Notes

34 See web site http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_bills&docid=f:s139is.txt.pdf.

35 U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2000, EPA 430-R-02 003 (Washington, DC, April 2002).

36 Energy Information Administration, Emissions of Greenhouse Gases in the United States 2001, DOE/EIA-0573(2001) (Washington, DC, December 2002).

37 Greenhouse gases differ in their impacts on global temperatures. For comparison of emissions from the various gases, they are often weighted by global warming potential (GWP), established by the Intergovernmental Panel on Climate Change, which is a measure of the impact of each gas on global warming relative to that of carbon dioxide, which is defined as having a GWP equal to 1.

38 This analysis will report all greenhouse gas emissions in metric tons carbon equivalent (i.e., the weight of only the carbon of carbon dioxide gas). This is consistent with EIA’s past practices in its reports. In future reports, EIA will conform to the changes in international procedures under the United Nations Framework Convention on Climate Change and express greenhouse gas emissions in carbon dioxide equivalent. To convert from carbon to carbon dioxide the ratio of 44/12 is multiplied times the value by weight of the carbon. Therefore, 1,000 metric tons carbon equivalent would be 3,667 metric tons carbon dioxide equivalent. The value for total greenhouse gases in 1990 (1,683 million metric tons carbon equivalent) is equal to 6,171 million metric tons carbon dioxide equivalent. The value for total greenhouse gases in 2001 is 1,883 million metric tons of carbon equivalent or 6,904 million metric tons of carbon dioxide equivalent.

40 Energy Information Administration, International Energy Annual 2001, DOE/EIA-0219(2001) (Washington, DC, February 2003).

41 Energy Information Administration, International Energy Outlook 2003, DOE/EIA-0484(2003) (Washington, DC, May
2003).

42 A “covered entity” (including a branch, department, agency, or instrumentality of Federal, State, or local government) is defined as an entity that owns or controls a source of greenhouse gas emissions in the covered sectors, refines or imports petroleum products for use in transportation, or produces or imports hydrofluorocarbons, perfluorocarbons, or sulfur hexafluoride and emits over 10,000 metric tons of greenhouses gas per year (carbon dioxide equivalent), or produces or imports petroleum products, hydrofluorocarbons, perfluorocarbons, or sulfur hexafluoride, or other greenhouse gases that, when used, will emit over 10,000 metric tons of greenhouse gas per year.

43 The “covered sectors” are defined as the electricity, transportation, industrial, and commercial sectors. The agricultural and residential sectors are excluded.

44 The actual number of allowances and, ultimately, greenhouse gas emissions from any covered sector will be less than the maximum, because a portion of the of the Phase I and II allotments will be allocated to the Corporation and the allocation will be reduced by a fraction of any initial allocations to early and accelerated participants. Under any circumstances, the total number of allowances cannot exceed the initial pool available to the covered sectors.

45 See Appendix A for requesting letters and related correspondence.

46 The carbon tax analysis replaces the Btu tax comparison requested in Sen. Inhofe’s letter, based on discussion with the Senator’s staff. Subsequent to EIA’s response, EIA received an e-mail from Aloysius Hogan of Senator Inhofe’s staff on April 23 that asked EIA to postpone analysis of an equivalent carbon tax in consideration of time. The e-mail is included in Appendix A. The e-mail also requested EIA to provide a sensitivity case in which geological sequestration and new nuclear generating capacity are excluded as options.

47 Energy Information Administration, The National Energy Modeling System: An Overview 2003, DOE/EIA-0581(2003) (Washington, DC, March 2003). Detailed documentation is available on the EIA web site at http://www.eia.gov/bookshelf/docs.html.

48 NewGen Data and Analysis, Platts Database (Boulder, CO, March 2003).

49 This relies on a discussion of the legislative intent as outlined in a meeting with Tim Profeta of Senator Lieberman’s staff on April 16, 2003.

50 Energy Information Administration, 1999 Commercial Buildings Energy Consumption Survey, Public Use Files (October 2002), available at web site http://www.eia.gov/emeu/cbecs/1999publicuse/99microdat.html. These results are consistent with the results published in a recent journal article, which concluded that no commercial buildings would exceed the 10,000 ton threshold. See Tristam O. West and Naomi Pena, “Determining Thresholds for Mandatory Reporting of Greenhouse Gas Emissions,” Environmental Science and Technology, Vol. 37, No. 6 (2003), pp. 1057-1060, Table 3.

51 Energy Information Administration, Office of Integrated Analysis and Forecasting.

52 General Mills, Inc., Form 10K (2002), p. 9.

53 U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2000, EPA 430-R-02 003 (Washington, DC, April 2002).

54 Energy Information Administration, Emission of Greenhouse Gases in the United States 2001, DOE/EIA-0573(2001)
(Washington, DC, December 2002).

55 S.139 is not clear on whether military and international bunker fuels are covered or not. While EPA’s inventory of US greenhouse gas emissions may exclude these sources in following the reporting conventions of the United Nations Intergovernmental Panel on Climate Change, S.139’s provisions for transportation coverage do not exclude them explicitly.

56 As requested in Floyd DesChamps e-mail of May 2, 2003. See Appendix A.

57 Conversely, emissions allowance prices in carbon equivalent terms are converted to carbon dioxide equivalent terms by dividing by 3.6667.

58 The 16 percent figure was derived by assuming that most of the estimated change in emissions in 2010 would be from entities that qualify for the incentive by reaching 1990 levels.

59 Potential sources of international offset data, including the U.S. Environmental Protection Agency, its contractors, and the Energy Modeling Forum, were identified in the request letter from Senators McCain and Lieberman. The Energy Modeling Forum is an informal study group that has been institutionalized at Stanford University to study key energy, economic and environmental issues. The latest study, called EMF 21, focuses on non-CO2 greenhouse gas emissions worldwide. Permission is required from John Weyant at Stanford to access the current assumptions on the international marginal abatement curves for non-CO 2 gases at http://www.stanford.edu/group/EMF/group21/index.htm.

60 U.S. Environmental Protection Agency, U.S. Methane Emissions 1990-2020: Inventories, Projections, and Opportunities for Reductions, EPA 30-R-99-013 (Washington, DC, September 1999), web site http://www.epa.gov/ghginfo/pdfs/07 complete.pdf; and Addendum to the U.S. Methane Emissions 1990-2020: Update for Inventories, Projections, and Opportunities for Reductions (December 2001), web site http://www.epa.gov/ghginfo/pdfs/final_addendum2.pdf.

61 U.S. Environmental Protection Agency, U.S. High GWP Gas Emissions 1990-2010: Inventories, Projections, and Opportunities for Reductions, EPA 000-F-97-000 (Washington, DC, June 2001), web site http://www.epa.gov/ghginfo/pdfs/gwp_gas_emissions_6_01.pdf.

62 U.S. Environmental Protection Agency, U.S. Adipic Acid and Nitric Acid N2O Emissions 1990-2020: Inventories, Projections and Opportunities for Reductions (Washington, DC, December 2001), web site http://www.epa.gov/ghginfo/pdfs/adipic.pdf.

63 The curves are based on an EPA-funded evaluation of reduction opportunities available across a range of emission allowance prices and are consistent with EPA’s BAU case. The BAU case has somewhat higher emissions than the policies and measures case published in EPA’s Climate Action Report 2001. The BAU and the associated MACs generally (with one exception, methane emissions from gas production) assume that technological improvement does not occur and that trends in improved management practices to reduce emissions do not continue into the future. Such an approach overestimates both the BAU emissions and the economic reductions possible.

64 Carbon sequestration is included for this analysis in 3 ways: domestic use of biofuels, geologic sequestration utilized by the power sector, and domestic and international sequestration from forestry and agriculture. The use of biofuels and geologic sequestration are part of the NEMS formulation while domestic and international forestry carbon sinks have been prepared and used for this study as exogenous inputs.

65 The 15 percent limit is adjusted to 16 percent in this analysis to account for those entities qualifying for a bonus limit of 20 percent for early participation.

66 D.M. Adams, R.J. Alig, J.M. Callaway, and B.A. McCarl, The Forest and Agricultural Sector Optimization Model (FASOM): Model Structure and Policy Applications, USDA Forest Service Report PNW-RP-495 (1996).

67 B.A. McCarl and U.A Schneider, “Greenhouse Gas Mitigation in U.S. Agriculture and Forestry,” Science, Vol. 294, No. 5551 (December 21, 2001), pp. 2481-2482, web site http://www.sciencemag.org/cgi/content/full/294/5551/2481.

68 U.S. Environmental Protection Agency, “Analysis of Multi-Emission Proposals for the U.S. Electricity Sector” (November 2, 2001), web site http://www.epa.gov/air/meproposalsanalysis.pdf.

69 It can be argued that all domestic offsets should be reduced by 50 percent as was done by EPA in its study for Senators Smith, Voinovich, and Brownback. Since the quantities of offsets available from domestic non-agricultural sources are small and prices are sharply rising, this study does not reduce the non-CO 2 abatement quantities.

70 Potential sources of international offset data, including the U.S. Environmental Protection Agency, its contractors, and the Energy Modeling Forum, were identified in the request letter from Senators McCain and Lieberman. The Energy Modeling Forum is an informal study group that has been institutionalized at Stanford University to study key energy, economic and environmental issues. The latest study, called EMF 21, focuses on non-CO 2 greenhouse gas emissions worldwide. Although permission is required from John Weyant at Stanford to access the current assumptions on the international marginal abatement curves for non-CO2 gases, the web site is http://www.stanford.edu/group/EMF/group21/index.htm.

71 See web site http://www.dti.gov.uk/ccpo/glossary_kyoto_1.htm.

72 The Annex I countries are the 15 European Union countries plus Australia, Bulgaria, Canada, Czech Republic, Estonia, Hungary, Iceland, Japan, Latvia, Liechtenstein, Monaco, New Zealand, Norway, Poland, Romania, Russian Federation, Slovakia, Switzerland, and the United States. The United States is not a participant in the Marrakech Accords, which means that the U.S. has not accepted the limits placed on the use of agricultural sequestration -- less than 30 million metric tons per year -- to satisfy its Kyoto targets.

73 “National Communications From Parties Included in Annex I to the Convention: Report on National Greenhouse Gas
Inventory Data from Annex I Parties for 1990 to 2000”, October 11, 2002, FCCC/SB/2002/INF.2, available at web site http://unfccc.int/program/mis/ghg/index.html (Table 4, page 10).

74 Some experts like Dr. Denny Ellerman of MIT are skeptical that all of Annex I will participate in an emission control and trading program that satisfies the conditions of S.139. Others believe that marketers will play a large role to expand the certified reductions, which can then be sold to the U.S. markets. If larger amounts of low-cost credits were to be made available through marketers, the offset prices would fall, thereby reducing marketers role. Since the costs of CDM and sequestration are so uncertain, it is impossible to develop a good estimate of how the CDM market will evolve.

75 http://www.planetark.org/dailynewsstory.cfm/newsid/21123/story.htm.

76 Ron Sands email to Joseph Beamon dated March 27, 2003. Although EIA produces baseline for CO2 emissions for Annex I or Annex B, EIA does not currently have a consistent CO2 MAC.

77 EPA’s Smith, Voinovich and Brownback study assumed a reduction of 75 percent for international sequestration.

78 Previous unrestricted global trading studies have suggested that greenhouse gas allowance prices would equilibrate on the lower end of the $5 to $ 25 per ton range in 2010 if the whole world participated in emissions reduction programs with relatively unrestricted CDM and sequestration. Since offsets in Annex I are more restricted than global trading schemes, price estimates in the middle to higher end of the price range for Annex I are more likely.

79 Denny Ellerman, MIT Joint Program on the Science and Policy of Global Change, email to EIA staff on April 11, 2003.

80 Because sources for international offsets of S.139 in this analysis of S.139 are restricted to a subset of Annex B, the uncertainty from this source was determined to be lower than the uncertainty that would have resulted from the remainder of  the world’s offsets assumed in EMF 21. EMF21 did not reduce the non-CO2 GHG offsets. Modelers were instructed to use  their own judgment regarding their use. Unadjusted MACs for carbon dioxide, non-CO2 gases, sequestration and CDM were used to balance the demand for emission reductions with the supply for Annex I. A 50 percent adjustment factor was assumed  on the remaining amount that might be available for sale to the United States. The adjustment factor was applied to the total remaining because it is uncertain whether or not such offset reductions will be undertaken and registered and because the MACs are based on engineering-economic estimates which are inadequate at predicting market adoption.

81 Communication to Andy S. Kydes by Francisco DelaChesnaye.

83 For a discussion of the treatment of Corporation revenues see Chapter 7.

84 In 2001, there were 2,792 units affected by the sulfur dioxide provisions of the Acid Rain Program. Since a plant may have more than one unit, the number of respondents was somewhat less than the number of units. U.S. Environmental Protection  Agency, EPA Acid Rain Program, 2001 Progress Report (Washington, DC, November 2002), p. 1.

85 T.O. West and N. Pena, “Determining Thresholds for Mandatory Reporting of Greenhouse Gas Emissions,” Environmental Science and Technology, Vol. 37, No. 6 (2003), pp. 1057-1060, Table 3.

86 For a description of the sensitivities, including the variation in banking options evaluated, see the section on Scenarios Included in this Study, below.

87 S.139 does not prescribe how emissions should be allocated between covered entities and the Corporation. EIA’s initial allocation of 80 percent to covered entities and 20 percent to the Corporation with a gradual increase in the amount allocated to the Corporation is based on comments received from EIA’s Independent Expert Reviewers.

88 See Annual Energy Outlook 2003, Appendix Table F4, p. 218.

89 Readily available historical data for the covered and noncovered sectors as defined in S.139 do not exist. These numbers are EIA estimates.

90 The decisions to sell or hold allowances for the future are expected to result in a gradually increasing allowance price that grows at a rate consistent with the rate of return for similar investments. For this analysis, a real discount rate of 8.5 percent was assumed. This occurs because arbitrage in allowance trading tends to equate the current prices for allowances with the present discounted value of future allowances. In practice, fluctuations in year-to-year prices are likely to occur as a result of imperfect information and unexpected events.

91 The issue of how much of the covered sector market would undertake actions prior to 2010 to meet 1990 greenhouse gas emission levels is debatable. However, assuming that in each sector all of the entities that reduce emissions in 2010 achieve 1990 emission goals, then that estimate provides an upper bound on the number of entities that could achieve 1990 levels before 2010. For example, using this approach, the electric power sector, the most price-responsive market, yielded a 41 percent participation rate. If the electric sector were representative of the entire covered entity market, then the percentage of offsets allowed in 2010 to 2015 would be 17 percent (41 percent of the difference between 20 percent offsets and 15 percent offsets). However, the non-electric generation markets are much less likely to participate, reducing the calculated market increase for offset purchases to 16 percent.

92 In S.139, the portion of the allowance credits allocated to the Climate Change Credit Corporation (hereafter referred to as the Corporation) and auctioned increases from 20 percent in 2010 to 80 percent in 2025. Corp20 is a sensitivity case that assumes that the Corporation is allocated 20 percent of the allowances for the entire forecast period. The corp80 case assumes that the share starts and remains constant at 80 percent. Although the S.139, corp20, and corp80 cases exhibit different impacts on the macroeconomy (as discussed in Chapter 7), they do not create significant differences in the U.S. covered sector market for allowances.

93 The exception is in 2023, as the allowance bank is depleted one year earlier in the intl0 case than in the S.139 case, and the price temporarily drops in the following year.

94 See Appendix A for a copy of the January 28, 2003, letter from Senator Inhofe to EIA.

95  PERSMAP CERUPT 2002, web site http://www.senter.nl/sites/erupt/contents/i001337/press_cerupt.doc; and PCF, web site http://www.prototypecarbonfund.org.

96 W. Chandler et al., Climate Change Mitigation in Developing Countries: Brazil, China, India, Mexico, South Africa, and Turkey (Pew Center on Global Climate Change, October 2002).

97 T. Szymanski, “The Clean Development Mechanism in China,” The China Business Review, Vol. 29, No. 6 (November-December 2002).

98  “Chinese Wind Farm Makes Kyoto Profits From Dutch,” Planet Ark (March 14, 2003), web site
http://www.planetark.org/dailynewsstory.cfm/newsid/20156/story.htm.

99 Energy Information Administration, International Energy Annual 2001, DOE/EIA-0219(2001) (Washington, DC, 2002).

100 T. Szymanski, “The Clean Development Mechanism in China,” The China Business Review, Vol. 29, No. 6 (November-December 2002).

101 Energy Information Administration, International Energy Outlook 2003, DOE/EIA-0484(2003) (Washington, DC, 2003).

102 W. Chandler et al., Climate Change Mitigation in Developing Countries: Brazil, China, India, Mexico, South Africa, and Turkey (Pew Center on Global Climate Change, October 2002).

103  A. Garg and P.R. Shukla, Emissions Inventory of India (New Dehli: Tata-McGraw-Hill Publishing Company, 2002), cited by Chandler et al. (2002).

104 PERSMAP CERUPT 2002, web site http://www.senter.nl/sites/erupt/contents/i001337/press_cerupt.doc.

105 O. Masera and C. Sheinbaum, “Mitigating Carbon Emissions while Advancing National Development Priorities: The Case of Mexico,” Climatic Change, Vol. 47 (2000), pp. 259-282, cited by Chandler et al. (2002).

106 Inter-American Institute for Global Change Research, Agreement Establishing the Inter-American Institute for Global Change Research (Montevideo, Uruguay, May 13, 1992), web site www.iai.int/files/agree_ENG.pdf.

107 The Commission for Environmental Cooperation was established by the United States, Canada, and Mexico in August 1993 as part of the North American Agreement on Environmental Cooperation (an agreement signed as part of the North American Free Trade Agreement).

108 U.S. Department of State, “Joint Statement of Enhanced Bilateral Climate Change Cooperation Between the United States and Mexico” (press release, March 18, 2003).

109 Chandler et al. (2002).

110 National Communication of the Republic of Korea, Submission of the ROK Under the UNFCCC (1998), web site http://www.unfccc.int/resource/docs/natc/kornc1.pdf. EIA currently projects that South Korea’s energy-related carbon  dioxide emissions will grow by 2.2 percent annually between 2001 and 2010. See Energy Information Administration, International Energy Outlook 2003, DOE/EIA-0484(2003) (Washington, DC, 2003).

111 Kim Sung-jin, “Greenhouse Gas Emissions To Be Monitored,” The Korea Times (September 19, 2002).

112 Kim Sung-jin, “Greenhouse Gas Emissions To Be Monitored,” The Korea Times (September 19, 2002).

113 The “hurdle rate” for evaluating energy efficiency investments has also been referred to as the “implicit discount rate” (i.e., the empirically based rate required to simulate actual purchases—the one implicitly used). These rates are often much higher than would be expected if financial considerations alone were their source. Among the reasons often cited for relatively high apparent hurdle rates are uncertainty about future energy prices and future technologies, lack of information about technologies and energy savings, additional costs of adoption not included in the calculations, relatively short tenure of residential home ownership, hesitancy to replace working equipment, attributes other than energy efficiency that may be more important to consumers, limited availability of investment funds, renter/owner incentive differences, and builder incentives to minimize construction costs. For a good discussion of potential market barriers and the economics of energy efficiency decisions, see Jaffe and Stavins, “Energy Efficiency Investments and Public Policy,” The Energy Journal, Vol. 15, No. 2 (1994), pp. 43-65.

114 Dahl (1993), “A Survey of Energy Demand Elasticities in Support of the Development of the NEMS,” US DOE, Contract Number DE-AP01-93EI23499 (October 1993). The Dahl survey incorporated results from other survey articles and from newer studies, not reviewed previously. From prior surveys, the residential/commercial own-price elasticities for total energy ranged from -0.012 in the short run (SR) to -0.44 in the long run (LR). Focusing on studies of aggregate time series data, demand elasticities for electricity from more recent studies averaged from -0.22 (SR) to -0.91 (LR) for residential and -0.22 to -0.82 for commercial. For natural gas the averages from more recent studies were -0.13 (SR) to -0.68 (LR) for residential and -0.26 to -0.99 for commercial.

115  The long-run elasticities reflect the effects of altered prices after 20 years for the last year of the forecast, 2025.

116 See Energy Information Administration, A Look at Residential Energy Consumption in 1997, DOE/EIA-0632(97), for further details.

117 This is clearly not a reasonable expectation, it is merely a convenient assumption since the NEMS residential model does not track households by income distribution. The proportion of future households with poverty level or aid-eligible incomes will depend on a number of factors and be either higher or lower than the constant shares assumed here.

118 See Chapter 5 on electricity supply for a description of how greenhouse gas permit costs are reflected in residential electricity prices.

119 This does not mean that the own-price elasticity of natural gas demand is unitary elastic. Part of the increase in natural gas demand is due to cross-price effects with the increased electricity price relative to the reference case.

120 For more details of the assumptions in the high technology case, see Energy Information Administration, Assumptions to the Annual Energy Outlook 2003, web site http://www.eia.gov/oiaf/aeo/assumption/pdf/0554(2003).pdf.

121 Single-family homes are chosen because the occupants are more likely to pay their own energy bills and because they tend to use more energy.

122 Because the number of homes that heat with distillate is less than half the number that use distillate for water heating, electricity is assumed to be the fuel of choice for water heating.

123 General characteristics of the commercial sector provided in the above paragraphs are from the Energy Information Administration’s 1999 Commercial Buildings Energy Consumption Survey (CBECS) Detailed Tables, available at http://www.eia.gov/emeu/cbecs/detailed_tables_1999.html; and Energy Information Administration, A Look at Commercial Buildings in 1995: Characteristics, Energy Consumption, and Energy Expenditures, DOE/EIA-0318(95) (Washington, DC, September 1998).

 124 Rates of return on investments in energy efficiency (referred to in financial parlance as “internal rates of return”) are required to meet or exceed the hurdle rate. The hurdle rates include both financial and nonfinancial considerations, as described in the residential footnote on hurdle rates. For more information on the distribution of commercial hurdle rates please see page 32 of Energy Information Administration, Assumptions for the Annual Energy Outlook 2003, DOE/EIA-0554(2003) (Washington, DC, January 2003), and Chapter 4 of Energy Information Administration, Model Documentation Report: Commercial Sector Demand Module of the National Energy Modeling System, DOE/EIA-M066(2003) (Washington, DC, March 2003).

125 For the purposes of this study, the financial portion of the hurdle rates is considered to be 15 percent in real terms. A more detailed discussion of the hurdle rate response to increases in fuel prices is provided on page 32 of Energy Information Administration, Assumptions for the Annual Energy Outlook 2003, DOE/EIA-0554(2003) (Washington, DC, January 2003).

126 Current assumptions use an analysis of data from EIA’s 1995 commercial buildings survey. Sources for data on consumer behavior are listed on page A-27 of Energy Information Administration, Model Documentation Report: Commercial Sector Demand Module of the National Energy Modeling System, DOE/EIA-M066(2003) (Washington, DC, March 2003).

127 As in the residential model, the long-run elasticities are for 2025 and represent the effects after 20 years of altered price regimes.

128 Dahl (1993), “A Survey of Energy Demand Elasticities in Support of the Development of the NEMS,” US DOE, Contract Number DE-AP01-93EI23499 (October 1993). The Dahl survey incorporated results from other survey articles and from newer studies, not reviewed previously. From prior surveys, the residential/commercial own-price elasticities for total energy ranged from -0.012 in the short run (SR) to -0.44 in the long run (LR). Focusing on studies of aggregate time series data, demand elasticities for electricity from more recent studies averaged from -0.22 (SR) to -0.91 (LR) for residential and -0.22 to -0.82 for commercial. For natural gas the averages from more recent studies were -0.13 (SR) to -0.68 (LR) for residential and -0.26 to -0.99 for commercial.

129 A quantitative discussion of combined heat and power in the S.139 case is included in the Industrial section of this chapter. Figure 4.21 and its associated text include commercial and residential combined heat and power projections in addition to industrial sector projections.

130 In most cases, the market price for offsets is expected to clear at prices below the allowance market due to offset limits and generally low costs of reductions from offset sources. Chapter 3 of this report includes a detailed discussion of the trading markets for allowances and offsets.

131 The NEMS industrial model is summarized in more detail in Energy Information Administration, Assumptions to the Annual Energy Outlook 2003, DOE/EIA-0554 (2003) (January 2003), pp. 39-51, web site http://www.eia.gov/oiaf/aeo/assumption/pdf/0554(2003).pdf. Complete documentation for the NEMS industrial model is provided in Energy Information Administration, Model Documentation Report: Industrial Sector Demand Module of the National Energy Modeling System, DOE/EIA-MO64(2003) (January 2003), web site http://www.eia.gov/FTPROOT/modeldoc/m064(2003).pdf.

132 Calculated from U.S. Department of Commerce, Statistics for Industry Groups and Industries: 2001 (January 2003) using Table 1 and Table 4.

133 For a variety of views, see Doblin, “Declining Energy Intensity in the U.S. Manufacturing Sector,” The Energy Journal, Vol. 9, No. 2 (1988); Howarth, “Energy Use in U.S. Manufacturing: The Impacts of the Energy Shocks on Sectoral Output, Industry Structure, and Energy Intensity,” The Journal of Energy and Development, Vol. 14, No. 2 (1991); Jacard, Nyober, and Fogwill, “How Big is the Electricity Conservation Potential in Industry?” The Energy Journal, Vol. 14, No. 2 (1993); Steinmeyer, “Energy Use in Manufacturing,” in Hollander, ed., The Energy-Environmental Connection (Island Press, 1992), Chapter 10; and Unander et al., “Manufacturing Energy Use In OECD Countries: Decomposition of Long-Term Trends,”  Energy Policy, Vol. 27 (1999).

134 Energy Information Administration, Assumptions to the Annual Energy Outlook 2003, DOE/EIA-0554 (2003) (January 2003), p. 47, web site http://www.eia.gov/oiaf/aeo/assumption/pdf/0554(2003).pdf.

136 Non-combustion uses of energy of 5 quadrillion Btu accounted for 19.8 percent of delivered energy consumption in the
industrial sector. These non-combustion uses of energy were inputs as feedstocks in the chemical industry and as construction materials in the construction industry.

137 West and Pena, “Determining Thresholds for Mandatory Reporting of Greenhouse Gas Emissions,” Environmental Science & Technology, Vol. 37, No. 6 (2003), Table 3.

138 The 1997 Economic Census-Manufacturing provides numbers of establishments in 10 different size groups for each industry, based on number of employees, but provides only the number of companies for the overall industry. The average number of establishments per company was calculated from the industry totals and was assumed to be the same for all size groups.

139 North American Industry Classification System.

140 Energy Information Administration, Manufacturing Consumption of Energy 1998, http://www.eia.gov/emeu/mecs/mecs98/datatables/d98n6_2.htm.

141 Calculated from U.S. Department of Commerce, Statistics for Industry Groups and Industries: 2001 (January 2003) using Table 5.

142 New light vehicle fuel economy estimates provided in this report reflect tested values.

143 U.S. Department of Transportation, National Highway Transportation Safety Administration, Summary of Fuel Economy Performance (Washington, DC, March 2002), p. 6.

144 Energy Information Administration, Office of Integrated Analysis and Forecasting, National Energy Modeling System run MLBILL.D061703A.

145 While S.139 targets all greenhouse gases, the balance of this chapter will focus on energy-related carbon dioxide emissions.

146  Dedicated biomass plants are plants built specifically to burn biomass, normally co-located with a biomass crop facility.

148 The EPACT 10-year renewable electricity production tax credit for new wind and some biomass plants originally expired on June 30, 1999. It was extended twice, first to December 31, 2001 and then retroactively through December 31, 2003, by the Job Creation and Worker Assistance Act of 2002 (P.L. 107-147). This analysis assumes the expiration of the production tax credit at the end of 2003.

149 Penetration in end-use applications is still limited by the high cost of the technology and also by the underlying turnover rates in the U.S. stock of buildings.

150 For a list of the regional status assumed see, Energy Information Administration, Annual Energy Outlook 2003, DOE/EIA 0383(2003), p. 69.

151 When a company is allocated allowances by the government at no cost, there is still a “cost” associated with using them. The company could simply sell the allowances in the open market and retain the revenues if it did not use them to cover its own emissions. Therefore, the market price of the allowances is used to represent this forgone benefit.

152 It is assumed that this sharing of benefits is enough to encourage regulated utilities to behave competitively pursuing all economical greenhouse gas reduction opportunities.

153 E.M. Bailey, Allowance Trading Activity And State Regulatory Rulings: Evidence From The U.S. Acid Rain Program  (Massachusetts Institute of Technology, March 1998), available at web site http://web.mit.edu/ceepr/ www/98005.pdf.

154 To determine the impact of allowance purchases or sales on revenue requirements in cost-of-service regions, it is assumed that power sector allowances are allocated based on each region’s share of year 2000 carbon emissions. Actual emissions in each year are then compared to the number of allowances that were freely allocated, and the net purchase/sale revenue is calculated and added/subtracted to the revenue requirements.

156 In this illustrative example, a 10,000 Btu per kilowatthour heat rate is assumed for the coal plant, while a 7,500 heat rate is assumed for the natural gas combined cycle plant. The differential grows further in the later years of the projections as the heat rate for new combined-cycle plants improves to 6,350.

157 Though not discussed in this report, the approach used to allocate allowances can have economic efficiency and distributional impacts. For a discussion of these issues see, Beamon, Leckey, and Martin, Power Plant Emissions Reductions Using a Generation Performance Standard, web site http://www.eia.gov/oiaf/servicerpt/gps/pdf/gpsstudy.pdf; and Burtraw, Carbon Emission Trading Costs and Allowance Allocations: Evaluating the Options, web site http://www.rff.org/ resources_archive/pdf_files/145_burtraw.pdf.

158 Energy Information Administration, Annual Energy Review 2001, DOE/EIA-0384(2001) (Washington, DC, October 2002), Table 2.8, p. 59.

159 Energy Information Administration, Manufacturing Consumption of Energy 1998, web site http://www.eia.gov/emeu/mecs/contents.html, Table C3.1

160 Energy Information Administration, Emissions of Greenhouse Gas in the United States 2001, Table 4, p. 32. The 2001 carbon dioxide emissions figure is preliminary.

161 Natural gas is consumed by pipelines in the transportation of gas from the well to the consumer. Lease and plant gas consumption is gas consumed near the field both to run production equipment and to separate methane from oil, low molecular weight hydrocarbons (i.e., ethane, butane, propane, etc.), water and other inert gases such as nitrogen, carbon dioxide, hydrogen sulfide, etc.

162 “Unconventional” natural gas refers to gas produced from tight (low permeability) sandstones, gas shales, and coalbeds.

163 Much of the natural gas imported from Mexico is expected to be coming from LNG regasification terminals that are close to the U.S.-Mexico border.

165 In reality, new pipeline construction could be constrained in the short-term due to delays in planning and construction and due to public opposition.

166 The first employment data series pertains to the industrial SIC 131 (crude petroleum and natural gas). The second employment data series pertains to the industrial SIC 138 (oil and gas field services).

167 Energy Information Administration, Annual Energy Outlook 2003, DOE/EIA-0383(2003) (Washington, DC, January 2003), Appendix Table F4, p. 218.

168  The high natural gas price cases were completed in response to a request from Senator Inhofe’s staff. The e-mail requesting this particular case is included in Appendix A.

170 Total 2025 electric power generation capacity is 27 gigawatts less in the high gas price S.139 case than in the high gas price case.

171 The incremental increase in renewable energy electricity generation capacity between the two cases is as follows: wood and other biomass with 85 gigawatts, wind with 80 gigawatts, geothermal with 5 gigawatts, and municipal waste with about 1 gigawatt.

172 In 2025, total industrial energy use is 2.6 quadrillion Btus less in the high gas price S.139 case, relative to the high gas price case. This reduction in industrial energy use occurs for all major fuel types (i.e., oil, gas, coal, electricity and renewable energy).

173 If world oil prices were higher, then S.139 would have less impact on consumption, because higher product prices reduce overall demand.

174 The projected price of corn in 2025 is $3.15 per bushel. A yield of 2.65 gallons of denatured ethanol per bushel of corn is assumed.

175 The projected price of soybean oil in 2025 is $0.28 per pound. A yield of one gallon of biodiesel per 7.65 pounds of soybean oil is assumed.

176 Renewable Fuels Association online list of ethanol plants as of April 2003, web site http://www.ethanolrfa.org/ eth_prod_fac.html.

177 Excludes coal consumed at combined heat and power plants in the industrial sector.

179 “Analysis of the Relationship Between the Heat and Carbon Content of U.S. Coals,” prepared for the Energy Information Administration, Office of Coal, Nuclear, Electric and Alternate Fuels, by Science Applications International Corp., September 1992, pp. 15-18.

181 Energy Information Administration, Coal Data: A Reference, DOE/EIA-0064(93) (Washington, DC, February 1995), Tables 18 and 19.

182 S. Palstev, J.M. Reilly, H.D. Jacoby, A.D. Ellerman and K.H. Tay, Emissions Trading to Reduce Greenhouse Gas Emissions in the United States: The McCain-Lieberman Proposal, Report No. 97 (Cambridge, MIT Joint Program on the Science of Global Change, June 2003 [revised: June 17]), Case 5.

183 S. Palstev, J.M. Reilly, H.D. Jacoby, A.D. Ellerman and K.H. Tay, Emissions Trading to Reduce Greenhouse Gas Emissions in the United States: The McCain-Lieberman Proposal, Report No. 97 (Cambridge, MIT Joint Program on the Science of Global Change, June 2003 [revised: June 17]), Case 7.

184 For a discussion of the relative merits of alternative policy instruments, see Perman, Ma, and McGilvray, “Pollution Control Policy,” in Natural Resource and Environmental Economics (Addison Wesley Longman, 1996).

185 EIA used the Global Insight, Inc. (formerly DRI-WEFA) model of the U.S. economy to assess these issues. The Global Insight model is a representation of the U.S. economy with detailed output, price, and financial sectors incorporating both long-term and short-term properties.

186  See Perman, Ma, and McGilvray, “Pollution Control Policy,” in Natural Resource and Environmental Economics (Addison Wesley Longman, 1996).

187 The Corporation is considered to be a quasi-governmental body separate from the Federal Government. To handle the flows of funds to the Corporation and to disperse funds, use is made of tax, expenditure, and transfer levers of the Federal tax system incorporated in the Global Insight Macroeconomic Model. The funds are dealt with in a revenue-neutral manner; i.e., all funds collected are immediately redistributed. This keeps the Federal ledger balanced with respect to receipts and expenditures of the Corporation. However, the Federal surplus/deficit will change due to price and income effects on the economy.

188 Hereafter, all dollar values, unless stated otherwise, will be expressed in 1996 dollars to conform to National Income and Product Account definitions. Some series will also be expressed in nominal, or current year, dollars, but this will be identified where appropriate.

189 The characterization of monetary policy reactions to inflation and unemployment used in these simulations is based on a Global Insight reaction function that has been estimated to reflect the historical relationship between the Federal funds rate and changes in inflation and unemployment. As such, the reaction function is a reflection of how the Federal Reserve may react to changes in the economy, based on past behavior.

190 Because of the nature of the chained price indexes adopted in the National Income and Product Accounts, the sum of the components of GDP is not equal to actual GDP in real terms. While the impacts of the real consumption, investment, etc., can be analyzed independently, they do not add up in absolute terms to the loss in actual GDP.

191 Energy-intensive industries include Food, Paper, Inorganic and Organic Chemicals, Plastic Materials, Agricultural Chemicals, Petroleum Refining, Glass, Cement, Blast Furnace and Basic Steel, and Aluminum.

192 Because of its Global Insight origin, the NEMS macroeconomic analysis relies on SIC industry definitions, as opposed to the North American Industry Classification System (NAICS). The Global Insight model used the SIC definitions.

193 Note: A quick assessment of a 50/50 split allocation would split the difference between the 20/80 and the 80/20 cases.

194 See Energy Information Administration, Model Documentation Report: Macroeconomic Activity Module (MAM) of the National Energy Modeling System (February 2003), pp. 5-6.

195 This result would hold even with some net increase in total R&D activity.

196 NewGen Data and Analysis, Platts Database (Boulder, CO, March 2003).

197 The fact that the 24 gigawatts of additional capacity was not included as planned capacity in AEO2003 does not invalidate the AEO2003 forecasts, because NEMS projects additional new capacity as needed to meet demand (primarily natural-gas-fired units in the time frame of the forecast).

198 The issue of how much of the covered sector market would undertake actions prior to 2010 to meet 1990 greenhouse gas emission levels is debatable. However, assuming that in each sector all of the entities that reduce emissions in 2010 achieve 1990 emissions goals, then that estimate provides an upper bound on the number of entities that could achieve 1990 levels before 2010. For example, using this approach, the electric power sector, the most price-responsive market, yielded a 41 percent participation rate. If the electric power sector were representative of the entire covered entity market, then the percentage offsets allowed in 2010 to 2015 would have been 17 percent (41 percent of the difference between 20 percent offsets and 15 percent offsets). However, the non-electric power markets are much less likely to participate, reducing the calculated market increase for offset purchases to 16 percent.

199 EIA has no plans to develop behavioral models of sequestration or domestic or international marginal abatement curves.  Because the estimates of MACs are exogenous to NEMS, highly uncertain, and scenario dependent, use of such curves in future studies will require further review and adjustment.

200 U.S. Environmental Protection Agency, Office of Air and Radiation, U.S. Methane Emissions 1990-2020: Inventories, Projections, and Opportunities for Reductions, EPA_30-R-99-013 (September 1999), http://www.epa.gov/ghginfo/pdfs/07complete.pdf; and Addendum to the U.S. Methane Emissions 1990-2020: Update for Inventories, Projections, and    Opportunities for Reductions ((December 2001), http://www.epa.gov/ghginfo/pdfs/final_addendum2.pdf.

201 U.S. Environmental Protection Agency, Office of Air and Radiation, U.S. High GWP Gas Emissions 1990-2010: Inventories, Projections, and Opportunities for Reductions (June 2001), EPA 000-F-97-000, http://www.epa.gov/ghginfo/pdfs/ gwp_gas_emissions_6_01.pdf.

202 U.S. Environmental Protection Agency, Office of Air and Radiation, U.S. Adipic Acid and Nitric Acid N2O Emissions 1990-2020: Inventories, Projections and Opportunities for Reductions (December 2001), http://www.epa.gov/ghginfo/pdfs/adipic.pdf.

203 The 15 percent limit is adjusted to 16 percent in this analysis to account for those entities qualifying for a bonus limit of 20 percent for early participation.

204 D.M. Adams, R.J. Alig, J.M. Callaway, and B.A. McCarl, The Forest and Agricultural Sector Optimization Model (FASOM): Model Structure and Policy Applications, USDA Forest Service Report PNW-RP-495 (1996).

205 B.A. McCarl and U.A Schneider, “Greenhouse Gas Mitigation in U.S. Agriculture and Forestry,” Science Magazine  (December 2001), http://www.sciencemag.org/cgi/content/full/294/5551/2481.

206 http://www.epa.gov/air/oaq_caa.html.

207 It can be argued that all domestic offsets should be reduced by 50 percent as was done by EPA in its study for Senators Smith, Voinovich, and Brownback. Since the quantities of offsets available from domestic non-agricultural sources are small and prices are sharply rising, this study does not reduce the non-CO2 abatement quantities.

208 Under S.139, Section 312, Compliance, Part (b)(1)(B), international allowances may be permitted for use if and only if three conditions are simultaneously met, the most important of which is that “… the other nation has adopted enforceable limits on its greenhouse gas emissions which the tradable allowances were issued to implement.” The major developing countries of China, Mexico, South Korea, India, and Brazil have no binding obligations to limit or reduce emissions under the UNFCCC or the Kyoto Protocol. Consequently, the only avenue that the United States has to access international allowances is through a subset of Annex B countries that meet the three criteria of S.139.

209 Annex I is composed of the 15 European Union countries plus Australia, Bulgaria, Canada, Czech Republic, Estonia, Hungary, Iceland, Japan, Latvia, Liechtenstein, Monaco, New Zealand, Norway, Poland, Romania, Russian Federation, Slovakia, Switzerland, and the United States. The United States is not a participant in the Marrakech Accords, which means that the proposed sequestration limit of 30 million metric tons carbon does not affect U.S. use of sequestration.

210 The Energy Modeling Forum, sponsored by Stanford University, is a series of periodic seminars and workshops that examine important energy issues. EMF 21 concentrated on non-CO 2 greenhouse gas abatement strategies. See http://www.stanford. edu/group/EMF/group21/index.htm.

211 http://unfccc.int/resource/docs/cop7/13.pdf.

212 The $15 per ton cost for CDM and sequestration is an assumption of this analysis. There is no good information to estimate such costs. For this analysis, any costs at or below $25 per ton would imply that these reductions would all be taken first and the residual amount of offsets left to the U.S. would remain unchanged. Previous global trading studies by PNNL and EMF suggest that such costs will range between $5 per ton to $25 per ton for Annex I because otherwise, less costly alternative Annex I reductions could be undertaken for the 2008-2020 period.

213 Communication with Ron Sands, who operates the SGM model for EPA. These curves integrated the EMF 21 offset curves and the SGM baseline and MACs for carbon dioxide.

214 The CDM allows Annex I countries to take emissions credits for projects that reduce emissions in non-Annex I countries, provided that the projects lead to measurable, long-term benefits.

216 Ron Sands email to Joseph Beamon dated March 27, 2003.

217 “National Communications From Parties Included in Annex I to the Convention: Report on National Greenhouse Gas Inventory Data from Annex I Parties for 1990 to 2000”, United Nations, October 11 2002, FCCC/SB/2002/INF.2, available at http://unfccc.int/program/mis/ghg/index.html (Table 4, page 10).

218 (Annex I + 4 other country) CO2 + Annex I non-CO2 - (4 other country CO2 +non-CO2) = Annex I total GHG - (4 other country non-CO 2 emissions).

219 “National Communications From Parties Included in Annex I to the Convention: Report on National Greenhouse Gas Inventory Data from Annex I Parties for 1990 to 2000”, October 11, 2002, FCCC/SB/2002/INF.2, available at http://unfccc.int/program/mis/ghg/index.html (Table 4, page 10).

220 For purposes of this analysis, any price between $1 per ton and $20 per ton would have made absolutely no difference to the prices and quantities of international offsets offered for sale to the United States. Virtually all estimates for limited use of international sequestration fall in that $1 - $20 range. Greater precision was not required for purposes of this study.

221 Greenhouse gas emissions and reductions are reported to the Voluntary Reporting Program in terms of carbon dioxide equivalent rather than carbon equivalent units, which are used in the other portions of this report. See footnote 38 in Chapter 1.

222 This discussion of accounting issues is based on testimony given by Jay Hakes, former EIA Administrator, on March 30,  2000, before the Senate Committee on Energy and Natural Resources on Senate Bills S. 882 and S. 1776 and their potential impacts on EIA’s Programs. The full text of the testimony is available on EIA’s web site at http://www.eia.gov/neic/speeches/hrtest3-30-00/testimony3.htm.

223 For a detailed description of reported reductions, see Energy Information Administration, Voluntary Reporting of Greenhouse Gases 2001, DOE/EIA-0608(2001) (Washington, DC, February 2003), web site www.eia.gov/oiaf/1605/vrrpt/index.html.

224 Because 1990 was a recession year, it may not be indicative of the success or failure of a reporting firm’s action.

225 Only data submitted during the most recent reporting cycle (2001) were examined. In most cases, reporters submit data on all previous years during each subsequent reporting cycle. As a result, earlier estimates of emissions are often superseded by an entity’s most recent report. However, because some entities did not report during the 2001 reporting cycle after having reported during earlier cycles, their emissions and reductions were not captured in this analysis.

226 Two firms that reported emissions data only for 2001 were excluded from this analysis, because no changes from a previous year’s baseline could be ascertained.

227 Tristam O. West and Naomi Pena, “Determining Thresholds for Mandatory Reporting of Greenhouse Gas Emissions,” Environmental Science and Technology, Vol. 37, No. 6 (2003), pp. 1057-1060.

228 Natural Resources Defense Council, Benchmarking Air Emissions of the 100 Largest Electric Generation Owners in the U.S.  (2000).

229 Tristam O. West and Naomi Pena, “Determining Thresholds for Mandatory Reporting of Greenhouse Gas Emissions,” Environmental Science and Technology, Vol. 37, No. 6 (2003), pp. 1057-1060.

230 Energy Information Administration, Petroleum Supply Annual 2002, Volume 1, DOE/EIA-0340(02)/1 (Washington, DC, June 2003), Table 40.

231 Tristam O. West and Naomi Pena, “Determining Thresholds for Mandatory Reporting of Greenhouse Gas Emissions,” Environmental Science and Technology, Vol. 37, No. 6 (2003), pp. 1057-1060.

232 The large increase in 2001 totals, roughly 90 million metric tons carbon dioxide equivalent higher than the next highest year (1996), is attributable to a large decrease in emissions from Southern Company (explained later in this appendix).

233  This share jumps to 77 percent in 2001 if the very large reductions accruing to Southern Company in that year are included.

234 FirstEnergy’s share of total annual reductions was 7.9 percent in 2001, due in part to the very large reductions accruing to Southern Company.

235 Ohio Edison, Cleveland Electric Illuminating Company, Toledo Edison, Pennsylvania Power, Pennsylvania Electric, Metropolitan Edison, and Jersey Central Power & Light.

236 Although “entity-level” reporting normally denotes reporting emissions for an entire organization, the General Program Guidelines (Section GG-4.3) allow entity-level reporting for individual plants or sets of plants. For purposes of reporting entity-level information for S.139, Southern Company would need to revise its entity-level emissions baseline so that the plants included in the base year matched plants included in subsequent years.

237 A gob is a zone of rubble created when the roof of a coal mine collapses behind the mining operations.

238 As mentioned above, the General Program Guidelines (Section GG-4.3) allow entity-level reporting for individual plants or sets of plants. Thus, AES, would, for the purposes of reporting entity-level information for S.139, need to revise its entity level emissions baseline so that the plants included in the base year matched plants included in subsequent years.

239 The lower bound number in all the ranges in this section is the total for all Voluntary Reporting Program entity-level reporters for which a 1990 base year could be used. The upper bound number is the total for all Voluntary Reporting Program entitylevel reporters whose base year was between 1990 and 2000.

240 Reporters to the Voluntary Reporting Program self-certify their reports. EIA does not certify the correctness of this information.