The emissions policy submodule, part of the integrating module, estimates energy-related carbon dioxide emissions and is capable of representing two related greenhouse gas (GHG) emissions policies:  a cap-and-trade program and a carbon dioxide emission tax. 

Carbon dioxide emissions are calculated from fossil-fuel energy consumption and fuel-specific emissions factors.  The estimates are adjusted for carbon capture technologies where applicable.  Carbon dioxide emissions from energy use are dependent on the carbon content of the fossil fuel, the fraction of the fuel consumed in combustion, and the consumption of that fuel. The product of the carbon content at full combustion and the combustion fraction yields an adjusted carbon emission factor.  The adjusted carbon emissions factors, one for each fuel and sector, are provided as input to the emissions policy module. 

Data on past carbon dioxide emissions and emissions factors are updated each year from the EIA’s annual inventory, Emissions of Greenhouse Gases the United States.¹⁰  To provide a more complete accounting of greenhouse gas emissions consistent with that inventory, a baseline emissions projection for the non-energy carbon dioxide and other greenhouse gases may be specified as an exogenous input. 

To represent carbon tax or cap-and-trade policies, an incremental cost of using each fossil fuel, on a dollar-per-Btu basis, is calculated based the carbon dioxide emissions factors and the per-ton carbon dioxide tax or cap-and-trade allowance cost.  This incremental cost, or carbon price adjustment, is added to the corresponding energy prices as seen by the energy demand modules.  These price adjustments influence energy demand and energy-related CO₂ emissions, as well as macroeconomic trends. 

Under a cap-and-trade policy, the allowance or permit price is determined in an iterative solution process such that the annual covered emissions match the cap each year. If allowance banking is permitted, a constant-growth allowance price path is found such that cumulative emissions over the banking interval match the cumulative covered emissions.  To the extent the policies cover greenhouse gases other than CO₂, the coverage assumptions and abatement potential for the gases must be provided as input.  In past studies, EIA has drawn on work by the Environmental Protection Agency (EPA) to represent exogenous estimates of emissions abatement and the use of offsets as a function of allowance prices. 

Representing specific cap-and-trade policies in NEMS almost always requires customization of the model.   Among the issues that must be addressed are what gases and sectors are covered, what offsets are eligible as compliance measures, how the revenues raised by the taxes or allowance sales are used, how allowances or the value of allowances are distributed, and how the distribution affects energy pricing or the cost of using energy.