2.  Energy Market Impacts of Reducing Greenhouse Gas Emissions

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This section discusses the modeling results simulating the effects of S. 1766, comparing the results to a policy-neutral Reference case.  The results under more optimistic technology assumptions will also be discussed.  The impacts on GHG emissions, energy markets, and the economy are presented in turn.  Table 2 compares the Reference case projections to the S. 1766 Core and Half CCS Bonus cases.  Table 3 compares the High Technology case projections to the S. 1766 High Technology and S. 1766 High Technology Plus Policies cases.  Table 4 compares the Reference case projections to the S. 1766 Plus Policies and Limited Alternatives cases.

Greenhouse Gas Emissions and Allowance Prices

Compared to the Reference case, GHG emissions are reduced under the S. 1766 cap and trade regulations, with the impact growing through 2030 (Figure 1).¹⁶  Meeting the S. 1766 caps would require an absolute decline in emissions over time; however, the cap is implicitly relaxed if allowance prices reach the TAP level.  In the S. 1766 Core case, the projected allowance price reaches the TAP level in 2020 (Figure 2), and covered emissions remain above the cap through 2030, stabilizing at about the 2000 level from 2026 to 2030.

From 2012 to 2020, covered emissions in the S. 1766 Core case match the cap on a cumulative basis, with allowance banking accounting for the year-to-year variations from the cap.¹⁷   By 2030, projected covered emissions, net of offsets, in the S. 1766 Core case are 6,085 million metric tons (mmt) CO2 equivalent, while the 2030 cap is 4,818 mmt.  This implies the use of the TAP provision to pay for the excess emissions of 1,267 mmt in 2030.

Due to the additional credits for CCS, the dominant compliance strategy in the S. 1766 Core case is the adoption of new coal-fired plants with CCS in the electric power sector.  CCS is assumed to be an option for new coal and natural gas power plants, although it has higher capital and operating costs than conventional plants.  S. 1766 provides a significant incentive to invest in and operate plants with CCS through a combined offset credit and multiple bonus credits.  Under S. 1766, each ton of CO2 emissions avoided through CCS qualifies for an offset credit, which can be used as an allowance.  The value of the offset credit, which reflects the allowance price, provides an economic incentive for the CCS investment.  In addition, S. 1766 further increases the economic attractiveness of CCS by offering an incentive bonus in the form of multiple allowances for each ton reduced over the first 10 years of CCS plant operation.  The bonus rate is 3.5 allowances per ton of CO2 captured and stored in 2012.  The bonus rate gradually drops to 1.9 allowances per ton in 2025 and to 0.9 in 2030.  The combination of the offset credits and bonus allowances makes CCS an attractive compliance strategy at much lower allowance prices than it otherwise would be.  The bonus makes CCS more competitive compared to nuclear and other carbon-neutral generating technologies at any given allowance price.

In the S. 1766 Core case, CO2 reductions from CCS are projected to be 1,511 mmt in 2030, nearly all of which occur at coal-fired plants.  Providing the bonus incentive for this sequestration at plants 10 years old or less requires an estimated 1,151 million allowances in 2030, or 24 percent of the total allowances created for 2030.  Sec. 201 of S. 1766 initially allocates 8 percent of allowances for distribution as bonus CCS incentives, but additional allowances for CCS and agricultural sequestration can be drawn from the allowances in the auction pool if needed.  In the S. 1766 Core case, the allowances for the CCS bonus incentive exceed the 8-percent allocation beginning in 2019.  The maximum share of allowances for bonus CCS incentives in any year is 38 percent in 2026 in the S. 1766 Core case.  This reduces the 2026 allowance auction share from 45 percent as initially allocated in Sec. 201 to 14 percent after adjusting for the incremental allowances needed for CCS bonus and agricultural sequestration incentives.

As seen in Figure 1, covered emissions in the S. 1766 Core case stop declining after 2025, reflecting the reaction to a gradually declining CCS bonus allowance incentive and the slowing of the allowance price increase once the TAP price is reached.  Initially, the bonus CCS rate provision provides a strong incentive to deploy CCS technology.  Towards the end of the projection, however, the declining bonus rate eventually becomes insufficient to induce continued rapid growth in CCS investment, and the covered emissions level off after 2025.  

Of course, many factors could affect the potential success of the CCS bonus provisions and the results in the S. 1766 Core could overstate its potential contribution.  For example, it could take many years to fully commercialize the technology and its cost and/or performance could turn out to be less attractive than expected.  In the Half CCS Bonus case, with half the bonus rate of the S. 1766 Core case, substantially less penetration of CCS occurs. By 2030, the projected emission offset through CCS in the Half CCS Bonus case is 246 mmt, compared to 1,511 mmt in the S. 1766 Core case.  The maximum share of allowances required for the bonus CCS incentive is 2 percent in the Half CCS Bonus case.  As a result, the Half CCS Bonus case has a higher share of auctioned allowances than the S. 1766 Core case throughout the projection period.

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Figure 3 breaks out the sources of emission reductions in the S. 1766 Core case, relative to the Reference case.  In the first several years, CO2 reductions, including those associated with CCS, constitute about half of the annual emissions impact.  Once CCS begins to penetrate, the CO2 share of reductions increases, reaching 75 percent by 2030.  The overall contribution of CO2 reductions in the Half CCS Bonus case also grows over time, but the CCS share is substantially reduced (Figure 4).  The emissions reduction from CCS reaches a maximum of 10 percent by 2030, compared to 53 percent in the S. 1766 Core case.

In addition to the incentive for CCS, S. 1766 provides an incentive for carbon sequestration in agriculture, where allowances are exchanged for certified increases in carbon sequestration.  Because the increase in carbon sequestration is not credited as an offset, the increases in carbon sequestration represent an additional impact of the bill, over and above the covered emissions reduction.  In Figures 3 and 4, biogenic carbon sequestration is included among the emissions impact sources.¹⁸  By 2030, biogenic carbon sequestration is projected to account for 17 percent of the total emissions impact in the S. 1766 core case and 20 percent in the Half CCS Bonus case.

In the S. 1766 High Technology case, projected emissions are initially lower than in the S. 1766 Core case, but ultimately converge to similar levels (Figure 5).  The allowance price in the S. 1766 High Technology case is lower than in the S. 1766 Core case until 2026, when it reaches the TAP level (Figure 6).  The lower early allowance prices in the S. 1766 High Technology case reduce the incentive to invest in CCS because their multiple bonus allowances are not as valuable.  As a result, CCS plays a reduced role as a compliance strategy under the high technology assumptions, while nuclear and renewable plant alternatives become relatively more cost effective.

Energy Market Impacts

As discussed in the previous section, most of the energy-related CO2 emissions reductions in the S. 1766 cases are associated with electricity generation (Figures 7 and 8).¹⁹  Reductions in the industrial and transportation sector account for nearly all the remaining impact.  In the Half CCS Bonus case, the pattern is similar, but the reductions come primarily from a shift away from coal use, rather than from CCS at new coal plants.  Relative to the High Technology case, CO2 reductions in the S. 1766 High Technology and S. 1766 High Technology Plus Policies cases also occur primarily in the electric power sector, but the share of emissions reductions from industrial and transportation sectors is greater.

In the S. 1766 High Technology Plus Polices case, the higher fuel economy standards bring about a somewhat greater reduction in emissions in the transportation sector than in the S. 1766 High Tech case.  In the S. 1766 High Technology case, direct CO2 emissions (excluding electricity-related) from transportation in 2030 are 2,366 mmt, compared to 2,278 in the S. 1766 High Tech Plus Policies case.  Some of the lower emissions that would otherwise result from a more efficient vehicle stock are offset by higher travel demand because vehicle miles traveled are 4 percent higher in 2030 than in the S. 1766 High Technology case--a so-called “rebound effect.”  Travel demand is influenced by the cost of driving, which is lowered with more efficient vehicles, as well as by slightly lower gasoline prices--15 cents per gallon less in 2030--compared to the S. 1766 High Technology case, which results from the greater market supply response to lower gasoline use.

In the four main policy cases considered, the overall impact of S. 1766 is to lower projections of coal, petroleum, and natural gas consumption compared to the Reference case, while increasing the use of renewables and nuclear energy (Figure 9).  Through 2025, natural gas use is generally near or above Reference case levels because of fuel switching in the electric power sector.  However, by 2030, new nuclear, renewable, and coal with CCS power generation is added and natural gas use falls below Reference case levels.  In the cases based on Reference case technology assumptions, the results depend heavily on the amount of the CCS bonus.  In the S. 1766 Core case, projected 2030 coal consumption is reduced by 8 percent relative to the Reference case level, while natural gas is reduced by 14 percent and liquid fuels are reduced 4 percent.  In the Half CCS Bonus case, a much greater reduction in coal use is projected (35 percent), along with an 87-percent increase in nuclear energy and a 57-percent increase in renewable energy.

Under high technology assumptions, the allowance prices do not increase as fast, and all generating technology costs are assumed to be 10 percent lower than in the S. 1766 Core case.  As a result, CCS does not penetrate the market as much as in the S. 1766 Core case, and the comparable reduction in coal use by 2030 is between 22 and 25 percent, relative to the High Technology case, compared to an 8-percent reduction in the S. 1766 Core case, relative to the Reference case.

The results under the S. 1766 Limited Alternatives case demonstrate the impacts if nuclear energy and biomass were restricted to AEO2007 Reference case levels, CCS technology remained unavailable through 2030, and LNG imports were constrained.  In this case, allowance prices would be driven to the TAP level by 2017, projections of natural gas consumption and wellhead prices would remain above Reference case levels after 2020, and much lower reductions in energy-related CO2 emissions would be achieved:  a 10-percent reduction from the Reference case in 2030, compared to a 27–percent reduction in the S. 1766 Core case.

Electricity Sector Emissions, Generation, and Prices

The provisions of S. 1766 alter electric power projections by favoring low-carbon technologies such as coal gasification plants that sequester CO2, renewable facilities, and nuclear power.  The impact of CCS technology is particularly pronounced because of the provisions that provide multiple allowances to these plants for each ton of CO2 sequestered.  In previous analyses of proposals to reduce greenhouse gas emissions, EIA has found that the electric power sector would first turn to increased use of nuclear and renewable fuels, before coal power plants with CCS.  However, the offset credits and bonus allowances provided for CCS in S. 1766 significantly improve its relative economics.  The shifts in the generation mix lead to lower CO2 emissions from the electricity sector, higher electricity prices, and lower electricity demand than in the Reference case.  The higher electricity prices are due to the higher capital costs of cleaner, more efficient technologies and the costs of holding allowances, both of which are partially offset by lower fuel expenditures. 

Emissions

As discussed, the electric power sector is expected to be the dominate source of U.S. emission reductions under S. 1766. In the S. 1766 Core case, CO2 emissions from power stations fall below 2005 levels in 2018 and continue decreasing through 2030 (Figure 10).  The pattern is similar in all the policy cases, though the power sector emissions do vary across the cases.  In the Half CCS Bonus case, the reductions do not occur as quickly and are smaller than in the S. 1766 Core case.  In the S. 1766 Core case, the 2030 CO2 emissions are below the 2005 level and 58 percent below the Reference case level.  The drop is caused largely by the decreasing generation from conventional coal plants which emit the largest amount of CO2 per kilowatthour produced.  The Half CCS Bonus case also has 2030 power sector CO2 emissions that are below 2005 emissions, but they are only 43 percent less than the emission level projected in the Reference case.  In all of the S. 1766 cases, nitrogen oxide and sulfur dioxide emissions from the power sector also fall well below the 2030 Reference case projections as the use of older coal plants declines.

In the High Technology cases, lower allowance prices and greater emissions reductions in the commercial, residential, industrial, and transportation sectors dampen the emissions reductions from the power sector.  However, technology switching and lower electricity demand still cause a substantial drop in emissions in the S. 1766 High Technology case. Without S. 1766, CO2 emissions in 2030 the High Technology case are 11 percent lower than in the Reference case.  In the S. 1766 High Technology case, 2030 electric power sector emissions are 44 percent below the level projected in the High Technology case, but 17 percent higher than in the S. 1766 Core case.

Capacity and Generation

In the Reference case, coal plants without CCS meet a large share of new capacity requirements through 2030 (Figure 11).  Absent regulations limiting GHG emissions, coal plants tend to be the most economical option for meeting continuous, or baseload, demand.  New natural gas plants are also added in the Reference case, but tend to be more economical for meeting intermittent loads.

Under S. 1766, power plant choices are projected to shift to coal plants with CCS and, to a lesser degree, renewable and nuclear capacity.  However, the projected mix of plants added under S. 1766 is sensitive to the CCS bonus rate and the level of allowance prices.  In the S. 1766 Core case, nearly 300 gigawatts of new coal plants with CCS are added to meet growing electricity demand and replace electricity from coal plants without CCS that are retired or used less intensively.  Overall, S. 1766 increases new capacity additions by approximately 40 percent above the level projected in the Reference case, because of the need to replace older coal, oil, and natural gas steam plants without CCS.  While the incentives for CCS plants are expected to make them economically attractive, constructing the nearly 300 gigawatts of such capacity projected by 2030 would be extremely challenging.  For example, if the technology were not fully commercialized until 2020, reaching nearly 300 gigawatts of capacity by 2030 would require the addition of 40 to 50 plants per year, a daunting challenge.

When the number of allowances given to new plants with CCS for each ton sequestered is reduced in the Half CCS Bonus case, only 49 gigawatts of such CCS-equipped capacity is projected by 2030, and other low-carbon technologies including nuclear plants and renewable facilities play a larger role in lowering electric power sector emissions.  However, electric power sector CO2 emissions are significantly higher as a result (Figure 10) in this case than in the S. 1766 Core case, because power companies choose to pay the TAP earlier rather than further reduce their emissions.

More rapid technology improvement assumptions also lessen the penetration of new coal plants with CCS.  The S. 1766 High Technology case still relies on this technology to meet emission reduction requirements, however the 128 gigawatts of projected capacity by 2030 is much more modest than the S. 1766 Core case despite the favorable credit environment.  Relative to the S. 1766 Core Case, the combination of lower GHG allowance prices through 2025 and the lower electricity demand growth resulting from greater efficiency improvements in all sectors of the economy reduces the penetration of new coal plants with CCS in the S. 1766 High Technology case.  By reducing the value of the CCS bonus, the lower allowance prices in the S. 1766 High Technology and S. 1766 High Technology Plus Policies cases also make new nuclear and renewable technologies relatively more attractive and they play a larger role in these cases than they do in the S. 1766 Core case.  When compared to the results in the High Technology case, the power sector still adds substantially more capacity and turns to a mix of new coal plants with CCS, renewable, and nuclear plants in the two S. 1766 High Technology cases.

The projections of generation by fuel are consistent with the capacity choices and are influenced by allowance prices and the CCS bonus incentive (Figure 12). In the Reference case, coal generation reaches 3,340 billion kilowatthours by 2030, a 66-percent increase from the 2005 level.  In the S. 1766 Core case, 2030 coal generation reaches a similar level, but two-thirds of it comes from new coal plants with CCS rather than from existing coal plants without CCS.  In the Half CCS Bonus case projected coal-fired generation declines to 2,087 billion kilowatthours by 2030, similar to the 2005 level.

Increases in nuclear and renewable power are projected in all of the policy cases, relative to the appropriate non-policy cases.  The results are sensitive to the size of the CCS bonus, the allowance prices, and the assumptions about technology improvements.  In the Reference case, nuclear capacity grows by 9 gigawatts through 2030.  This growth is largely spurred by the incentives offered in the Energy Policy Act of 2005 (EPAct 2005).  In the S. 1766 Core case, nuclear capacity is projected to increase, but its role is tempered by the growth of coal with CCS. The S. 1766 Core case projects an additional 15 gigawatts of nuclear capacity in 2030 over the Reference case projection.  However, in the Half CCS Bonus case, 2030 nuclear capacity is 84 gigawatts higher than in the S. 1766 Core case and 99 gigawatts higher than in the Reference case.  In the Half CCS Bonus case, nuclear generation in 2030 reaches 1,625 billion kilowatthours, 87 percent above the Reference case, and nuclear plants account for 29 percent of total electricity generated.  Nuclear power also plays an important role in the S. 1766 High Technology cases, where lower allowance prices reduce the value of the bonus allowances to CCS and assumed technology improvements make nuclear power relatively more attractive than in the S. 1766 Core case.

Almost 80 percent of existing renewable capacity is comprised of hydroelectric plants, with wind, municipal solid waste, biomass, and geothermal energy accounting for virtually all of the remainder.  In the Reference case, a 17-percent increase in renewable capacity is projected by 2030.  Most of this growth comes from the addition of new wind and biomass plants.²⁰  While there are 13 gigawatts more renewable capacity and generation projected in the S. 1766 Core case, the potential is tempered by the bonus allowances given to CCS plants.  Nearly all of the renewable capacity is from dedicated biomass.  The remaining additions are wind and municipal solid waste plants.  In the Half CCS Bonus case, projected renewable capacity, primarily dedicated biomass, is 56 gigawatts higher in 2030 than in the S. 1766 Core case.  Since new biomass plants operate to meet baseload demand, they are a better replacement for retiring coal capacity than intermittently-operating wind or solar plants.  Faster renewable penetration occurs under the High Technology policy cases than in the S. 1766 case, but not to the level seen in the Half CCS Bonus case.  Still, 29 gigawatts of additional renewable capacity, mostly biomass, is added by 2030 in the S. 1766 High Technology case when compared to the S. 1766 Core case. 

Changes in renewable generation, for the most part, follow the changes in capacity discussed above with one exception, biomass co-firing.  Existing coal plants can be modified to co-fire with biomass.  The costs of these modifications are much lower than building dedicated biomass capacity, but the share of fuel that can be supplied by biomass is limited.  The Reference case projects approximately 60 billion kilowatthours per year of this generation in the last 10 years of the projection period, compared to 7 billion kilowatthours of co-firing in 2005.  The S. 1766 Core case shows more rapid growth: by 2021, over 200 billion kilowatthours are generated through co-firing.  This drops to 153 billion kilowatthours by 2030 as new dedicated biomass plants compete for biomass fuel and produce 104 billion kilowatthours of generation. 

Price and Demand

S. 1766 is expected to lead to higher electricity prices and lower electricity demand, with a lesser impact under the more rapid technology assumptions as in the High Technology cases.  In the S. 1766 case, electricity prices reach 8.2 cents per kilowatthour in 2020 and 8.8 cents in 2030 (Figure 13).  These prices are 4 percent and 10 percent higher, respectively, than the prices in the Reference case.  The price increases are smaller in the S. 1766 High Technology cases, where the 2030 prices increase 8 percent above the price in the High Technology case.

Total consumer expenditures for electricity in the S. 1766 Core case, relative to the Reference case, are $71 billion greater over the 25-year projection period.²¹  This added expenditure is a 1.7-percent increase in consumers’ total electricity costs.  The higher prices stem from suppliers’ increased capital and fixed costs together with costs of holding allowances.  These higher costs are partially offset by lower quantities of fossil fuel purchased and less generation.  The increase in consumer electricity expenditures ranges from $91 billion (2.3 percent) in the S. 1766 High Technology case to $81 billion (2.0 percent) in the S. 1766 High Technology Plus Policies case.

The higher electricity prices projected under S. 1766 (8 to 10 percent higher by 2030) are projected to result in a slight damping of electricity demand (2 percent by 2030).  Projected total sales in the Reference case increase to 5,170 billion kilowatthours in 2030, a 41-percent increase from 2005.  The S. 1766 Core case results in a 2030 aggregate demand of 5,073 billion kilowatthours, 2 percent below the Reference case level.  Because of the improvements in equipment efficiency, the High Technology cases show significantly lower electricity demand than in the Reference case, and the S. 1766 High Technology cases show still lower demand as consumers make additional investments in efficient appliances.

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Effects of Limited Availability of Key New, Clean Generating Technologies

The results of the S. 1766 policy cases suggest that the power sector will turn to a combination of new CCS, renewable, and nuclear plants to reduce its emissions.  However, there is substantial uncertainty about the potential pace and size of the expansion of these technologies.  For example, new coal plants with CCS remain to be commercialized, renewable technologies other than hydroelectric continue to play a small role in overall electricity supply despite recent expansion, and new nuclear capacity has not been added in the United States for many years.  It is certainly possible that the use of these technologies could expand rapidly if they are made economically attractive under the provisions of S. 1766.  The existing fleet of approximately 100 gigawatts of U.S. nuclear capacity was nearly all brought on-line during the 20-year period from 1970 to 1990, despite the 1979 Three Mile Island accident and the 1986 accident at Chernobyl.  Furthermore, the power industry demonstrated as recently as 2002, when nearly 60 gigawatts of capacity was brought on in a single year, that it can rapidly expand.  However, given such uncertainties associated with developing, commercializing, and deploying these technologies rapidly, a prudent question to ask is what would happen under S. 1766 if the availability of these key technologies were limited.  In the S. 1766 Limited Alternatives case it is assumed that:

• CCS is not available by 2030,
• Nuclear and biomass power plant additions are limited to Reference case levels, and
• LNG imports are limited to Reference case level.

The key finding in this case is that power producers choose not to reduce their CO2 emissions as much as they do in the other policy cases (Figure 14).  In fact, in the S. 1766 Limited Alternatives case, electric power sector CO2 emissions continue to grow, albeit at a slower rate than in the Reference case.  Instead of reducing their emissions sharply, power producers opt to pay the TAP. 

Limiting the coal with CCS, nuclear, and biomass options also forces the electric power sector to rely more heavily on natural gas to reduce their emissions (Figure 15).  In all other S. 1766 policy cases, total natural gas generation is projected to fall relative to Reference case levels as the power sector turns to coal with CCS, nuclear, and renewables.  However, if these options have no or limited availability, shifting partially from coal to increased natural gas generation becomes an attractive emissions reduction option.

The major consequence of the increased reliance on natural gas in the S. 1766 Limited Alternatives case is higher natural gas and electricity prices (Figure 16).  Natural gas prices at the Henry Hub in the S. 1766 Limited Alternatives case are 10 percent higher in 2030 than in the Reference case, and 21 percent higher than in the S. 1766 Core case.  Similarly, electricity prices in the S. 1766 Limited Alternatives case are 20 percent higher in 2030 than in the Reference case, and 9 percent higher than in the S. 1766 Core case.  These combined effects increase the residential sector’s total energy bill in 2030 by $35 billion (13 percent) relative to the Reference case and $15 billion (5 percent) relative to the S. 1766 Core case.

Transportation Fuel Use in Alternative Cases

The GHG cap-and-trade program in S. 1766 will lead to lower transportation sector CO2 emissions as consumers modify their travel and vehicle purchase decisions in response to higher motor fuel prices.  However, because the GHG cap-and-trade program in S. 1766 only increases 2030 motor gasoline prices by at most 20 cents per gallon (8 percent) in the various policy cases, the impacts on transportation sector fuel use and emissions are projected to be small.  For example, by 2030 total transportation energy demand is reduced 2.4 percent between the High Technology and S. 1766 High Technology cases.  An 80-percent share of this reduction in transportation energy is due to reduced travel from highway vehicles, a response to the higher projected fuel prices and reduced industrial output.  Reductions in light duty-vehicle travel account for 60 percent of the total reduction in transportation fuel use between the S. 1766 High Technology case and the High Technology case.  The remaining reductions in transportation energy demand between these cases can be attributed to reductions in rail coal shipments (9 percent) and pipeline shipments (7 percent).  Transportation sector CO2 emissions between these two cases are reduced 2.7 percent by 2030 (Figure 17).

When the GHG cap-and-trade provisions in S. 1766 are combined with increasing fuel economy standards to 35 miles per gallon by 2020, the reduction in transportation sector fuel use and emissions are much larger.  In the S. 1766 High Technology Plus Policies case, total transportation energy demand in 2030 is 6.5 percent lower than in the High Technology case.  Total 2030 transportation sector CO2 emissions are 6.4 percent lower in the S. 1766 High Technology Plus Policies case than in the High Technology case, a much larger change than occurred with S. 1766 alone. 

While the increased CAFE standards reduce transportation sector energy demand and the associated GHG emissions, these reductions are achieved at a relatively high implicit allowance price.  Test simulations with the NEMS transportation model were conducted to find an allowance price, beginning in 2012, that would induce consumers and manufacturers to change their behavior such that they achieve an average fuel economy for new light-duty vehicles of 35 miles per gallon by 2020.  An allowance price of $325 a ton, more than 20 times the 2020 TAP limit and 13 times the 2030 TAP limit, was found to be the minimum that would achieve this objective.  It should be noted, however, that higher CAFE standards may also advance other goals, such as reducing reliance on imported oil, and that consideration of such impacts may motivate policy action in this area despite the availability of lower-cost options for GHG reduction.

Economic Impacts

Implementing the S. 1766 GHG allowance program will affect the economy through two key mechanisms.  First, the cost of using energy, particularly fossil fuels and electricity, will be increased by the requirement to submit allowances or pay the TAP price.  Second, the auctioning of allowances and the technology accelerator payments will generate revenue for the government, which, in turn, will spend these funds on programs designed to help businesses and consumers reduce their emissions or ameliorate the impacts associated with higher energy prices.

Allowance Revenues

The total value of allowances created under the S. 1766 allowance program depends on the quantity of allowances issued and the allowance price.  Some allowances are auctioned, raising revenue directly, while others are distributed directly.  The value of allowances allocated for free can also be considered a revenue transfer in the sense that recipients will use the allowances to cover their own emissions, thus avoiding the costs of buying them, or accrue revenue from the sale of the allowances to others.  For simplicity in the following discussion, allowances allocated for free are treated as revenue transfers.  All other allowances are auctioned and the revenue flows to State, local and Federal governments for disbursement (Table 5).²²

The revenues collected for redistribution, including auction revenue and technology accelerator payments collected by the Federal government, as well as allowances allocated to the States, vary significantly across the cases (Figure 18 and Table 6).  The major reasons for the difference in revenues are the variation in bonus allowances provided as incentives for CCS and the quantity of TAP sales.  The CCS bonus is important because each CCS bonus allowance that is given out reduces the number of allowances auctioned, lowering the revenue to the government for redistribution.  On the other hand, the revenue collected through the TAP increases the revenue to the government.  Because of the CCS bonus differences, the maximum revenue collected by the government in the main S. 1766 cases occurs in the Half CCS Bonus case where the fewest new coal plants with CCS are built and more allowances are auctioned.  In contrast, the smallest value occurs in the S. 1766 Core case, where the most new coal plants with CCS are built. The revenue collected by the government in 2030 ranges from $82 billion (2005 dollars) to $120 billion (2005 dollars) in the main S. 1766 cases.  The cumulative government revenue collected from 2012 through 2030 in the main S. 1766 cases ranges from $770 billion to $1.2 trillion.

Figures 19 and 20 illustrate the flow of allowance-related funds and TAP revenue in the four main S. 1766 cases.  Comparing the S. 1766 Core and Half CCS Bonus cases, the main differences are the levels of CCS bonus allowances and TAP revenue.

Impacts on Energy and Aggregate Prices

Rising energy costs influence the aggregate economy through their effect on prices and energy expenditures.  Figure 21 shows the percentage changes in the both the consumer and producer indices for energy in the main S. 1766 cases.  Figure 21 highlights the All-Urban Consumer Price Index (CPI), a measure of aggregate consumer prices in the economy.  The CPI for energy, a summary measure of energy prices facing households at the retail level, increases by approximately 10 percent above the Reference case level by 2030 in the S. 1766 Core case.  Ultimately, the consumer sees higher prices directly through final prices paid for energy-related goods and services, higher prices for other goods and services that result from the energy price changes and revenue flows, and changes in interest rates.  Until 2020, all S. 1766 cases show very similar energy price paths in Figures 21 and 22.  In the post-2020 period, energy prices moderate initially and begin to return to the Reference case level.  After 2025, the prices increase and diverge from the Reference case level.

Real GDP and Consumption Impacts

The higher delivered energy prices lower real output for the economy.  They reduce energy consumption, but also indirectly reduce real consumer spending for other goods and services due to lower purchasing power.  The lower aggregate demand for goods and services results in lower real GDP relative to the Reference case (Figure 23).  Relative to the Reference case, real GDP in 2030 is between 0.07 percent below to 0.01 percent above base in 2030.  Total discounted GDP losses over the 2009 to 2030 time period are $52 billion (-0.02 percent) in the S. 1766 Core case and range from $104 billion (-0.04 percent) in the S. 1766 High Technology case to $163 billion (-0.07 percent) in the S.1766 High Technology Plus Policies case²³.  Projected GDP impacts generally begin to return to baseline as redistributed revenues offset the effect of steady increases in energy prices.  In the S. 1766 High Technology Plus Policies case, fuel economy standards are increased, forcing a change in the optimal mix of factor inputs of capital, labor, and energy.  Moving to this new factor input mix involves dislocations, idling of the old capital stock, and accumulation of new capital stock with the requisite technologies.  As a result, losses in potential output are greater in the S. 1766 High Technology Plus Policies case.

While real GDP is a measure of what the economy produces, the composition of GDP may change considerably between the major components:  consumption, investment, government and net exports.  Consumer expenditures, one indicator of consumers’ welfare, show larger relative losses compared to GDP, although both start to return to baseline by 2025.  Figure 24 depicts consumption impacts over time and the cumulative discounted percent change in consumption over the 2009 to 2030 period compared to the appropriate Reference case.  The cumulative losses of consumption are $157 billion (-0.09 percent) in the S. 1766 Core case and $215 billion (-0.13 percent) in the Half CCS Bonus case, $181 billion (-0.11 percent) in the S. 1766 High Technology case, and $287 billion (-0.17 percent), in the S. 1766 High Technology Plus Policies case.

Industrial Impacts

As energy prices increase, the energy-intensive sectors, including food, paper, bulk chemicals, petroleum refining, glass, cement, steel and aluminum, show greater losses compared to the rest of the industrial sectors, reaching 2.2 percent below the Reference case by 2030 in the S. 1766 Core case.  Figure 25 depicts impacts by industry in the S. 1766 Core case while Figure 26 shows the change in total industrial output in the S. 1766 Core, Half CCS Bonus, S. 1766 High Technology, and S. 1766 High Technology Plus Policies cases.  In the S. 1766 Core case, the industrial sector (all non-service industries) output is 1.8 percent lower than the Reference case, as higher inflation and lower demand impact industrial activity.  As with real GDP and consumption, industrial activity losses are similar across all S. 1766 cases.

Uncertainty

All long-term projections engender considerable uncertainty.  It is particularly difficult to foresee how existing technologies might evolve or what new technologies might emerge as market conditions change, particularly when those changes are fairly dramatic.  Under S. 1766, this analysis finds energy providers, particularly electricity producers, will increasingly rely on technologies that currently play a relatively small role or have not been built in the United States in many years.  Sensitivity analyses suggest that the economic impacts can change significantly under alternative assumptions regarding the cost and availability of new technologies.  However, under S. 1766, the economic impacts would be tempered by the TAP which acts as a ceiling that limits the potential increase in allowance and energy prices that might occur if new clean technologies were not available in a timeframe consistent with the requirements of S. 1766 or their cost or performance was not as promising as expected.

This analysis suggests that increasing the use of coal with CCS, nuclear, and renewable power is an economical compliance strategy, with coal with CCS capacity being driven by the bonus allowances provided in S. 1766.  However, concerns about the time that it will take to commercialize this technology and its cost and performance characteristics add considerable uncertainty in this analysis.  For nuclear, concerns about siting, waste disposal, and project risk could deter nuclear development.  Similarly, there are questions about the potential development of a large-scale biopower industry.  For example, the analysis does not assume enactment of a significant new mandate for the use of biofuels in the transportation sector, which would tend to reduce the availability of biomass for electricity generation.  With all three of these generating options, the industry will be relying on technologies about which there is considerable uncertainty. 

The S. 1766 Limited Alternatives case examines the implications of these technologies not being available.  As discussed, under these conditions, the industry would opt to pay the TAP shortly after the 2012 starting date of the program and turn to natural gas to partially reduce the growth in coal generation that would have otherwise been expected.

Figure Data

Figure Data

Energy Market Impacts of Reducing Greenhouse Gas Emissions - Tables

Notes