Executive Summary

This report responds to a request from Senators Lieberman and Warner for an analysis of S. 2191, the Lieberman-Warner Climate Security Act of 2007 and a subsequent analysis request from Senators Barasso, Inhofe, and Voinovich.¹  S. 2191 is a complex bill regulating emissions of greenhouse gases (GHG) through market-based mechanisms, energy efficiency programs, and economic incentives.²  Title I of S. 2191 establishes a cap on emissions of greenhouse gases beginning in 2012 through an emission allowance program.  The Title I allowance program covers energy-related carbon dioxide (CO2), methane, nitrous oxide, perfluorocarbons, sulfur hexafluoride, and hydrofluorocarbons (HFCs) emitted from production of hydrochlorofluorocarbons (HCFCs).  Sources that are exempt from the Title I cap, but which have other emission reduction incentives under the bill, include most non-CO2 agricultural emission sources, emissions from coal mines and landfills, and the other HFCs.  The emissions covered under Title I represented approximately 87 percent of total GHG emissions in 2006 as reported by the Energy Information Administration (EIA) in its inventory.³ 

The Title I caps decline gradually from 5,775 million metric tons (mmt) CO2-equivalent in 2012 (7 percent below 2006 emission levels), to 3,860 mmt in 2030 (39 percent below 2006 levels), and 1,732 mmt in 2050 (72 percent below 2006 levels).  The bill specifies that an increasing share of the allowances would be auctioned, while the remainder would be distributed for transition assistance to covered entities, energy consumers, and manufacturers as incentives for carbon sequestration; to States with programs for exceeding Federal targets; and to fund forest protection and research.  Auction proceeds would be used to fund low-carbon energy technology programs.

The emission allowances created under the bill are tradable and bankable.  Allowance obligations also may be offset by registered reductions in domestic emissions of exempted sources or by emission allowances from other countries with comparable emissions laws, with the maximum offsets from domestic and international sources each capped separately at 15 percent of the total allowance obligation that applies in each year.  The bill includes substantial economic incentives for carbon capture and storage, as well as biogenic carbon sequestration, to further offset GHG emissions.  S. 2191 also calls for more stringent appliance efficiency standards and building efficiency codes, including some of the requirements now mandated under the Energy Independence and Security Act of 2007 (EISA).

While this analysis is as comprehensive as possible, it does not address several important provisions of S. 2191.  For example, the report does not assess the impacts of the Title X provisions regulating the consumption of HFCs, nor does it evaluate the transportation fuels standard requiring percentage reductions in life-cycle GHG emissions called for in Title XI.  Also not addressed are the provisions of Section 3902 that call for the allocation of allowances to new fossil generators as a function of their generation. 

While the Title I emissions caps in S. 2191 decline through the year 2050, the modeling horizon in this report runs only through 2030.  However, the increasing need to pursue high-cost emissions reductions beyond 2030, driven by tighter caps and continued economic and population growth, is reflected in the modeling by assuming that a positive balance of banked allowances is held at the end of 2030.

Analysis Cases

To analyze the provisions of S. 2191, several alternative cases were prepared (Table ES1).  These cases, while not exhaustive, are meant to analyze some of the key areas of uncertainty that impact the analysis results:

• The S. 2191 Core Case represents an environment where key low-emissions technologies, including nuclear, fossil with carbon capture and sequestration (CCS), and various renewables, are developed and deployed in a timeframe consistent with the emissions reduction requirements without encountering any major obstacles, even with rapidly growing use on a very large scale, and the use of offsets, both domestic and international, is not significantly limited by cost or regulation. 
• The S. 2191 No International Offsets Case, is similar to the S. 2191 Core Case, but represents an environment where the use of international offsets is severely limited by cost or regulation.  The regulations that will govern the use of offsets have yet to be developed and their availability will depend on actions taken in the United States and around the world.
• The S. 2191 High Cost Case is also similar to the S.2191 Core Case except that the costs of nuclear, coal with CCS, and biomass generating technologies are assumed to be 50 percent higher than in the Core Case.  There is great uncertainty about the costs of these technologies, as well as the feasibility of introducing them rapidly on a large scale.  While the costs assumed in the High Cost Case are more closely aligned with recent cost estimates than those in the Core Case, it is unclear if the recent cost increases are a short- or long-run phenomenon.  The High Cost Case, which raises the cost of key low- and no carbon electric generation technologies, falls between the Core Case and the Limited Alternative Case discussed below.
• The S. 2191 Limited Alternatives Case represents an environment where the deployment of key technologies, including nuclear, fossil with CCS, and various renewables, is held to their Reference Case level through 2030, as are imports of liquefied natural gas (LNG).   The inability to increase the use of these technologies causes covered entities to turn to other options in response to S.2191. 
• The S. 2191 Limited/No International Case combines the assumptions from the S. 2191 Limited Alternatives and S. 2191 No International Offset Cases.

In addition to the S.2191 cases, the report also includes a case that represents S. 1766, the Low Carbon Economy Act of 2007.  EIA’s earlier analysis of S.1766⁴ used a reference case with significantly higher projected energy use and emissions than the reference case used in this report, which reflects the provisions of EISA and other updates.

Key Findings

S. 2191 significantly reduces projected GHG emissions compared to the Reference Case from the Annual Energy Outlook 2008 (AEO2008)⁶.  Relative to the Reference Case, projected covered emissions in the S. 2191 cases, net of offsets, are 27 percent to 36 percent lower in 2020 and 45 percent to 56 percent lower in 2030 (Table ES2).  The range each year reflects the different emissions compliance paths taken in each of the cases.

The electric power sector accounts for the vast majority of the emissions reductions, with   new nuclear, renewable, and fossil plants with CCS serving as the key compliance technologies in most cases.  In the S. 2191 cases the electric power sector is projected to account for between 82 percent and 87 percent of energy-related CO2 emissions reductions in 2020 and between 82 percent and 92 percent of such reductions in 2030.  The reductions are achieved mainly through the deployment of new nuclear, renewable, and fossil plants with CCS.  Many existing coal plants without CCS are projected to be retired early because retrofitting with CCS technology is generally impractical.

If new nuclear, renewable, and fossil plants with CCS are not developed and deployed in a timeframe consistent with the emissions reduction requirements, covered entities are projected to turn to increased natural gas use to offset reductions in coal generation, resulting in markedly higher delivered prices of natural gas.  Natural gas generation falls below the Reference Case level in most of the S. 2191 cases, but in the S. 2191 High Cost, S. 2191 Limited Alternatives, and S. 2191 Limited Alternatives/No International Cases natural gas generation is between 8 percent and 82 percent above the Reference Case level in 2020 and between 21 percent and 142 percent above it in 2030.  Total natural gas consumption in 2030 is 2.7 trillion cubic feet greater in the Limited Alternatives Case and 4.4 trillion cubic feet higher in the Limited Alternatives/No International Case than in the Reference Case.  The combination of higher wellhead natural gas prices and higher allowance prices under these conditions doubles the estimated impact of S. 2191 on the delivered price of natural gas to electric generators and industrial users if international offsets remain available, and quadruples that impact if international offsets are also unavailable.

Emissions reductions in the residential, commercial, industrial, and transportation sectors are small relative to those in the electric power sector.  The energy price increases resulting from the allowance program are generally not large enough in most of the S. 2191 cases to induce consumers to make large changes in their energy use.  For example, motor gasoline prices in the cases are 22 to 49 cents per gallon (9 to 21 percent) higher than in the Reference Case in 2020 and 41 to 101 cents per gallon (17 to 41 percent) higher than in the Reference Case in 2030.  In addition, since all cases include the 35-mile–per-gallon corporate average fuel economy (CAFE) standard recently enacted, many of the lowest cost vehicle efficiency options are adopted in all cases, including the Reference Case.  Only in the S. 2191 Limited Alternatives and Limited Alternatives/No International Cases, which have the highest long-term allowance prices, do price-driven energy efficiency investments play a larger role.

Total coal consumption is significantly reduced.  Despite the addition of as much as 64 gigawatts of new coal capacity with CCS through 2030 in one case, total coal consumption in 2030 ranges between 62 percent and 89 percent below the Reference Case level in the S. 2191 cases (Figure ES1).  The increased use of coal at these new facilities with CCS is not large enough to offset the reduction that occurs because of the retirement and reduced utilization of existing coal plants.  It is possible that the continued addition of coal plants with CCS post-2030 could lead to resurgence in coal use, but these plants will continue to face competition from other low-emission technologies.  To offset the reduction in coal use, the power industry is projected to increase its use of nuclear power, renewable fuels, and natural gas.

GHG allowance prices are sensitive to the cost and availability of low-carbon generating technologies and emissions offsets.  Estimated allowance prices in the S. 2191 cases range from $30 to $76 per metric ton CO2-equivalent in 2020 and from $61 to $156 per metric ton CO2-equivalent in 2030 (Figure ES2).  The highest prices in the first 5 years of the cap-and-trade program occur when international offsets are not assumed to be available.  The highest prices in the long term occur when it is assumed that key low-emissions technologies including nuclear, fossil with CCS, and various renewables are not developed and deployed in a timeframe consistent with the emissions reduction requirements and international offsets are limited by cost or regulation.

S. 2191 increases energy prices and energy bills for consumers.  Relative to the Reference Case, the price of using coal for power generation, including the cost of holding allowances, is between 161 percent and 413 percent higher in 2020 and between 305 percent and 804 percent higher in 2030 in the S. 2191 cases.  The price of electricity is between 5 percent and 27 percent higher in 2020 and between 11 percent and 64 percent higher in 2030 in the S. 2191 cases.  Under S. 2191, average annual household energy bills, excluding transportation costs, are between $30 and $325 higher in 2020 and $76 to $723 higher in 2030.

S. 2191 increases the cost of using energy, which reduces real economic output, reduces purchasing power, and lowers aggregate demand for goods and services. The result is that projected real gross domestic product (GDP) generally falls relative to the Reference Case.  Adverse economic impacts generally increase over time as higher cost emissions abatement options are required as emissions caps become more stringent while population and economic activity levels continue to grow.   Total discounted GDP losses over the 2009 to 2030 time period range from $444 billion (-0.2 percent) to $1,308 billion (-0.6 percent) across the S. 2191 cases (Table ES3).  Similarly, the cumulative discounted losses for personal consumption range from $546 billion (-0.2 percent) to $1,425 billion (-0.6 percent).  GDP losses in 2030, the last year explicitly modeled in this analysis, range from $27 billion to $163 billion (-0.1 to -0.8 percent) while consumption losses in that year range from $58 billion to $149 billion (-0.4 to -1.1 percent).  Economic impacts are largest when it is assumed that key low-emissions technologies including nuclear, fossil with CCS, and various renewables are not developed and deployed in a timeframe consistent with the emissions reduction requirements and international offsets are not available.

S. 2191 impacts industrial activity, including manufacturing, to greater extent than it affects the overall economy.   Industrial shipments in 2030, excluding services, are reduced by $233 billion to $589 billion (-2.9 to -7.4 percent), with the largest impacts occurring in the Limited Alternatives/No International Case.    

Significant revenue will be generated through Federal allowance auctions and allowance sales by State governments and other non-emitters given free allowances.  By 2030, approximately 84 percent of the total allowances allocated are auctioned directly by the Federal government or given to parties including State governments and the U.S. Department of Agriculture that are expected to sell them to covered entities.  The total revenue from these auctions and sales ranges from $113 to $290 billion in 2020 and from $326 to $853 billion in 2030.

Additional Insights

The potential for and the timing of the development, commercialization, and deployment of low-emissions electricity generating technologies such as nuclear power, coal with CCS, and dispatchable renewable power is a major determinant of the energy and economic impacts of S. 2191. The absence of these technologies is estimated to significantly increase compliance costs.  Key technologies face a variety of technical and cost challenges and, in some cases, additional questions regarding public acceptance of their widespread deployment.  As noted in previous EIA reports, both technical and acceptance barriers to key low-emissions technologies can be directly influenced by policy design choices.  For example, while a mechanism to relax compliance pressure that is tied directly to the level of compliance costs or other measures of economic impact could affect the amount of emissions reduction achieved, it might also discourage stakeholders who view GHG emissions limitation as the highest environmental protection priority from pursuing efforts to block the deployment of nuclear power, CCS, or other technologies that, from their perspective, may raise important, but lesser, environmental concerns.  Absent such a mechanism, such stakeholders may be less motivated to accept technologies that raise any environmental concern, regardless of their importance to GHG abatement at low cost. 

Besides changing the projected mix of new electricity generation capacity, compliance with the S. 2191 cap-and-trade program will also significantly increase the total amount of new electric capacity that must be added between now and 2030 due to the retirement of many existing coal-fired power plants that would be expected to continue operating beyond 2030 in its absence.  Obstacles to siting major electricity generation projects and/or the transmission facilities needed to support the greatly expanded use of renewable energy sources are not explicitly considered in this report.  However, the additional capacity needs in all of the S. 2191 cases suggest the need for review of siting processes so that they will be able to support a large-scale transformation of the Nation’s electricity infrastructure by 2030.        

Details involving some of the provisions not addressed in this analysis could have a significant impact on the energy and economic impacts of S. 2191.  For example, the performance-based allocation of allowances to new fossil generators under Section 3902 could significantly alter the investment decisions of powerplant builders, encouraging continued construction of new generating plants that use fossil fuels and raising the overall costs of compliance with the GHG cap-and-trade program.   This provision, and several others, are open to a variety of interpretations with widely varying implications for energy and economic impacts.

Notes