expected to turn thermostats down (up) a few degrees during cooler (warmer) weather and to be more conscientious about turning off lights and office equipment not in use.

The fastest-growing commercial end uses, under reference case assumptions, include office equipment and miscellaneous devices powered by electricity (e.g., telecommunications equipment, medical imaging equipment, ATM machines), which are continuing to penetrate the commercial sector. Although electricity consumption for these end uses would be responsive to the price signals resulting from emissions reduction efforts in the power sector, their growth still is expected to be faster than growth in the end uses that directly consume fossil fuels (primarily space heating and water heating).

Because the requirement for the power sector to hold emissions allowances causes a greater percentage increase in electricity prices than natural gas prices relative to those in the reference case, commercial consumers are expected to adopt distributed generation technologies, including combined heat and power, to a much greater extent in the S.139 case than in the reference case. The impacts are most pronounced toward the end of the forecast period, when projected cost declines for advanced technologies such as fuel cells and microturbines are expected to occur. In keeping with the typical power and heating requirements of commercial establishments, the size and use of the distributed generation/combined heat and power systems adopted in the S.139 case are assumed to remain well under the threshold requiring participation in the proposed emissions allowance system. ¹²⁹

The energy price impacts of the proposed emissions allowance system are seen in the effects on commercial consumers’ energy bills, in addition to the effects described previously (Figure 4.13). Commercial sector energy expenditures in the S.139 case are 11 percent ($16 billion in 2001 dollars) higher than reference case expenditures in 2016 when emissions allowances for covered sectors are tightened to 1990 levels. By 2025, commercial consumers are projected to pay 25 percent ($46 billion) more for energy in the S.139 case relative to 2025 energy costs in the reference case.

The costs of S.139 expected to be borne by commercial consumers include investments in energyefficient equipment as well as the energy expenditures discussed in the previous paragraph. The proposed legislation attempts to reduce the cost burden to consumers by directing the Corporation to use the proceeds collected through the auction of emissions allowances for that purpose. A share of the proceeds, starting at 20 percent in 2010 and declining at 2 percent per year, is to be used for transition assistance to dislocated workers and communities. The remainder of the proceeds is available for buydowns, rebates, or other forms of subsidy to lessen the costs to consumers, to be distributed equitably across all U.S. regions. As described in Chapter 2, the S.139 case includes rebates for energy-efficient equipment for the major commercial end-use services (space heating, space cooling, lighting, etc.) starting in 2010. Rebates to commercial consumers from the Corporation are projected to average $303 million (2001 dollars) per year between 2010 and 2025 in the S.139 case.

Sensitivity Cases

The majority of the sensitivity cases included in this analysis use the same commercial sector assumptions as those used in the S.139 case. Two sensitivity cases were analyzed that involve changes to commercial assumptions. The results of those cases are discussed here. The commercial coverage case requires the entire commercial sector to participate in the emissions allowance system proposed in S.139. This sensitivity case was included to explore the potential impact on emission allowance costs of broader energy use coverage. To make the commercial assumptions in the commercial coverage case comparable with those for other covered sectors, rebates from the Corporation for energy-efficient equipment are not provided to the commercial sector in this case. The S.139 high technology case includes high technology assumptions for all end-use demand sectors and the power sector, as described in Chapter 2. While the commercial sector is excluded from coverage in the S.139 high technology case, the menu of technologies available reflects increased research and development into more advanced technologies relative to the technology menu in both the reference case and the S.139 case. Corporation rebates to commercial consumers for energy-efficient equipment are included in the S.139 high technology case. The S.139 high technology case will be compared to the high technology reference case described in Chapter 2.

In the commercial coverage case, commercial delivered energy use in 2025 is projected to be 7 percent lower than in the S.139 case (see Figure 4.10) as allowance requirements drive up the costs of fossil fuel use. Carbon dioxide emissions attributable to the commercial sector in the commercial coverage case are 11 percent (18 million metric tons carbon equivalent) below the S.139 case projection for 2025. When the commercial sector is required to hold emissions allowances, the projected adoption of distributed generation/combined heat and power decreases significantly compared to the S.139 case, reducing on-site emissions from natural gas use but increasing the need for purchased electricity. The increased cost of energy-efficient equipment (due to the lack of Corporation rebates) contributes to projected commercial use of purchased electricity that is 5 percent (81 billion kilowatthours) higher in 2025 than in the S.139 case (see Figure 4.11). Conversely, commercial natural gas use in 2025 is projected to be 18 percent lower in the commercial coverage case than in the S.139 case as emissions limits lead to lower adoption of distributed generation/combined heat and power and slightly lower consumption for end-use services such as space and water heating.

Although treating the commercial sector as covered results in lower commercial energy use and carbon dioxide emissions, directly limiting commercial sector emissions has little impact on the projected allowance price (Figure 4.14). Projected allowance prices in the commercial coverage sensitivity case and in the S.139 case are virtually the same from 2010 through 2025, with less than one dollar difference between the two cases in 2025. Mandatory commercial sector participation in the tradable allowance system increases the total covered sector emissions and, consequently, the number of offsets allowed in the 15 percent and 10 percent cap allowed in the bill’s alternative compliance provisions. As a result, the cost of offsets increases in this case relative to the S.139 case. ¹³⁰ By 2016, the projected offset price in the commercial coverage case is 14 percent higher than in the S.139 case, and that difference is generally maintained through the end of the forecast.

Annual energy expenditures by commercial consumers in the commercial coverage case, including allowance costs, total $244 billion by 2025—7 percent above projected 2025 expenditures in the S.139 case and 34 percent higher than projected in the reference case (see Figure 4.13). Projected electricity prices in this case are comparable to those projected in the S.139 case, but the imposed limit on commercial emissions increases the effective prices of fossil fuels, resulting in higher commercial energy expenditures.

The S.139 high technology case results in lower projected commercial energy use through the end of the forecast, relative to the high technology reference case (see Figure 4.10). Projected commercial carbon dioxide emissions in 2025 are 51 percent lower in this case than in the high technology reference case due to lower electricity-related commercial emissions. By 2025, the projected commercial electricity price is 36 percent higher in the S.139 high technology case than in the high technology reference case, as the power sector passes a share of the costs of compliance on to consumers in the form of higher prices. The combination of higher electricity prices, and Corporation rebates that mitigate the net added cost of efficient equipment keeps projected commercial electricity consumption in the S.139 high technology case 11 percent below that of the high technology reference case by 2025. Higher electricity prices increase the projected use of commercial fossil-fuel-fired distributed generation/combined heat and power relative to the high technology reference case. Projected natural gas prices are higher in the S.139 high technology case than in the high technology reference case—9 percent higher by 2025. However, the relative increase in natural gas prices is smaller than the increase in electricity prices between the two cases, leading to greater projected adoption of natural-gas-driven distributed generation/combined heat and power in the S.139 high technology case. In the case of solar photovoltaic systems, the optimistic technology assumptions of the high technology cases and the higher electricity prices of the S.139 high technology case, relative to the high technology reference case, result in an additional 311 million kilowatthours (15 percent) of projected electricity generation by commercial photovoltaic systems in 2025.

Higher projected energy prices outweigh lower energy demand, resulting in higher commercial energy bills in the S.139 high technology case relative to the high technology reference case (see Figure 4.13). Commercial energy expenditures projected for 2025 in the S.139 high technology case are 20 percent ($33 billion) above projected expenditures in the high technology reference case. Rebates to commercial consumers from the Corporation in the S.139 high technology case are projected to average $300 million per year between 2010 and 2025.

Industrial Sector

Background

The industrial sector includes agriculture, mining, construction, and manufacturing activities.¹³¹ The sector consumes energy as an input to processes that produce the goods that are familiar to consumers, such as cars and computers. The industrial sector also produces a wide range of basic materials, such as cement and steel, which are used to produce goods for final consumption. Energy is an especially important input to the production processes of industries that produce basic materials. Typically, the industries that are energy-intensive are also capital-intensive. Industries within the sector compete among themselves and with foreign producers for sales to consumers. Consequently, variations in input prices can have significant competitive impacts. The most significant determinant of industrial energy
consumption is demand for final output.

Although energy is an important factor of production, it is not large in terms of annual manufacturing expenditures. In 2001, for example, purchased energy expenditures were 2.8 percent of annual manufacturing outlays.¹³² New technology usually plays a minor role in the pattern of energy consumption, because technology tends to be used to produce new and improved final products rather than to reduce energy consumption; however, when new investments are undertaken to introduce improved production technology, steps to increase energy efficiency also are undertaken. Overall, energy prices and technological breakthroughs tend to have a rather small impact on industrial energy consumption.¹³³

The industrial demand model forecasts energy consumption for fuels and feedstocks for nine manufacturing industries and five nonmanufacturing industries. The model includes electricity generated through combined heat and power systems that is either used in the industrial sector or sold to the electricity grid. Projections of traditional combined heat and power capacity additions are based on steam demand from the buildings and the process and assembly components of the industrial sector. These projections are based on an economic evaluation of 8 prototype combined heat and power systems,¹³⁴ given the prices of electricity and natural gas.

The industrial sector consists of numerous heterogeneous industries. The industrial model classifies these industries into three general groups: energy-intensive industries, non-energy-intensive industries, and non-manufacturing industries (Table 4.3). There are eight energy-intensive manufacturing industries; seven of these are modeled in the industrial model: food, pulp and paper, bulk chemicals, glass, cement, steel, and aluminum. Also within the manufacturing group are metal-based durables and the balance of manufacturing. The eighth energy-intensive industry, petroleum refining, is modeled in detail in the Petroleum Market Model, a separate module of NEMS, and the projected energy consumption is included in the manufacturing total. The forecasts of lease and plant fuel and cogeneration consumption for oil and gas are modeled in the Oil and Gas Supply Module and included in the industrial sector energy consumption totals (see Chapter 6 for a discussion of the impacts on these sectors and industries).

The influence of energy prices on industrial energy consumption is modeled in terms of the efficiency of use of existing capital, the efficiency of new capital additions, and the mix of fuels used. This analysis uses “technology bundles” to characterize technological change in the energy-intensive industries. This approach is dictated by the number and complexity of processes used in the industrial sector and the absence of systematic cost and performance data for the components. These bundles are defined for each production process step (e.g., coke ovens) for five of the industries and for each end use (e.g., refrigeration) in four of the industries. The process-step industries in the NEMS model are pulp and paper, glass, cement, steel, and aluminum.¹³⁵ The industries for which technology bundles are defined by end use are food, bulk chemicals, metal-based durables, and the balance of manufacturing. Energy conservation from technological change is represented over time by trend-based technology possibility curves. These curves represent the aggregate efficiency of all new technologies that are likely to penetrate the future markets as well as the aggregate improvement in efficiency of 1998 technology. Higher projected energy prices increase the rate of movement along the technology possibility curve, which reduces energy intensity more rapidly than if prices remained constant. Industrial price elasticity of demand for energy is an outcome of the model rather than an input assumption. The resulting elasticities range from -0.3 to -0.5.

During 2001, the industrial sector used 32.7 quadrillion Btu of primary energy (including allocated electricity losses), which accounted for a little over one-third of U.S. primary energy consumption.136 The associated carbon dioxide emissions of 451 million metric tons carbon equivalent, including 178 million metric tons attributed to purchased electricity, accounted for 29 percent of U.S. carbon dioxide emissions.

In the reference case, most industrial energy prices are projected to fall slightly for the first few years of the projection period and then begin to increase slowly. Two important examples are the prices of natural gas and electricity. Compared with 2001, both these prices are projected to fall slightly, by 0.2 percent annually. However, between 2010 and 2025, these prices are projected to begin increasing, with the electricity price projected to increase by 0.3 percent annually and the natural gas price by 1.0 percent annually. Industrial energy intensity is projected to fall by 1.3 percent annually over the projection period despite these falling or modestly increasing energy prices. The factors that are expected to produce the decline in industrial energy intensity despite moderate changes in energy prices include a relative shift from energy-intensive to less energy-intensive industries; replacement of existing equipment with less energy-intensive equipment as existing capacity is retired; adoption of improved and less energy-intensive technologies; and the pressures of international competition.

Covered Industrial Entities

S.139 requires that any entity in the industrial sector that emits over 10,000 metric tons of greenhouse gas per year, measured in units of carbon dioxide equivalence, redeem permits for all such emissions. The calculations shown in Table 4.4 have been used to determine the percentage of emissions from combustion of fossil fuels within each manufacturing sector that would come from entities above the threshold. The calculations do not include indirect emissions from purchased electricity, emissions from renewable energy sources, or emissions from process activities.

The estimated coverage within the manufacturing sector is similar to that calculated by West and Pena.¹³⁷ There are four major differences in the methodology in this analysis: emissions imputations in this analysis are based on value of shipments, rather than number of employees; the 10,000 metric ton cutoff was applied at the company, rather than facility level;¹³⁸ the results were extrapolated to 2001; and the calculations were made for the sectoral aggregations in the NEMS Industrial Demand Module, rather than at the 3-digit NAICS¹³⁹ manufacturing level.

The number of additional facilities required to report due to common ownership or control is not known. However, the 84 percent coverage estimate will increase as additional facilities fall into the covered category. Since the equilibrium emissions allowance price is determined primarily in the power sector, the model results differ very little if one assumes that 100 percent of manufacturing would be covered. Consequently, for analysis purposes the main case assumes that the entire manufacturing sector is covered.

For purposes of modeling S.139, the agriculture sector is excluded from the emissions limits. This assumption is based on the size limitation, difficulty in measurement, and the apparent intent of the legislation’s authors.

S.139 Results for the Industrial Sector

The combined effect of higher energy prices and reduced demand for U.S. industrial products results in lower energy consumption in the S.139 case than in the reference case. In the S.139 case the projected average industrial energy price is more than 50 percent higher than the projected average energy price in the reference case (Figure 4.15). The effective price of all fuels, including the cost of greenhouse gas allowances, is projected to be higher in the S.139 case. Compared with the projected prices for 2025 in the reference case, coal prices are projected to be 412 percent higher, natural gas prices 77 percent higher, and electricity prices 55 percent higher. The projected price increase for coal is attributable solely to the projected emissions allowance price, whereas both the emissions allowance price and higher demand contribute to the projected increase in natural gas prices.

Compared with the reference case in 2025, industrial output is $138 billion (1.4 percent) lower in the S.139 case (Figure 4.16). The non-manufacturing sector incurs the largest percentage reduction in value of shipments, with shipments in the S.139 case 2.3 percent lower than in the reference case, followed by the energy-intensive manufacturing industries, which are 1.5 percent lower than in the reference case. The non-manufacturing result is due to the countervailing impact of an increase in the value of shipments of oil and gas being more than offset by a large fall in the value of coal shipments (Figure 4.17). While the value of oil and gas shipments is projected to increase by 4 percent, the value of coal shipments is projected to be 77 percent lower than in the reference case.

Within the manufacturing sector, the hardest hit industries are aluminum, bulk chemicals and steel, all of which see their shipments in 2025 fall by more than 2.6 percent in the S.139 case compared with the reference case (Figure 4.18). These three industries participate in highly competitive international markets and would be expected to lose markets if domestic energy prices increase relative to foreign energy prices. Projections of lower industrial output and higher energy prices reduce the projections for delivered energy consumption in the industrial sector by 1.8 quadrillion Btu (5.2 percent) in the S.139 case (Figure 4.19).

Coal consumption is projected to drop sharply in the two S.139 cases, given its extreme price disadvantage. In the S.139 case, coal consumption in 2025 is lower by 383 trillion Btu (19 percent) than in the reference case. About two-thirds of the projected reductions in coal consumption are due to projected reductions in boiler fuel use, with the remainder due to reduced use of metallurgical coal in the steel industry.

The industrial sector consumes coal mainly as a boiler fuel and for production of coke in the iron and steel industry. For example, 67 percent of manufacturing consumption of coal was used in boilers in 1998.¹⁴⁰ Coal-fired boilers have substantially higher capital costs than do gas-fired boilers, because of their materials handling requirements. For large steam loads, however, coal’s price advantage over natural gas offsets its capital cost disadvantage in the reference case. In the carbon reduction cases, coal suffers from both a capital cost and a fuel cost disadvantage. As a result, a substantial amount of boiler fuel use switches from coal to natural gas and petroleum products.

The steel industry uses coal coke in the steel production process. The coal coke is either produced domestically from metallurgical coal or is imported from other countries. In the S.139 case, metallurgical coal consumption is projected to be 21 percent lower than the reference case in 2025. The reduction has several causes: substitution of natural gas in production processes, replacement of domestic coke production with coke imports, replacement of some coke-based steel production capacity with electricitybased capacity, and reduced production of domestic steel.

Natural gas consumption is subject to two countervailing effects. The effect of generally higher energy prices, and consequently lower levels of industrial activity, is to reduce natural gas consumption. On the other hand, due to its lower carbon content, natural gas prices do not increase by as much as the prices of competing fuels. Since electricity prices are also higher, there is a greater incentive to use combined heat and power technologies to reduce purchased electricity requirements. Consequently, there is an incentive to increase use of natural gas.

Compared with the reference case, additions to industrial (including refining and oil and gas production) natural-gas-fired combined heat and power capacity are projected to increase by more than 70 percent in the S.139 case (Figure 4.20). In the reference case, natural-gas-fired combined heat and power capacity is projected to increase by 10.3 gigawatts (75 percent) by 2025, while in the S.139 case, natural gas capacity is projected to increase by 18.0 gigawatts (128 percent). In the S.139 case, industrial natural gas consumption is projected to be about the same as in the reference case because the impact of increased combined heat and power use offsets the reduction caused by lower industrial output.

The buildings sector, which consists of the residential and commercial sectors, also reacts to the improved economics of combined heat and power in the S.139 case. Buildings and industrial combined heat and power capacity for several cases are shown in Figure 4.21. Note that in the S.139 case, the commercial sector is not covered by the emissions restraints. The commercial sector does incur sharply higher electricity prices due to cost increases in the electricity sector. At the same time, the effective natural gas price does not reflect the carbon price. Consequently, additional combined heat and power becomes an attractive option. In the S.139 case, the buildings sector in 2025 adds 16.2 gigawatts of total combined heat and power capacity, compared with 1.6 gigawatts in the reference case. However, in the commercial coverage case, where both electricity and natural gas prices are higher for the commercial sector, total combined heat and power capacity additions in the buildings sector are reduced to only 1.8 gigawatts.

In the reference case, industrial carbon dioxide emissions are projected to be 140 million metric tons higher in 2025 than they were in 2001 (Figure 4.22). Emissions attributable to increased electricity consumption account for almost half the increase. In the S.139 case, electricity-based carbon dioxide emissions in 2025 are 183 million metric tons (75 percent) lower than in the reference case. In the S.139 case, total industrial carbon dioxide emissions are projected to be 391 million metric tons, which is 15 percent lower than industrial sector emissions in 1990 (458 million metric tons).

Part of the reduction in electricity-based carbon dioxide emissions for the industrial sector is due to 7 percent lower electricity consumption in the S.139 case. The largest portion of the reduction results from sharply lower carbon intensity of electricity production. In the reference case, approximately 16.6 million metric tons carbon equivalent is emitted per quadrillion Btu of energy consumption in the electricity sector in 2025, as compared with only 4.6 million metric tons in the S.139 case.

In 2001, approximately 6,023 Btu of energy was required to produce a dollar’s worth of industrial value of shipments. In the reference case energy intensity continues to fall, and in 2025 it is projected that only 4,379 Btu will be required for each dollar value of industrial shipment. The impact of S.139 on industrial energy intensity results from opposing effects. The effect of higher energy prices is to reduce energy intensity, whereas reduced or falling output growth limits the amount of new, less energy-intensive capital equipment that will be added to the existing stock, thereby retarding the rate of decline in energy intensity. Additional structural shifts in the composition of industrial output further reduce energy intensity. As shown in Figure 4.23, the change in energy intensity varies widely by industry. Even though agriculture is not a covered sector, this sector does respond to the higher electricity prices that all sectors would incur.

Total expenditures for energy purchases in the industrial sector are projected to be $191 billion (2001 dollars) in 2025 in the reference case. In the S.139 case, the effects of higher energy prices are reduced by fuel switching and reduced consumption. Nevertheless, energy expenditures in 2025 are projected to be $86 billion (45 percent) higher in the S.139 case (Figure 4.24). The increased industrial energy expenditures equates to 60 percent of the manufacturing sector’s capital expenditures of $144 billion in 2001.¹⁴¹

High Technology Cases

The projections of industrial sector energy consumption and expenditures in the S.139 case are based on the reference case assumptions about technology improvements and likely industrial responses to higher energy prices. A more optimistic technology outlook would reduce energy consumption and expenditures. The S.139 high technology case examines this possibility by imposing the high technology assumptions that were used in the Annual Energy Outlook 2003.

In the S.139 case, industrial primary energy consumption is 3.0 quadrillion Btu lower in 2025 than in the reference case (see Figure 4.19). In the S.139 high technology case, energy consumption is 5.0 quadrillion Btu lower in 2025 than in the reference case. Due to the lower level of energy demand, the average industrial energy price in the S.139 high technology case is 12 percent lower than in the S.139 case (see Figure 4.15). Energy intensity in the industrial sector (thousand Btu per 2001 dollar of value of shipments) declines by an average of 1.5 percent per year between 2001 and 2025 in the S.139 case, compared with an average decline of 1.3 percent in the reference case. If the technology outlook were more optimistic, as in the S.139 high technology case, the energy intensity decline would be 1.7 percent per year. For the paper industry, energy intensity does not decline quite as rapidly in the S.139 high technology case, due to an increase in biomass consumption (18 percent higher than the reference case in 2025).

Industrial energy expenditures increase by $86 billion in 2025 in the S.139 case (see Figure 4.24). However, in the S.139 high technology case industrial energy expenditures increase by only 40 percent of the S.139 case level, or $34 billion, in 2025. This smaller increase in energy expenditures is due to the combined effects of lower industrial energy consumption and lower energy prices than projected in the S.139 case.

Imposing the high technology assumptions on the reference case would lower industrial energy consumption by 2.5 quadrillion Btu in 2025 (Figure 4.25). In comparison, the S.139 case with reference case assumptions regarding technology, projects industrial energy consumption to be 3.0 quadrillion Btu lower than the reference case in 2025. Imposing the industrial sector’s high technology assumptions on the S.139 case yields an additional 2.1 quadrillion Btu of energy reductions in 2025. In short, the high technology case and the S.139 case yield energy reductions of the same order of magnitude. However, when the two cases are combined, the results are not quite additive. If the results were strictly additive, energy consumption in the S.139 high technology case would have been 5.5 quadrillion Btu lower than the reference case as opposed to the projected reduction of 5.0 quadrillion Btu in 2025.

Transportation Sector

Background

Based on primary energy use in 2001, transportation sector carbon dioxide emissions were the highest among the end-use demand sectors and close to the level of carbon dioxide emissions from electricity generation. About 33 percent of all carbon dioxide emissions and 75 percent of carbon dioxide emissions from petroleum consumption originate from the transportation sector. In 2001, almost all (97 percent) of transportation sector emissions resulted from the consumption of petroleum products, which supply 97 percent of the energy consumed for transportation activities. Of the 13.6 million barrels per day oil equivalent consumed by the transportation sector in 2001, 62 percent was motor gasoline consumption in light-duty vehicles. Diesel fuel for heavy trucks (15 percent) and jet fuel for aircraft (11 percent), accounted for most of the remainder. Increased fuel use by light vehicles accounted for the majority (52 percent) of the growth in carbon dioxide emissions from 1990 to 2001, but emissions from heavy trucks and commercial aircraft increased at much faster rates, 2.4 percent per year and 4.4 percent per year, respectively. This compares to an average annual growth in light vehicle greenhouse gas emissions of 1.6 percent. The increase in greenhouse gas emissions for all modes is due primarily to increased demand for travel and relatively stagnant fuel efficiency.

In order to examine the growth in transportation energy demand and transportation-related greenhouse gas emissions, the NEMS transportation model addresses all modes of travel, including light vehicle, heavy vehicle, air, rail, marine, and pipeline. Within the light vehicle mode, new vehicle fuel economy, sales, and travel are addressed for 12 vehicle size classes, 16 fuel and propulsion system configurations, and 63 vehicle subsystem technologies. Sales and stocks of vehicles are estimated for the household and fleet markets, and the vintage of vehicle stocks is tracked. The NEMS transportation model allows consumers to switch to either smaller size classes or smaller vehicles within a size class. These size class shifts are dependent on per capita income, fuel prices, and fuel economy. In addition to size class shifts, the NEMS transportation model also allows for consumer shifts away from light trucks (vans, sport utility vehicles, and pickups) to cars based on increases in fuel prices.

Heavy vehicles are modeled by fleet and non-fleet applications for 3 vehicle size classes (Class 3, Classes 4-6, and Classes 7&8). New heavy vehicle fuel economy is estimated for 4 fuel types using a menu of 37 subsystem technologies. The projections assume the new emissions standards for heavy trucks beginning in 2007 and also assume use of ultra-low-sulfur diesel fuel.

The NEMS transportation model also estimates travel by mode: light vehicle travel is determined by the cost of driving per mile and per capita income, heavy vehicle travel is a function of industrial output, and air travel is a function of per capita income and ticket price. In addition, the transportation model estimates travel demand by mass transit (bus and rail). Because S.139 does not provide policy specifically addressing the use of mass transit, it was assumed that Federal, State, or local governments would not institute programs designed to shift personal travel to mass transit as a strategy to further reduce greenhouse gas emissions in the transportation sector.

Reference Case

Similar to historic trends, projected transportation energy use shows a continued reliance on petroleum fuels, with petroleum fuels providing approximately 97 percent of the energy demanded by the sector throughout the forecast. Due to continued demand for transportation services, energy demand increases from 13.6 million barrels per day oil equivalent in 2001 to 21.7 million barrels per day oil equivalent in 2025. Light vehicle energy demand is responsible for the majority (64 percent) of the increased demand for energy in the transportation sector. The heavy truck and air modes do not show significant increases in energy demand until 2005, at which time heavy truck travel increases by 2.8 percent annually and air travel demand increases by 3.6 percent annually. Travel demand for all modes is projected to increased through 2025. Between 2001 and 2025, light vehicle travel is projected to increase by 2.3 percent annually, heavy vehicle travel by 2.6 percent annually, and air travel by 3.0 percent annually.

Vehicle efficiency in the reference case is projected to increase moderately over the projection period for all modes of travel. For light-duty vehicles, new vehicle efficiency increases from 24.1 miles per gallon in 2001 to 26.4 miles per gallon in 2025.¹⁴² This increase reflects the new corporate average fuel economy (CAFE) standard for light trucks (22.2 miles per gallon by 2007) as well as fuel economy improvements resulting from the increased used of advanced technologies. Heavy-duty vehicle fuel economy increases from 6.0 miles per gallon in 2001 to 6.5 miles per gallon in 2025 in the reference case. Increases in heavy truck fuel economy are slowed significantly through 2010 as the new emissions standards come into effect in 2007. The 2007 emissions standards will require new emission control equipment, such as NOx adsorbers, which will have an adverse effect on fuel economy. Aircraft efficiency is projected to increase from 51.2 seat-miles per gallon in 2001 to 60.7 seat-miles per gallon in 2025. Efficiency improvements are realized through improved load factors as well as increased aircraft efficiency.

The reference case projects that emissions of carbon dioxide from the transportation sector grow at an average annual rate of 2 percent through 2025, making it the largest and fastest growing source of new carbon dioxide emissions among the end use sectors. Comparatively, carbon dioxide emissions from the residential sector increase by 1.1 percent annually, carbon dioxide emissions from the commercial sector increase by 1.6 percent annually, and carbon dioxide emissions from the industrial sector increase by 1.1 percent annually. By 2010, greenhouse gas emissions from the transportation sector increase to 628 million metric tons carbon equivalent (a 22 percent increase over 2001 levels) and by 2025, greenhouse gas emissions increase to 826 million metric tons carbon equivalent (a 61 percent increase over 2001 levels).

S.139 Case

Under S.139, refiners and importers are required to purchase greenhouse gas emission allowances for petroleum products sold for transportation use. Refiners are also required to purchase allowances for fuel consumed in the refining of crude oil. The effective price (including greenhouse gas allowance costs) of petroleum products consumed in the transportation sector is higher in all greenhouse gas reduction cases because of the cost of the greenhouse gas allowances (see Chapter 6 for a detailed discussion of fuel price impacts). Among highway fuels, gasoline is the petroleum product most affected due to its large consumption in the transportation sector. As a result, there is a measurable impact on energy demand for transportation.

S.139 provides a framework for reducing transportation sector greenhouse gas emissions through the allocation of tradeable greenhouse gas credits for improved fuel economy. Under the bill, light vehicle manufacturers can earn greenhouse gas credits if their measured CAFE exceeds the CAFE standard by 20 percent in years 2010 and beyond. Manufacturers’ decisions to participate will be driven by the required improvement in their CAFE, the number of allowances awarded, and the market value of those allowances. In order to achieve increases in CAFE, manufacturers might employ new technologies, downsize vehicles, or offer pricing incentives to shift consumers into more efficient vehicles. For this analysis, it is assumed that manufacturers will choose only to adopt new technologies in their efforts to increase vehicle fuel economy, thus preserving vehicle utility, comfort, performance, and occupant safety.

The NEMS transportation demand model estimates fuel economy through two separate submodules: (1) the Manufacturer Technology Choice Model (MTCM) and (2) the Consumer Vehicle Choice Model (CVCM). The MTCM is an engineering based model that examines a menu of 63 subsystem technologies for fuel economy improvement, performance improvement, or to meet legislative requirements (safety and emissions standards). Subsystem technology penetration is estimated by comparing technology cost to consumer willingness to pay for fuel economy improvement and/or increased horsepower. CAFE fines related to non-compliance also impact a manufacturers’ decision to adopt new subsystem technology for fuel economy improvement. Subsystem technology adoption is estimated for 16 vehicle types (conventional gasoline, diesel, hybrid, fuel cell, etc.) by 12 vehicle size classes (6 car and 6 light truck). The CVCM estimates vehicle type market penetration by vehicle size class. This submodule employs a multinomial nested logit model with coefficients for 9 vehicle attributes (vehicle price, range, acceleration, fuel cost, fuel availability, maintenance cost, multi-fuel capability, battery replacement cost, and luggage space) that vary by size class.

To capture the impact of the CAFE provision in S.139, the NEMS transportation model was modified so that manufacturers evaluate the opportunity cost associated with meeting the 20 percent fuel economy improvement. As the model evaluates the choice decision for technology adoption, the opportunity cost associated with the potential fuel economy improvement is included in the cost equation, similarly to the way a manufacturer might evaluate a CAFE fine for noncompliance. The analysis reflects a gradual increase in participation by vehicle manufacturers over time, accounting for the relative difficulty manufacturers will experience in improving CAFE based on their vehicle sales mix. For example, in 2001, domestically manufactured Toyota and Honda passenger cars and imported Suzuki passenger cars had CAFE ratings that exceeded the current CAFE standard by 20 percent, but several other manufacturers failed to meet the standard, including BMW, Porsche, Lotus, and Fiat.¹⁴³ The variation in CAFE achieved by these manufacturers is a reflection of the mix of vehicles sold and the performance characteristics of those vehicles. The largest disparity in measured CAFE was between domestically produced Hondas (36.3 mpg) and imported Fiats (13.7 mpg).

Delivered energy prices for the transportation sector increase significantly in the S.139 case compared to the reference case (Figure 4.26). In the S.139 case, gasoline fuel price in 2001 constant dollars increases by 40 cents per gallon (27 percent) above the reference case price, while diesel increases by 52 cents per gallon (35 percent). By themselves, these increases in fuel prices move consumers toward more fuel efficient vehicles signaling a market for increased fuel economy, which provides additional incentive for manufacturers in meeting the CAFE threshold. Jet fuel and residual fuel both experience significantly higher increases compared to the reference case at 54 percent (49 cents per gallon) and 111 percent (66 cents per gallon), respectively.

In the S.139 case, gasoline prices in 2010 are 13 percent higher when compared to the $1.42 per gallon price in the reference case. By 2025, gasoline prices increase to $1.90 per gallon, $0.40 higher than thereference case (Figure 4.27). In addition, other petroleum-based fuel prices continue to increase over the projection period, as the transportation sector purchases additional greenhouse gas allowances to comply with the greenhouse gas cap. As shown in Figure 4.28, the other transportation fuels follow price trajectories similar to those for gasoline, with diesel fuel increasing to $1.99 per gallon by 2025. Petroleum product prices increase in 2003 as a result of higher world oil prices. The price increase subsides in subsequent years as the projected world oil price first decreases from current levels and then slowly rises.

In the S.139 case, new light vehicle fuel economy in 2025 is 29.0 miles per gallon, compared with 26.4 miles per gallon in the reference case (Figure 4.29). Increased fuel economy results from the adoption of new subsystem technologies to meet the 20 percent CAFE threshold for light-duty vehicle manufacturers to receive an allocation of greenhouse gas emission allowances under S.139, as well as a slight shift in demand for smaller size class vehicles. Due to the market for specialty vehicles (high-performance sports cars, for example), some manufacturers will opt not to participate in the CAFE credit program on certain nameplates. As a result, fuel economy for the new vehicle fleet does not achieve a full 20 percent increase above the required standard.

New cars and light trucks contribute equally to the increase in average light vehicle fuel economy. Fuel economy for cars in 2025 increases from a reference case value of 30.1 miles per gallon to 32.9 miles per gallon in the S.139 case, an increase of 9.5 percent (Figure 4.30). New light truck fuel economy in 2025 increases from 23.5 miles per gallon in the reference case to 25.8 in the S.139 case, an increase of 9.5 percent. New car fuel economy in 2025 is 19.6 percent higher and new light truck fuel economy is 16.1 percent higher than the CAFE standards.

The impact of S.139 was also examined without the provision for providing an allocation credit for a 20 percent increase in new light vehicle fuel economy. In this case, fuel economy for new light-duty vehicles increases to 27.8 miles per gallon in 2025, compared to 29.0 miles per gallon in the S.139 with CAFE credit case. Compared to the CAFE standards, new car fuel economy in 2025 is 14.4 percent higher (31.5 miles per gallon) and new light truck fuel economy is 11.2 percent higher (24.7 miles per gallon).¹⁴⁴Light-duty vehicle fuel use increases in this case relative to the S.139 case, which results in higher fuel prices due to increased carbon allowance costs. As a result of higher energy prices and lower vehicle efficiencies, the cost of driving increases, which in turn causes a decrease in light vehicle travel relative to the S.139 case.

The transportation sector is the only end use sector that does not reach 1990 carbon dioxide emissions levels by 2025 in the S.139 case (Figure 4.31), as is expected under a trading system, where more cost-effective reductions are achieved in other energy sectors. For this case, carbon dioxide emissions are reduced by 10 percent compared to the reference case. Almost all of the transportation-related greenhouse gas emission reductions in the S.139 case result from decreased energy demand in the light vehicle mode. In the S.139 case, light vehicle energy use in 2025 is reduced by 12 percent (1.68 million barrels per day), accounting for 87 percent of the total reduction in greenhouse gas emissions from the transportation sector. The remainder of the total reduction in transportation-related greenhouse gas emissions results from reduced energy demand for heavy trucks (accounting for 6.0 percent of the sector’s total emissions reduction), air travel (2.6 percent), and other travel modes (4.2 percent). For light-duty vehicles, decreased energy use results from increased fuel economy and reduced travel. As discussed above, new vehicle fuel economy increases by 2.6 miles per gallon over the reference case by 2025, and the average fuel economy for all vehicles in the fleet increases by 1.3 miles per gallon (6 percent). The average annual growth in light vehicle travel decreases from 2.3 percent in the reference case to 1.9 percent in the S.139 case. This equates to an annual reduction in light vehicle travel of 338 billion miles (8.2 percent) by 2025.

Total energy demand by mode is illustrated in Figure 4.32. Higher fuel prices do not result in a significant change in heavy truck efficiency because of the high power requirements of the engines. As a result, by 2025, new heavy truck fuel economy in the S.139 case increases by 4 percent, to 6.8 miles per gallon. The main source of reductions in diesel fuel use is the response to overall lower economic activity and demand for goods, which leads to lower freight travel. Reduced industrial output results in a 1 percent decrease in heavy truck travel by 2025, relative to the reference case.

Personal, business, and international air travel are expected to decline marginally (1.2 percent) due to higher ticket prices and decreased disposable income compared to the reference case. Aircraft efficiency, measured as seat-miles per gallon, is projected to increase by 1.0 percent over the reference case by 2025.

The remaining reductions in energy use are due primarily to reduced freight shipments by rail, which result from decreased coal shipments as utilities shift demand to natural gas and other low greenhouse gas fuel sources to generate electricity. In the S.139 case, 2025 freight travel by rail is 32 percent lower than in the reference case.

As a result of the increased fuel prices, fuel expenditures increase for all modes of travel, with the exception of rail, in the S.139 case compared to the reference case. Even though light vehicle travel decreases and light vehicle fuel economy increases, by 2025 annual light vehicle fuel expenditures in the S.139 case are $35.6 billion (11.5 percent) higher than in the reference case in constant 2001 dollars (Figure 4.33). Compared to the reference case, annual fuel expenditures for heavy truck travel increase by $26.6 billion (34.8 percent) by 2025 in S.139 case and fuel expenditures for air travel increase by $17.3 billion (50.7 percent).

S.139 High Technology Case

The transportation assumptions for the high technology cases reflect lower costs, higher efficiencies, and earlier introduction dates for new technologies. The high technology reference case is based on these assumptions alone, whereas the S.139 high technology case includes the optimistic technology assumptions and the manufacturer CAFE incentive proposed in S.139. Figure 4.34 illustrates the percent increase in efficiency by mode of travel for the high technology cases relative to the reference case. For the high technology reference case no additional fuel efficiency improvement is projected for new heavy vehicles due to the lack of economic incentives (higher fuel prices) and due to the significant investment in emission control technologies needed to meet the Environmental Protection Agency’s 2007 and 2010 Rules. Relative to the high technology reference case, efficiency improvements are realized for the light vehicles, heavy vehicles, and aircraft in the S.139 high technology case. The more optimistic assumptions reflected in the S.139 high technology case provide the economic incentive needed to increase the penetration of advanced fuel efficiency technologies in the heavy truck market. Efficiency of rail and marine travel shows closely matched improvements in the two high technology cases, because the maximum efficiency improvement is achieved in both cases. In the S.139 high technology case, new light vehicle fuel economy increases by 18.6 percent (4.9 miles per gallon), heavy truck efficiency increases by 6.1 percent (0.4 miles per gallon), aircraft efficiency (seat miles per gallon) increases by 11.5 percent, rail efficiency (tons-miles per Btu) increases by 14.2 percent, and marine efficiency (ton-miles per Btu) increases by 6.8 percent relative to the reference case.

As shown in Figure 4.35, the lower costs and advanced introduction dates assumed in the high technology cases provide light vehicle manufacturers the ability to achieve higher fuel economies in their new vehicles. Compared to the reference case, by 2025 new vehicle fuel economy is 2.5 miles per gallon higher (9.6 percent) in the high technology reference case and 4.9 miles per gallon higher (18.5 percent) in the S.139 high technology case. The majority of the fuel economy improvement gained in the high technology reference case occurs between 2010 and 2015, but in the S.139 high technology case fuel economy continues to increase as a result of the CAFE credit program and higher fuel prices realized from enacting the proposed S.139 legislation. As a result of this, as well as efficiency improvements realized across all sectors, carbon allowance prices are lower in this case, leading to lower fuel prices than in the S.139case.

Figure 4.36 shows transportation fuel prices for the reference, high technology reference, S.139, and S.139 high technology cases. For the high technology reference case, all fuel prices, except residual fuel, decrease relative to the reference case as a result of reduced energy use achieved from improved efficiency. Fuel prices for both cases evaluating proposed S.139 legislation show the increases in fuel price resulting from imposed caps on greenhouse gas emissions. Comparing the S.139 and S.139 high technology cases, residual fuel and jet fuel show the largest declines in price in 2025, decreasing by 17.1 percent and 15.0 percent, respectively, in the high technology case.

Compared to the high technology reference case, vehicle efficiency increases in the S.139 high technology case, but the higher fuel prices result in increased travel costs, which reduce travel demand. The average annual growth in light vehicle travel is 2.2 percent in the S.139 high technology case, 0.1 percentage points lower than the growth projected in the reference case. This equates to an annual decrease in light vehicle travel of 134 billion miles (3 percent) by 2025 in the S.139 high technology case compared to the high technology reference case. In the S.139 high technology case, highway freight and air travel remains at levels similar to those projected in the high technology reference case, while 2025 rail and domestic marine travel decrease relative to the high technology reference case.

Figure 4.37 shows 2025 incremental fuel expenditures for the high technology cases compared to the reference case. Because fuel prices decrease and vehicle efficiency increases in the high technology reference case relative to the reference case, fuel expenditures for light vehicle and air travel decrease relative to the reference case. By 2025, annual light vehicle fuel expenditures in the S.139 high technology case increase by $28.9 billion in constant 2001 dollars relative to the high technology reference case. In 2025, annual fuel expenditures for heavy truck travel increase by $11.9 billion and air travel fuel expenditures increase by $9.7 billion by 2025 in the S.139 high technology case relative to the high technology reference case. As a result of the increased fuel efficiency in highway vehicles and aircraft in the high technology reference case, 2025 carbon dioxide emissions are reduced 46 million metric tons in the transportation sector relative to the reference case. As illustrated in Figure 4.38, carbon dioxide emissions from the transportation sector are reduced an additional 60 million metric tons (7.7 percent) in the S.139 high technology case when compared to the high technology reference case. In 2025, transportation carbon dioxide emissions projected for the S.139 high technology case exceed 2001 levels by 205 million metric tons carbon equivalent (40 percent).

Special Topics

4. End-Use Energy Demand - Tables

Notes