Economic Impacts

Implementing the S. 2191 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 lower total emissions and submit allowances for any ongoing emissions.  Second, the auctioning of allowances together with the free distribution of allowances to non-emitting sources will generate revenue that will be spent on programs designed to help businesses and consumers reduce their emissions or ameliorate the impacts associated with higher energy prices.⁵  However, as the share of allowances auctioned and the price of allowances grow over time in the S. 2191 cases, the revenue to the government that could be redistributed also grows, while the economy slows.  Without other changes, a full rebate of these funds would cause the Federal deficit to increase above baseline levels.  In all of the cases in this analysis, it is assumed that the amount of money rebated is limited to the level that maintains the Federal deficit at the baseline level.

Allowance Revenues

Allowance revenue for redistribution is generated by the direct auctioning of allowances by the Federal government and the sale of allowances freely allocated to non-emitting companies, States, and other government programs.  The total cumulative allowance revenue collected for redistribution over the next 22 years ranges from $2.8 trillion (nominal) in the S. 2191 Core Case to $7.6 trillion in the Limited Alternatives/No International Case (Figure 21). Figure 22 shows how the overall allowance related revenues, including those that are grandfathered to covered sources, are distributed throughout the macroeconomy.

Impacts on Energy and Aggregate Prices

Rising energy costs influence the aggregate economy through their effect on prices and energy expenditures.  Figure 23 shows the percentage changes in both the consumer and producer indices for energy prices in the S. 2191 cases.  Figure 24 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 18 percent above the Reference Case level by 2030 in the S. 2191 Core Case.  Industrial energy prices increase 10 percentage points more, at 29 percent above Reference Case levels since S. 2191 provides incentives to keep consumer energy prices lower.  Except for the cases restricting international offsets, energy prices rise rather gradually over the forecast horizon, unlike the pattern of energy prices in recent history (Figure 25).  If measured from 2008 energy prices, it takes 22 years in the S. 2191 Core Case to reach the same percentage change that current energy prices have increased from 2003 to 2008.

If commercialization of low-carbon generating technologies or availability of offsets becomes more difficult, then the increase in energy prices more than doubles that of the S. 2191 Core Case.  In the Limited Alternatives/No International case, consumer energy prices increase as much as 62 percent and industrial energy prices by 100 percent above Reference Case levels, with overall consumer prices rising by 10 percent above the Reference Case in 2030.

Ultimately, the consumer sees higher prices directly through final prices paid for energy-related goods and services and higher prices for other goods and services using energy as an input.  If the cost increases cannot be passed on to consumers, labor and capital stock may be reallocated. Figure 24 shows that increase in consumer prices range between 3 percent above Reference Case levels in the S. 2191 Core Case by 2030, and 4.2, 4.6, 5.8, and 10.1 percent in the No International Offset, High Cost, Limited Alternatives, and Limited Alternatives/No International Cases, respectively.

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 26 and Table 4).  Relative to the Reference Case, real GDP in 2030 is $163 (0.8 percent) lower in the Limited Alternatives/No International Case and $27 billion (0.1 percent) lower in the No International Offsets Case.  In the S. 2191 Core Case, real GDP is 59 billion (0.3 percent) lower in 2030.  Over the entire forecast period, the cumulative present value GDP loss reaches $444 billion in 2000 dollars (0.2 percent) in the S. 2191 Core Case.  The Limited Alternatives/No International Case shows the largest real discounted GDP loss between 2009 and 2030, reaching $1.3 trillion (0.6 percent).

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.  Figure 27 depicts consumption impacts over time and the cumulative discounted percent change in consumption over the 2009 to 2030 period compared to the Reference Case.  The cumulative losses of real consumption are between $558 billion (0.4 percent) in the S. 2191 Core Case and $1.4 trillion (0.6 percent) in the Limited Alternatives/No International Case.  By 2030, real consumption losses reach $68 billion (0.5 percent) in the S. 2191 Core Case.  The Limited Alternatives/No International Case shows the highest consumption loss, reaching $149 billion (1.1 percent) in 2030.

Industrial Impacts

Industrial energy prices increase more than consumer energy prices since 11 percent of the allowance revenue received by industry is aimed at ameliorating energy price impacts for consumers, 9 percent to electricity load-serving entities and 2 percent to natural gas distributors.  As a result, industrial impacts show substantial losses.  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 3.6 percent below the Reference Case by 2030 in the S. 2191 Core Case, and 5.0, 5.3, 6.4 and 10.2 percent in the No International Offsets, High Cost, Limited Alternatives, and Limited Alternatives/No International Cases, respectively.  Figure 28 highlights manufacturing industries’ impacts across the S. 2191 cases, separately showing the energy-intensive and non-energy-intensive manufacturing industrial sectors.

Figure 29 shows industrial sector (all non-service industries) and employment impacts for the S. 2191 Core, Limited Alternatives, No International Offsets, High Cost, and Limited Alternatives/No International Cases.  In the S. 2191 Core Case, industrial output is down by 2.9 percent compared to the Reference Case in 2030 as higher prices and lower demand leads industrial output to fall.  Manufacturing employment changes mirror industrial impacts.

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. 2191, 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 and the availability of offsets.

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. 2191.  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, a significantly increased mandate or breakthrough in the use of biofuels in the transportation sector could 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.

Notes