Highlights and Summary Notes

1 Most commercial entities would not be covered. Most industrial and electric power companies would be covered.

2 Prices are in constant 2001 dollars, unless otherwise noted.

3 In a sensitivity case without a binding offset limit, the use of offsets increases and the overall cost of compliance, as reflected in the allowance and offset prices from 2010 to 2025, decreases by about 20 percent.

4 The maximum percentage change occurs in 2012 and amounts to a difference of $93 billion (1996 dollars).

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

6 The commercial sector includes government entities.

7 The bill allows each covered entity to obtain a portion of its emission allowances from alternate compliance sources,  including purchase of allowances from certified reduction or sequestration programs, both domestically and abroad. The alternate compliance limits are 15 percent from 2010 to 2015 (Phase I) and 10 percent thereafter (Phase II). As an incentive for early action, entities reducing their emissions below 1990 levels may be granted a limit of 20 percent of their target reductions from alternate compliance sources in Phase I.

8 Covered entities must submit allowances for their covered emissions or, to a limited extent, offsetting emission reduction credits from noncovered entities. Therefore, the covered emissions, less any offset credits, are subject to the allowance cap.

9 This provision requires the entity to show that a specific capital project is underway to reduce emissions, and any allowances borrowed must be returned at an effective interest rate of 10 percent per year. In addition, borrowed allowances count against the limit on alternate compliance offsets. Therefore, in the aggregate, allowance borrowing is likely to be minimal under the bill.

10 The relationship between fuel economy credits and emission allowances is to be based on the emissions reductions
attributable to the higher fuel economy, as determined by the Secretary of Transportation.

11 These limits are subject to a biannual review for adequacy by the Under Secretary of Commerce for Oceans and Atmosphere.

12 Because covered entities can, to a limited extent, fulfill their allowance requirement with registered reductions from abroad and by registered increases in net sequestration, their aggregate emissions would not necessarily reach 1990 levels.

13 Energy Information Administration, Annual Energy Outlook 2003, DOE/EIA-0383(2003) (Washington, DC, January 2003), web site http://www.eia.gov/oiaf/aeo/.

14 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).

15 Energy Information Administration, Emission of Greenhouse Gases in the United States 2001, DOE/EIA-0573(2001)
(Washington, DC, December 2002). There are several sources of difference between EIA’s carbon dioxide emissions accounting and those in the EPA inventory. One is that EIA does not subtract emissions for military and international bunker fuels. Another is that EIA recently revised its energy data accounting for fossil fuels used to generate electricity.

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

17 A sensitivity case is used to test the effect of the offset limit. In that case, the prices of the offset and allowance market equalize.

18 Not reflected in Figure S.2 are changes in domestic biological carbon sequestration that are expected to be registered and purchased as offsets. In addition, some of the offsets purchased would be from international sources, as allowed in the bill. This topic is addressed in Chapter 3.

19 Note that refineries, as industrial entities, would be required to obtain allowance permits for the fuel they burn in refining oil, in addition to allowances for downstream emissions of the transportation fuel they sell.

20 While entities in the commercial and industrial sector with emissions greater than 10,000 metric tons of carbon dioxide per year are covered by the bill’s allowance program, we have assumed in the S.139 case that no commercial entities are covered and that all industrial entities, with the exception of agriculture, are covered. This assumption is based partly on the lack of data on emissions by entities as defined by the bill. See Chapter 2 for a discussion of coverage assumptions.

21 It is assumed that 90 percent of the allowance revenue acquired from the sale of greenhouse gas allowances by regulated utilities would be used to mitigate the electricity price increases of its customers and only 10 percent would be allocated to the shareholders as profits.

22 The prices that do not include allowance costs are fossil fuels used by noncovered entities in the residential, commercial, and agricultural sectors, which do not need allowances.

23 The emissions factors cited reflect emissions per unit of fuel consumed and do not reflect differences in fuel efficiency related to the fuel’s use (e.g., for electricity generation).

24 See Chapters 2 and 4 for more on the assumptions and effects of appliance efficiency and other programs that could be funded by the Corporation to reduce the economic impacts of the bill.

25 See Chapter 4 for a summary of data from EIA’s Residential Energy Consumption Survey showing how home energy consumption varies by income cohort.

26 The bill does not specify the share of allowances that would be allocated to the Corporation, leaving this to be determined on an annual basis by the Secretary of Commerce, subject to the approval of Congress.

27 These cases are presented in response to the requests made by the solicitors of the analysis.

28 GDP and disposable income values in this section are in 1996 dollars.

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

30 Some of the funds are used as rebates to buy down the cost of efficient appliances.

31 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.

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

33 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, MA: MIT Joint Program on the Science and Policy of Global Change, June 2003 [revised June 17]).