June 9, 2014

Power sector CO₂ emissions sensitive to policy changes and natural gas supply

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In 2012, almost 40% of total energy-related CO₂ emissions resulted from electricity generation. About three-fourths of those power sector emissions occurred from burning coal, the most carbon-intensive fuel. Policies to reduce CO₂ emissions could result in less consumption of coal in favor of natural gas, which emits about 40% as much CO₂ per kilowatthour as typical coal-fired generation when used in a combined-cycle plant, as well as increases in other low- or zero-carbon power generating technologies such as renewables and nuclear.

Earlier this week, the Environmental Protection Agency (EPA) issued a proposed rule that would require reductions in CO₂ emissions from existing fossil-fueled electric power plants. The EPA proposal includes emission rate targets for each state, measured as pounds of CO₂ emissions per megawatthour of covered generation, as well as guidelines for the development, submission, and implementation of state plans. The emission rate targets vary significantly across individual states, reflecting the application of a series of common building blocks to states with widely different starting points in their respective electricity markets.

The Annual Energy Outlook 2014 (AEO2014) Reference case, which assumes current laws and regulations, does not include the EPA proposal. Currently there are two regional programs in the Northeast and California (the Regional Greenhouse Gas Initiative and Assembly Bill 32, known as RGGI and AB32, respectively) that include control policies for greenhouse gases (GHGs) from the power industry, which are also included in the AEO2014 Reference case. All existing final environmental rules, including the Mercury and Air Toxics Standard, are also included in the projections. After taking these existing environmental regulations into account, the projections for electricity generation and its resulting emissions are primarily determined by the relative operating costs of the different technologies. The AEO2014 Reference case projections show several CO₂-related trends, including:

• CO₂ emissions from the electric power sector increase from 2,035 million metric tons in 2012 to 2,271 million metric tons in 2040, an increase of 12%
• The share of power sector CO₂ emissions from natural gas increases from 24% to 27%, as natural gas-fired plants account for most of the capacity that is added to meet increases in demand and to replace retiring plants
• Few new coal plants are added, as uncertainty about future carbon regulations influences capacity decisions

While EIA does not assume the final structure of any proposed regulations, in order to represent policies that explicitly or implicitly place a value on GHG emissions, the AEO2014 includes alternative cases that impose a fee on energy-related CO₂ emissions. These side cases incorporate an initial CO₂ value of $10 (GHG10 case) and $25 (GHG25 case) per metric ton in 2015, rising by 5% per year. The GHG10 case is also combined with High Oil and Gas Resources, which results in lower gas prices and encourages greater natural gas use. In these side cases, EIA projects the following results as compared with the AEO2014 Reference case:

• 2025 power sector CO₂ emissions are 16% and 49% lower in the GHG10 and GHG25 cases with fees, respectively, and 23% lower when the GHG10 case is combined with the High Oil and Gas Resource case
• 2040 power sector CO₂ emissions reductions range from 36% to 82% across the three side cases, which is greater than the corresponding changes in other sectors and indicates that the electric power industry is typically the most cost effective sector to achieve reductions in response to economy-wide CO₂ fees
• Natural gas-fired generation increases sharply beginning when CO₂ fees are assumed to be introduced in 2015, followed by more nuclear and renewable plant additions as the fees increase
• Natural gas-fired generation levels off around 2030 in the GHG10 case, and it begins to decline after 2025 in the GHG25 case
• In the High Oil and Gas Resource case without CO₂ fees, lower natural gas prices result in higher gas-fired generation and CO₂ emissions in the power sector as more new natural gas plants are built instead of nuclear and renewable capacity
• Natural gas-fired generation continues to increase through 2040 when the fees for the GHG10 case are combined with the lower gas prices from the High Oil and Gas Resource case

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Additional analysis can be found in the AEO2014 Market Trends discussion of emissions from energy use.

Principal contributor: Jeffrey Jones, Kevin Lillis, Laura Martin