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
Data on past carbon dioxide emissions and emissions factors are updated
each year from the EIAs 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.