2.  Results

This section presents the results of the analysis, focusing on the effects of S. 2191 in the Core Case.  The results of additional cases that vary technology cost and availability assumptions are also discussed where relevant, along with some comparisons to the S. 1766 Update Case.  The impacts on GHG emissions, energy markets, and the economy are presented in turn.  Table 3 compares the projections in the AEO2008 Reference Case to the projections in the five S. 2191 cases and the S. 1766 Update.  A full set of tables for all cases is available on the EIA web site.

Greenhouse Gas Emissions and Allowance Prices

Under the S. 2191 Title I cap-and-trade program, GHG emission levels are governed by the quantity of allowances issued each year, the availability and limits on offsets, and the economics of banking allowances for future use.  As discussed in Chapter 1, an underlying assumption is that the ability to sell or bank allowances for the future will promote a gradual escalation in allowance prices.  The allowance prices and levels of emissions banking are estimated in concert such that covered emissions, less allowed offsets, meet the allowance caps over a period of time. 

Figure 2 compares projections of the S. 2191 covered emissions under Title I in the Reference Case and the S. 2191 Core Case, relative to the emissions cap.  Because entities can meet up to 15 percent of the allowance obligation with domestic offsets and 15 percent from international offsets, the graph also depicts the projected offsets purchased, along with the covered emissions net of offsets for comparison to the cap.

As indicated in Figure 3, covered emissions net of offsets are projected to be below the gradually declining cap, causing a bank of allowances to accumulate through 2030.  Because the modeling horizon ends in 2030, a sizable allowance bank balance in 2030 is assumed to be amassed in anticipation of the increasing allowances prices that would likely occur under declining post-2030 caps, given continued population and economic growth.  As a result, cumulative emissions net of offsets through 2030 are projected to be about 5 billion metric tons lower than actually required by the allowance caps over that period. 

The 15-percent limit on international offsets becomes binding in the S. 2191 Core Case in 2016, while the domestic limit is first reached in 2025.  Because the emission caps are declining, the absolute quantity of offsets also declines over time, once the percentage limits becomes binding.

The projected allowance prices and compliance results depend on the assumed availability of international offsets and the cost and availability of low carbon energy sources.  Projected emissions in the Reference Case and the five S. 2191 cases vary, as depicted in Figure 3.  The various compliance paths across these cases reflect different patterns of allowance bank accumulation (Figure 4), along with the estimated allowance price trajectories that shape the compliance response (Figure 5).

As shown in Figure 4, there is a relatively low level of allowance bank accumulation in the first 10 years of the allowance program in the S. 2191 Core case, and the allowances banked in any single year over that period account for less than 5 percent of the yearly cap.  After 2022, the allowance banking escalates as low-carbon emissions sources in the electric power sector emerge, inducing a build-up of allowance balances in anticipation of the increasingly stringent post-2030 emission targets.  As shown in Figure 5, projected allowance prices in the S. 2191 Core case are $17 in 2012 (2006 dollars) and rise at the assumed 7.4-percent rate to $61 in 2030.¹  

In the S. 2191 High Cost and S. 2191 Limited Alternatives Cases, where carbon mitigation options are more costly or unavailable through 2030, allowance prices are driven up, and considerably more allowance banking takes place in the first 10 years of the program.  Allowance prices in 2030 are $78 in the S. 2191 High Cost Case and $91 in the S. 2191 Limited Alternatives Case.  The higher allowance price levels accelerate the use of offsets, and the limits on domestic and international offsets are reached 2 to 4 years earlier than in the S. 2191 Core Case.

The allowance price path from 2012 through 2019 in the S. 2191 No International Offsets case departs from the growing price trajectory seen in the other S. 2191 cases. Without international offsets, allowance prices are driven higher initially, compared to the S. 2191 Core case.  For example, the allowance price in 2012 is $48 in the No International Offsets case, compared to $17 in the Core case.  The allowance price rises to levels necessary to meet the emissions cap in 2012 through fuel-switching and early investment in efficiency and carbon-neutral technologies.  Meeting the gradually declining caps over the next few years is achieved without any significant allowance price increases.  While an outlook for steady or falling allowance prices could create an incentive to borrow allowances against future obligations, as permitted under S. 2191, the effective 10-percent interest penalty on such borrowing and the 15-percent borrowing limit are assumed to preclude this option. 

In the S. 2191 Limited Alternatives/No International Case, where compliance options are most limited, the allowances prices are driven to the highest levels among the cases considered, $51 in 2012 and $156 in 2030. 

Allowance and Offset Prices

The independent limits on domestic and international offsets will influence their pricing relative to allowance prices (Figure 6).  When neither offset limit is binding, the prices in the two offset markets would be expected to clear at the same price as in the allowance market.  When the use of either domestic or international offsets reaches the maximum, competition to supply a fixed quantity of offsets will tend to drive down the offset price below the allowance price.  This situation occurs beginning in 2016 for international offsets and in 2025 for domestic offsets in the S. 2191 Core Case.

Emissions Impacts by Source and Sector

The allowance program and other incentives under S. 2191 are expected to result in substantial covered emissions reductions in energy-related CO2 and other GHG emissions.  Under the offset provisions, emission reductions from non-covered entities also occur, along with increases in biogenic carbon sequestration from domestic forestry and agriculture and credited decreases in emissions abroad.  Under Section 3701, an allowance distribution program provides a supplementary incentive for agricultural and forestry emissions reductions and sequestration.  As seen in Figure 7, S. 2191 Core Case, the emissions reductions from CO2 account for less than half of the total compliance response in the first 10 years of the program, when lower cost offsets and non-CO2 abatement opportunities predominate.  The CO2 share of compliance measures increases over time with more stringent reduction requirements and with greater turnover of electric power plants, energy-using equipment, vehicles, and appliances.  This growing contribution of CO2 reductions occurs in the other policy cases as well, but the degree of response and the relative share of offsets used in the compliance response differ among the cases.

As indicated in Figures 8 and 9, most of the energy-related CO2 emissions reductions occur in the electricity sector, with less than 20 percent of direct emissions occurring in the buildings, industrial, and transportation sectors in all the cases examined.²  The electricity sector reductions stem from the use of more efficient, less carbon-intensive sources of generation.  This results from a variety of factors, particularly the industry’s current dependence on coal, the availability and economics of technologies to switch from coal to less carbon-intensive energy sources, and the comparative economics of fuel switching in other sectors.  A relatively small share of the electricity-related CO2 emissions reductions results from reduced electricity demand.

Comparison of GHG Emissions in the S. 2191 and S. 1766 Cases

The covered emissions and allowance caps under Title 1 of S. 2191 and S. 1766 are compared in Figure 10, relative to the emissions in the AEO2008 Reference Case.  Because the categories of emissions that are covered differ slightly in the two bills, the covered emissions for the Reference Case are presented under each.  The caps under S. 1766 in the first few years are actually slightly above the Reference Case emissions.  Since S. 1766 was introduced, EIA released its AEO2008, with revised Reference Case projections of CO2 emissions.  The AEO2008 Reference Case assumes lower economic growth and higher energy prices than in the AEO2007 Reference Case, and also accounts for the emission reduction impacts of EISA.   As a result, meeting the S. 1766 cap requires lower emission reductions from the AEO2008 Reference Case compared to the AEO2007 Reference Case.  Emissions in the AEO2008 Reference Case would be in compliance with the S. 1766 caps from 2012 to 2017, after taking into account allowance banking.  On a cumulative basis from 2012 to 2030, compliance with the S. 1766 cap would require reductions (or offsets) from the AEO2008 Reference Case emissions of 16 billion metric tons CO2 equivalent, while compliance with S. 2191 requires a cumulative reduction of 37 billion metric tons CO2 equivalent.

Energy Market Impacts

Energy consumers are expected to face higher costs of using energy as a result of the S. 2191 allowance program.  The cost of the allowances requirements imposed on fuel suppliers will tend to be passed on to consumers through higher petroleum and natural gas prices.  Coal consumers, directly responsible for submitting allowances for their coal-related CO2 emissions, will incur higher cost of using coal, reflecting the cost of the associated allowance requirements.   Electricity generators will also pass their higher fuel costs, as well as their higher incremental capital cost, to their customers, partially offset by the S. 2191 provisions that distribute allowances to reduce economic impacts.  Table 2, presented earlier, summarizes the projected impacts on the delivered cost of energy under S. 2191.  Detailed sets of projection tables on energy production, consumption, and prices for each case accompany the presentation of this report on EIA’s web site.³

The impacts of S. 2191 on energy prices are closely linked to the allowance price, so the energy prices are significantly greater when key compliance options such as international offsets, nuclear power, and CCS are assumed to be unavailable or more costly, driving up the allowance prices.  For example, projected prices for motor gasoline in 2030 are $2.46 per gallon (2006 dollars) in the Reference Case, $2.86 per gallon in the S. 2191 Core Case, and $3.46 in the Limited Alternatives/No International Case.  Average electricity prices, net of the mitigating effect from allowance distribution incentives, range from 8.9 cents per kilowatthour in the Reference Case to 9.8 cents in the S. 2191 Core Case and 14.5 cents in the Limited Alternatives/No International Case.  Under S. 2191, average annual household energy bills, excluding transportation costs, are between $30 and $325 higher in 2020 and $76 and $723 in 2030.Energy-related emissions will be influenced by both the higher energy costs from the allowance program, as well as the S. 2191 incentives that promote energy efficiency and low-carbon fuel sources.  Overall, the use of fossil fuels generally decreases relative to the Reference Case, while the use of renewable energy sources and nuclear power increases (Figure 11).  As discussed earlier, the greatest impacts from the higher energy costs occur in the electricity sector, with reductions in the use of coal and increases in nuclear and renewable fuels, relative to the Reference Case in most cases.  The impacts tend to grow over time as the caps become more stringent and the allowance price increase.  In the S. 2191 Core, the S. 2191 High Cost, and the S. 2191 No International Offsets Cases, total natural gas consumption is lower than in  the Reference Case over the 2012 to 2030 period.  In the Limited Alternatives and Limited Alternatives/No International Cases, where compliance options are assumed to be limited, projected natural gas use exceeds the Reference Case and nuclear power remains at the Reference Case level.

Notes