[Senate Hearing 110-516]
[From the U.S. Government Publishing Office]
S. Hrg. 110-516
CLIMATE CHANGE LEGISLATION
=======================================================================
HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
TO
RECEIVE TESTIMONY ON ENERGY AND RELATED ECONOMIC EFFECTS OF GLOBAL
CLIMATE CHANGE LEGISLATION
__________
MAY 20, 2008
Printed for the use of the
Committee on Energy and Natural Resources
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44-664 PDF WASHINGTON DC: 2008
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon LISA MURKOWSKI, Alaska
TIM JOHNSON, South Dakota RICHARD BURR, North Carolina
MARY L. LANDRIEU, Louisiana JIM DeMINT, South Carolina
MARIA CANTWELL, Washington BOB CORKER, Tennessee
KEN SALAZAR, Colorado JOHN BARRASSO, Wyoming
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator From New Mexico................ 1
Corker, Hon. Bob, U.S. Senator From Tennessee.................... 7
Domenici, Hon. Pete V., U.S. Senator From New Mexico............. 4
Gruenspecht, Howard, Deputy Administrator, Energy Information
Administration................................................. 15
Hannegan, Bryan, Vice President, Environment and Generation, the
Electric Power Research Institute.............................. 64
Martinez, Hon. Mel, U.S. Senator From Florida.................... 7
McLean, Brian J., Director, Office of Atmospheric Programs,
Office of Air and Radiation, Environmental Protection Agency... 20
Orszag, Peter R., Director, Congressional Budget Office.......... 26
Parker, Larry, Congressional Research Service.................... 12
Yacobucci, Brent, Congressional Research Service................. 8
APPENDIX
Responses to additional questions................................ 67
CLIMATE CHANGE LEGISLATION
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TUESDAY, MAY 20, 2008
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m. in room
SD-366, Dirksen Senate Office Building, Hon. Jeff Bingaman,
chairman, presiding.
OPENING STATEMENT OF HON. JEFF BINGAMAN, U.S. SENATOR FROM NEW
MEXICO
The Chairman. Why don't we go ahead and get started. Today
we'll hear testimony on analyses of global warming legislation
to learn about the economic and energy impacts of climate
policy and how to understand what the capabilities and
restrictions of economic models are. Over the past several
years the committee has had a number of hearings and workshops
and briefings to understand the economic, environmental impacts
of climate legislation, specifically on its impacts to the
energy sector.
Last year the Energy Information Administration and others
testified before our committee on draft legislation that would
become the Bingaman-Specter Climate bill. Since that time many
other climate bills have been introduced. Many of them have
been modeled and not only by EIA but also by EPA and also by
various stakeholders and interest groups.
Debates on climate legislation and energy policy in general
have often focused heavily on modeling analyses and
predictions. They go from one extreme to another. There are
some models that have been used to show that legislation will
cause massive disruptions in our economy. There are other
models that have been used to show that this legislative
proposals can be accomplished with little or no cost.
Given this wide disparity of findings it can be difficult
to navigate the space in-between and to understand what the
true impacts of legislation will be. We're faced with the
question how could reasonable people and institutions analyze
the same policy and come to completely different conclusions.
A broader question that the committee needs to focus on is
how energy models can be helpful to us in creating a road map
to transform our economy toward a low carbon economy. Although
EIA and EPA and others have done modeling of various climate
change proposals in the last year, the most recent modeling has
been of the Lieberman-Warner Climate Security Act which was
reported by the Environment Committee in December.
It is my understanding that a substitute for that bill is
being developed and that the substitute will be what is
considered on the Senate floor in the next several weeks.
Obviously, that substitute has not been the subject of modeling
as yet. Nevertheless, I believe it's valuable for us to
understand first, the extent to which modeling can reliably
inform our judgment about what to do.
Second, the assumptions built into the various models about
the availability of resources and the need and the speed of
technology development in deployment.
Third, the factors that most significantly affect the
outcomes from these models.
I very much thank the witnesses for being here to help us
understand these complex issues. Let me defer to Senator
Domenici before I introduce the witnesses.
[The prepared statements of Senators Salazar and Murkowski
follow:]
Prepared Statement of Hon. Ken Salazar, U.S. Senator From Colorado
Thank you Chairman Bingaman and Ranking Member Domenici for holding
today's hearing on the energy and related economic impacts of global
climate change legislation. This Congress has made climate change
legislation a priority, and, under your leadership, this Committee has
devoted considerable effort to developing a cap-and-trade system to
control greenhouse gas emissions. We are all anticipating the upcoming
floor debate of the Lieberman-Warner climate change bill.
Many have called the lack of a price on carbon the greatest market
failure in history. Placing a price on carbon will likely touch many
sectors of the economy. Our design choices can have far-reaching
consequences, and we must take care to motivate and reward consumers,
farmers, and industrialists to ``do the right thing'' with regards to
embracing a low-carbon footprint.
Above all, a carbon cap-and-trade system has the potential to
turbo-charge the nascent clean energy revolution that has already begun
in our country. Clean, low-carbon energy can be an economic engine for
our nation, and I am hopeful that a cap-and-trade system and the right
tax policies will stoke our transformation into the undisputed world-
leader in cost-effective solutions to the climate challenge.
Our nation's competitiveness in the global marketplace and the high
standard of living we enjoy today are intimately related to our
longstanding dedication to promoting and capitalizing on technological
innovation. Long the envy of the world, our innovation infrastructure
holds the key to solving the climate crisis. A cap-and-trade program
has the potential to fully unleash our economy's innovation capacity
and fuel incredible economic growth. I am particularly interested to
hear from our panelists whether the existing analyses of the Lieberman-
Warner bill have captured and incorporated these undeniable forces in
our economic system.
In Colorado I have witnessed firsthand the economic muscle of clean
energy, where our citizens' commitment to a renewable electricity
standard has attracted thousands of new jobs to the state. In the
Denver metro region alone, the number of renewable-energy sector jobs
tripled between 2004 and 2007.
Our nation holds the technological potential to meet the climate
challenge and the economic potential to capitalize on it. Time and
again throughout our history American ingenuity has developed the
technologies to meet our greatest challenges. Achieving homegrown
solutions to the carbon problem will undoubtedly present incredible new
economic opportunities to export these technologies to the rest of the
world, particularly China and India. Last year Morgan Stanley declared
that clean energy industries could reasonably achieve $1 trillion in
annual global revenues by 2030. Clean, low-carbon energy will be an
economic driver for the 21st century. I look forward to discussing this
transformation with this distinguished panel.
Thank you, Mr. Chairman.
______
Prepared Statement of Hon. Lisa Murkowski, U.S. Senator From Alaska
Mr. Chairman, I must admit this is a particularly complex hearing.
As the CRS report makes clear, so many of the computer models that
purport to look at the effects of Lieberman-Warner and of the
alternative Bingaman-Specter cap and trade bills for that matter,
seemingly use different assumptions and generate vastly different
results. And many of the models themselves produce vastly different
results between their reference cases and their ``high-tech''
alternatives.
While there is some uniformity of opinion that the Lieberman-Warner
bill will reduce our gross domestic product, there is a big difference
in estimates as to how much. The EPA predicts a drop of between--0.7%
to -2.5% by 2020 and from -0.9% to -3.8% by 2030. EIA predicts a drop
of from -0.3% to -0.9% by 2020 and from -0.3% to -0.8% by 2030. The
Clean Air Task Force model predicts a low of -0.7% by 2030 while the
National Association of Manufacturer's ACCF model predict up to a -2.7%
reduction by 2030--resulting in a cumulative difference of nearly $4
trillion among the models.
That difference is not unimportant. If you look at all the computer
models, the EIA models pegs the cost to the average household at
somewhere between $76 and $723 in 2030, quite a spread. But the NAM/
ACCF model puts that spread at between $4,000 and $6,750 per household
in 2030. The EPA model puts it at between $446 and $608 in 2020, less
than half of the $1,340 that the Charles River Associates International
model predicts in that same year.
Look at specific utility prices, electricity rates are predicted to
rise by a low of 10% in 2030 in the Clean Air Task Force Model, to by
30% in the Nicholas Institute model, to 34% in the Charles River
Associates International model, by 44% in the EPA model, to 57% in the
MIT model, by between 11 and 64% in the EIA model, and to 101 to 129%
in the NAM/ACCF model.
There is not much more uniformity of opinion about the price
impacts on coal, natural gas or oil/gasoline costs. Or for that matter
how much alternative and renewable energy we are likely to gain by
passing the bill. The EIA in its 2008 energy outlook predicted about
4.5 gigawatts of alternatives would be built to 2030 in a business as
usual case. MIT predicts in its model about 16 gigawatts will result
from the bill. EIA is harder to pin down but I thought the report
suggested around 16 gigawatts, which is a 146% increase over their
business as usual case. EPA estimates 61 gigawatts, NAM between 108 and
180 gigawatts, the Clean Air Task Force around 100 gigawatts and
Charles River Associates 176 gigawatts.
How can we in Congress be on the verge of voting on a measure where
there is such a large difference in the forecasts about what the bill
will mean to our constituents with little hope of clarifying the
estimates before floor action?
From a provincial Alaska perspective, the NAM/ACCF model predicts
it will cost the average Alaskan household between $4,548 and $8,294 a
year in higher energy costs and will cut jobs in Alaska between 6,410
and 8,530 in 2030. The Heritage Foundation model puts Alaska's job loss
at 1,800 by 2025. Meanwhile an analysis by the University of Alaska's
Institute of Social and Economic Research implies the cost will be far
less, especially in terms of jobs, a recent report indicating the bill
might actually hike employment in the State by leading to construction
of a natural gas pipeline.
Seldom has Congress been asked to start voting on a bill that will
have such a massive impact on our economy and our future with such a
large divergence of opinion about what it will mean for the nation and
our state's constituents.
Obviously as the CRS report shows, and as other analysis has shown,
there are real differences in the assumptions that drive the models and
real differences of opinion about what assumptions make the most sense.
Nuclear power may be a rational way to replace carbon emitting
power with clean energy. The models, however, have vast differences as
to how much nuclear power will be built--that affecting greatly the
various cost estimates for how climate legislation will impact people.
As the CRS report notes from 1963 until 1985--22 years--this
country built 78 gigawatts of nuclear power in total. But the computer
models predict that over the next 22 years we will build somewhere
between 117 in the view of the Clean Air Task Force model, which helps
to limit the cost of the Lieberman-Warner bill, between 88 and 286
gigawatts in the differing forecasts of EIA, to 62 gigawatts in the EPA
model, 40 in the view of Charles River (CRAI), 25 in the view of NAM
and just 3.5 gigawatts in the view of the MIT report.
You get almost the same vast spread in predicted outcomes in the
amount of carbon capture and storage capable coal-fired plants that
will be built. And those differences are vital in how the models
determine the predicted cost to Americans of the legislation.
And as the CRS report makes clear there are similar uncertainties
in a host of other areas. Look at carbon prices for allowances, a key
in determining gasoline, coal, natural gas, and electricity prices that
Americans will pay under the measure because of their impacts on carbon
emission allowance costs. The estimates are that carbon in 2030 may
cost a low of $38 a ton in the report by the Nicholas Institute, which
helped design the architecture of the Lieberman-Warner bill. The Clean
Air Task Force places it at $50 a ton. Charles River at $76 a ton, EPA
between $61 and $83 a ton, MIT at $86, EIA at between $61 and $156 a
ton, depending on which of their forecast scenarios you pick, and NAM
at between $227 and $271 a ton.
That variance alone helps to explain why CRAI says that Lieberman-
Warner may cost the nation $7.4 trillion in 2007 dollars to 2050, while
the Bingaman-Specter alternative cap and trade bill that I am a co-
sponsor of is expected to cost just $1.7 trillion till 2050.
And what will Americans get for that cost. As the CRS report makes
clear, it depends solely upon whether foreign nations follow America's
suit and adopt similar types of carbon emission reductions. If they
don't, the world will see a drop in atmospheric levels of carbon of
about 23 to 25 parts per million less than would otherwise be seen.
I point out these differences not because I believe nothing should
be done to limit carbon emissions. Coming from Alaska, the state
already impacted by climate change during the past three decades, and
predicted to be the most impacted in America by climate change, I
certainly want to do things that work quickly to reduce carbon
emissions, if nothing more than an insurance policy against future
atmospheric change.'
But I certainly want to make sure that the costs of legislation are
the lowest possible on Americans, while maximizing the benefits they
will see from any measure that we pass.
I await the testimony and my chance to try to make sense out of the
models and the estimates of the impacts of the Lieberman-Warner bill
that we are about to hear. Thank you Mr. Chairman.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR FROM
NEW MEXICO
Senator Domenici. First, thank you, Mr. Chairman for
calling this hearing. I think the more of these kinds of
hearings we can hold, gathering expertise from the people like
today's witnesses, the better off we are and the better off our
country will be. I thank you for coming and lending us your
time and your intelligence.
Good morning, everyone. We have five cap and trade bills in
the Senate. At least 11 attempts have been made to analyze
them. Every single one--11 out of 11--has concluded that these
bills will result in higher energy prices, lower economic
growth and minimal environmental benefit. That's what every one
of the studies says.
There are seven sets of analysis on the Lieberman-Warner
Bill alone. They don't agree on much. One study projects 264
gigawatts of new nuclear power plants, while another projects
no more than four. But all of them anticipate a negative impact
on our Gross Domestic Product. Even those estimated impacts
vary, from $444 billion to a high of $4.8 trillion.
Addressing global climate change is one of the great
challenges of our time. I have the greatest respect for the
goals and efforts of each bill's authors. I also appreciate the
hard work that has gone into these studies. But a range of
nearly $4.5 trillion is as massive as it is inconclusive. I
remain concerned about the dire consequences that the
Lieberman-Warner bill could have for our Nation.
We must also remember that projections are just that,
projections. The best estimates by our most capable minds often
prove inaccurate. Take for instance, EIA's projected oil price
for 2010 as it appeared in the Annual Energy Outlook for 2005.
I certainly hope that oil prices decline to $25 a barrel over
the next 18 months, but right now, we're paying five times that
amount. On a projection just 5 years into the future, what a
difference the past 3 years have made.
Even the projected environmental impacts of climate change
have varied significantly. In 2001 the IPCC predicted that sea
levels would rise by 3 feet by the year 2100. In their latest
assessment, that number was lowered to between 7 and 23 inches
on a projection that sought to look a full century forward,
what a difference the past 7 years have made.
Compounding this uncertainty is what appears to be the
worst kept secret on Capitol Hill--that what was reported from
EPW last December will be replaced by a manager's amendment.
Senator Bingaman has alluded to that. Very few will have been
able to provide input on this amendment, and even fewer will
have had a chance to properly evaluate it.
We're all working on the bill, as it was reported by EPW.
But the bill will be irrelevant when it is substituted for by a
manager's amendment, which I am certain will have substantial
changes at every level and every part. Today, this leaves us to
learn about legislation that will never be taken up on the
Senate floor.
Given what we lack in future projections, it is critical to
look at what other countries have tried to do, including the
signatories to what was supposed to have been a binding treaty.
It caught my attention last December when President Clinton
appeared on the Charlie Rose show, Mr. Chairman, and latented
the fate of the Kyoto Protocol. He said 170 countries signed
this treaty, only 6 out of the 170 have reduced their
greenhouse gases to the 1990 level. He said that only 6 will do
so by 2012 deadline.
One hundred sixty-four out of 170 is a staggering rate of
failure, and we should give that precedent the attention it
deserves. If the Wright Brothers had been among 170 seeking to
be the first to fly, I'm certain they would have wanted to know
why all but a handful of their fellow aviators came crashing
down to earth.
I'm not endorsing the status quo, but our Nation has done
reasonably well compared to those who have implemented cap and
trade programs. The European Union began operating its system
in 2005. According to the Wall Street Journal, their carbon
dioxide emissions have continued to rise by about 1 percent a
year. During that same period, America's carbon dioxide
emissions actually declined by 1 percent.
Any reasonable amount of time spent looking at cap and
trade proposals leads to more questions than answers. While
that may be acceptable for scientific endeavors it is not a
very sound footing from which to embark upon policymaking. One
of these questions is particularly troubling. Assume for a
moment that Congress passes, and the President signs, the
Lieberman-Warner legislation. What then will we have
accomplished for the environment?
As it turns out, the answer is next to nothing. This is a
global problem. But without further international action, the
Lieberman-Warner bill would reduce atmospheric concentrations
of greenhouse gases by a mere 1 percent by 2050. To achieve
that reduction we may subject our economic prosperity and
global competitiveness to irreparable harm.
My concerns are no different than those shared by the full
U.S. Senate in 1997, when on a vote of 95 to 0, we passed a
resolution indicating that we did not support Kyoto. Our
economy grew by 5 percent in the quarter before that vote. In
the midst of robust growth the Senate overwhelmingly rejected
the idea of a treaty that did not include developing nations or
``could result in serious harm to the United States economy.''
With the many factors now limiting our economy, which
expanded by just 0.6 of a percent last quarter, today should be
no different. Our determination to involve developing nations
in these efforts should be stronger than ever, since we now
know that China has surpassed us in greenhouse gas emissions
decades before they were supposed to. There is a fine line
between success and failure in the global economy. We must not
let a disproportionate sense of urgency tip the balance away
from our economic strength and competitiveness with emerging
economies.
Addressing climate change is a great challenge, but it is
not the only challenge that we face. Between 1990 and 2006,
American's reliance on foreign oil increased from 42 percent to
60. As a result, nearly half a trillion dollars will be sent
overseas this year for energy that we are capable of producing
at home.
Our trade deficit ballooned from $81 billion to $700
billion last year, and our Nation's national debt tripled to
over $9 trillion during that same period. These are bipartisan
shortcomings that have played out over the course of decades.
During these same years, we did make progress on one front,
and it is a front that is central to this debate. Between 1990
and 2007, the greenhouse gas intensity of our economy dropped
by nearly 27 percent, even as many other problems became much
more serious. We may see an increase in emissions in some
years. But over the past 2 decades, our ability to reduce
greenhouse gas emissions relative to GDP has been very
instructive.
We are already experiencing record prices for gasoline, oil
and other commodities. To me, it's more than a little ironic
that the free market, which so many of my colleagues have
criticized as responsible for those high prices, is the very
same mechanism that they ask us to trust for containing the
costs associated with a cap and trade regime.
We, as a Congress and as a Nation, must realize that cap
and trade is neither our only option nor our best option for
addressing climate global climate change. Rather than choosing
among cap and trade proposals, we could look at alternate
measures promoting nuclear power, advancing clean energy tax
incentives, and accelerating the development of clean
technologies.
The Energy bills we passed in 2005 and 2007 are the
functional equivalent of a clean energy Manhattan Project.
There is no question that fully funding these measures, and the
additional progress made possible by my Clean Energy Investment
Bank that might come into being, will lower emissions even
further.
In closing I remind my colleagues of the importance of
choosing the right path for our Nation on climate change and
the enormity of the consequences if we fail to fully and wisely
choose. I look forward to hearing from the witnesses. Many of
them I do not know, but I know enough about them to say that
they are more than adequate to help us understand what we are
about to enter upon.
Thank you, Mr. Chairman.
The Chairman. Thank you. Let me suggest this way of
proceeding. I know there are members here who would like to
give opening statements as well.
I think in fairness to our witnesses, I would like to go
ahead and hear from the witnesses, and maybe give each member 7
minutes of time for comments or statements and questions on the
first round. Any member that has not had a opening statement
like I did and like Senator Domenici did, so that we don't get
into a major debate here about whether climate change should be
addressed through cap and trade or not. Because I do think that
these witnesses are really here to talk about the modeling
which is the focus of our hearing.
Let me just introduce Senator Corker.
STATEMENT OF HON. BOB CORKER, U.S. SENATOR
FROM TENNESSEE
Senator Corker. Yes, I'll refrain from giving an opening
comment. I have to go to a banking meeting at 10:30 that has a
mark up and a thin number as it relates to actually having a
quorum. I apologize. I do want to thank you for having this
hearing.
There are numbers of things that I'd like to say which I
guess I will not say at this time out of respect for the
chairman, but I thank you for having this hearing. I'll
probably enter those into the record. Thank you.
The Chairman. I would like to give you time to say them,
but Senator Domenici has a hearing he has to be at at 11
o'clock. We'll still be giving opening statements by 11 o'clock
if we don't go ahead, I'm afraid.
STATEMENT OF HON. MEL MARTINEZ, U.S. SENATOR
FROM FLORIDA
Senator Martinez. Mr. Chairman, could I also say that I
would have to be going to this banking hearing and mark up as
well very shortly, but I'm very interested in this topic. Thank
you for calling the hearing.
The Chairman. Thank you all very much. Our first witness is
Brent Yacobucci who is with the Congressional Research Service.
I've asked that the CRS provide us with a brief description of
how a cap and trade system would work, and he's intending to do
that in his statement.
Larry Parker is also with the CRS and will proceed to give
us some of the conclusions in a new report that CRS has done
seeking to compare the results of various climate change
analyses.
Howard Gruenspecht who's a familiar witness to us here is
with the Energy Information Administration and Brian McLean who
has also been here before with the Environmental Protection
Agency. They will talk about the analyses that their respective
agencies have done. Brian McLean is accompanied by Francisco de
la Chesnaye, thank you for being here to provide technical
support.
Peter Orszag is well known to all of us as the Director of
the Congressional Budget Office. He'll speak about some of the
economic impacts of climate legislation. He recently testified
before the Finance Committee on similar issues.
Thank you all for being here. Why don't we start and just
go across the table there. If you could take 5 or 6 minutes and
make the main points that you think that we need to understand.
Then we will have questions.
STATEMENT OF BRENT YACOBUCCI, CONGRESSIONAL RESEARCH SERVICE
Mr. Yacobucci. Alright. Good morning, Senators. My name is
Brent Yacobucci and I'm joined by Larry Parker.
On behalf of the Congressional Research Service we would
like to thank the committee for this invitation to testify here
today. I've been asked by the committee to present a short
introduction to cap and trade policy including key concepts and
terms and relate those to S. 2191, the Lieberman-Warner Climate
Security Act of 2008. Attached to my opening statement is a
brief glossary of key terms presented in this statement.
A cap and trade system imposes an emissions ceiling or cap
on the total annual emissions from entities covered by the
system. The level of the cap is equal to the number of
emissions permits or allowances allocated each year. At the end
of the year covered entities must submit one allowance for each
ton of carbon dioxide equivalent emitted.
In general a cap and trade system achieves emission
reductions by decreasing the number of allowances allocated in
successive years, the steeper the annual reduction in
allowances, the more stringent the program. Also for the same
cap the wider the coverage, that is, the more economic sectors
and entities within those sectors covered by the system, the
more stringent the program. S. 2191 as already reported would
establish a mandatory cap and trade system reducing overall
emissions by 66 percent from 2005 levels by 2020 according to
the bill's sponsors.
Allowances may be used to comply with the cap, banked for
future use or traded to someone else. This is the trade aspect
of a cap and trade program. A key component of trading is the
fact that some participants will have lower reduction cost than
others.
To the extent that two different firms have different cost
it makes the most economic sense for the firm with higher
reduction costs to pay the lower firm to further reduce their
emissions. In a national program these sorts of trades could
occur among entities, sectors and countries within certain
limits. A key element in designing a cap and trade system is
selecting the point at which emissions are regulated. That is,
who should submit allowances under the program.
Greenhouse gases can be controlled downstream at the point
where they are emitted into the atmosphere or they could be
controlled upstream requiring allowances from firms that
produce or supply fuel and other products that will ultimately
lead to greenhouse gas emissions. S. 2191 achieves broad
coverage through upstream regulation of petroleum, natural gas
and fluorinated gas producers and importers and downstream
regulation of coal consumers such as electric generators. Now
the point of regulation should not be confused with how and to
whom allowances are allocated.
Allowances may be given at no cost to cover entities. In
contrast allowances could be given to anyone. For example,
States who may sell them to covered entities and use the
proceeds for various purposes. Also allowances may be auctioned
by the government and the proceeds used for purposes related or
unrelated to greenhouse gas reduction.
S. 2191 uses a mix of all 3 options allocating roughly 35
percent of allowances in 2012 to covered sectors, another 35
percent to non-covered entities and auctioning the rest. In
successive years the percentage of allowances given to covered
entities reduces to zero while the share being auctioned
increases.
Within a cap and trade system three flexibility mechanisms
are key to determining the ultimate cost of the program. The
first is banking, which is the ability to retain allowances for
future use or sale. A provision included in S. 2191. Banking
allows smoother transitions and can promote earlier reductions.
A second flexibility mechanism is the availability of
domestic offsets which are emission reductions achieved by non-
covered entities. These non-covered entities can sell offsets
to covered entities who may use them in lieu of an allowance.
Under S. 2191 up to 15 percent of a covered entities
requirement can be met using these domestic offsets.
A third flexibility mechanism is the availability of
international credits which are reductions achieved in eligible
foreign systems that may be used by covered entities to comply
with a U.S. program. Under S. 2191 up to 15 percent of a
covered entities requirement can be met through the use of
international credits.
In addition to these flexibility mechanisms cap and trade
approaches may contain techniques to limit costs. These include
a safety valve like that in S. 1766 which allows a covered
entity to choose to pay a fee in lieu of submitting an
allowance. Another way to control costs is S. 2191's carbon
market efficiency board with the authority to loosen limits on
offsets, international credits and the borrowing of allowances
from future years.
To conclude the relative costs of a cap and trade program
are largely driven by three factors, as we call them, the three
T's: tonnage, time, and techniques or the level of the cap and
its coverage, the rate of emissions reductions and the
available flexibility and cost control mechanisms.
Thank you for inviting us to appear. We'll be pleased to
address any questions you may have.
[The prepared statement of Mr. Yacobucci follows:]
Prepared Statement of Brent Yacobucci, Congressional Research Service
My name is Brent Yacobucci, and I am joined by Larry Parker. On
behalf of the Congressional Research Service (CRS), we would like to
thank the Committee for its invitation to testify here today. I have
been asked by the Committee to present a short introduction of cap-and-
trade policy, including key concepts and terms, and relate those to S.
2191, the Lieberman-Warner Climate Security Act of 2008. Attached to my
opening statement is a brief glossary of key terms presented in this
discussion.
As suggested by its name, a cap-and-trade system imposes an
emissions ceiling or cap on the total annual greenhouse gas emissions
of entities covered by the system. The level of the cap is equal to the
number of emissions permits or allowances distributed each year. The
allowances are distributed to entities through an allocation scheme. At
the end of the year, for each ton of carbon dioxide equivalent\1\
emitted by a covered entity, that entity must submit one allowance to
the agency regulating the program.\2\ In general, a cap-and-trade
system achieves emissions reductions by decreasing the number of
allowances allocated in successive years. For the same cap, the wider
the coverage, that is the more economic sectors (and entities within
sectors) under the cap, the more stringent the program. Also, the
steeper the annual reduction in allowances, the more stringent the
program. S. 2191, as ordered reported by the Senate Committee on
Environment and Public Works,\3\ would establish a mandatory cap-and-
trade system, reducing overall emissions by 66% from 2005 levels in
2050, according to the bill's sponsors. S. 2191 would limit emissions
from all petroleum refiners and importers, natural gas processors,
entities that produce or import fluorinated gases and other greenhouse
gases, and facilities that use more than 5,000 tons of coal per year.
Sponsors estimate that S. 2191 would cover 87% of the country's
greenhouse gas emissions.
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\1\ In general, greenhouse gas reduction bills address emissions of
all six greenhouse gases recognized under the United Nations Framework
Convention on Climate Change: carbon dioxide (CO2), methane
(CH4), nitrous oxide (N2O), sulfur hexafluoride
(SF6), hydrofluorocarbons (HFC), and perfluorocarbons (PFC).
\2\ The U.S. Environmental Protection Agency in most proposals.
\3\ Available on Senator Lieberman's website: http://
lieberman.senate.gov/documents/lwcsa.pdf.
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Allowances--each of which represents a limited authorization to
emit one metric ton of carbon dioxide equivalent--may be used to comply
with the cap, banked for use in a future year, or traded to someone
else. This is the trade aspect of a cap-and-trade program. A key
component of trading is the fact that some participants will have lower
reduction costs than others. To the extent that two firms have
different costs, it makes the most economic sense for the firm with
higher reduction cost to pay the firm with lower costs to further
reduce its emissions. An illustrative example of this concept is
attached (Appendix).* In a national reduction program, these sorts of
trades could occur among entities, sectors, and countries (within
certain limitations).
---------------------------------------------------------------------------
* Figures have been retained in committee files.
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A key element in designing a cap-and-trade system is the point at
which emissions are regulated (point of regulation). That is, where are
emissions measured, and thus, who must submit allowances to comply with
the program. Greenhouse gases can be controlled downstream, at the
point where they are emitted into the atmosphere, or they can be
controlled upstream, requiring allowances from firms that produce or
supply fuel and other products that will ultimately lead to emissions.
A key advantage of downstream regulation is that the entity causing
emissions has the responsibility for reductions. A key advantage of an
upstream system is that it may simplify the regulatory process and help
limit the number of covered entities.\4\ S. 2191 achieves its broad
coverage through an upstream regulation mandate on petroleum, natural
gas, and fluorinated gas producers and importers, and a downstream
mandate on coal consumers, such as electric generators.
---------------------------------------------------------------------------
\4\ A useful example is the automotive sector. While the purpose of
the cap-and-trade program would be to have motor vehicle owners make
reductions by driving less or purchasing more efficient vehicles, it
would be a massive regulatory undertaking to install emissions monitors
on the millions of cars and trucks on U.S. roads, and to demand that
every driver submit emissions allowances at the end of the year.
---------------------------------------------------------------------------
The point of regulation should not be confused with how, and to
whom, allowances are allocated. Allowances may be given at no cost to
the covered entities. For example, that is how the sulfur dioxide cap-
and-trade program of the Clean Air Act allocates allowances. In
contrast, allowances could be given to anyone--for example, states--who
may sell them to covered entities and use the proceeds for specified or
unspecified purposes. Finally, allowances may be auctioned by the
federal government and the proceeds used for various purposes related
or unrelated to greenhouse gas reduction. For example, those funds
could be used to lessen the economic burden of the program on affected
workers, industries, and regions, to promote the development of new
technology, or to adapt systems to a changing climate. Further, those
revenues could be used for non-climate-related purposes such as deficit
reduction or tax relief.
S. 2191 uses a mix of all of these options, allocating roughly 35%
of allowances in 2012 to covered sectors, roughly 35% to unregulated or
non-covered entities, and auctioning the rest. In successive years, the
percentage of allowances given to covered entities decreases to zero,
while the share of auctioned allowances increases. With respect to
revenues, S. 2191 allocates a large share of auction revenue to keep
the bill revenue-neutral, to speed deployment of new technology, to
provide assistance to energy consumers, and to promote adaptation
efforts.
Within a cap-and-trade system, three flexibility mechanisms are key
to determining the ultimate cost of the program:
The first is banking. Banking is the ability to retain
allowances either received or purchased for future use or sale.
(It is a provision included in S. 2191.) This allows smoother
transitions and can promote early reductions.
The second flexibility mechanism is the availability of
domestic offsets. Offsets are emissions reductions achieved by
non-covered entities, such as the agricultural sector. These
non-covered entities can sell offsets to covered entities, who
may use them in lieu of an allowance, within certain limits.
Effectively, offsets increase the supply of available
allowances--under S. 2191, up to 15% of a covered entity's
allowance requirement can be met through submission of domestic
offsets.
A third flexibility mechanism is the availability of
international credits. International credits are emissions
reductions achieved by other countries that may be used by
covered entities to comply with a U.S. cap-and-trade program.
Under S. 2191, up to 15% of a covered entity's allowance
requirement can be met through submission of international
allowances from eligible foreign cap-and-trade systems.
In addition to flexibility mechanisms, cap-and-trade approaches may
contain other techniques to limit costs. These include a safety valve
like that in S. 1766 which allows a covered entity to choose to comply
with a cap-and-trade program by paying a safety valve fee instead of
submitting allowances. However, this would allow emissions to exceed
the cap. Another way to control costs is S. 2191's Carbon Market
Efficiency Board, with authority to increase (within certain bounds)
the pool of available allowances without increasing overall emissions.
To conclude, the relative costs of a cap-and-trade program are
largely driven by three factors, as we call them, the ``Three T's'':
tonnage, time, and techniques.
Tonnage refers to the stringency of the cap, as well as the
breadth of coverage. The more stringent the cap (that is, the
fewer the tons allotted), the higher the cost.
Time refers to the rate of decrease in allowances. The
faster the cap decreases, the more expensive the program will
be.
Techniques refers to the flexibility and cost-control
mechanisms used. Banking is arguably the most important
mechanism to limit volatility in allowance markets. Other
techniques that will decrease costs include the availability of
domestic offsets and international credits--effectively
increasing the supply of allowances.
Thank you for inviting us to appear. We will be pleased to address
any questions you may have.
attachment.--common terms
Allowance.--A limited authorization by the government to emit 1
metric ton of carbon dioxide equivalent. Although used generically, an
allowance is technically different from a credit. A credit represents a
ton of pollutant that an entity has reduced in excess of its legal
requirement. However, the terms tend to be used interchangeably, along
with others, such as permits.
Auctions.--Auctions can be used in market-based pollution control
schemes to allocate some, or all of the allowances. Auctions may be
used to: 1) ensure the liquidity of the credit trading program; and/or
2) raise (potentially considerable) revenues for various related or
unrelated purposes.
Banking.--The limited ability to save allowances for the future and
shift the reduction requirement across time.
Cap-and-trade program.--An emissions reduction program with two key
elements: 1) an absolute limit (``cap'') on the emissions allowed by
covered entities; and 2) the ability to buy and sell (``trade'') those
allowances among covered and non-covered entities.
Coverage.--Coverage is the breadth of economic sectors covered by a
particular greenhouse gas reduction program, as well as the breadth of
entities within sectors.
Emissions cap.--A mandated limit on how much pollutant (or
greenhouse gases) an affected entity can release to the atmosphere.
Caps can be either an absolute cap, where the amount is specified in
terms of tons of emissions on an annual basis, or a rate-based cap,
where the amount of emissions produced per unit of output (such as
electricity) is specified but not the absolute amount released. Caps
may be imposed on an entity, sector, or economy-wide basis.
Greenhouse gases.--The six gases recognized under the United
Nations Framework Convention on Climate Change are carbon dioxide
(CO2), methane (CH4), nitrous oxide
(N2O), sulfur hexafluoride (SF6)
hydrofluorocarbons (HFC), and perfluorocarbons (PFC).
Offsets.--Emission credits achieved by activities not directly
related to the emissions of an affected source. Examples of offsets
would include forestry and agricultural activities that absorb carbon
dioxide, and reductions achieved by entities that are not regulated by
a greenhouse gas control program.
Revenue recycling.--How a program distributes revenues from
auctions, penalties, and/or taxes. Revenue recycling can have a
significant effect on the overall cost of the program to the economy.
Point of Regulation.--Regulatory approaches to limiting emissions
can choose different points and participants along the production
process to assign compliance responsibility. Upstream allocation
schemes establish emission caps at a production, importation, or
distribution point of products that will eventually produce greenhouse
emissions further down the production process. In contrast, downstream
allocation schemes establish emission caps and assign allowances at the
point in the process where the emissions are emitted.
Sequestration.--Sequestration is the process of capturing carbon
dioxide from emission streams or from the atmosphere and then storing
it in such a way as to prevent its release to the atmosphere.
The Chairman. Thank you very much. I think that was a good
summary of the complex issue we're trying to deal with here.
Dr. Parker, why don't you go right ahead?
STATEMENT OF LARRY PARKER, CONGRESSIONAL
RESEARCH SERVICE
Mr. Parker. My name is Larry Parker. On behalf of the
Congressional Research Service, Brent Yacobucci and I would
like to thank the committee for the invitation to testify here
today. S. 2191 would establish a cap and trade program to
reduce U.S. greenhouse gas emissions through the year 2050.
While CRS takes no position on the bill, CRS has just completed
a review and synthesis of six studies that attempt to project
the cost of S. 2191 to the year 2030 or 2050.
It is difficult and some would consider it unwise to
project cost up to the year 2030 much less beyond. The already
tenuous assumption that current regulatory standards would
remain constant becomes more unrealistic. Other unforeseen
events loom as critical issues which cannot be modeled.
Hence long term cost projections are at best speculative
and should be viewed with a tint of skepticism. In the words of
the late Dr. Lincoln Moses, the first Administrator of the
Energy Information Administration, there are no facts about the
future.'' Models cannot predict the future, but they can
indicate the sensitivity of a program's provisions to varying
economic, technological and behavioral assumptions that may
assist policymakers in designing a greenhouse gas reduction
strategy.
The various cases CRS examined do provide some informative
insights on the cost and benefits of S. 2191 and its many
provisions. We have summarized these insights into seven
points.
First, if enacted the ultimate cost of S. 2191 would be
determined by the response of the economy to the technological
challenges presented by the bill. The bill provides numerous
research and development, deployment, regulatory and price
incentives for technology and evasion to reduce greenhouse gas
emissions. The potential for new technology to reduce the cost
of S. 2191 is not fully analyzed by any of the cases examined
nor can it be.
The process of technology development and dissemination is
not sufficiently understood at the current time for models to
replicate it with any long term confidence. In the same vein,
it is difficult to determine whether the various incentives
provided under S. 2191 are directed in the most optimum manner.
Second, a considerable amount of low carbon, electric
generating capacity would have to be built under S. 2191 in
order to meet the reduction requirements. The cases presented
here do not agree on the amount of new generating capacity
necessary under S. 2191 or the mix of fuels and technologies
that would be employed. The estimated amount of capacity
constructed depends on the cases assumptions about the need for
new capacity and the replacement or retirement of existing
capacity under S. 2191 along with consumer demand response to
the rising prices and incentives contained in the bill.
Third, the cases suggest that the carbon capture and
storage bonus allowance allocation provided under S. 2191 would
be effective in encouraging deployment of carbon capture and
storage technology accelerating development by 5 to 10 years.
However, the cases disagree on whether or not the bonus amount
provided by the bill is sufficient or needs to be extended
additional years.
Fourth, the cases generally indicate that domestic carbon
offsets and international carbon credits could be valuable
tools for entities covered under S. 2191. Not only to
potentially reduce cost, but combined with the bill's
provisions permitting the banking of allowances to provide
companies more time to develop long term investment and
strategic plans and to pursue new technologies. Cost could be
lowered further by allowing greater availability to domestic
offsets and international credits and with a broader definition
of eligible international credits. A more direct path for
permitting the use of international credits would also reduce
one of the more important cost uncertainties revealed by the
cases varying interpretations of S. 2191's international credit
eligibility requirements and their projected price.
Fifth, the proposed Carbon Market Efficiency Board could
have an important effect on the cost of the program through its
powers to increase the availability of domestic offsets and
international credits. However, the board is primarily designed
to deal with short term volatilities due to episodic events in
the allowance market and has only short term powers. Whether it
could coordinate a longer terms strategy, if necessary, with
its proposed authority is not known.
Sixth, the proposed low carbon fuel standard could
greatly--could significantly raise fuel prices and limit
supply. The effects would depend on what fuels are included in
it, the level of emission reductions achieved by alternatives
and the ability of suppliers to reduce those alternatives. If
plug-in hybrid vehicles or large amounts of cellulosic biofuel
are available early, or if certain fuels such as aviation fuel
are excluded from the mandate the cost would be lower.
Seventh, S. 2191's potential climate related and
environmental benefit is best considered in a global context
and the desire to engage the developing world in the reduction
effort. It is in this context that the United States and other
developed country agree both to reduce their own emissions to
help stabilize atmospheric concentrations of greenhouse gases
and to take the lead in reducing greenhouse gases when they
ratify the 1992 framework convention on climate change.
The global scope raises two issues for S. 2191. Whether the
bill's greenhouse gas reduction program and other provisions to
be considered sufficiently credible by developing countries so
that schemes for including them in future international
agreements becomes more likely and two, whether the bill's
reductions meet U.S. commitments to stabilization under the
framework convention and occur in a timely fashion so that
global stabilization may occur at an acceptable level.
I thank the chairman. We would be happy to answer any
questions the committee may have.
[The prepared statement of Mr. Parker follows:]
Prepared Statement of Larry Parker, Congressional Research Service
My name is Larry Parker. On behalf of the Congressional Research
Service (CRS), Brent Yacobucci and I would like to thank the Committee
for its invitation to testify here today. S. 2191 would establish a
cap-and-trade program to reduce U.S. greenhouse gas emissions through
the year 2050.\1\ While CRS takes no position on the bill, CRS has just
completed a review and synthesis of six studies that attempt to project
the costs of S. 2191 to the year 2030 or 2050. It is difficult (and
some would consider it unwise) to project costs up to the year 2030,
much less beyond. The already tenuous assumption that current
regulatory standards will remain constant becomes more unrealistic, and
other unforeseen events (such as technological breakthroughs) loom as
critical issues which cannot be modeled. Hence, long-term cost
projections are at best speculative, and should be viewed with
attentive skepticism. In the words of the late Dr. Lincoln Moses, the
first Administrator of the Energy Information Administration: ``There
are no facts about the future.''\2\
---------------------------------------------------------------------------
\1\ CRS Report RL34489, Climate Change: Costs and Benefits of S.
2191, by Larry Parker and Brent Yacobucci. (Note: CRS report has been
retained in committee files.)
\2\ Lincoln E. Moses, Administrator, Energy Information
Administration, Annual Report to Congress: 1977, Volume II (1978).
---------------------------------------------------------------------------
Models cannot predict the future, but they can indicate the
sensitivity of a program's provisions to varying economic,
technological, and behavioral assumptions that may assist policymakers
in designing a greenhouse gas reduction strategy. The various cases CRS
examined do provide some important insights on the costs and benefits
of S. 2191 and its many provisions. We have summarized these insights
into seven points:
First, if enacted, the ultimate cost of S. 2191 would be
determined by the response of the economy to the technological
challenges presented by the bill. The bill provides numerous
research and development, deployment, regulatory, and price
incentives for technology innovation to reduce greenhouse gas
emissions. The potential for new technology to reduce the costs
of S. 2191 is not fully analyzed by any of the cases examined,
nor can it be. The process of technology development and
dissemination is not sufficiently understood at the current
time for models to replicate it with any long-term confidence.
In the same vein, it is difficult to determine whether the
various incentives provided by S. 2191 are directed in the most
optimal manner.
Second, a considerable amount of low-carbon electric
generating capacity would have to be built under S. 2191 in
order to meet the reduction requirement. The cases presented
here do not agree on the amount of new generating capacity
necessary under S. 2191 or the mix of fuels and technologies
that would be employed. The estimated amount of capacity
constructed depends on the cases' assumptions about the need
for new capacity, and replacement/retirement of existing
capacity under S. 2191, along with consumer demand response to
the rising prices and incentives contained in the bill.
Third, the cases suggest that the carbon capture and storage
bonus allowance allocation provided under S. 2191 would be
effective in encouraging deployment of carbon capture and
storage technology, accelerating development by 5-10 years.
However, the cases disagree on whether the bonus amount
provided by S. 2191 is sufficient, or needs to be extended
additional years.
Fourth, the cases generally indicate that domestic carbon
offsets and international carbon credits could be valuable
tools for entities covered by S. 2191 not only to potentially
reduce costs, but combined with the bill's provisions
permitting the banking of allowances, to provide companies more
time to develop long-term investment and strategic plans, and
to pursue new technologies. Cost could be lowered further by
allowing greater availability of domestic offsets and
international credits and with a broader definition of eligible
international credits. A more direct path for permitting use of
international credits would also reduce one of the more
important cost uncertainties revealed by the cases' varying
interpretations of S. 2191's international credit eligibility
requirements and their projected price.
Fifth, the proposed Carbon Market Efficiency Board could have
an important effect on the cost of the program through its
power to increase the availability of domestic offsets and
international credits. The cases generally do not consider the
Board in their analyses but, one can infer from the results
that the most important power that the Board may have is the
ability to increase the availability of domestic offsets and
international credits (although the Board would not have the
authority to change the eligibility requirements for domestic
offsets or international credits). In this sense, the Board's
powers could mesh with the previous insight about the
importance of offsets and banking to the cost-effectiveness of
S. 2191. However, the Board is primarily designed to deal with
short-term volatility due to episodic events in the allowance
market and has only short-term powers. Whether it could
coordinate a longer term strategy, if necessary, with its
proposed authority is not known.
Sixth, the proposed Low Carbon Fuel Standard could
significantly raise fuel prices and limit supply. The effects
would depend on what fuels are included in the LCFS, the level
of emissions reductions achieved by alternatives, and the
ability of suppliers to produce those alternatives. If plug-in
hybrid vehicles or large amounts of cellulosic biofuel are
available early, or if certain fuels such as aviation fuel are
excluded from the mandate, the costs could be lower.
Seventh, S. 2191's potential climate-related environmental
benefit is best considered in a global context and the desire
to engage the developing world in the reduction effort. It is
in this context that the United States and other developed
countries agreed both to reduce their own emissions to help
stabilize atmospheric concentrations of greenhouse gases and to
take the lead in reducing greenhouse gases when they ratified
the 1992 United Nations Framework Convention on Climate Change
(UNFCCC). This global scope raises two issues for S. 2191: (1)
whether S. 2191's greenhouse gas reduction program and other
provisions would be considered sufficiently credible by
developing countries so that schemes for including them in
future international agreements become more likely, and (2)
whether S. 2191's reductions meet U.S. commitments to
stabilization under the UNFCCC and occur in a timely fashion so
that global stabilization may occur at an acceptable level.
Thank you. We will be glad to answer any questions you may have.
The Chairman. Thank you very much.
Dr. Gruenspecht, go right ahead.
STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY
INFORMATION ADMINISTRATION
Mr. Gruenspecht. Mr. Chairman and members of the committee,
I appreciate the opportunity to appear before you today to
discuss the energy and economic effects of global climate
change legislation. EIA is the independent statistical and
analytical agency in the Department of Energy. We do not
promote, formulate or take positions on policy issues. Our
views should not be construed as representing those of the
Department or the Administration. Since you already have our
written testimony and our recent analysis* that addresses both
the reported Lieberman-Warner bill and an updated analysis of
S. 1766, the Low Carbon Economy Act of 2007 introduced by you,
Senator Specter and others, my remarks will focus on some key
findings and insights.
---------------------------------------------------------------------------
* Document has been retained in committee files.
---------------------------------------------------------------------------
First, the projected impacts of the Lieberman-Warner
proposal on energy prices, energy use and the economy are
highly sensitive to assumptions about the cost and availability
of no- and low-carbon technologies for power generation and
international offsets. Our report on S. 2191 includes five
alternative cases that reflect a variety of different
assumptions regarding these factors, with the Core case on the
one hand and the Limited Alternatives/No International Offsets
Case on the other representing, respectively, the most
favorable and least favorable situations for ease of compliance
with the Lieberman-Warner targets.
Allowance prices and economic impacts through 2030--EIA is
not brave enough to go to 2050--are roughly three times larger
using the least favorable assumptions than using the most
favorable ones. As discussed in our report, both technical
barriers and public acceptance barriers to key no- and low-
emissions technologies can be influenced by policy design
choices.
Second, energy and economic impacts are sensitive to
whether the recent steep rise in the cost of major energy
infrastructure projects reflects a temporary bubble or a
permanent shift. Compliance with very stringent emission
targets is expected to result in the need to replace all or the
vast majority of the existing fleet of coal-fired power plants.
With a large increase in capacity additions needed to replace
those units and also meet rising demand, higher costs could
result in increased energy and economic impacts.
The baseline, including expectations for future energy
prices as noted in Senator Domenici's opening statement, is a
third key assumption for analysis. Policy design is another
extremely important factor affecting price uncertainty. For
example, the technology accelerator payment provision in S.
1766 greatly reduces uncertainty in the cost and energy price
impacts of global climate legislation, while adding to
uncertainty regarding the amount of emissions reduction in any
given year.
Let me now turn briefly to the specific results of our
analysis. Figure 1 in my written testimony shows that allowance
prices vary widely under the cap and trade program, the
Lieberman-Warner version, depending on assumptions regarding
the availability and cost of the key electricity technologies
and international offsets.
As shown in the top-left-hand panel of figure 2 of my
written testimony, the effect of the program on the cost of
using coal is particularly significant, with delivered costs
between four and eight times higher under the Lieberman-Warner
bill than in the reference case. This reflects both the low
baseline price of coal relative to other fossil fuels and its
relatively high carbon content per unit of energy. The
delivered price of natural gas, shown in the lower-left-hand
panel of figure 2, is also significantly affected, increasing
by between 34 and 107 percent above the reference case
projection by 2030. The price of motor gasoline is affected to
a lesser extent.
As shown in figure 3 of the written testimony, national
average electricity prices in 2030 are 11 percent to 64 percent
higher. Electricity price impacts vary by region. Your
invitation letter had asked about regional effects. In general,
larger price impacts occur in those regions that are most
reliant on coal and have competitive wholesale power markets.
Turning next to energy system impacts as shown in figure 4,
electricity-related reductions account for roughly 80 to 90
percent of overall reductions in energy-related emissions.
There are several reasons for this result. Over 90 percent of
coal, the fuel whose price is most heavily impacted by
allowance costs, is used in the electricity sector.
Second, while coal-fired generation is a major source of
current and projected reference-case emissions, there are
several alternative, no- and low-emissions technologies already
demonstrated--wind and nuclear, for example--and others being
developed.
Third, changes in electricity generation fuels don't
require large changes in distribution infrastructure or
electricity--using equipment. Thus, the chicken and egg issues
that bedevil major fuel transformations and other areas do not
arise.
Finally, recent experience with very high motor fuel prices
in other countries over an extended period suggest that major
shifts in transportation energy use are not likely to be
induced by the impact of the Lieberman-Warner bill on the price
of petroleum fuels.
I've already noted the impact on the need for new electric
capacity additions--over 2007 to 2030, projected electricity
generation additions, other than natural gas, range from 353 to
484 gigawatts across the five Lieberman-Warner cases as
compared to 168 gigawatts in the reference case. By comparison,
generation capacity additions other than natural gas have
totaled only 55 gigawatts since 1990. We haven't been adding a
lot of base load recently. Frankly, we haven't needed it. We
had a lot of coal, a lot of nuclear. We've raised the
utilization rates of those units over the past 18 years. But
we're running toward the end of that string.
Finally, turning to economic impacts, the left-hand panels
of figure 6 compare the reductions in GDP and consumption, 2009
through 2030, across the cases. In the Core case, those
accumulative discounted reductions are $444 billion and $558
billion, respectively. They're roughly three times higher in
the least optimistic Limited Alternatives/No International
Offsets Case. Manufacturing impacts, which are not illustrated
in the figure, are significantly higher than GDP impacts and
these costs can be framed in many different ways.
Mr. Chairman and members of the committee, that concludes
my oral testimony. I'd be happy to answer any questions you
might have.
[The prepared statement of Mr. Gruenspecht follows:]
Prepared Statement of Howard Gruenspecht, Deputy Administrator, Energy
Information Administration
Mr. Chairman, and members of the Committee, I appreciate the
opportunity to appear before you today to discuss the Energy
Information Administration's (EIA) recent analysis of the energy and
economic impacts of global climate change legislation.
EIA is the independent statistical and analytical agency within the
Department of Energy. We are charged with providing objective, timely,
and relevant data, analyses, and projections for the use of the
Congress, the Administration, and the public. Although we do not take
positions on policy issues, we do produce data and analyses to help
inform energy policy deliberations. Because we have an element of
statutory independence with respect to this work, our views are
strictly those of EIA and should not be construed as representing those
of the Department of Energy, the Administration, or any other
organization. My testimony focuses on EIA's recent analysis of the
Lieberman-Warner Climate Security Act of 2007 (S. 2191), which also
includes an updated analysis of the Bingaman-Specter Low Carbon Economy
Act of 2007 (S. 1766).
The choice of a baseline is one of the most influential assumptions
for any analysis of global climate change legislation. Our analysis
uses the reference case of the Annual Energy Outlook 2008 (AE02008) as
its starting point. AE02008 is based on Federal and State laws and
regulations in effect as of the end of 2007, including the Energy
Independence and Security Act of 2007, which became law last December.
It does not, however, include State-level greenhouse gas limitation
initiatives that are in various stages of development in several
regions of the country. The projections included in AE02008 and our
analysis, which both extend through 2030, are not meant to be exact
predictions of the future but represent plausible energy futures given
technological and demographic trends, current laws and regulations, and
consumer behavior as derived from available data. EIA recognizes that
projections of energy markets over a nearly 25-year period are highly
uncertain and subject to many events that cannot be foreseen, such as
supply disruptions, policy changes, and technological breakthroughs. In
addition to these phenomena, long-term trends in technology
development, demographics, economic growth, and energy resources may
evolve along a different path than expected in the projections.
Generally, differences between cases, which are the focus of our
report, are likely to be more robust than the specific projections for
any one case.
The Lieberman-Warner bill imposes limits on emissions of energy-
related carbon dioxide and other greenhouse gases with a cap-and-trade
system that regulates suppliers of oil products and natural gas, owners
of plants that burn coal, and suppliers of some industrial gases other
than carbon dioxide. EIA's complete report, which includes a full
description of the bill, our modeling approach, and our results, as
well as a discussion of uncertainties and caveats, has been provided to
the Committee and is publicly available on our web site
(www.eia.doe.gov).
The projected impacts on energy prices, energy use, and economic
activity that are presented in the report and summarized briefly in my
testimony suggest several key findings and additional insights. It is
important to note that the estimated impacts of the Lieberman-Warner
proposal on energy prices, energy use, and the economy are highly
sensitive to assumptions about the cost and availability of no- and
low-carbon technologies for power generation and international offsets.
EIA's report includes five cases that reflect a variety of different
assumptions regarding these factors, with the Core Case and Limited
Alternatives/No International Offsets Case representing, respectively,
the most favorable and least favorable situations for ease of
compliance with the Lieberman-Warner targets. We find that allowance
prices and economic impacts through 2030 are roughly three times larger
using the least favorable assumptions than using the most favorable
ones.
It is well-known that key technologies for reducing emissions, such
as nuclear power and coal with carbon capture and sequestration (CCS),
face a variety of technical challenges and, in some cases, additional
questions regarding public acceptance of their widespread deployment
arising from concerns unrelated to global climate change. As noted in
EIA's report, both technical and public acceptance barriers to key low-
and no-emissions technologies can be directly influenced by policy
design choices. For example, both the Lieberman-Warner and Bingaman-
Specter bills include incentives for early technology deployment. The
``technology accelerator'' payment in the Bingaman-Specter bill, which
implicitly relaxes emissions targets in the event that a predetermined
compliance cost threshold is exceeded, can help to promote public
acceptance of key technologies by stakeholders who view greenhouse gas
emissions limitation as the highest priority, but might be inclined to
block deployment of these technologies due to non-climate concerns in
the absence of such a mechanism.
Our results also suggest that energy and economic impacts are
sensitive to whether the recent steep rise in the cost of major energy
infrastructure projects reflects a temporary ``bubble'' or a permanent
shift. EIA's analysis generally reflects only a portion of recent
infrastructure project cost increases as a permanent shift, with a much
larger permanent component assumed in the High Cost Case. Compliance
with the Lieberman-Warner emissions targets is expected to result in
the rapid retirement of the existing fleet of coal-fired power plants.
With a large increase in capacity additions needed to replace these
units and also meet rising demand under any of the technology cases,
higher costs translate directly into increased energy and economic
impacts.
Your invitation letter, Mr. Chairman, asked about the main factors
contributing to price uncertainty in analyses. In addition to
uncertainty regarding the cost and availability of key no- and low-
carbon technologies and international offsets, future energy prices
also play an important role in determining the cost and energy price
impacts of meeting a fixed emissions target. Policy design is another
important factor. For example, the technology accelerator payment
provision in the Low Carbon Energy Act of 2007 greatly reduces
uncertainty in the cost and energy price impacts of global climate
legislation, while adding to uncertainty regarding the amount of
emissions reduction achieved in any given year.
Let me now turn briefly to the specific results of EIA's recent
analysis.
ALLOWANCE AND ENERGY PRICE IMPACTS
Figure 1* shows that allowance prices, which are the key driver of
energy price impacts, vary widely under the Lieberman-Warner cap-and-
trade program, depending on assumptions regarding the availability and
cost of electricity technologies such as nuclear and coal with CCS, as
well as the availability of international offsets.
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* Figures 1-6 have been retained in committee files.
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As shown in the top left-hand panel of Figure 2, the effect of the
program on the cost of using coal is particularly significant; by 2030,
it is between 4 and 8 times higher under Lieberman-Warner than in the
reference case. This reflects both the low baseline price of coal on an
energy content basis relative to other fossil fuels and its relatively
high carbon content per unit of energy. The delivered price of natural
gas, shown on the lower left-hand panel of Figure 2, is also
significantly affected, increasing by between 34 and 107 percent above
the reference case projection by 2030. In cases where the demand for
natural gas is increased as a result of the policy proposed in S. 2191,
delivered and wellhead prices both move in the same upward direction.
As shown in the top right-hand panel, the price of motor gasoline is
also affected, but to a much lesser extent than coal or natural gas
prices. In fact, the gasoline price changes anticipated to result from
this program through 2030 are smaller than the changes experienced over
the past several years.
Electricity is generated using a mix of fuels. Currently, about 50
percent of the Nation's electricity is generated using coal, and coal
would be a highly competitive source of additional generation to meet
demand growth absent any limits on carbon dioxide emissions. The impact
of allowance prices on the cost of using fossil fuels to generate power
is reflected in higher electricity prices, but the impact is cushioned
by changes in the projected electric generation mix that occur in
response to S.2191. As shown in Figure 3, national average electricity
prices in 2030 are between 1.0 cents to 5.7 cents per kilowatt-hour (11
percent to 64 percent) higher, relative to the reference case.
Electricity price impacts vary by region. In general, larger price
impacts occur in those regions that are most reliant on coal and have
competitive wholesale power markets.
ENERGY SYSTEM IMPACTS
As shown in Figure 4, between 82 percent and 91 percent of
reductions in energy-related carbon dioxide emissions in 2030 are
achieved through the electricity-related reductions, requiring a rapid
expansion of low- and no-carbon generation. There are several reasons
for this. First, over 90 percent of coal, the fuel whose price is most
heavily impacted by allowance costs, is used in the electricity sector.
Second. while coal-fired generation is a major source of current and
projected reference case emissions, there are several alternative no-
and low-emission technologies already demonstrated, and others are
being developed. Third, changes in electricity generation fuels do not
require large changes in distribution infrastructure or electricity-
using equipment. Thus, the ``chicken-and-egg'' issues that bedevil
major fuel transformations in the transportation sector, where the
absence of a robust fuel supply infrastructure--that is precluded by
the lack of a sufficient number of dedicated alternative-fueled
vehicles to be served--in turn discourages the sale of such vehicles,
do not arise. Finally, recent U.S. experience and very high fuel prices
over an extended period in Europe and other world regions show that
major shifts in transportation energy use are not likely to be induced
by the impact of the Lieberman-Warner cap-and-trade program on the
price of petroleum fuels.
In addition to changing the projected mix of electricity generation
sources, as shown in Figure 5, the Lieberman-Warner program
significantly increases the total amount of new electric capacity that
must be added between now and 2030. The requirement for capacity
additions, which poses significant challenges to siting both generation
and transmission facilities, reflects the retirement of many existing
coal-fired power plants that would be expected to continue operating
beyond 2030 absent the limitations on greenhouse gas emissions required
by the Lieberman-Warner bill. Over the 2007-to-2030 period, projected
electricity generating capacity additions other than natural gas range
from 353 to 484 gigawatts (GW) across the five Lieberman-Warner policy
cases, as compared to 168 GW in the AE02008 reference case. By way of
comparison, generating capacity additions other than natural gas have
totaled only 55 GW since 1990.
ECONOMIC IMPACTS
The left-hand panels of Figure 6 compare the cumulative reductions
in gross domestic product (GDP) and consumption over the 2009-through-
2030 period across cases. In the Core Case, which has the most
optimistic assumptions regarding technology cost and availability and
international offsets, the cumulative discounted reductions in GDP and
consumption were $444 billion and $558 billion, respectively. In the
Limited Alternative/No International Offsets Case, cumulative
discounted losses in GDP and consumption are substantially higher,
$1.31 trillion and $1.42 trillion, respectively. The reduction in GDP
from reference-case levels is between 0.3 percent and 0.9 percent in
2020 and between 0.3 percent and 0.8 percent in 2030. The reduction in
real consumption is between 0.4 percent and 1.2 percent in 2020 and
between 0.5 percent and 1.1 percent in 2030. Manufacturing impacts,
which are not illustrated in the figure, are significantly higher than
GDP impacts. Total manufacturing output is 1.5 percent to 5.4 percent
lower than in the reference case in 2020 and 3.0 percent to 9.5 percent
lower in 2030.
While the greenhouse gas issue is a problem of unprecedented scale
in terms of its implications for our energy system, the scale of the
economy itself is huge. Therefore, the same estimated economic impacts
from any given analysis can be ``framed'' to sound either large or
small. Figure 6, which in its right hand panels presents the same
results discussed above in terms of the absolute levels of GDP and
consumption in 2020 and 2030, shows how framing matters. At EIA, we
strive to present our results as neutrally as possible and leave the
framing to others.
Mr. Chairman and members of the Committee, this concludes my
testimony. I would he happy to answer any questions you may have.
The Chairman. Thank you very much.
Dr. McLean, thank you for being here.
STATEMENT OF BRIAN J. MCLEAN, ENVIRONMENTAL PROTECTION AGENCY
Mr. McLean. Thank you, Mr. Chairman and members of the
committee. I appreciate the opportunity to testify today before
you on the effects of recent climate change legislation. I am
Brian McLean, Director of the Office of Atmospheric Programs
within EPA's Office of Air and Radiation. With me today is
Francisco de la Chesnaye, our chief climate economist to assist
me in answering your questions.
To date EPA has analyzed three bills for Congress. S. 280
introduced by Senators Lieberman and McCain. S. 1766 introduced
by Senators Bingaman and Specter and S. 2191, introduced by
Senators Lieberman and Warner.
In analyzing each bill EPA developed a set of scenarios in
consultation with the Senate staff to evaluate the various
provisions and to gauge the importance of key assumptions in
climate mitigation technologies. The scenarios do not represent
an EPA assessment of which scenarios are more likely to occur
or any formal position of the EPA or the Administration. EPA's
analyses covered all greenhouse gases and key economic sectors,
both domestically and internationally and go out to 2050.
To provide a complete picture of possible impacts EPA
employed two economy wide models that take slightly different
approaches to estimating technological development and macro
economic effects as well as a detailed electricity sector model
given the significance of the emission reductions from that
sector. There is significant uncertainty about the future
course of economic growth and technological advances as has
been mentioned several times by people. Our analyses contain
several sensitivity analyses, however, that help show the
impacts that key assumptions have on future projections.
All of our analyses use the same EIA 2006 reference case
for easy comparison and do not reflect the new Energy
Independence and Security Act or the most recent EIA Annual
Energy Outlook. Both of which tend to lower the estimated costs
of these bills. We analyzed an alternative reference scenario
with lower referenced emissions as an approximation of the most
recent projections.
In my written testimony I respond to each of the eight
questions posed in your invitation. This morning I will
summarize our major observations.
The overall economy will grow under all the bills. In EPA's
alternative reference scenario the size of the U.S. economy is
projected to increase an average of 80 percent from 2010 to
2030. Under Lieberman-Warner, the most stringent of the three
bills, the economy is estimated to be an average of 2 percent
smaller than in the alternative reference scenario in 2030.
We did not calculate the benefits of greenhouse gas
reductions. But S. 2191 is expected to have the ancillary
benefit of reducing sulfur dioxide and nitrogen oxides from
electric generation below current requirements. This will
facilitate the achievement of the fine particle and ozone air
quality standards.
All of our analyses point out the importance of technology,
of offsets and of international action. They illustrate the
value of a portfolio of technologies and confirm that there is
no silver bullet.
The absence of a single technology such as carbon capture
and storage or new nuclear capacity results in some cost
increases but the absence of many technologies would
significantly increase cost. Most models including ours, do not
try to forecast major advances in technology over what we are
aware of today. Such advances are likely to reduce costs since
market economies not only drive innovation, but generally adopt
lower cost solutions over higher cost ones.
The overall price signal plus specific incentives in the
bills push deployment of technology earlier. Incentives for
carbon capture and storage in particular, help maintain the use
of coal as a major source of energy for the next several
decades. The offset provisions can also be very important for
cost containment.
Although cost can be reduced significantly with larger
offset programs, it will be important to ensure environmental
integrity and consider implementation issues to ensure that
offsets do not lessen the greenhouse gas reductions achieved
through the caps. Though significant, legislative action by any
country including the U.S. would not be able to reduce
greenhouse gas concentrations in the atmosphere enough to fully
address the climate challenge. Global participation is clearly
needed.
Our analysis shows that if all countries take action we
could make significant progress in addressing climate change
without risk of emissions leakage because U.S. industry is an
effective global competitor. If on the other hand, additional
actions are not taken by other countries, emissions leakage
would lessen the impact of our actions by about 11 percent.
In closing we believe that EPA has provided valuable
technical input to the U.S. climate policy debate. We look
forward to working with you as this process continues. Thank
you, Mr. Chairman.
[The prepared statement of Mr. McLean follows:]
Prepared Statement of Brian J. McLean, Director, Office of Atmospheric
Programs, Office of Air and Radiation, Environmental Protection Agency
Mr. Chairman and Members of the Committee, I appreciate the
opportunity to come before you today to testify on the energy and
economic effects of global climate change legislation as analyzed by
EPA. To date, EPA has analyzed the following three bills for this
Congress: S. 280, the ``Climate Stewardship and Innovation Act''
introduced by Senators McCain and Lieberman; S. 1766, the ``Low Carbon
Economy Act of 2007,'' introduced by Senators Bingaman and Specter; and
S. 2191, the ``Lieberman-Warner Climate Security Act of 2007,''
introduced by Senators Lieberman and Warner. I note that for this last
bill, the analysis was based on the bill reported out by the Senate
Environment and Public Works Committee this past December; the first
two bills were modeled as introduced.
In all three bill analyses, EPA developed a set of scenarios in
consultation with Senate staff to evaluate various provisions in the
bills as well as gauge the importance of key enabling climate
mitigation technologies. EPA's scenarios describe a wide range of
possibilities but do not represent an EPA assessment of which scenarios
are more likely to occur. The analyses do not attempt to estimate the
benefits of reducing greenhouse gas emissions (GHGs) nor do they
represent any formal position or opinion of the EPA or the
Administration.
EPA's analyses covered all GHGs and key economic sectors, both
domestically and internationally, and go out to 2050. For the broader
impacts on the U.S. economy, EPA employed two economy-wide models to
estimate a range of economic impacts and GHG reductions. Combined,
these two models provide a more complete picture of possible impacts
than can be provided from any single model. These models take different
approaches to estimating technological development and macroeconomic
effects. Since the electricity sector plays a key role in GHG
mitigation, and the near-term response in the electricity sector is of
particular interest, EPA also used a detailed electricity sector model
to shed further light on the near-term impact of the bills and
complement the broader picture presented by the economy-wide models.
It is worth noting that in projecting significant policies such as
global climate change legislation, there is significant amount of
uncertainty about what that future will look like (e.g. uncertainty
with regards to economic growth and technological advances). Our
analysis contains a number of sensitivity analyses that help show the
impact that key assumptions have on future projections. This
uncertainty increases the further into the future one is making
projections. It is also worth noting that EPA did not separately assess
or judge the ``workability'' of the legislation from an implementation
standpoint. For example, the Agency did not assess whether various
provisions would be able to be implemented or enforced.
The following responses to the questions posed by the Committee in
its letter of invitation to this hearing are based on EPA's analyses of
the bills indicated above.
Question 1. What do the analyses show about impacts of global
climate legislation on GDP and the overall economy?
Answer. The economic impacts of the bills EPA analyzed depended on
the level of greenhouse gas reductions sought and percentage of U.S.
GHG emissions that are from sources that are covered and would thus be
required to hold allowances under the cap. The following estimates are
from the main bill scenarios in EPA's analyses of the three bills that
incorporate the assumptions agreed upon with Senate staff. All of these
scenarios assume that there is a widely available portfolio of enabling
mitigation technologies. However, it does not assume major
breakthroughs in technology over the next 40 years. Additionally, the
analyses assume that there are no significant regulatory or litigation
obstacles to the infrastructure needed to support a massive scale-up of
low carbon energy, such as new interstate transmission lines, new
pipelines and liability concerns surrounding CCS, access to natural gas
(domestic production or new LNG terminals), and adequate long term
storage for spent nuclear fuel. In EPA's Reference Scenario, the size
of the U.S. economy is projected to increase an average of 97% from
2007 ($13.4 trillion) to 2030 ($26.3 trillion) and by an average 215%
by 2050 ($42 trillion).
For the Lieberman-McCain bill which would cover about 73% of
U.S. GHG emissions (based on the 2005 GHG inventory), GHG
emissions in 2030 were projected to be approximately 25% below
what they are projected to be in the reference scenario without
a climate policy in 2030. The estimated reduction in GDP is
between 0.6% and 1.6% (between $146 and $419 billion) in that
same year. GHG emissions in 2050 were projected to be
approximately 44% below what they are projected to be in the
reference scenario without a climate policy in 2050. The
estimated reduction in GDP is between 1.1% and 3.2% (between
$457 and $1,332 billion) in that same year.
For the Bingaman-Specter bill which would cover about 83% of
U.S. GHG emissions, GHGs also were projected to be
approximately 23% below reference emissions in 2030. The
estimated reduction in GDP was slightly lower estimated at
between 0.5% and 1.4% (between $124 and $370 billion) in 2030.
GHG emissions in 2050 were projected to be approximately 40%
below what they are projected to be in the reference scenario
without a climate policy in 2050. The estimated reduction in
GDP is between 0.9% and 2.9% (between $401 and $1,199 billion)
in that same year. The small difference in GDP impacts between
the two bills was due to the broader coverage in the Bingaman-
Specter bill and the slightly higher allowance prices under the
Lieberman-McCain bill.
For the more recent Lieberman-Warner bill which would cover
about 87% of U.S. GHG emissions, GHGs were projected to be
approximately 40% below reference emissions in 2030 with an
estimated impact on GDP of between 0.9% and 3.8% (between $238
and $983 billion) in 2030. GHG emissions in 2050 were projected
to be approximately 56% below what they are projected to be in
the reference scenario without a climate policy in 2050. The
estimated reduction in GDP is between 2.4% and 6.9% (between
$1,012 and $2,856 billion) in that same year. The coverage of
GHGs is slightly more than the Bingaman-Specter bill, and the
level of GHG reductions is greater than the other two bills.
Please see Figures 1 and 2* from our Lieberman-Warner analysis for
a comparison of the bills projected GHG emission reductions.
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* Figures have been retained in committee files.
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Question 2. How does the impact on energy prices vary from region
to region under these analyses?
Answer. Our detailed power sector analysis provides insight into
regional electricity price changes. Retail electricity price impacts
vary by region, depending on a host of factors. The most important
factors determining electricity price impacts are the types of existing
power generating technologies and the electricity market structure for
each region. Generally, the Central and Midwestern portions of the
country, which are more dependent upon coal-fired generation for
electricity production, will see higher price impacts than the Western
and Northeastern portions of the country, which rely less on coal. In
the South, prices increase somewhat less than in the Midwest even
though the South is reliant on coal-fired generation. This is largely
due to the fact that much of the South is a regulated market, and the
value of allowances allocated directly to utilities at no cost must be
passed along to customers, which will dampen price increases.
Question 3. Why do the analyses contain such a broad range of
projected economic impacts?
Answer. The response to question #1 explains some of the key
differences in the results of EPA's analyses. When considering the
range of results from various analyses of a given bill, there are a
number of factors that lead to such a broad range of estimated economic
impacts.
The projected reference case economic growth rate will
affect both the level of GDP and projected levels of U.S. GHG
emissions. In general, a higher projected level of reference
GHG emissions will make it more costly to meet GHG reduction
targets. This is highlighted in EPA's analysis using an
alternative reference scenario which is more consistent with
recent projections of GHGs related to lower projected economic
growth and also emission reductions attributed to the Energy
Independence and Security Act of 2007 (EISA). For example, in
the Lieberman-Warner bill the estimated reduction in GDP would
be smaller, estimated at between 0.6% and 3.6% in 2030 ($158
and $947 billion). Allowance prices also would be 15% lower on
average ($60/tCO2 vs. $72/tCO2).
Assumptions about the development and deployment of key
enabling technologies such as nuclear power, advanced coal-
fired power with carbon capture and storage, and more efficient
renewable power have a significant effect on projected economic
impacts. The greater the extent of the development and
deployment of key enabling technologies, the lower the costs of
achieving GHG emission reductions. (To the extent the
development and deployment of key enabling technologies do not
occur in the timeframe assumed by the analysis, the costs of
achieving GHG emissions reductions will undergo a corresponding
increase.)
The use and amount of allowable offsets, that is, reductions
made outside of the covered sectors as specified in the bills,
will influence the estimated economic impacts. In general,
greater use of offsets, both domestic and international, can
reduce costs, while providing commensurate environmental
benefits. However, the costs and benefits need to be considered
in the context of issues related to the implementation of an
offset program. The models assumed that an offsets program
could be managed efficiently and generate additional reductions
in emissions and increases in carbon sequestration with no
discounting and minimal transaction costs. If offsets are not
truly additional they will lessen the expected reductions in
GHGs achieved through a cap. If international offsets are fully
utilized, the total payments for international credits are
approximately $12 billion in 2030 and $22 billion in 2050.
Question 4. What are the 5 most influential assumptions made in
these analyses?
Answer. Five of the more influential assumptions in our analyses
were:
On modeling: In all the policy scenarios, we assume that
there is a well functioning market for the trading of emission
allowances, that once technologies are commercially available
they are deployed, and that the agents in the models know the
future prices of allowances hence there is no market
volatility.
Nuclear Power: The main bill scenarios assume a substantial
growth in nuclear power reflecting possible future policies to
promote this technology in the bills and elsewhere. Our
assumption is that nuclear power generation increases by 150%
from 2005 to 2050. This would require the construction of
approximately 60 new or expanded nuclear plants by 2030 and 150
new or expanded nuclear plants by 2050. These assumptions are
based on a study conducted by the U.S. Climate Science Program
on long-term scenarios.
CCS: The main bill scenarios assume advanced coal-fired
power with carbon capture and storage is deployable as soon as
it is projected to be commercially available. Where bonus
allowances for CCS are available, this helps advance the
deployment of this technology from 5 to 10 years in our
analysis. The assumption of widespread deployment of CCS is
critical to the continued use of coal in the U.S. for electric
power generation under any of the three bills analyzed. In our
analyses, we constrain the rate at which CCS technology can be
deployed considering historic capital turnover rates given the
existing capital investments and infrastructure of the
electricity sector. It is also worth noting, however, that in
absence of a carbon price, there are zero coal fired power
plants with CCS in operation today and that there are only a
handful of applications for commercial scale coal fired power
plants with CCS to be built in the next 10 years. In addition,
deployment of CCS will be contingent upon the ability to site
new pipelines as well as addressing the liability concerns
surrounding underground storage of CO2. Please see
Figure 3 from our Lieberman-Warner analysis.
International action: In the main bill scenarios, we assume
the following: High-income countries in the Kyoto Protocol
fully comply with the treaty. After 2012, Kyoto countries, with
the exception of Russia, follow an emissions path that falls
gradually from simulated Kyoto levels in 2012 to 50% below 1990
levels in 2050. Low-income countries adopt a policy in 2025
that returns emissions and holds them at 2015 levels through
2034 and returns emissions to and maintains them at 2000 levels
from 2035 to 2050.
Offsets: In the main bill scenarios we assume that both
domestic and international offsets are available up to the
amounts allowed in the bills and that there are systems in
place to ensure the environmental integrity of those offsets,
that do not result in the benefits being heavily discounted or
high transaction costs.
Question 5. What are the most significant factors contributing to
price uncertainty in the analyses?
Answer. In our analyses, the two most significant factors affecting
the projected allowance prices are the availability of enabling
technologies and the use of offsets. For example, in our analysis of
the Lieberman-Warner bill for the scenarios that limit the availability
of enabling technologies, the projected allowance prices increase by
over 80% (from $61/tCO2 to $112/tCO2 in 2030). We
did not run scenarios that assumed significant advances over current
technologies. In scenarios that do not allow use of domestic offsets
and international credits, costs increase by over 90%.
Question 6. What are the consequences if either new nuclear power
plants or new coal-fired power plants that capture and sequester carbon
dioxide, which are both assumed in many analyses, are not available at
such significant levels?
Answer. EPA evaluated additional scenarios for the impact on GDP
given the availability of these two key enabling technologies. In our
analysis of the Lieberman-Warner bill under the scenario where nuclear
power and biomass power do not exceed reference case growth and carbon
capture and sequestration technology does not become commercially
available until 2030, the impact on GDP is slightly more than double
the impact estimated under the main bill scenario ($603 versus $238
billion). In sensitivity cases conducted as part of the analysis of the
McCain-Lieberman bill where carbon capture and sequestration technology
was not allowed and nuclear power growth was cut in half, there was a
greater impact on GDP. The lower nuclear power case only slightly
increased costs, as long as there is compensating increases in CCS
generation to reduce the economic impact of the lower nuclear capacity.
In the case where CCS is not available, this results in almost a
doubling of the impacts on GDP versus the main bill scenario.
Question 7. What conclusions are reached on American
competitiveness in the global economy?
Answer. EPA did evaluate the potential impact on the trade of U.S.
energy-intensive manufactured goods in the recent analysis of the
Lieberman-Warner bill. The general conclusion is that in the case where
developing countries also take on mandatory reductions of GHGs, the
terms of trade for the U. S. are better than in the case where those
countries do not take action.
In the main bill scenarios where the U.S. and all other countries
are assumed to take action, imports of energy-intensive manufacturing
goods from high-income countries to the U.S. fall as that group of
countries also takes on emission targets.
In the same scenario, there is an increase of U.S. exports of
energy-intensive manufacturing goods to developing countries,
particularly after 2030 as that group of countries is assumed to take
on mandatory reductions in GHGs starting in 2025. This is due to the
greater energy-efficiency in the production of U.S. manufactured goods
relative to those goods being manufactured in lower income countries.
In the case where developing countries do not adopt any additional
policies or measures to reduce GHGs, the terms of trade for the U.S.
are substantially worse. In 2030 there is a 6.3% decrease of U.S.
exports of energy-intensive manufacturing goods to developing
countries, and a 1.5% increase of U.S. imports of energy-intensive
manufacturing goods from developing countries. However, the use of an
International Reserve Allowance Requirement limits imports from those
countries.
Question 8. What impact does domestic climate change legislation
have on global concentrations of greenhouse gases?
Answer. In EPA's analysis of the Lieberman-Warner bill, there is a
reference scenario for global CO2 concentrations that
increases from today's levels of about 380 parts per million (ppm) to
about 720 ppm by the end of the century. If the US adopts the
Lieberman-Warner bill the concentration is reduced by between 7--10 ppm
in 2050 and by 25--28 ppm in 2095. In the scenario where the U.S.
adopts the Lieberman-Warner bill and the international community takes
on mandatory GHGs reductions as described above, global CO2
concentrations would be reduced by about 50 ppm in 2050 and 230 ppm in
2095 with US action under Lieberman-Warner accounting for about 10 ppm
in 2050 and 25 ppm in 2095, leading to global CO2
concentrations of 458 ppm in 2050 and about 490 ppm at the end of the
century. It is important to note that while CO2
concentrations would be significantly reduced in this scenario with
international action; they are not on a stabilization trajectory since
this scenario assumes that emissions are held constant after 2050 which
results in continued increases in CO2 concentrations.
In summary, based on the analyses of the three bills, I would like
to make the following points:
The analyses illustrate the value of a portfolio of
technologies and confirm that there is no silver bullet.
Although the absence of certain technologies, or availability
of offsets would significantly increase cost.
If we assume that CCS technology will be successfully
developed at the commercial scale, the overall price signal
plus specific incentives in the bills push deployment of
technology earlier, and incentives for CCS, in particular, help
maintain the use of coal as a source of energy for the next
several decades.
The offset provisions are also very important for cost
containment. Although costs are reduced with larger offset
programs, it will be important to ensure that offsets do not
lessen the GHGs reductions achieved through the cap and that
the offsets program is efficient and the benefits are fully
recognized.
There will be economic costs associated with the bills.
However, in all cases the U.S. economy grows over time. In
EPA's Reference Scenario, the size of the U.S. economy is
projected to increase approximately 97% from 2007 to 2030 and
215% higher by 2050. Under the Lieberman-Warner bill, that
growth is projected to decrease by between 0.9% and 3.8% in
2030 and 2.4% and 6.9% in 2050.
The ability of models to forecast major changes in
technology or the invention of new responses to the climate
challenge which may significantly reduce costs is limited and
are therefore not a part of this analysis.
Our analyses indicate that there will be ancillary benefits
under the Lieberman-Warner bill in the form of greater
SO2 and NOX emissions reductions from the
power sector under current regulations. This will facilitate
the achievement of the fine particle and ozone air quality
standards.
The impact of any of these bills, as would action by any one
country alone, on the concentration of GHGs in the atmosphere is not
enough to address the global climate challenge, but this is not
surprising. Clearly, global participation is needed.
In closing, we believe that EPA has provided valuable technical
input to the U.S. climate policy debate. We look forward to working
closely with members of Congress as this process continues.
Thank you, Mr. Chairman, and Members of the Committee for this
opportunity. This concludes my prepared statement. I would be pleased
to answer any questions that you may have.
The Chairman. Thank you very much.
Dr. Orszag, go right ahead.
STATEMENT OF PETER R. ORSZAG, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Orszag. Thank you very much, Chairman Bingaman, Senator
Domenici, members of the committee. Let me make four basic
points.
First. Global climate change does pose a significant long
term risk to the economy and to our Nation. Addressing that by
reducing greenhouse gas emission, however, will involve short
term economic costs. A cap and trade program reduces the
economic costs involved by providing flexibility to firms to in
terms of where and how they undertake the emission reductions
as has already been referred to.
But what I want to focus on today is the very important
timing issue involved in a cap and trade program. In particular
under an inflexible cap there is a level of emissions specified
each year. The problem arises because costs for achieving that
cap can vary substantially from year to year depending on the
state of economic activity, environmental conditions, the
weather, technology, etc.
From an environmental prospective, however, it does not
matter to a first approximation whether you reduce a ton of
carbon emissions this year or next year. The costs, however,
can vary substantially. An inflexible cap does not provide that
kind of timing flexibility which can have a very substantial
impact on costs.
Let me try to illustrate that point with the following
chart. What you see on the left hand part on the top is what
happens in 2018 if costs are at or equal to what's projected
currently. That's a simple cap in the light blue.
The white area and then the dark blue area present
different approaches in which there is either a price ceiling
or a price floor. That's ways of trying to limit the
fluctuation from year to year and provides a timing flexibility
in when emission reductions occur. So if things turn out as you
expect, those price ceilings and price floors don't matter. You
hit what you expected to occur.
But now let's consider a case in which costs are
significantly higher than projected. In that case having a
price ceiling or a safety valve in place will mean that there's
not as much emission reductions occurring. You can see
reflected in the white bar being lower than the light blue bar.
But also that costs are significantly below what was projected
because you're not undertaking as much emission reductions in
that year. The existence of a price floor which is shown in the
dark blue area doesn't matter when costs are higher than you
projected.
Now let's take a case in which costs are lower than were
expected. In that case the price ceiling doesn't matter. But
the existence of a price floor where you're not allowing the
price of carbon permits to fall below some level means that
you're actually undertaking more emission reductions in that
low cost year than you would without either the price ceiling
or the price floor.
But costs are higher with the price floor in this case. You
can see that by the fact that the dark blue bar is higher than
the other two. Costs are also somewhat higher because you're
undertaking more emission reductions in that year.
Now the kicker is that if we go to the next slide combine a
high cost and a low cost year. Then focus on, in particular,
the first bar and the last bar. You can see that under an
inflexible cap and under a combined price ceiling and price
floor, you wind up with the same cumulative emission
reductions.
From an environmental perspective, that is the key. It
doesn't matter when you undertake the emission reductions. It
matters how much you undertake ultimately.
From a cost perspective, however, there is a very
significant difference. The combination of a price ceiling and
a price floor means cumulative costs that are roughly 20
percent lower than under an inflexible cap and trade system.
Twenty percent is the significant amount of money given the
cost involved in many of these efforts.
So I think the key point that I wanted to make here is
providing the timing flexibility to allow emission reductions
when they're cheapest to do. That's what generating this
difference here. You're getting more of the emission reductions
in the cheap year rather than in the expensive year, can have a
very significant effect on cost.
Another very substantial influence on cost is shown in the
next chart--what one does with the value created from the
allowance permits where the value of the allowances created.
There's a very substantial amount of money at stake here, often
in the hundreds of billions of dollars a year.
If you auction those allowance permits and then you provide
an equal lump sum rebate to households--so you just give the
money back to households on an equal basis for each household--
you wind up with a macro economic efficiency cost of about half
a percent of GDP according to at least one estimate.
We can sort of scale these. But they also produce a
progressive net result. The reason is that the fact that each
household is getting the same amount per dollar back from the
government more than offsets the price increases on electricity
and gasoline and other things for low income households.
Alternatively you could auction the revenue and then use
that to reduce corporate income taxes. That's the second bar.
There you have a regressive of outcome because high income
households will benefit more.
Low income households wind up worse off. But you
significantly reduce the macro economic efficiency costs, cut
it basically in half. That's what you see on the top bar.
If you give the permits away you wind up with the worst of
both worlds. You wind up with the full macro economic cost and
all the regressivity of the first set of results, or the second
set of results. I'm sorry.
Giving the permits away is effectively equivalent to
auctioning the permits and then giving the money that you raise
back to the producers. That foregoes both the opportunity to
reduce the macro economic cost and the opportunity to offset
the regressivity of the ultimate price increases.
So just in summary, two key factors of a cap and trade
system.
One whether you provide timing flexibility which could be
done through a combined price ceiling and price floor.
Second, what you do with the revenue will have a very
substantial effect on the economic cost involved.
Thank you very much.
[The prepared statement of Mr. Orszag follows:]
Prepared Statement of Peter R. Orszag, Director, Congressional
Budget Office
Chairman Bingaman, Senator Domenici, and Members of the Committee,
thank you for the invitation to discuss the implications of cap-and-
trade programs that are designed to reduce U.S. emissions of greenhouse
gases, most prominently carbon dioxide (CO2). Under a cap-
and-trade program, policymakers would set a limit on emissions and
allow entities to buy and sell permits (or allowances) to emit
CO2 and other greenhouse gases.
Global climate change is one of the nation's most significant long-
term policy challenges. Human activities are producing increasingly
large quantities of greenhouse gases, particularly CO2. The
accumulation of those gases in the atmosphere is expected to have
potentially serious and costly effects on regional climates throughout
the world. Although the magnitude of such damage remains highly
uncertain, there is growing recognition of the risk that the damage
could prove extensive and perhaps even catastrophic. The risk of
potentially catastrophic damage associated with climate change can
justify actions to reduce that possible harm in much the same way that
the hazards we all face as individuals motivate us to buy insurance.
Reducing greenhouse-gas emissions would provide benefits to society
by helping to limit the damage associated with climate change,
especially the risk of significant damage. However, decreasing those
emissions would also impose costs on the economy--in the case of
CO2, because much economic activity is based on fossil
fuels, which release carbon when they are burned.
Most analyses suggest that an appropriately designed program to
begin lowering CO2 emissions would produce greater benefits
than costs. Market-oriented approaches to reducing carbon emissions,
such as a cap-and-trade program or a carbon tax, would reduce emissions
more cheaply than would command-and-control approaches, such as
regulations requiring across-the-board reductions by all firms. Those
market-oriented approaches are relatively efficient because they create
incentives and flexibility for emission reductions to occur where and
how they are least expensive to accomplish.
I will focus today on two key design elements of a cap-and-trade
system that could help to improve its efficiency further in terms of
reducing the cost of emission reductions: (1) structural features to
allow the timing of reducing emissions to respond to year-to-year
differences in conditions that affect the cost of doing so and (2) the
use of the allowances' value created by a cap-and-trade system to
reduce its cost.
The Congress is currently considering a bill, S. 2191, which would
reduce emissions by establishing a cap-and-trade program.\1\ S. 2191
would also establish a Carbon Market Efficiency Board, which would be
authorized to transfer emission allowances across years to help
minimize the cost of meeting a long-term target for reducing emissions.
Other approaches--such as imposing limits on the price of allowances--
could also be used to contain the costs that a cap might impose on the
economy.
---------------------------------------------------------------------------
\1\ The Congressional Budget Office (CBO) reviewed S. 2191 as the
bill was ordered reported by the Senate Committee on Environment and
Public Works on December 5, 2007. As discussed later, on April 10,
2008, CBO provided a cost estimate for the bill as it was ordered
reported and a cost estimate for it with a proposed amendment
transmitted to the agency on April 9, 2008.
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My testimony makes the following key points:
The cost of meeting an emission target with a cap-and-trade
program could be reduced, potentially quite substantially, by
providing firms flexibility in the timing of their efforts to
reduce emissions. In particular, the most cost-effective cap-
andtrade design would encourage firms to make greater
reductions when the cost of doing so was low and would allow
them leeway to lessen their efforts when the cost was high.
Providing firms with such flexibility could also prevent large
fluctuations in the price of allowances that could be
disruptive to the economy. The reduction in economic burden
need not come at the cost of additional environmental risk: The
flexibility to shift emission reductions across years could be
designed to achieve any given cumulative reduction in emissions
over the medium or long term.
One option for allowing firms flexibility in determining
when to reduce emissions while also achieving compliance with a
cumulative target would be through setting both a ceiling--
typically referred to as a safety valve--and a floor on the
allowance prices each year. The price ceiling would allow firms
to exceed the annual target when the cost of cutting emissions
was high, while the price floor would induce firms to cut
emissions more than the annual target in low-cost years. The
price ceiling and floor could be adjusted periodically to
ensure that emission reductions were on track for achieving the
long-run target; such a dynamic price system could
substantially reduce the cost of a cumulative target for
emissions.
Another option would be to authorize firms to ``borrow''
future allowances for use in the current year or to ``bank''
allowances for use in future years. Firms would have an
incentive to borrow allowances, though, only if they expected
the price in the future to be sufficiently lower than the
current price to make borrowing cost-effective. Similarly,
firms would have an incentive to bank allowances only if they
expected the price in the future to be sufficiently higher than
the current price. Most proposals for borrowing and banking
would impose limits on the degree to which they could be
undertaken, and partially as a result of those limits, this
approach is likely to be less effective at reducing cumulative
costs for any given cumulative target for reducing emissions
than a dynamic price system would be.
Under the Carbon Market Efficiency Board described in S.
2191, which would be authorized to transfer emission allowances
across time periods, regulators would attempt to shift
allowances in a manner that led to more reductions when costs
were relatively low and less reductions when costs were high.
An alternative approach, which may be easier for regulators to
implement efficiently, would be to have the board set a ceiling
and floor for allowance prices and be responsible for adjusting
those price limits periodically as needed to achieve a long-
term target for reducing emissions.
Policymakers' choices about whether to distribute the
allowances without charge or to auction them--and if they are
auctioned, how to use the proceeds--could also have a
significant effect on the overall economic cost of capping
emissions. Evidence suggests that the cost to the economy of a
15 percent cut in U.S. emissions (not counting any benefits
from mitigating climate change) might be half as large if
policymakers sold the allowances and used the revenue to lower
current taxes on capital that discourage economic activity,
rather than giving the allowances away to energy suppliers and
energy-intensive firms or using the auction proceeds to reduce
the costs that the policy could impose on low-income
households. Using the allowances' value to lower the total
economic cost could, however, exacerbate the regressivity of
the cap-and-trade program.
CONTAINING COSTS BY PROVIDING FLEXIBILITY IN THE TIMING OF
EMISSION REDUCTIONS
A cap-and-trade program, which creates financial incentives for
firms and households to cut their greenhouse-gas emissions, is a lower-
cost approach to reducing emissions than more restrictive command-and-
control approaches, which mandate how much those entities can emit or
what emission-reduction technologies they should use. The lower cost of
a cap-and-trade program stems from the flexibility it provides as to
where and how emission reductions are to be achieved.
Under a cap-and-trade program for CO2, policymakers
would set a limit on total emissions during some period and would
require regulated entities to hold allowances for the emissions
permitted under that cap. (Each allowance would entitle companies to
emit one ton of CO2 or to have one ton of carbon in the fuel
that they sold.) After the allowances for a given period were
distributed, entities would be free to buy and sell them. The trading
aspect of the program could lead to substantial cost savings relative
to command-and-control approaches: Firms that were able to reduce
emissions most cheaply could profit from selling allowances to firms
that had relatively high abatement costs. The cost-effectiveness of a
cap-and-trade program could be further improved by providing firms with
flexibility in determining when to reduce their emissions.
THE IMPORTANCE OF FLEXIBILITY IN THE TIMING OF EMISSION REDUCTIONS
In its most inflexible form, a cap-and-trade program would require
that a specified cap on emissions was met each year. That lack of
flexibility would increase the cost of achieving any long-term goal
because it would prevent firms from responding to year-to-year
differences in conditions that affected costs for reducing emissions,
such as fluctuations in economic activity, energy markets, and the
weather (for example, an exceptionally cold winter would increase the
demand for energy and make meeting a cap more expensive), and the
technologies available for reducing emissions.
In contrast, because of the long-term nature of climate change, the
key issue from an environmental perspective involves emissions over the
long term and concentration paths of greenhouse gases, not the year-to-
year fluctuations in emissions. In other words, limiting global climate
change will entail substantially reducing the amount of greenhouse
gases that accumulate in the atmosphere over the next several decades,
but the benefits of doing so are largely independent of the annual
pattern of those reductions.\2\ Consequently, a cap-and-trade program
could achieve roughly the same level of benefits at a significantly
lower cost if it provided firms with an incentive to make greater
reductions in emissions at times when the cost of doing so was low and
allowed them leeway to lessen their efforts when the cost was high.
---------------------------------------------------------------------------
\2\ Although costs and benefits are difficult to measure, the long-
term cumulative nature of climate change implies that the benefit of
emitting fewer less ton of CO2 in a given year--referred to
as the marginal benefit--is roughly constant. In other words, the
benefit in terms of averted climate damage from each additional ton of
emissions reduced is roughly the same as the benefit from the previous
ton of emissions reduced, and shifting the reductions from one year to
another does not materially affect the ultimate impact on the climate.
In contrast, the cost of emitting one fewer ton of CO2 in a
given year--the marginal cost--tends to increase with successive
emission reductions. The reason is that the least expensive reductions
are made first and progressively more-expensive cuts would then have to
be made to meet increasingly ambitious targets for emission reductions.
---------------------------------------------------------------------------
Including features in a cap-and-trade program that enabled to firms
to reduce emissions less when costs were high and more when costs were
low could also reduce the volatility of allowance prices. Experience
with cap-and-trade programs has shown that price volatility can be a
major concern when a program's design does not include provisions to
adjust for unexpectedly high costs and to prevent price spikes. For
example, one researcher found that the price of sulfur dioxide
allowances under the U.S. Acid Rain Program was significantly more
volatile than stock prices between 1995 and 2006 (see Figure 1).* \3\
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* Figures 1-4 have been retained in committee files.
\3\ See William D. Nordhaus, ``To Tax or Not to Tax: Alternative
Approaches to Slowing Global Warming,'' Review of Environmental
Economics and Policy, vol. 1, no. 1 (Winter 2007), pp. 37-39.
---------------------------------------------------------------------------
Price volatility could be particularly problematic with
CO2 allowances because fossil fuels play such an important
role in the U.S. economy. In 2006, fossil fuels accounted for 85
percent of the energy consumed in the United States. CO2
allowance prices could affect energy prices, inflation rates, and the
value of imports and exports. If those prices were volatile, they could
have disruptive effects on markets for energy and energy-intensive
goods and services and could make investment planning difficult.
DESIGN FEATURES PROVIDING FLEXIBILITY IN THE TIMING OF EMISSION
REDUCTIONS
Recent proposals for cap-and-trade proposals include a variety of
design features that would provide firms or regulators with flexibility
in the timing of emission reductions, thereby reducing the economic
costs of the effort to limit greenhouse gas emissions.
A PRICE CEILING AND A PRICE FLOOR
The combination of a price ceiling and a price floor offers one
method of allowing timing flexibility and thereby reducing the economic
burden of achieving any desired cumulative target for reducing
emissions:
Setting a ceiling, or safety valve, for the price of
allowances could prevent the cost of reducing emissions from
exceeding either the best available estimate of the
environmental benefits or the cost that policymakers considered
acceptable. The government could maintain a price ceiling by
selling companies as many allowances as they would like to buy
at the safety-valve price.
Similarly, policymakers could prevent the price of
allowances from falling too low by setting a price floor. If
the government chose to auction a significant share of the
allowances, it could specify a so-called reserve price and
withhold allowances from the auction as needed to maintain that
price. The efficiency advantage of a price floor would stem
from the fact that it could prevent the cost of emission
reductions from falling below the expected benefits or below
the level of effort that policymakers intended.
A cap-and-trade program that included both a ceiling and a floor
for allowance prices could achieve a long-term target for emissions
while minimizing both the overall cost of achieving the target and
price volatility. Under such a program, policymakers would specify
annual emission targets as well as a ceiling and a floor for the price
of allowances for each year. Regulators could adjust the levels of the
price ceiling and floor periodically (for example, every five years) to
ensure that emission reductions were on track for achieving the long-
term target. For example, the rate at which the price floor or ceiling
rose over time could be increased if regulators determined that the
reductions in the previous five-year period were significantly lower
than the amount needed to achieve the long-term target. Alternatively,
policymakers could include provisions in a cap-and-trade program that
would automatically trigger adjustments in the price ceiling and floor.
For example, the rate at which the price ceiling and floor rose could
be based on the percentage gap between anticipated and actual emissions
in the previous five-year period.
Figures 2 and 3 illustrate the effects of price ceilings and
floors. The figures present a simple example of an inflexible cap each
year relative to a system involving price ceilings and floors. In
Figure 2, the results illustrate what happens in 2018 if the costs of
reducing emissions by roughly 15 percent are twice as high or 50
percent lower than expected. Under an inflexible cap, the emission
reductions are unaffected. Under a price ceiling, fewer emission
reductions are undertaken when costs are high; the result is lower
economic costs that year but also less of a reduction in emissions.
Under a price floor, more emission reductions are undertaken when costs
are low.
Figure 3 shows the results after one high-cost year and one low-
cost year. Cumulative reductions of emissions are the same under the
inflexible cap and the combined price ceiling-and-floor system, but
costs are more than 20 percent lower under the latter approach. The
reason, again, is that more of the emission reductions are undertaken
in the low-cost year under that approach.
BORROWING AND BANKING ALLOWANCES
An alternative but generally somewhat less effective approach to
reducing economic costs involves allowing companies to borrow future
allowances in high-cost years, thereby deferring emission reductions to
later years. Borrowing allowances from future years would tend to
reduce allowance prices in the current year but then raise prices in
the future (because borrowing would allow smaller reductions now but
require greater reductions later). Firms would want to borrow
allowances only if they expected the price of allowances in the future
to be sufficiently below the current price as to make deferring
reductions profitable. Most proposals would impose limits on borrowing,
furthermore, in part because of concerns about enforcement and
questions about who would be liable if the firm that borrowed future
allowances was unable to pay them back (if it declared bankruptcy, for
example).
Similarly, policymakers could help keep the price of allowances
from falling too low by allowing companies to exceed their required
emission reductions in low-cost years in order to bank allowances for
use in future high-cost years. The additional emission reductions
motivated by banking in low-cost years would put upward pressure on the
price of allowances in those years.
S. 2191 AND THE CARBON MARKET EFFICIENCY BOARD
S. 2191 would address sustained high prices for allowances by
allowing an administrative board, the Carbon Market Efficiency Board,
to transfer future allowances to the current year. That action could be
viewed as a form of forced borrowing--that is, it would require firms
to trade lower reductions today for higher reductions in the future,
even if they would not have found it profitable to do so voluntarily.
Such transfers could ultimately raise or lower the overall cost of
meeting a long-run target depending on how the price of allowances
changed over time. For example, if a low-cost, low-carbon energy
technology became available in the future, transferring future
allowances to the current period would have successfully shifted
emission reductions to a time when the cost of achieving them was
lower. Alternatively, if policymakers borrowed future allowances with
the expectation that such a technology would become available, but it
did not, then the transfer could cause even more reductions to be made
at a relatively high-cost time. (An alternative approach to the one
embodied in S. 2191, which may be easier for regulators to implement
efficiently, would be to have the board be the entity responsible for
setting a ceiling and a floor for allowance prices and for adjusting
those price limits periodically as needed to achieve a long-term target
for reducing emissions.)
USING THE VALUE OF ALLOWANCES TO REDUCE ECONOMIC COSTS
In establishing a cap-and-trade program, policymakers would create
a new commodity: the right to emit CO2. The emission
allowances would have substantial value. For example, on April 10,
2008, CBO estimated that the value of the allowances created under S.
2191 (as order reported) would be roughly $145 billion (in 2006
dollars) once the proposed program took effect in 2012; in subsequent
years, the aggregate value of the allowances would be even greater.
(See Box 1 for a short description of CBO's cost estimate for S. 2191.)
BOX 1.--CBO'S COST ESTIMATE FOR S. 2191
On April 10, 2008, the Congressional Budget Office (CBO) issued a
cost estimate for S. 2191, the America's Climate Security Act of 2007,
as ordered reported by the Senate Committee on Environment and Public
Works in December 2007. CBO also issued a cost estimate for a slightly
amended version of the legislation that was transmitted by the
committee on April 9.
The legislation would create a cap-and-trade system for carbon
dioxide and other greenhouse gases. (The bill actually calls for two
separate cap-and-trade programs--a bigger one covering most types of
greenhouse gases and a smaller one covering hydrofluorocarbons.) Some
of the emission allowances would be auctioned--through a new entity,
the Climate Change Credit Corporation; the remaining allowances would
be distributed at no charge to states and other recipients. Over the
roughly 40 years that the proposed capand-trade programs would be in
effect, the number of allowances--and thus the emissions of relevant
gases--would be reduced each year.
On the basis of an analysis of the results of several economic
models, CBO estimates that if the legislation was enacted, the auction
price of emission allowances for those gases would rise from about $23
per metric ton of carbon-dioxide-equivalent (mt CO2e)
emissions in 2009 to about $44 per mt CO2e in 2018.\1\ (In
2006 dollars, the auction price per metric ton of CO2e would
rise from about $21 in 2009 to $35 in 2018.) Measured relative to base-
case emissions (that is, those that would occur under current law),
emissions of the main greenhouse gases covered by the programs would
decline by 7 percent in 2012 and by 17 percent in 2018; over the 2012-
2050 period, emissions would decline by a total of 42 percent relative
to the base case.
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\1\ A carbon dioxide equivalent is defined for each greenhouse gas
as the quantity of that gas that makes the same contribution to global
warming as one metric ton of carbon dioxide, as determined by the
Environmental Protection Agency.
---------------------------------------------------------------------------
Enacting S. 2191 as it was ordered reported would increase revenues
by about $1.19 trillion over the 2009-2018 period, CBO estimates.
Direct spending from distributing those proceeds would total about
$1.21 trillion over the period. The net effect of the original
legislation (as ordered reported) would be to increase the deficit
(excluding any effects on future discretionary spending) by an
estimated $15 billion over the next 10 years. The effect of the amended
version, in contrast, would be to reduce the deficit (again excluding
any effects on future discretionary spending) by roughly $80 billion
over the same period. In addition, if policymakers appropriated the
amounts necessary to implement S. 2191, discretionary spending would
increase over the 2009-2018 period, CBO estimates, by about $4 billion
under the original legislation and by about $80 billion under the
amended version.
The cost estimates for the two versions of the bill differ because
the amendment would increase the proportion of allowances that were
auctioned, deposit some of the auction proceeds in a Climate Change
Deficit Reduction Fund, and make spending from that fund subject to
appropriation.
OPTIONS FOR DISTRIBUTING EMISSION ALLOWANCES
Policymakers would need to decide how to allocate the allowances
that corresponded to each year's CO2 cap. One option would
be to have the government capture their value by selling the
allowances, as it does with licenses to use the electromagnetic
spectrum. Another possibility would be to give the allowances to energy
producers or some energy users at no charge. The European Union has
used that second approach in its two-year-old cap-and-trade program for
CO2 emissions, and in the United States, the federal
government has distributed nearly all of the allowances issued under
the 13-year-old U.S. cap-and-trade program for sulfur dioxide emissions
(which contribute to acid rain) that way.
Selling the allowances would provide lawmakers with an opportunity
to reduce the overall economic impact of a CO2 cap. For
instance, the government could use the revenue from auctioning
allowances to reduce existing taxes that tend to dampen economic
activity--primarily, taxes on labor, capital, or personal income. As
research indicates, a CO2 cap would exacerbate the economic
effects of such taxes: The higher prices caused by the cap would lower
real (inflation-adjusted) wages and real returns on capital, which
would be equivalent to raising marginal tax rates on those sources of
income. Using the value of the allowances to reduce such taxes could
help mitigate that adverse effect of the cap. Alternatively,
policymakers could choose to use the revenue from auctioning allowances
to reduce the federal deficit. If doing so lessened the need for future
tax increases, the end result could be similar to dedicating the
revenue to cuts in existing taxes.
The decision about whether or not to sell the allowances and how to
use the proceeds could have a significant impact on the overall cost.
For example, researchers have estimated that the efficiency cost of a
15 percent cut in emissions could be reduced by more than half if the
government sold allowances and used the revenue to lower corporate
income taxes, rather than devoting the revenue to providing lump-sum
rebates to households or giving the allowances away (see the top panel
of Figure 4).\4\
---------------------------------------------------------------------------
\4\ The efficiency cost of a policy reflects the economic losses
that occur because prices are distorted so that they do not reflect the
nonenvironmental resources used in their production. That cost includes
decreases in the productive use of labor and capital as well as costs
(both monetary and nonmonetary) associated with reducing emissions. To
provide perspective on the magnitude of such efficiency costs, they are
depicted as a share of gross domestic product.
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THE DISTRIBUTIONAL CONSEQUENCES OF DIFFERENT APPROACHES
The ways in which lawmakers allocated the revenue from selling
emission allowances would affect not only the total economic cost of a
cap-and-trade policy but also its distributional consequences. The
ultimate distributional impact of a cap-and-trade program would be the
net effect of two distinct components: the distribution of the costs of
the program (including the cost of paying for the allowances) and the
distribution of the allowances' value. (Because someone would pay for
them, someone would benefit from their value.) Market forces would
determine who bore the costs of a cap-and-trade program, but
policymakers would determine who received the value of the allowances.
The ultimate effect could be either progressive or regressive, imposing
disproportionately large burdens on high-income or low-income
households, respectively.
MARKET FORCES WOULD DETERMINE WHO BORE THE COSTS OF A CAP
Obtaining allowances--or taking steps to cut emissions to avoid the
need for such allowances--would become a cost of doing business for
firms that were subject to the CO2 cap. However, those firms
would not ultimately bear most of the cost of the allowances. Instead,
they would pass the cost along to their customers (and their customers'
customers) in the form of higher prices. By attaching a cost to
CO2 emissions, a cap-and-trade program would thus lead to
price increases for energy and energy-intensive goods and services.
Such price increases would stem from the restriction on emissions and
would occur regardless of whether the government sold emission
allowances or gave them away. Indeed, the price increases would be
essential to the success of a cap-and-trade program because they would
be the most important mechanism through which businesses and households
were encouraged to make investments and change their behavior to reduce
CO2 emissions. (In regulated electricity industries,
distributing the permits at no cost might mitigate or prevent price
increases in those markets but only at the cost of requiring even
larger price increases in other markets. Ultimately, consumers will, in
one way or another, bear costs roughly equal to the value of the
permits.)
The rise in prices for energy and energy-intensive goods and
services would impose a larger burden, relative to income, on low-
income households than on high-income households. For example, without
incorporating any benefits to households from lessening climate change,
CBO estimated that the price increases resulting from a 15 percent cut
in CO2 emissions would cost the average household in the
lowest one-fifth (quintile) of all households arrayed by income
slightly more than 3 percent of its income; such increases would cost
the average household in the top quintile just under 2 percent of its
income (see Table 1).* \5\
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* Table 1 has been retained in committee files.
\5\ Those numbers are based on an analysis that CBO conducted using
1998 data; see Congressional Budget Office, Who Gains and Who Pays
Under Carbon -Allowance Trading? The Distributional Effects of
Alternative Policy Designs (June 2000). CBO is in the process of
updating those figures, using recent data on households' expenditures
and income.
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The higher prices that resulted from a cap on CO2
emissions would reduce demand for energy and energy-intensive goods and
services and thus create losses for some current investors and workers
in the sectors of the economy supplying such products. Investors might
see the value of their stock decline, and workers could face the risk
of unemployment as jobs in those sectors were cut. Stock losses would
tend to be widely dispersed among investors, because shareholders
typically diversify their portfolios. In contrast, the costs borne by
workers would probably be concentrated among relatively few households
and, by extension, communities.
POLICYMAKERS WOULD DETERMINE WHO RECEIVED THE VALUE OF THE ALLOWANCES
Although the price increases triggered by a cap-and-trade program
for CO2 emissions would be regressive, the program's
ultimate distributional effects would depend on policy-makers'
decisions about how to allocate the allowances. As noted above, those
allowances would be worth tens or hundreds of billions of dollars per
year. Who received that value would depend on how the allowances were
distributed.
Lawmakers could more than offset the price increases experienced by
low-income households or the costs imposed on workers in particular
industrial sectors by providing for the sale of some or all of the
allowances and using the revenue to pay compensation. For example, when
CBO examined the ultimate distributional effects of a capand-trade
program that would reduce CO2 emissions in the United States
by 15 percent, it concluded that lower-income households could be
better off (even without any benefits from reducing climate change
considered) as a result of the policy if the government chose to sell
the allowances and use the revenue to pay an equal lump-sum rebate to
every household in the United States. In that case, the size of the
rebate would be larger than the average increase in low-income
households' spending on energy and energy-intensive goods.\6\ Such a
strategy would, on net, increase average income for households in the
lowest income quintile by about 2 percent (see the bottom panel of
Figure 4). At the same time, the net average income for households in
the top quintile would fall by less than 1 percent, CBO estimated.
---------------------------------------------------------------------------
\6\ One researcher has suggested that an environmental tax credit
based on earnings could offer another means of reducing the regressive
effects of the price increases that would result from a tax or cap on
CO2 emissions. See Gilbert E. Metcalf, A Proposal for a U.S.
Carbon Tax Swap (Washington, D.C.: Brookings Institution, October
2007).
---------------------------------------------------------------------------
In contrast, if lawmakers chose to use the allowances to decrease
corporate income taxes, the overall cost to the economy would fall but
the distributional effects would be significantly more regressive than
the initial price increases. Because low-income households pay
relatively little in corporate taxes, the cut in corporate tax rates
would not offset their increased spending on energy and energy-
intensive goods. Households in the top income quintile, however, would
experience an increase in after-tax income as a result of the policy.
Should policymakers decide to use the revenue from selling allowances
to decrease payroll taxes, the effects (not shown in the figure) would
be regressive as well, although less so than for a cut in corporate
taxes.\7\
---------------------------------------------------------------------------
\7\ For those results, see Congressional Budget Office, Trade-Offs
in Allocating Allowances for CO2 Emissions (April 25, 2007).
---------------------------------------------------------------------------
Giving all or most of the allowances to energy producers to offset
the potential losses of investors in those industries--as was done in
the cap-and-trade program for sulfur dioxide emissions--would also
exacerbate the regressivity of the price increases. On average, the
value of the CO2 allowances that producers received would
more than compensate them for any decline in profits caused by a drop
in demand for energy and energy-intensive goods and services. As a
result, the companies that received allowances could experience
windfall profits.
For example, in 2000, CBO estimated that if emissions were reduced
by 15 percent, as in the scenario discussed above, and all of the
allowances were distributed free of charge to producers in the oil,
natural gas, and coal sectors, the value of the allowances would be 10
times as large as the producers' combined profits in 1998. Profits for
those industries have climbed substantially since then, yet the value
of the allowances associated with the policy that CBO analyzed would
still be large relative to those producers' profits.\8\ Because the
additional profits from the allowances' value would not depend on how
much a company produced, such profits would be unlikely to prevent the
declines in production and resulting job losses that the price
increases (and resulting drop in demand) would engender.
---------------------------------------------------------------------------
\8\ Specifically, CBO estimated that the value in 1998 of the
allowances stemming from the 15 percent reduction in U.S. emissions
would total $155 billion (in 2006 dollars). By comparison, profits for
U.S. producers of oil, natural gas, and coal totaled $13.5 billion in
1998 (in 2006 dollars). Those companies' total profits have grown
substantially--for example, in 2006, they totaled $174 billion.
---------------------------------------------------------------------------
In addition, those profits would accrue to shareholders, who
typically are from higher-income households, and would more than offset
those households' increased spending on energy and energy-intensive
goods and services. Low-income households, by contrast, would benefit
little if allowances were given to energy producers for free, and they
would still bear a disproportionate burden from the price increases
that would nonetheless occur. Thus, giving away allowances would be
significantly regressive, making higher-income households better off as
a result of the cap-and-trade policy while making lower-income
households worse off. Further, giving away the allowances would
preclude the government from dedicating the value of the allowances to
reducing the overall economic impact of the policy.
The Chairman. Thank you very much. I'll start and just ask
5 minutes of questions and then defer to Senator Domenici.
Then, as I said earlier, members that have not had a chance to
make an opening statement will each have 7 minutes so they can
make whatever statement they want, if they would prefer rather
than ask some questions.
Let me start with a question to you, Dr. Gruenspecht. I
looked at this CRS report. They did an analysis of the various
studies.
The ACCF NAM study, National Association of Manufacturers
Study, high cost scenario stands out. It has, it proposes or
contemplates allowance prices roughly 75 percent higher than
the highest cost scenario that you have come up with at EIA.
But the Gross Domestic Product impact in 2030 is three times
higher than what you estimate in 2030.
Could you explain that? Just how that would be the case or
what your understanding of that is? I just wasn't able to
understand why the 75 percent increase in allowance prices
would translate into a three time increase in impact on the
Gross Domestic Product.
Mr. Gruenspecht. Thank you, Mr. Chairman. It's always
difficult to talk about somebody else's work, but I think I can
try a little bit here. Amen corner. Now I'm on my own, I guess.
First of all, the allowance price differences reflected
some of the assumptions, like the absence of banking in their
analysis which they were very clear about. There are some
similarities in that when we make similar technology cost and
availability assumptions as they do, we get fairly close in
allowance prices for that high case.
However, based on our own previous work we were surprised,
as I guess you are, by the size of the macro-economic losses
reported in the study done for NAM, we had concerns about their
consistency with the identified energy market impacts.
In order to better understand their work we asked to look
at some of their modeling results and met with their
contractor, and we did identify an issue we think contributes
to the size of the economic impacts in the study performed for
NAM and the ACCF. They apparently arose from problems in
implementing the modification of the Annual Energy Outlook 2007
baseline to pick up the Energy Independence and Security Act
and the lower baseline economic growth.
For example, they used EIA's high price oil scenario in
their policy case. But then they compared the results to a
baseline with much lower oil prices. So really the macro
impacts that are shown in their report reflect both the S. 2191
policy and the effects of higher oil prices, not just the
effects of the S. 2191 policy.
So, we think that there are some abnormal results in the
report. We've shared our concern and other comments with both
the contractor and the report sponsors, and look forward to
their resolution.
We certainly recognize and welcome the use of our modeling
tools by diverse users for climate policy studies. There was
also one by the Clean Air Task Force that used NAM. So again, I
think there may be a mix of--maybe what is attributed to the
cap and trade bill may also be picking up the high oil price
scenario that they used.
The Chairman. I guess I understand that you're saying
basically there's some type of double counting going on in the
model. Is that what I'm understanding?
Mr. Gruenspecht. I don't know if it's double counting. I
think it's more mixing the impact of two things, the effect of
S. 2191 and moving from lower oil prices to higher oil prices
that is not because of S. 2191. Senator Domenici had talked
about the difficulty in projecting or looking at scenarios of
oil prices.
We have a high oil price case that's much higher than the
reference case. They use the high oil price case, which is
actually closer to current prices, for looking at the S. 2191
policy. Then our understanding is they compared that to a
scenario with the reference oil prices in the baseline. So it
was mixing the effects of S. 2191 and a less favorable oil
price situation which is not good, obviously, for the U.S.
economy either.
The Chairman. Let me ask, Dr. Orszag. As I understand one
of the points you made, is that you think the best result of
getting emission reductions at minimal cost is accomplished by
a structure that would have both a price ceiling and also a
price floor on allowances. Did I understand that correctly?
Mr. Orszag. That is correct. I don't want to use the word,
best. But if you wanted to create an efficient system that from
the perspective of achieving the emission reductions at the
lowest possible economic cost, providing timing flexibility
which could be done by both a price ceiling and a price floor
where both of those prices could be adjusted over time to hit
any cumulative emission reductions target you wanted is an
effective way of achieving that objective.
The Chairman. Thank you very much. My time is up.
Senator Barrasso.
Senator Barrasso. Thank you very much, Mr. Chairman. I very
much appreciate you holding these hearings. This is very
important for all of us to get a clear understanding. I do have
real concerns as do all the members. I have a lengthy
statement. With your permission I'd like to have that inserted
into the record?
[The prepared statement of Senator Barrasso follows:]
Prepared Statement of Hon. John Barrasso, U.S. Senator From Wyoming
In dealing with climate change, there are certain principles that I
apply in assessing any approach to this issue.
One, is that fossil fuels, such as coal, maybe ironically to many
in the Senate, is vital to achieving our goals of having a cleaner
energy future.
We can not get there without them.
Two, a strong American economy--that creates jobs and new
technologies--is critical to developing the tools we need that capture
and sequester carbon.
China and India will not act to address carbon emissions until such
technologies are developed.
And third, we cannot afford to hurt the very regions, industries,
and workers, who will provide that technology through hard work and
innovation.
In terms of economic impact, I have serious concerns with the
Lieberman-Warner approach as currently written.
According to a recent study done by the National Association of
Manufacturers, the impact to my home State of Wyoming is dire.
I will note these numbers could change because we do not know what
the final bill that will be on the floor will look like.
The study projects Wyoming would lose roughly 2,000 to 3,000 jobs
by 2020, and 6,000 to 8,000 jobs by 2030.
Gasoline prices and energy prices for Wyoming families would
double.
How would that impact Wyoming families?
Wyoming family budgets are predicted to lose 900 to 3,000 dollars a
year in income by 2020, and 4,000 to 7,000 dollars a year by 2030.
Sadly, the impacts of the bill results in class warfare, hitting
lower income families the hardest. Low income families in Wyoming would
have to dedicate 1 dollar out of 5 from their family budget for energy
costs under the Lieberman-Warner bill.
The statistics go on and on.
Higher costs for Wyoming schools, universities, and hospitals.
According to the study, Wyoming coal would face a serve decline.
That would result in lost jobs, broken family budgets, and
displacement.
As I have said, fossil fuels, including coal, are vital to our
energy security. We need to make them cleaner so that they can be a
basis for America's energy mix.
But clean coal technology is a work in progress. It will take time
to perfect.
The men and women of Wyoming, who are the backbone of the coal
industry, are essential to providing clean coal technology to America.
The capital and infrastructure that make coal happen in Wyoming are
also essential to providing clean coal technology to America.
America can simply not tolerate the lost jobs and high energy
prices that will come from dramatic decreases in coal production under
Lieberman-Warner.
As I stated in the beginning, we need to have a strong economy, we
need an economy that creates jobs and fosters innovation to provide the
clean energy technologies we need.
We can ill afford to hurt the very regions, industries, and
workers, who will provide that technology through hard work and
innovation.
On both points, at least according to this report, the Lieberman-
Warner bill appears to fail.
It doesn't have to be this way. I truly believe we can address
climate change. There are betters ways, more economically friendly
approaches, that can make a real difference.
I do not simply offer platitudes on this issue.
Earlier this year, I introduced legislation to address climate
change.
I believe overlooked in the debate are green house gasses,
currently in the atmosphere. Those are the gasses contributing to the
warming of the planet.
The best science tells us it is a factor.
To what extent, we are not sure.
It would seem to me a worthy approach, to find a way to remove
existing green houses gases from the atmosphere and permanently
sequester them. This is the other end of the problem.
To accomplish this, we certainly are going to need to invest the
money to develop the technology.
The approach my legislation takes to address this is through a
series of financial prizes where we set technological goals, and
outcomes.
The first to meet each criteria would receive federal funds and
international acclaim.
The prizes would be determined by a federal commission under the
Department of Energy.
The commission would be comprised of climate scientists,
physicists, chemists, engineers, business managers and economists.
They would be appointed by the President, with the advice and
consent of the Senate.
The awards would go to those, both public or private, who would
achieve milestones in developing and applying technology.
Technology that could significantly help to slow or reverse the
accumulation of greenhouse gases in the atmosphere.
The greenhouse gasses would have to be permanently sequestered.
Sequestered in a manner that would be without significant harmful
effects.
I believe this approach is just one example of how we can tackle
the problem of climate change in an economically friendly way without
sacrificing real progress.
I would hope, as we begin debate on this issue, that more members
of this body embrace approaches that address climate change while
protecting jobs, family budgets, and the industries we must count on.
The Chairman. We'll be glad to include anyone's statement
in the record.
Senator Barrasso. Dr. Gruenspecht, if I may. You state in
your testimony both written and oral that the larger price
impacts occur in those regions that are most reliant on coal
and being from Wyoming, the No. 1 coal producer in the United
States, that is clearly a concern. So I know we're in the
category.
But you say different regions of the country will be
affected. What specific regions are you talking about?
Mr. Gruenspecht. We looked at electricity prices. We looked
at 13 regions of the country. They each use different amounts
of coal for power generation. They each have different
regulatory structures. We generally find, I'm just doing this
by memory, but we find places like the Pacific Northwest, which
have a lot of hydropower and don't have competitive markets,
places like California, are less affected. Places that are more
heavily reliant on coal and are competitive have larger
impacts. In the testimony we tried to illustrate the effect on
the 13 regions.
Senator Barrasso. So it looks like we're talking about
having significant impact on the Midwest, the Rocky Mountains,
the South. They're going to suffer the most. When I look at
these studies it looks like in the State of Wyoming and many of
those other Rocky Mountain States that about one dollar out of
five dollars in the income of an average family in my State
will have to be spent on energy costs under Lieberman-Warner.
Does it appear to you that the impacts of the bills are
really hitting the lower income families the hardest? Would you
agree with that assessment?
Mr. Gruenspecht. We have not really looked at income
distribution, and we haven't really looked at the individual
State levels. All we did regionally, in response to the
chairman, is look at the electricity price impacts on a broad
regional basis.
Senator Barrasso. You stated that the price of motor fuel
gasoline would be affected maybe to a lesser extent than coal
or natural gases. There's a study that's reported in today's
copy of The Hill: Warner-Lieberman bill could raise gas prices.
They talked about some large numbers there. This would be
on top of the gas prices that people are already enduring
across the country. How do you explain this increase in the
cost of gasoline prices under Lieberman-Warner?
Mr. Gruenspecht. We do not see the Lieberman-Warner
proposal significantly affecting the world oil price. But we do
see the cost of the allowances that are needed under the cap
and trade program as being reflected in the price of motor
fuels. So the real question is how high those allowance prices
are.
In our analysis, that really depends on how successfully
the electric power sector can reduce its carbon emissions. The
electric power sector accounts for 40 percent, roughly, of
energy-related emissions and energy-related emissions account
for a little bit more than 80 percent of total emissions. So
energy-related emissions are very important.
The range we get for gasoline price impacts is about 40
cents a gallon to about a dollar a gallon. That almost
completely reflects the value of these allowances under a cap
and trade program.
Senator Barrasso. Which is significant in terms of the
amount of prices already that people are enduring at the pump--
another 40 cents to a dollar.
Mr. Gruenspecht. I don't think anyone likes the first
number that they're seeing when they drive up to the pump. I
guess this analysis would affect either the second digit or
potentially in the case where it's a dollar, you know it would
be a dollar. But again, that's what we find.
Senator Barrasso. As Congress is being asked to address
some of these pieces of legislation I want to make sure the
American people realize what the impacts are going to be on
their own pocketbook as we try to address an issue and as this
comes to the floor next month.
Dr. Yacobucci and Dr. Parker, you talk a bit about the
uncertainty of the estimates in terms of the costs to the
economy, the cost to American jobs. The uncertainty as I read
this, really reflects the magnitude rather than the direction
in terms of it seems is it a question of how many jobs will be
lost. How big the drag will be on the economy. You know, how
much we will shackle our economy. I think Dr. Parker, you used
the word, challenges to the economy.
Would including a so called safety valve help things if in
part of the legislation?
Mr. Parker. Yes, I always forget that. A safety valve which
for people who don't know, that's basically putting an upper
limit on a price so that if the volatility and the allowance
market exceeds a certain level, you can pay a fee as opposed to
having to submit an allowance. It is basically a very effective
method of controlling the upper level prices that you would
entail.
A question of course, is where do you set that price. So
the, yes, it would be very effective at doing so. In fact it
would guarantee the price of the program could not exceed that
level because any rational entity would decide to pay the fee
rather than pay more for an allowance.
Senator Barrasso. It does seem, well, that no matter how
you do this there's going to be impacts on higher heating
bills, higher electrical cost for cooling, higher prices at the
pump, lower wages and lower returns for people in their long
term retirement plans. No matter what you do. No matter which
way you go, all of those things are going to be impacted by all
of the assessments.
Mr. Parker. Prices will go up. Whether or not individual
bills go up depend on how people respond to the prices. A
couple of the models attempted to look at what the various
incentives that the bill has it in for conservation and other
abilities.
They concluded that while, yes, electric for example,
electric prices or natural gas prices might go--the prices
would go up. The monthly bills might go down if people
sufficiently conserved. So in the end it's how the economy and
ourselves respond to what's occurring as to how much it
ultimately hits our pocketbook. But yes, no one is predicting
that prices were going down.
Senator Barrasso. Dr. Gruenspecht, if I could ask about the
issue of nuclear energy. I think there's been some criticism
regarding some of the assumptions in the model in terms of
construction of 264 gigawatts of electricity from nuclear power
by the year 2030. Could you explain what that means in terms of
the number of plants, the construction timelines, locations, to
see if this is actually a realistic assessment of where this
Nation can be with nuclear power in 23 years?
Mr. Gruenspecht. My view would be that it is very unlikely
that much nuclear would actually be built. But this is a Core
case result. It results from running the reference case
distribution version of the EIA model which does not reflect
constraints that would likely hold the maximum number of
nuclear builds to a lower level.
The implications of more modest nuclear builds are
reflected in our High Cost and Limited Alternatives cases which
are also included in the report. I'd like to give you some
context. Until recently the primary issues surrounding nuclear
power, as members of this committee know, was whether any
nuclear plants would be built. EIA was often excoriated by
coming up here and suggesting that our long term outlooks
projected that no nuclear would be built through 2030. In this
setting, modeling attention really focused on the issue of what
it would take to build any and not on a concern that too many
might be built. As a result there was not much focus on
characterizing constraints that would limit builds.
Without such constraints, nuclear's status is as a
demonstrated base load technology with no carbon dioxide
emissions that's already close to being economically
attractive, even without a carbon constraint. That leaves the
model to choose large amounts of nuclear when a strict carbon
cap applies. That's a little bit of the history.
Indeed, the reason this study was built the way it was, and
this came up in the questions asked by the chairman, was to
show what matters. These technology assumptions really matter a
lot. There's no implied or intended preference for the Core
case as representing the most likely or preferred view.
As I said, technology is important. Public acceptance is
also really important. Nuclear is an example of a technology
that exists today in large part, but there are issues
surrounding public acceptance. So I think it's important we
frame this issue. We not only discuss it in terms of if we did
R and D, which is very important, but we also have to worry
about whether the market will take it.
I'd also point out that 250 gigawatts of nuclear power or
something very close to the level we talked about in that Core
case was actually ordered in the 1960s at various points in
time. One hundred and fifty gigawatts of it ended up being
canceled. One hundred ended up being built.
That was a time when U.S. electricity demand was growing at
a very rapid rate. This was not just planned plants, it was
actually ordering the steam supply systems for 250 gigawatts of
nuclear power. So we were able to order literally 250 gigawatts
of nuclear in the 1960s. Clearly we're not ordering much if any
yet. But it's a very important question.
Senator Barrasso. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Sanders.
Senator Sanders. Thank you, Mr. Chairman for holding this
important hearing. I thank our guests for all the work that
they have done. I just want to say a few words.
I didn't hear much discussion this morning. Maybe that
wasn't your assignment. About what happens in fact if the
United States and the world do not act aggressively to address
the crisis of global warming.
There are studies out there which suggest that in terms of
the growth of drought, of flooding, wars, disease, severe
environmental disturbances and weather patterns that if we do
not act sufficiently we're going to end up in an economic
situation worse than the Great Depression with massive job loss
and economic dislocation. So I want in a moment, I would to ask
some of you to address that issue.
The other issue that concerns me very much, Mr. Chairman,
is I think we're into old think here. I do not think that we
are looking at the extraordinary potential of energy efficiency
to substantially reduce greenhouse gas emissions at a
reasonable cost. I think there is not significant attention
paid to the tremendous potential in sustainable energy on top
of energy efficiency.
I find it hard to be talking about the cost of moving away
from greenhouse gas emissions without looking at the reality
that we're driving cars today that get 15 miles per gallon.
That we have homes and appliances which are grossly
inefficient. That we have a transportation system in terms of
rail which lags far behind Europe and Japan and in some cases
even China. That we have not explored the potential of electric
cars. That photovoltaics are just beginning to take off.
So I would say, Mr. Chairman, that there is huge potential
out there. We have seen it in California. We have seen it in
the State of Vermont in terms of energy efficiency. The day
will come and certainly should come that our people will be
driving cars that get 50, 75 miles per gallon. There will be
millions of electric cars out there.
Just one example in terms of concentrating solar power, as
some of you may know there is a plant that is going to be built
by Pacific Gas and Electric in the Mohave Desert which should
be online within a couple of years. Over 500 megawatts of
electricity at a competitive price. There are those people who
think that we can build dozens of those plants in the Southwest
of the United States that could provide a very substantial
amount of the electricity that we consume as a people at a
competitive price. No greenhouse gas emissions.
What I fear very much is that our old friends in the coal
industry, in the fossil fuel industry, in the automobile
industry, simply continue to want us to go the old way and are
not looking at a bold, new future. I think if we look at a
bold, new future what we can be talking about is the creation
of significant numbers of good paying jobs as we transform our
economy away from fossil fuels and dependence on foreign oil.
Alright.
So my first question and anyone can jump right up there.
What happens if you don't act? How much is it going to cost us,
the American people, the people around the world in increased
costs and in human suffering? Who wants to tell us that?
Mr. Orszag. I guess I'll step up. As I tried to indicate I
think global climate change is among the Nation and the world's
most serious long term risk. It is clear that we are running
some risk of potentially catastrophic changes to the climate
which would have substantial effects on society and on the
economy.
The difficulty really is in terms of timing. Moving away
and we can come back to your second point. But moving away from
the current fossil fuel based economy, will involve some up
front costs, even if the technologies are already available.
Senator Sanders. Yes, of course.
Mr. Orszag. So it's really a question of paying up front an
insurance premium, almost, for reduced long term costs. That's
one question. The second question is the global dimension of
the problem.
Senator Sanders. You didn't give me an example. There are
some of my friends say, look, it's going to be very expensive
to move forward. Fair question. A good point. What happens if
we don't move forward? How much is it going to cost?
What we're paying in the supplemental bill, if my memory is
correct, some $10 billion more for Katrina, $10 billion more.
How much will flooding cost? What will drought cost? What will
water cost us as we fight for limited resources?
Who wants to tell us how many trillions of dollars we will
be spending on that? What will it mean to the people in Wyoming
or the people in Vermont if we don't act? I mean because that's
really what we're debating. Somebody will say, well, look it's
expensive. We can't go forward.
But what I'm suggesting is disaster if we don't go forward.
Second of all, I believe you are underestimating the potential
of energy efficiency and the new sustainable energy that we can
put online right now. If they are breaking ground almost now
for a solar thermal plant in the Mohave Desert for $2 billion
to provide 400,000 homes with electricity. The people tell me
we can build dozens of those plants.
I'm afraid that I don't see such a great cause. Of course
there's going to be economic dislocation. Am I underestimating
the problem or is there more potential in terms of energy
efficiency and sustainable energy than you guys are suggesting.
Dr. McLean?
Mr. McLean. On your first question on the impacts, I think
this is an area that concerns us greatly. We have several
people on my staff who are working on this area. But as you
know it's been a very hard area to quantify.
Senator Sanders. Sure.
Mr. McLean. To monetize. It's an area that we need to make
progress on and I agree with you. Because you have to compare
what the alternative is. We're working on that as we speak.
On your second questions dealing with energy efficiency and
renewables and actions we can take. There is a lot we can say
about that. First of all, in these analyses we show a huge
increase in reliance on renewables for energy production.
That's a recognition of the kinds of points you're making that
the technologies are evolving. As the cost, the relative cost
for fossil rises, renewable costs decline. They come in.
Senator Sanders. Dr. McLean, I'm sorry to interrupt. But
let me ask you this. I'm reading from a document which says the
building just 80 gigawatts of concentrating solar power, these
solar plants, a target that is achievable in 2030 with
sufficient public policies what which I believe is true, would
produce enough electricity to power approximately 25 million
homes and reduce carbon dioxide emissions by 6.6 percent
compared to 2000 levels.
Does that seem like off the wall or does that seem--with
strong public policy? We're saying that's what we're going to
do. Can we do that? Are you looking at that type of magnitude?
Mr. McLean. Yes. I can't give you an answer to that. I
don't know the numbers without looking through that. I can say
that we are showing a greater reliance, an increase in
renewables. It has to do with policies as well as cost shifts
in those technologies.
Senator Sanders. Mr. Chairman, the problem that I'm having
is if we look at global warming as a really, really serious
problem that I believe it is. If we say we are going to commit
resources to transform our economy and energy systems. I think
we can make real progress.
I think somehow our friends may be underestimating the
potential that exists if we really focus on a Manhattan type
project. That would be my point. I thank the panelists very
much.
The Chairman. Thank you very much.
Senator Corker.
Senator Corker. Mr. Chairman, thank you. I just want to say
that I love the passion that my friend, Bernie Sanders has. I
traveled with him to Greenland where we had a chance to meet
with scientists from Denmark and other places. It was most
educational.
I certainly appreciate the leadership you've shown. A year
ago you and I were in Europe meeting with the carbon traders,
meeting with members of the European Commission, utility
providers and others. This panel, and I hate that I didn't hear
every panelists, but I have a general idea of what each of you
has said.
I think what they're doing is shedding light on some of the
pragmatic issues that we need to address. The fact is that my
hope is that somehow we can take the passion, if you will, that
so many have around the issue of the environment and global
warming and link that simultaneously with our desire as a
country in the short term to have energy security. I think that
is possible. That's what over the last year I've been working
with others to try to do.
Now we have a bill that's coming to the floor on June 2,
possibly. It's a bill that I think is different than the bill
we actually came in the room to discuss. My understanding
there's a number of amendments and changes that came out at 10
o'clock this morning. So in some ways we're discussing a bill
that's not the bill, if you will or not the vehicle.
But I do think that getting down and taking, if you will,
that passion and linking it though in a pragmatic way so that
we pass a bill that works and moves us in that Manhattan
Project way toward energy efficiency, toward conservation. I
think that to me, is the beauty of what we might be able to
accomplish with cap and trade. That's why our office and so
many other people have spent so much time on it.
I think on the other hand there are real decisions that we
have to make that really affect people every day. I mean the
fact is the bill, as it came out, is not simply a cap and trade
bill. I mean, I'm actually a purist. I think in many ways,
Bernie, excuse me, Senator Sanders, you and I have some similar
views about the purity, if you will, of a bill.
This bill is not just a cap and trade bill though. It's a
huge spending bill. I mean at the end of the day, I know it's
going to be revised, revisited, revised right now, but right
now it spends every penny that comes in in a non-discretionary
way. I mean that's an unusual bill. We don't pass bills like
that around here.
So we need to talk about that. I think the whole issue of
allowances, and I understand Dr. Orszag, may have addressed in
his testimony. That's a big deal because we're passing out what
is like public shares in a public company.
I mean these things are marketable. How those get laid out
is a big deal. I mean it affects so many things. I hope that
what we'll do--I know the romance of this is interesting.
That's what drives so many people to want to look at cap and
trade legislation.
I'm interested in it for that reason. But the fact is that
there's a lot underneath this that truly is going to affect us.
We need to line up priorities in an appropriate way.
One of the--I'm just going to mention. I'm going to get
down in the weeds now. Ok. We got these allocations of
allocating out, transferring wealth, trillions of dollars of
wealth out to people.
I think people should understand that $7.2 trillion between
now and 2050. If carbon is at $13 a ton initially which is what
the modeling projects.
Today in London carbon is selling from $38, $40 a ton, so
we're talking maybe $20, $23 trillion, preset. Again, I just
think that's a pretty important thing to talk about as to how
that's allocated. Now I don't understand why in the world we
would be allocating credits out to middlemen, to people that
have absolutely nothing to do with the creation of energy.
This bill allocates out credits or allowances to States.
Why would we do that? I mean, States have nothing what so ever
to do with producing energy. What would a State do with public
shares in IBM if we just transferred it out?
What would a State do with allowances that we're allocating
out that are worth a lot of money? I'd like for one of you all
to--and by the way there's numbers of middlemen. I don't mean
to pick on States, but why would we do that? I'd like for one
of you, any of you to share with me why in the world we do
that? What public policy end would we meet in doing that?
Mr. Orszag. You'd be helping the State governments.
Senator Corker. The State governments are actually.
Mr. Orszag. The recipients of a permit, I think the best
way of viewing of when you give a permit away it is like you
sold the permit for some amount of money. Then you just hand
the money to the recipient of the permit. So the only objective
that you're generally fulfilling is if you wanted to transfer
money to those recipients. This accomplishes that objective.
Senator Corker. So in essence this bill which is to focus
on capping carbon emissions transfers out hundreds of billions
of dollars to States for no reason.
Mr. Orszag. There also are requirements. I mean, the bill
is a little bit more complicated because there also are
requirements on sort of what happens. But I think focusing on
the fact that this is a huge amount of money and handing out
the permits is a windfall to many of the recipients is a key
insight.
Senator Corker. Ok. I just have to tell you that I don't
understand why, I have no idea what thinking could be behind
that. By the way there are numbers of other people that have
nothing what so ever to do with reducing carbon that are given
these allowances. It makes absolutely no sense. I hope it is
something we will address.
The other issue that I bring up today, I have many others
I'd like to talk about, but it's the international allowances.
I listened to my friend again, Senator Sanders, who I like as
much as anybody here in the Senate. I love his passion. He's
talking about capping emissions here in our country.
Yet this bill provides for us to buy international credits.
That does nothing what so ever to lower emissions in our
country. All it does is allow people who are emitting to lower
their costs.
What it does do is transfer out. I want to say in a time we
have a trade deficit, ok. We're losing jobs here in our
country. Again it transfers out hundreds of billions of dollars
to other companies.
I will just say and Senator Bingaman and I have witnessed
this in Europe, to projects that actually in many cases are
fraught with fraud. I'd like for someone to please share with
me on what public policy motive, if you will, we would allow
our money here in this country to be transferred out to
international credits to many countries that are not capping
emissions. I'd love for somebody to support that notion.
I just want the record to show that----
The Chairman. You've got--we'll give another 10 seconds for
an answer. Then we'll----
[Laughter.]
Senator Corker. Ok.
The Chairman [continuing]. Move on to Senator Salazar.
Senator Corker. Ok.
The Chairman. Yes, Dr. McLean.
Mr. McLean.Yes. Can I take on your first question?
Senator Corker. Sure.
Mr. McLean.What would States do with money? I'm not
defending the amount of money or even whether this is a good
policy decision, but just to answer your question about some
uses that it might be put to. Then you can decide whether those
are worthy.
First of all, a lot of efficiency programs are run at the
State level by energy offices and other offices within States,
so some of that funding would go toward assistance in running
those programs. There's assistance to low income----
Senator Corker. Could be. The bill says could be.
Mr. McLean. Right. So I'm not saying, you know, you can
decide whether that's worded correctly or it accomplishes its
purpose. But just to say there are purposes I think that people
have in mind. A third area would be adaptation. I mean there's
a whole issue of what do we do in response to the inevitable
things in terms of infrastructure and responses there.
So there would be expenses and costs and some people
believe that this would be a way of covering that. Now you can
raise the question is this the right thing to do? Is this the
right amount of money? There are certainly questions there. But
it's not that there would be no purpose to it. But I understand
your point.
Senator Corker. Mr. Chairman, my time is up. I realize. I
just would make one more comment. That is, I mean this with
total sincerity, I think we have a chance in our country to
quit the squabbling, to focus on our environment in a
responsible way and to tie the concern for our environment
responsibly to some pragmatic things to cause our country to be
energy secure.
I think we can do so in a way that does away with all this
picking of winners and losers and the subsidizing for 3 years
and then not subsidizing. I think it's really incoherent what
we do as a country. But I hope we will do as a Senate is to
truly look at what this bill says. Then work together.
I mean this totally sincerely, work together toward a
pragmatic end. I hope that what we do on June 2 is a dry run. I
don't think enough people in the Senate actually understand
what this bill really does.
I hope that we together can do something. I mean it to
harness the passion for our environment with the absolute need
for this country to have an energy policy that causes us to be
more secure. I thank you so much for this hearing.
The Chairman. Thank you very much.
Senator Salazar.
Senator Salazar. Thank you very much, Mr. Chairman. I would
be happy to be a co-sponsor of the Corker-Sanders Climate
Change bill.
[Laughter.]
Senator Salazar. When they get it together given the
passion that they bring to the issue. If they can get it
together I think they might actually get a number of co-
sponsors with the same practical approach that both Senator
Corker and Senator Sanders were talking about.
Let me first say, Mr. Chairman, I think it is incredibly
important that this committee exercise its jurisdiction over
this issue because when you look at what's been happening in
the last three and a half years that I've served on this
committee. We have been trying to define a clean energy future
for America. It is inextricably tied in to what happens with
global climate change and what we do with the cap and trade
systems.
So I think your holding this hearing is very important
because at the end of the day what we're doing is defining the
new energy future for America. I think in fact that I would
suggest, Mr. Chairman, I don't know that we have time between
now and June 2. But hopefully it will be something that will be
a continuing feature of what we do here in this committee. I
know we've already had hearings, but I think also this is an
area where, as Senator Corker pointed out, there's a lot of
information, a lot of learning yet to be held.
I'm going to ask a question that I wanted to Dr. Orszag and
Dr. Gruenspecht to respond. That is on the allocation on the
auction revenues that are set forth in Lieberman-Warner. There
are nine categories that are set forth there.
My question to you, as you think about that, is whether or
not those allocations are correct. Whether changing those
allocations, given the sensitivity of the models in terms of
technology investment, might make a major difference in terms
of our GDP as well as in terms of the effects on consumers. Let
me give you, as your thinking about that question, just a
comment.
You know for me when I look at the practical reality of
what we've done out of this committee in my State of Colorado.
In 2005 we were producing no power at all from wind energy. As
a result of what this committee has done, today we're over
1,000 megawatts of energy from my State, almost 1,500 megawatts
equivalent of what 5 mid-size coal-fired power plants.
We had no biofuel industry to speak of 3 years ago. As a
result of what we've done here with renewable fuel standards
and other incentives we now have 5 ethanol plants producing
several hundred million gallons of ethanol a year. As a result
of what we've done in this committee as well as the Finance
Committee and the Agriculture Committee, we're creating great
incentives for cellulosic ethanol that hopefully the President
will sign into law with the Farm bill that will override soon.
We're looking at a whole host of other things. Geothermal and
solar, biomasses and all the rest of what we include within the
renewable energy portfolio.
As we've worked on these issues over the last three and a
half years so closely with Senator Bingaman and Senator
Domenici and their leadership. I've always viewed the energy
future for us as a tied into first of all, efficiency. That's a
low hanging fruit. Many in the business community very much
support what we're trying to do to create incentives to be much
more efficient than how we use our energy.
Second, opening up this new door of opportunity to
renewable and alternative fuels, which we're working together
with the Administration on and many of the legislation that we
passed.
Third, the new technology. When we talk about hybrid plug-
ins or we talk about IGCC, that all is incredibly important in
terms of getting us to where we want to be on energy
independence.
Fourth, we're going to continue to use some of our
conventional fuels whether that would be coal or that would be
oil or natural gas out of the Gulf, domestic production we're
going to continue to do that as we make this transition.
My question is at the end of the day whatever global
climate legislation we pass there's going to be created a pot
of money. It could be a very large pot of money. I think in the
Finance Committee Dr. Orszag testified it was several hundred
billion dollars a year that might be created from this cap and
trade system.
Ultimately the question I think we're going to face here is
what is the best way of investing those proceeds. Because last
year when Secretary Bodman, wonderful leader, who said that we
were not going to move forward with FutureGen because we
couldn't find the money to move forward with carbon capture and
sequestration with new coal technology. We didn't have the
money to do it.
So at the end of the day it seems to me what Lieberman-
Warner is trying to do in allocation of the nine categories is
try to figure out a way how we fund these new technologies. So
we can develop this new energy future that will be good for the
economy, good for the climate. Get it done so we're not at a
point where we just don't have the money to do it.
So my question to both of you, if you can spend a couple of
minutes on it, is is this the right allocation?
Mr. Orszag. I'm not going to talk to right or wrong. But in
terms of achieving--it depends really what your objective is.
They're different objectives. You can try to cushion the blow
for low income households. You can try to reduce the macro
economic costs. You can try to accelerate over time the
adoption and deployment of technology.
Depending on what your objective is this may or may not be
the right thing to do. So, for example, on macro economic
costs, at least with regard to the short run, a more effective
approach would be to auction the permits. Then use that auction
revenue to reduce other distortionary taxes, like payroll taxes
or corporate income taxes. That was one of the points I made in
one of the slides. You can have a significant effect on
economic efficiency through that kind of approach. If instead
you wanted to more cushion the blow for low income households
you'd go in that direction.
I don't know because I wasn't present in the drafting
whether----
Senator Salazar. Let me ask you, Dr. Orszag. A lot of
people, a lot of my colleagues on both sides of the aisle have
talked about a Manhattan Project. We heard Senator Corker
talking about it. I heard Senator Sanders. A lot of people.
They're talking about the kinds of resources that embark on
Manhattan style type of project. Would it be better to invest
that money in the new technology pot as opposed to softening
the blow on low income consumers that might be affected? How
can we essentially launch a Manhattan style project that
ultimately would be effective?
Mr. Orszag. Two things quickly. One is, I mean there is
only--it's big. But there is only a given size of the pot. So
you can't do all things for all people at all times. It is
significant that, you know, a trillion dollars or more over the
10-year window.
Second we do need to remember in terms of the deployment
and adoption of new technologies there will be something that
happens just through the price signal that would occur through
pricing carbon emissions.
Then finally if you wanted to go beyond that, one could,
yes, either auction the revenue and explicitly fund new R and D
or one alternatively could allocate the permits to the entities
that are undertaking R and D. In general that's less--that's
more opaque and may not lead to as a good policy outcome.
Senator Salazar. Mr. Chairman, could I have Dr.
Gruenspecht----
The Chairman. Yes, Dr., why don't you go ahead? Respond.
Then I'll call on Senator Domenici.
Mr. Gruenspecht. I would actually associate myself with a
lot of Peter's remarks. I would say they're really issues on
the economic side. There's issues of economic efficiency and
concerns related to what I would call fairness, whether its the
impact on low income consumers or other such things. The weight
you put on those would matter.
On the energy side there's energy efficiency and then
there's energy technology and the weight you put on those would
matter. But really that is a policy call. I don't think EIA is
really well placed to say what the right ways are, so other
than framing the question I would defer.
Senator Salazar. If I may, Mr. Chairman, just 15 seconds on
this. I think that at the end of the day that's one of the huge
issues obviously, that we'll be debating. If we create this pot
of money where are you going to make the investment?
You know, I've had conversations with you and Senator
Domenici over the years that we have these great thoughts and
these great programs and at the end of the day the question is
well, where is the money? We can talk about plug-in hybrids and
clean coal technology, but if you don't have the money to move
forward with that then we really have an empty policy. So I
think this is an opportunity for us to marry up our work with
what we're trying to do on global climate change to make our
vision a reality.
The Chairman. Thank you very much.
Senator Domenici.
Senator Domenici. Let me say to my friend from Colorado and
to the rest of my Senate colleagues, as well as those people at
the table, I haven't been here because I had to go to a budget
meeting, and for once in my life I didn't have to do any work
there. They wanted to give me a present--they gave me a big
gavel.
Senator Craig. Was it money?
Senator Domenici. No, it was not money. That's the point
I'm going to get to--they gave me a gavel. I assured them that
while I cleaned up my office and put things in boxes that I
wouldn't throw this one away. It was too nice. I thought I'd
keep it.
But let me just say I've been looking at the so-called
Manhattan Project approach, which came from ideas out of the
brain of Senator Bingaman and some thoughts out of mine. I
really don't think we need to have a cap-and-trade regime, and
rely upon the money it raises to create a Manhattan Project.
What's evolving from the Manhattan Project idea is the notion
that we don't need one. We need a bunch of mini-Manhattan
Projects instead.
You need to pick about 8 or 10 issues that you must solve.
You can take them and put them into a Manhattan Project
context. You certainly can do that within the current wealth of
our Nation without producing a new engine of wealth, which is
what the rights to pollute which we're talking about here
really are.
I wanted to say to you, Mr. Orszag, that at a various point
in time in this place, the CBO Director called something we
were doing differently than everybody else had been calling it,
and became a very big hero. Your predecessor, third removed,
whose name slips my mind, made a decision in the middle of the
discussions of health care by the Clinton Administration.
Mr. Orszag. Mr. Reischauer.
Senator Domenici. Reischauer. Regarding the Clinton
Administration's plan for health care, he ruled all on his own
over there and it became binding that that health care plan was
a tax. You might remember that, and that, in my opinion, was a
realistic analysis of the plan. It denied the plan's
effectiveness because it was going to be too big a tax.
You have come along and I don't know if you're first and
alone. But you're talking realistically about this program as
if it were another gigantic Federal reserve system or another
gigantic banking system that what would be created. These
credits would be worth billions, if not trillions of dollars
that are going to be floating around this economy. We don't
know who's going to end up owning them and who's going to end
up losing them.
But you have made it eminently clear as an expert that we
need in our government to understand what cap and trade is. I
understand that much better because of the way you've addressed
it. I thank you for that. I think more people are going to
understand it and be very quizzical about what in the world we
are doing when we attempt to do this.
I'm going to ask you a question. If it doesn't make sense
then don't answer it. But I believe----
Mr. Orszag. What a luxury.
Senator Domenici. Ok. I believe that what we really need to
do is develop new technology at the most rapid pace possible to
reduce greenhouse gas emissions. How does that strike you and
your understanding of what we're doing here? What if we said
we're going to spend $30 or $40 billion and get these new
technology requirements achieved? Tell me. Answer that for me.
Mr. Orszag. Sure. With respect. I do think that pricing
carbon will be a spur to the adoption and diffusion of lower
carbon technologies. So the thought that the technologies will
just develop and then be, especially, be deployed aggressively
in the absence of a price on carbon is unlikely to be as
realistic as in a context in which carbon emissions have some
price associated with them.
If you look at current energy efficient technologies that
they often don't diffuse as widely as some experts believe both
because of the price signal. I also think we have to pay and
this is a broader point, I think we have to be paying a lot
more attention in public policy, not just the financial
incentives and those matter.
But also to, basically to behavioral psychology, the way
people actually behave. The way things would get adopted. The
way things are framed for example and what's presented first,
whether the energy efficient refrigerator or something else can
have a very substantial effect on outcomes. We haven't really
gone very far along that road in hearing both financial
incentives and things like defaults and how things are
presented in changing behavior.
Senator Domenici. Ok. To change the subject a little bit.
Before the Senate Finance Committee on April 24, you asserted
that research has suggested a tax on greenhouse gas emissions
could achieve a long-term target at roughly one-fifth the cost
of an inflexible cap and trade regime. Could you characterize
S. 2191 in terms of its flexibility or inflexibility?
Mr. Orszag. There's some degree and this point is the same
one that I was trying to make through a price ceiling and a
price floor within a cap and trade system. The key is timing
flexibility. A tax actually provides you timing flexibility to
undertake the emission reductions when they're cheapest.
The Lieberman-Warner legislation has some limited timing
flexibility through the banking and borrowing provisions and
through the related Carbon Market Efficiency Board. But it is
not as much as would be achieved through the kind of dynamic
price system that we discussed earlier or through a tax.
Senator Domenici. This commodity, which is a right to emit,
will presumably have a value in the global market. What is the
impact on American economic competitiveness, of imposing a cost
in the U.S. that is not imposed in emerging economies, if in
fact we are creating ``creating a commodity'' as you asserted
the Lieberman-Warner bill would do in your testimony before the
Finance Committee.
Mr. Orszag. There are really two issues here. One is an
environmental question and the so called leakage question about
whether production and other activities and therefore emissions
move to other countries. The second is the sectors in the
United States and sort of what is happening to their
production.
The concern is most salient with regard to, on that later
point, with regard to a very limited number of sectors,
aluminum, uranium processing. There a bunch of sectors that are
very energy intensive. The legislation has a component in it to
try to cushion the blow on those sectors.
But it is the case that the, those, and it's a limited
number, but those energy intensive sectors will likely
experience some shifting in their production patterns relative
to other countries.
Senator Domenici. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Sessions.
Senator Sessions. Thank you. There will be, likely some
shifting patterns. What you mean is, I was talking to a
chemical company person whose plants in maybe 50 countries in
the world who told me that natural gas prices are high in the
United States relative to a number of other places. Those
plants exist. With increased cost of natural gas energy in the
United States if their company decides to expand production it
will not be in the United States.
In fact they hadn't expanded at that plant in years.
Senator Voinovich says that the chemical industry has been
devastated in Ohio as a result of this. This is not academic.
You drive up the cost here whereas our competitors in China
and other places which already have wage advantages also have
now energy advantages. It really begins to put our people, our
jobs at stake. I want to mention that.
Mr. Chairman, thank you so much for having this hearing. I
find it almost breathtaking that our EPW colleagues who voted
out this cap and trade bill did not have a serious hearing on
the cost that it would incur on the American people and our
economy. I thank you also, several years ago, couple of years
ago for having a hearing on cap and trade.
We had Europeans testify and other experts. I went into
that hearing more positive about cap and trade. When I came out
of it I was more uneasy.
My unease has increased having read a, I think, a fabulous
article in Scientific American who went into great detail
saying first, if you're going to do this, a simple tax is
better. But if you do a cap and trade these are the
difficulties you have to work through and the lawsuits and the
fraud and all the problems that go with it. When I got through
reading it I realized I concluded it wasn't a very good idea.
Second they noted at the conclusion it's still better to have a
simple tax than the cap and trade, although they favor a
massive reductions and are concerned about global warming.
Senator Corker and I agree. I think most of us in this
Congress have come to a conclusion that we need to do something
that works. I have made that decision.
It's going to cost money. It's going to cause us to change
what we're doing. But a seven to $23 billion cost to John Q.
Citizen is what we are, trillion, $7 to $23 trillion cost is
what we're talking about imposing on our constituents. That's
the average working American. So we have to be careful about
that. We really got to be careful.
I think it's an intoxicating concept that we can empower
what would be masters of the universe to sort of control this
economy. That's a seductive concept. A lot of people just can't
wait to be empowered to start regulating all of these things
and passing out credits and picking winners and losers and that
kind of thing. I think it's very, very dangerous. It worries
me.
I would note this. Before I would say that. I want to agree
with Senator Domenici.
My basic concept is kind of let's do the things that work.
Let's get busy doing them now. Let's find out what is impeding
those things that work from occurring now. Let's figure out how
to eliminate those road blocks. Let's do it and sooner rather
than later.
But I want to point out for a perspective that between 2000
and 2010, according to the University of California study that
just the growth in China's greenhouse gas emissions will be
approximately six times greater than all the commitments to
reduce carbon made by all the developed countries signatories
to Kyoto in the same time period. Any of you familiar with that
or want to dispute that? That's a significant thing.
Also I would point out to my colleagues that according to
the International Panel on Climate Change, as I understand the
numbers, they project that if we and the world signs on the
Kyoto and we go forward with these very strict controls by 2060
it will reduce the growth of temperature onto the climate
models by less than one tenth of one degree centigrade, really
.07 percent of a degree centigrade, which is almost
unmeasurable. So we've got to be humbled here before we start
thinking about imposing great burdens on the American people. I
just want to make that point.
You, Mr. Gruenspecht, talked about the nuclear component.
You indicate it's unlikely we would achieve the projections
that some have considered. The EPA analysis of the America's
Climate Security Act assumes substantial growth, Dr. McLean, in
nuclear generation, approximately 150 percent from the 782
billable kilowatt hours in 2005 to 1,982 billable kilowatt
hours in 2050. This is about 200 new nuclear plants.
Today there are 104 power plants in America. I think
Senator Domenici and I agree that one of the things we need to
be doing, perhaps on a higher priority than cap and trade is to
figure out how to make that happen. Do you see, is it going to
take legislation and other actions in Congress to move to that
kind of growth in nuclear power? Is it important to have this
kind of nuclear power growth to meet our global greenhouse gas
emission goals?
Mr. Gruenspecht. I think we'll try to split that.
Senator Sessions. Good.
Mr. Gruenspecht. Like an ice cream sundae. Nuclear power
exists. It's carbon free. I think there are real challenges to
public acceptance.
I think one of the issues is that, you know, issues and
problems need to be prioritized. I know there are some concerns
that some people have with nuclear power, but the sense is if
global climate change is prioritized as a very high challenge,
the thought is that you already have nuclear power technology.
In one sense looking for technologies is very important
because one technology is not going to do it. I think everyone
agrees with that. On the other hand, with nuclear power you
have a technology that, again, is very attractive in terms of
greenhouse gas emissions.
So the real issue is that choices have to be made, as you,
as a Senator, are involved in every day and know very well. I
guess it's really a policy design question that I danced around
a little bit in my testimony. But that technology is very
important. Public acceptance is also very important and
designing programs in a way----
Senator Sessions. Let me just suggest, I don't think that
as a professional politician I'm not as worried about public
acceptance. Some are. I think it's a question of how we can get
there.
Mr. Gruenspecht. Ok.
Senator Sessions. Feasibility, economically,
technologically.
Mr. Gruenspecht. I think it's fairly attractive with a
significant carbon price, nuclear power is attractive.
The Chairman. Dr. McLean, did you want to add something?
Mr. McLean. Yes, just a little bit. I basically agree with
the points that Howard was making. But in our analysis we
project a little bit lower nuclear than he does.
But one of our constraints we added was just how much have
we ever produced in the past. So we sort of looked at the last
30, 40 years when we were building in nuclear. We sort of said
that's how much we can do in a 10-year timeframe. So it reduced
it a little bit.
But the basic element is that both of our models look at
this as an economic issue. These are economic models.
Economically this becomes more attractive as an alternative
than it is today. The issues are not the economics of building
these facilities.
The issues are as you know proliferation, waste and safety
which he's referring to as public, sort of, acceptance. How you
address those and how you overcome those will determine the
extent to which it's used. Not the economics or the ability to
construct it.
Senator Sessions. Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman for calling this
hearing. I would agree with all of my colleagues. This
information that we're getting this morning is exceptionally
important for us as we consider whether it's Senators Warner
and Lieberman's legislation that we'll be taking up or whether
it's your legislation, Mr. Chairman that I have signed on to.
But we need to understand what it is that we are doing as
we embark on policies that are enormous in terms of a departure
from where we currently are. Analyzing and understanding the
costs behind our policy decision are something that we just
can't hope that we get it right. I think some of us are looking
at the decisions that we have made when it comes to ethanol and
our reliance on corn based ethanol that is having an impact on
the price of food. We're kind of walking this land of
unintended consequences.
I want to make sure that when or to the fullest extent
possible that as we move forward into this new world of cap and
trade, new to this country, that we're not waking up and
saying, oh, my gosh, what have we wrought. I, in preparing for
this hearing this morning, talking to my staff who spent a fair
amount of time yesterday reviewing the 74 page report from CRS.
He described it as mind numbing. I think that that was probably
a polite way to put it.
[Laughter.]
Senator Murkowski. But I will tell you I came away from the
exchange that we had yesterday and recognizing the various
reports that are out there with an understanding that you've
got a whole multitude of different reports. Modeling based on
different assumptions generating vastly different results. I
think we would agree that there's some uniformity of opinion
that Warner-Lieberman will reduce our Gross Domestic Product,
but by how much.
I will attribute this to my staff, but when he was looking
at the EPA model, the Clean Air Task Force, NAMs, EIAs, he
comes back and he tells me there's a cumulative difference
between all of these reports of nearly four trillion dollars
between these models. So you kind of say, well, so what does
this mean? Who's right? Who's using the assumptions that are
most likely?
When you look at what it means to our constituents. That's
where we've got an obligation to try to do better than just,
kind of, second guess. When you look at the computer models
that the EIA uses, they peg the cost to the average household
somewhere between $76 and $723 in 2030. This is quite a spread.
But the NAM model puts that spread at between $4,000 and
$6,750 per household in 2003. The EPA model puts it at between
$446 and $608 into 2020. But this is less than half of what
Charles Rivers Associates predicts.
So I said well, what does it mean. This is again, mind
boggling. Mind numbing. What does it mean for my constituents
in Alaska?
So we're looking into some of the specific studies and NAM
predicts it will cost the average Alaskan household between
about $4,500 and $8,200 a year in higher energy costs. It will
cut jobs in the State between 6,400 and 8,500 in 2030. Then you
go to the Heritage Foundations model and they put Alaska's job
loss at 1,800 by 2025. Meanwhile the University of Alaska with
their economic modeling, they imply that the cost will be far
less, especially in terms of jobs.
So I'm looking at this and I'm saying, who's right? My
constituents are saying to me, well Lisa, if we're going to
embark on this kind of a policy, what does it mean to me and my
household because right now we're getting socked when it comes
to the cost of energy. That's not only in Alaska, that's all
over the country.
So we've got an obligation to be fair and honest with them
when we move forward with policies like this. Because if they
say, you know what, the cost really is worth it. If they agree
with Representative Sanders that the price of doing nothing is
not something we're willing to take on. We still need to give
them some assurance of what we're looking at.
I'm not convinced that we know. As Senator Corker said,
we're going to go to the floor after the Memorial Day break
with legislation that you all haven't really modeled yet. Now I
don't know how long it takes to do these models but I don't
think you're going to be able to do it over the Memorial Day
break.
So, Dr. Parker, Mr. Yacobucci, is it even fair to ask the
question of you of all the models that are out there and yeah,
there's a new one out today. The NERA Economic Consulting that
was done at the request of the National Petroleum and Refiners
Associations. So the reports are coming out all the time.
Is it fair to ask you which model you think is perhaps
best? Can you rank them? Does it really all depend on the level
of assumptions? I know you're going to create friends and
enemies here. But we need a little better sense as to where we
really look. Can you help me out?
Mr. Parker. Is it fair? Probably, no.
[Laughter.]
Mr. Parker. I think it depends on what you're asking out of
the models. How reliable or predictable they are. If you're
looking for one of the models to give you the answer that this
is what the world will look like in 20 years and this is what
it will cost. None of the models will give you that answer. Not
reliably.
You know, it would be if they could, perhaps we could make
them our stockbrokers and make lots of money because they could
predict the future. What the models can do is to tell you have
we designed this bill so that under different circumstances we
have kept the price down as low as possible. What element in
this bill helped hold the price down? What elements in this
bill tend to increase price and how could they be modified so
that we are bringing these reductions in at the most cost
effective level. That is what the models can do for you.
So for the analyses that have done the most sensitivity
analysis on these different technological, economic and
behavioral assumptions are the ones that are going to be the
most useful. So do that----
Senator Murkowski. But the most useful but for whose end?
If I'm opposed to cap and trade legislation I'm probably going
to look at the NAM model because that predicts that the costs
are going to be higher. If I'm a supporter, I might be looking
at somebody else's modeling and the assumptions that are there.
So I think we also need to recognize that we can use these
models, use these projections just as, you know, we use
statistics to support our particular situations. So you're
saying that really nobody's right, nobody's wrong. It just
depends on the level of assumptions that are going into it. Is
that correct? Dr. Gruenspecht?
Mr. Gruenspecht. I guess Larry still has all his friends.
[Laughter.]
Senator Murkowski. He's a politician there.
Mr. Gruenspecht. I'm going to lose some. I think you have
to realize the different studies, you know, in part they start
from different baselines. As EPA said, if they looked at the
Annual Energy Outlook 2008 which includes the bill that
Congress passed that was enacted last year, the Energy
Independence and Security Act, they may come out someplace
different.
They start from different baselines. They analyze different
provisions. You mentioned the Charles River Associates
analysis. They get a fairly big impact early from the low
carbon fuel standard. I don't think any of the other analyses
looked at the low carbon fuel standard. In our case we felt it
wasn't specified in the bill enough as to what it was. So we
just didn't want to make assumptions about it.
I already had a fairly long discussion with the chairman
regarding the NAM and the issue that they may have wrapped up
the effect of S. 2191 with the effect of a different oil price
scenario. So, you know, there is going to be a range, I think,
so you could try to standardize some of those things and
probably narrow the set a little bit.
But again, it's technology and technology acceptance by the
public in some cases. A lot of times people want to make
assumptions that may lower the cost. Then you might suspect
that some of those same people would be the people who would
oppose those technologies after the bill was enacted.
So it's hard for me to give you advice. But if one designs
one's policy so that the incentives after enactment are
consistent with the assumptions made about technologies and
costs and market penetration while the bill is being debated,
that's probably your best chance to avoid this kind of
concern--that an assumption is made and then you find
opposition to that assumption once the proposal is enacted.
Senator Murkowski. Thank you, Mr. Chairman.
The Chairman. Thank you very much.
Senator Craig.
Senator Craig. Mr. Chairman, thank you. Let me pick up
where Senator Murkowski left off. I think we're all frustrated
about where we are or where we might be. I don't know whether
I'm willing to risk Idahoans on the environmental models of
climate change or the economic models of climate change.
Neither of them are accurate.
This committee under the leadership of Senator Domenici and
Senator Bingaman a few years ago passed a sweeping energy
policy act in 2005. We had spent years shaping it. We knew what
it would do. It's in large part doing it.
Here we are now looking at models and legislation that none
of you had a chance to really examine. As you can see you're
all over the field, as is the country. In probably an effort
that Congress has never undertaken before in micromanaging the
economy of this country to this magnitude.
I'm not quite sure I can remember. Our staff has done a
little research. Have we ever as a Congress tried to
micromanage the marketplace in a way with the magnitude that
these bills are offering? I think the answer is no, Mr.
Chairman. That's never happened before.
So when Senator Murkowski asked the question that is asked
of her constituent. She better be right if she votes for this
and so had I and everybody else. Because I'm not quite sure
that we'll build the switches accurately enough so that we can
turn them quickly enough.
Once we've told the world to go invest in this direction.
We find out that it's inaccurate or it's dislocating in a way
that we can't live with. So we say, no, we'll turn the switch a
little more in this direction. We'll shift trillions of dollars
of investment in another way. But that's kind of the game that
wants to get played here.
Models are models. Let's look at this model. This is
Heritage's model based on all the accuracy. It says that
somewhere out there there's a three million job loss.
Most of it comes in the manufacturing sector. That's the
dislocation that Senator Sessions is talking about. About a
million of it comes in the household sector.
I'm not one of those who certainly says we get it. If we're
going to do this we better get it right instead of play the
politics of a Presidential year. I wish the chairman was here,
that our leader now wants to do because somehow this has
magnitude in it of political value. I serve on two committees
the EPW Committee, so I've marked up Lieberman-Warner as have
several on this committee. We probably have a better grasp of
that then others of this committee do.
We were pushing the chairman to get allocation figures.
She's now come out with them: $911 billion to consumers to help
energy costs, $566 billion to States to deal with greenhouse
gas cuts, $307 billion to fossil fuel electric utilities, $254
billion to States that rely on manufacturing of coal, $253
billion to States and tribal adaptations and 237 billion to
wildlife conservation and $213 billion to carbon intensive
manufacturing of iron, steel, paper, etc, etc. Phenomenal
redistribution of wealth, I think that word has been used here
before.
So whether it is old think or new think or green think. The
reality is we're not thinking at this moment because we don't
have the model. We don't have the legislation, Mr. Chairman
that will ultimately go to the floor in a way that this
committee has to be able to examine it in great detail and
listen to these gentlemen and their staffs after they've had a
chance to look at it and model it and work on it extensively.
We get this one wrong, we're in deep trouble. If we're
talking about trillions of dollars that we're going to flow out
there in a way that many have spoken to this, here's another
little irony. I tried to get a forestry sequestration amendment
in the Warner-Lieberman bill on EPW. Not allowed, not allowed.
Yet I now find the chairman of that committee's going to
offer an amendment on the floor that will allow 10 percent of
the bill's compliance requirements to fund international
reforestation. Now somebody used to chair the Forestry
Committee. I can't find a dime to reforest U.S. forests. But
we're going to ask ratepayers and industry to gain the system
at 10 percent to reforest somebody else's forests.
That's green speak folks. That has nothing to do with
economics. That's purely environmental politics across the top.
You can't model that one. Don't try.
I'm not going to ask the question because you've all worked
hard. I've looked at it. I'm reading your material. It's as
valid as the day it was written and tomorrow it will be invalid
because we're going to write it differently. Then we're going
to ask you to come back and turn the dials on your models a
little to see if you can readjust.
But I believe, Mr. Chairman, there are a few simple
conclusions to be made. This committee, no other committee of
the U.S. Congress has ever tried to micromanage the U.S.
economy in the way we're attempting to do it today. The long-
term impact, if we get it wrong, is devastating.
So let me conclude with this idea. It's a different way of
measuring. If climate change is creating radical factors in the
climates of our world, and it may. I'm not going to say it
isn't.
Right now we're averaging about 1.9 hurricanes a year in
the United States. Now that's at an average of $5 billion. Ok.
Do you know what the impact of this if all of the modeling
is reasonably accurate is on the economy of our country and our
peoples? It's between 300 to 900 hurricanes from now to 2030.
You don't have hurricanes in Alaska. Nor do I in Idaho. But you
will now.
Because we've spread the hurricane hit nationwide. All of
these States of the Nation. It isn't just Florida, the Gulf
Coast and possibly some of the Southern East Coast. It's all of
the U.S. economy now gets hurricanes between 200 to 900
additional hurricanes between now and 2030 from an economic
point of view, instead of the five billion a year spread
somewhere along the Gulf Coast and up the East Coast.
Mr. Chairman, we've got a lot more struggling to do with
this issue before we get it anywhere near a way that we can
take to the American people to say this is the right thing to
do. I would hope that you as chairman and this ranking member
fight to allow that to happen, instead of the politics that is
getting played with this at the moment for the sake of
politics. Old speak, new speak, or green speak, I'm not sure
where we are. But right now I suspect no speak is the safest
for our citizens and our constituents as we attempt to figure
out which way to go.
Thank you. Thank you all very much for being here.
The Chairman. Thank you. We've all had a chance to ask some
questions. Let me do a short second round if we can. Let me ask
a couple of questions.
Dr. Parker, you and Mr. Yacobucci, in your report which I
complement you on. I think it's very useful. You have this
statement which I thought was good about how long-term cost
projections are at best speculative and should be viewed with
an attentive skepticism.
I think that's a good phrase. Attentive skepticism. That's
what you develop around this place. Attentive skepticism.
Senator Domenici. Attentive.
The Chairman. Right. It strikes me that projections of job
loss or job creation are also extremely speculative. It's much
easier to project job loss than it is to project job creation
when you are seeing a transition of an economy from a high
carbon based economy to a low carbon based economy, which is
sort of what we're looking at for the next couple decades.
I'd be interested in your reaction to that, Dr. Parker, if
you agree with that or disagree, and if any of the rest of you
that wanted to comment.
Mr. Parker. First, let me state that yes, once you move
from primary economic impacts to secondary economic impacts you
have added another layer of uncertainty in your analysis. I'm
saying this is a cost to translating that into an employment
impact means you're already making assumptions, what you
believe. Not only the impact of what the bill is. But what you
believe future productivity is going to be. What future life
going to be. What it's going to be in terms of future leisure
opportunities. You're making a whole host of assumptions about
future quality of life that a generation will be making that
currently doesn't even work.
So therefore, you have added an entire new layer of
uncertainty on top of your analysis. So the attentive
skepticism becomes even more attentive because you have numbers
that are even farther away from the economic analysis in the
first ones were. So my general concerns about these analyses
would be increased when you were talking about employment
numbers.
The Chairman. Dr. Orszag, did you have any thoughts on the
ability to use these kinds of models of potential cap and trade
systems to project impact on employment?
Mr. Orszag. There is, I would just reinforce. There's a
significant amount of uncertainty surrounding any of these
point estimates. Most of the effect, if you're talking about
jobs, most of the effect will be on the type of job, at least
over the medium to long term and not the number thereof.
That's a general phenomena in the economy does, even with a
reduction in GDP will adjust the types of jobs. They may be a
different set of jobs. But the typically analysis that's done
that studies the number of jobs is often excludes the dynamic
adjustment of the economy over time to new conditions.
The Chairman. I assume that that's the case with the
various models that we've looked at here or that have been done
on this. There's no effort to incorporate any kind of dynamic
adjustment.
Mr. Orszag. I tend not to focus very much on the jobs
numbers that come out of these sorts of analyses.
The Chairman. Ok. Alright. Dr. Parker, did you want to add
anything.
Mr. Parker. I would just completely agree with that last
comment by the CBO that we don't tend to focus on those numbers
either. We consider them very, very uncertain. Therefore we are
very skeptical of them.
The Chairman. Why don't we go ahead and see if Senator
Corker has additional questions?
Senator Corker. I'm going to make some additional comments.
Again, I think this hearing has been outstanding, our
testimony. Many of you have been in our offices for some of
these numbing presentations and we appreciate the tremendous
amount of time that you spent with us both here and there.
Senator Salazar did ask about technology. I just want to
say that the way that this bill now talks about technology is
52 percent of the auction proceeds which again we need to be
deciding how much is auctioned and how much is not. But 52
percent of the auction proceeds actually go into technology
development.
The way this is set up a five person board, not the
Congress which maybe that's a great thing based on what I've
seen in 16 months. But a 5-person board decides how this money
is spent. So just to give it, you know, at $13 a ton as a
beginning assumption, which I think is the basis for this
modeling in the first place.
Again I'd like to add that in Europe today, that carbon is
selling for $38 to $40 a ton. So we could be talking about
vastly different numbers. Through the life of this bill, $2.3
trillion would be spent on technology development. It would be
decided by a 5-person board, generally speaking, as to how that
money was spent.
Again, some of these factoids I think are things that
people in the Senate and the House and certainly this country
should care a great deal about.
Senator Domenici. How much money was that?
Senator Corker. It's $2.3 trillion at a $13 ton beginning
price. I mean if you look it could be $6 trillion, $7 trillion
and again a 5-person board deciding where these moneys go.
Let me move to another point. We talked about upstream
verses downstream. With a board with this distinguished, mind
numbing panel, agree that if you in essence have upstream
allowances that's in essence pretty much a direct tax. A
downstream allowances an indirect tax. Would you all like to--
in other words if you're taxing petroleum out of the refinery
based on the number of gallons because we know, you know, how
much carbon content it has. In essence that's a pretty direct
tax. Is it not, if that's how we're doing the allocations,
upstream?
Mr. Orszag. I guess in economics, direct and indirect taxes
have these sort of technical meanings. But ultimately
regardless of whether you applied it upstream or downstream
consumer prices are going to go up. Consumers will bear most,
if not all, of the burden involved.
The upstream verses downstream question should really be
one in terms of administrative efficiency and what's the
simplest to administer.
Senator Corker. Ok. I understand that refining it is easier
to do upstream. Utilities you can do it downstream because of
some of the monitoring systems we have in place.
I guess what I'm leading up to is that in essence this is a
tax. By the way, I think we all understand that. We're still
focused on this piece of legislation. It is in fact a carbon
tax.
What's happened though in the process of this bill,
interest groups have gathered around the table which I don't
blame them when we're talking about trillions of dollars and
have made a, what could have been very simple with a carbon
tax, something very complicated and many people are going to
benefit. I mean, we see them walking up and down the hallways
non stop. I mean this is a transference of wealth of
monumental--it's monumental what's occurring if this bill were
to pass.
I'd like for each of you to quickly address the efficacy of
just having a carbon tax. I mean at the end of the day what
we're about, I think, is trying to change behavior. Ok. A
carbon tax that, you know, that's what this bill is intending
to do anyway.
A carbon tax that's started at a certain amount, but
increased in amount so that over time it became increasingly
painful, ok, to be emitting carbon emissions. I'd love for each
of you to sort of reflect upon that verses, if you will, this
comprehensive bill, if you will, that has many subtleties that
most people, I think in the Senate today don't understand.
Mr. Orszag. I guess I'll start. Economic analysis generally
suggests that a tax is more efficient than a simple cap and
trade system. You can make the cap and trade system approach
the efficiency of a tax through auctioning the permits and
through providing significant flexibility in terms of when the
emission reductions occur.
Senator Corker. That's if you auction all of them.
Mr. Orszag. That's correct.
Senator Corker. Right now we're giving away about 70
percent of them on the front end. Is that correct?
Mr. Orszag. That, actually at the very front end a little
bit more than that. That does impair the efficiency of what
you're trying to do.
Senator Corker. Ok.
Mr. Yacobucci. I think one key thing to keep in mind with
all of this is regardless of whether you're talking a carbon
tax or a cap and trade system, especially if you're auctioning
or running a tax. You're either giving these allowances out for
free or you are selling the right in one form or other to emit,
whether it's a tax or an allowance. Regardless you are talking
huge sums of money being controlled by the government.
If you went to a tax you would still deal with many of the
same questions of allocation of revenue. In this case it would
be tax revenue. The government would still need to decide,
Congress would still need to decide where that money goes. So
you don't necessarily put these questions of allocation that
you've raised aside if you move to a tax.
Senator Corker. Mr. Chairman, I know my time is up. Again,
you do an outstanding job. Both you and the ranking member
making sure that this committee truly looks at issues in a real
way.
We're going to be offering an amendment to this bill that
actually returns all of the revenues back to the citizens who
are paying them, ok. All of the revenues. Congress can decide
over time whether it can certainly with that amendment whether
to pass or not.
But let me just say. I think it's so ironic that on June 2
we're going to be debating on the floor of the U.S. Senate a
tax. Everybody at this panel and everybody up here at the Dias
knows that this is a tax.
We have two Presidential candidates who've actually asked
for a gas tax holiday. Ok. This summer with gas prices
approaching $4 a gallon, we're going to be debating a tax on
citizens through the year 2050.
I just think that all of us need to be very transparent
about that as we discuss it. So again, I think this is, I
understand altering behavior. I just think citizens around
America need to know that in trying to alter that behavior when
in essence, directly not indirectly, directly driving up the
cost of petroleum which may be very necessary.
I'm not debating against that. I just hope we'll be very
transparent. I thank you, Mr. Chairman.
The Chairman. Thank you very much. Let me ask if either
Senator Domenici or Senator Murkowski has additional questions.
Senator Domenici. No. I just wanted to say, Senator, before
you leave, that I have spoken to you before as your ranking
member about the need for your involvement in this bill. After
today's hearing, I want to reiterate that point.
You say you haven't been here very long, but we're very
fortunate on our side that you are here. I do believe it's
urgent that you remain involved because the things you have
said, Senators must know. It's going to be hard to get the word
out on what you have described and the way you've described the
tax and the implications of this bill. So I commend you and I
ask that you stay involved as much as you can.
I don't have a question, but before she proceeds, could I
just make one observation. I wanted to say to you, Senator,
that the people from Alaska certainly know that you're
concerned about the impact this bill will have on them.
We certainly talked enough about a tax and the burden it
comes with today. I'm not sure we spent enough time on how much
benefit there would be after we've done all this. Because that
too is a very important issue, and it's the benefit in terms of
the global consequence which is what we're talking about. Not
our consequence, but the global consequence. The American
contribution, if the rest of the world isn't contributing, is
very, very small after we've gone through all of this
manipulation that worries you. One final question. Why do you
think there's so much support for cap and trade and so little
for carbon tax, which seems just in discussing things here, to
be a far more direct way to do this? Do you have any thoughts,
Mr. CBO?
Mr. Orszag. I guess I would only say that it is a general
phenomenon that the consensus among economists is often not the
consensus among policymakers. That seems to be the case here
too.
Senator Domenici. Thank you.
The Chairman. Senator Murkowski.
Senator Murkowski. Thank you, Mr. Chairman. Senator
Domenici, I appreciate the observation about the benefits. I am
one who very firmly believes that we will resolve our issues as
they relate to emissions. We will have good policies when we
have the technology that allows us to do what you're all
speculating and prognosticating that we need to do.
As I look at the various bills that are out there the
concern that I have is we've got this schedule. We've got this
timeline that requires all this to be in place. Our reality is
that we're going to be paying for the technology after the
auction proceeds come in. But I'm wondering whether or not, by
front loading the technology whether it's capture and
sequestration of carbon or the various technologies out there
that will allow us to meet the reduction in emissions by the
time that we want.
Senator Craig has pointed out the job loss. We've been
focusing a lot about the actual costs. But there are other
issues out there that if we can get the technology in place
first, perhaps we won't see the loss in manufacturing jobs.
Perhaps we won't see the regional impact in those States that
are more coal producing.
Given your analysis of all that is out there is it fair to
say that if we allow the technology to somehow or other be
front loaded. I haven't figured out how we do that, whether
we--what it is that we have to do from the governmental
prospective to get that technology in place first. Does that
perhaps reduce some of the cost to the economy whether it's
actual cost or job loss? Is it an approach we should be looking
at a little more carefully or do we just revise our timelines
or do we just hunker down and make it happen regardless of the
cost?
Mr. Orszag.
Mr. Orszag. I will take a crack at that. I think it's hard.
You know, the key question of how you accelerate that is the
elephant in the room and that pricing carbon will create a
strong incentive for more technologies to be developed and for
them to be diffused in a, sort of in a broader way. The thought
that we can just sort of create it out of nothing and then have
it diffused rapidly doesn't seem consistent with all of the
experience that we've had to date.
Senator Murkowski. So you think the policy message out
there is enough to incent the companies to make the investment
and make the technology happen?
Mr. Orszag. No, putting a price on carbon would create a
significant incentive. It could be supplemented with government
efforts but if you priced something that firms want to avoid,
they will invest in trying to avoid it, including in this case
carbon emissions.
Senator Murkowski. Again the impact in some areas may be
more difficult and problematic than others.
Dr. Orszag.
Mr. Orszag. Admittedly, yes.
Senator Murkowski. Yes.
Mr. McLean. I wanted to second that and maybe more answer
your question. I think there are two pieces to this. One is the
research and development aspect, which we are investing in at
very high levels and maybe people think we should be doing
more.
The second one is the price signal that Peter mentioned. So
I think you have to have both of them there. If you have only
one, you're going to have a problem. You raised the concern.
What if we mandate this, but there's no technology. That's a
problem.
So, I think we need to do both. The timing is very
important in these policies. You can say I want you to do it
today or you can say I'm telling you today that I want you to
do it in 10 years. That's a very different signal and it gives
people the time between when they know it's a policy and when
they have to respond to the policies. So that would be the
third aspect.
Senator Murkowski. Thanks, Mr. Chairman. They've been very
kind with their time. I appreciate yours as well.
The Chairman. Thank you all very much. I think it's been
very useful testimony. I appreciate it. That will conclude our
hearing.
[Whereupon, at 12:27 p.m. the hearing was adjourned.]
[The following statement was received for the record.]
Statement of Bryan Hannegan, Vice President, Environment and
Generation, the Electric Power Research Institute
On behalf of the Electric Power Research Institute (EPRI) I submit
this written testimony to the full Committee oversight hearing on May
20, 2008 to receive testimony on energy and related economic effects of
global climate change legislation.
On May 8, 2008, EPRI convened a workshop in Washington, DC to
develop further understanding of the wide range of cost estimates
(Figure 1)* that have been made public over the last 6 months. Below is
a summary of the workshop.
---------------------------------------------------------------------------
* Figures 1-3 have been retained in committee files.
---------------------------------------------------------------------------
EPRI appreciates the opportunity to provide this testimony to the
Committee.
epri workshop explores cost estimates of lieberman-warner
climate legislation
EPRI convened a May 8 workshop in Washington, DC to develop further
understanding of the wide range of cost estimates (Figure 1) that have
been made public over the last 6 months. The meeting was attended by
Congressional staff, government officials, energy-economy modelers, and
electricity company staff.
Workshop presenters included modeling teams from the Energy
Information Administration (EIA); the American Council on Capital
Formation (ACCF); the Clean Air Task Force (CATF); the Environmental
Protection Agency (EPA), Massachusetts Institute of Technology (MIT)
and CRA International (CRAI).
While there are important differences in the modeling approaches
and models used, much of the variation in the cost estimates appears
driven by a handful of key assumptions, several of which are
highlighted here:
Reference case. Most modeling efforts rely on the Energy
Information Administration's Annual Energy Outlook (AEO) to develop
their reference case. In general, models that use an earlier projection
of the baseline (AEO 2006 or AEO2007) have to find more emission
reductions to achieve the Lieberman-Warner targets and have higher
costs--everything else equal--than those using the recent AEO2008
projection (Figure 2).
Technology cost and deployment. In general, scenarios that limit
the use of advanced, low and non-emitting electricity generation
technologies result in higher costs; those that let them enter freely
result in lower costs. Model results presented at this workshop show
dramatic variations in renewable, coal with CCS and nuclear capacity
additions (Figure 3).
Emission offsets. In general, scenarios that allow for
compliance using offsets (emission reductions that are made
outside of an emissions cap) show a much lower cost than those
scenarios without offsets. Most groups do not model offsets in
detail, but rather make relatively crude assumptions about
their cost and quantity. Several teams did not include any
international offsets in their analyses based upon their
interpretation of the bill.
Time horizon. The EIA's NEMS model runs (used by several
groups) extend through 2030, but most of the other models run
through 2050. Different time horizons can affect compliance
behavior (e.g. banking of extra credits), choice of technology
deployments, and other aspects of model economics.
Discount rates. The models use discount rates (which define
the time preference for money) ranging from 4 to 7%. This
affects the time period in which emissions reductions are
viewed to be most attractive from an economic point of view,
and leads to differences in total economic cost.
Workshop participants agreed that presentation of their modeling
assumptions and results in a common format could provide important
insights for decisionmakers and reduce confusion on how to interpret
different estimates of costs. Links to the meeting agenda,
presentations (and underlying analyses) are provided below.
APPENDIX
Responses to Additional Questions
----------
Responses of Howard Gruenspecht to Questions From Senator Bingaman
gdp impacts of the accf/nam study
Question 1. Can you please provide more detail about what you said
at the hearing? Please explain in more detail why GDP impacts are
disproportionately so much higher in the ACCF/NAM study than in the EIA
study compared to the difference in allowance prices?
Answer. Our review of the ACCF/NAM analysis performed by SAIC
identified problems in the methodology used in the macroeconomic
modeling. These problems arose from how modifications were made to the
baseline used in their analysis (using the Annual Energy Outlook 2007
reference case) to reflect the effects of the Energy Independence and
Security Act of 2007 and the lower macroeconomic growth in the
subsequent AE02008 reference case. These problems magnified the size of
the economic impacts identified in the ACCF/NAM study.
The analysis attempted to adjust their baseline to reflect higher
world oil prices by using the EIA high oil price scenario as part of
their Lieberman-Warner policy scenario. Unfortunately, they compared
the results to a baseline with much lower oil prices. This led to
larger reported energy price and macroeconomic impacts than would be
associated with the S. 2191 policy alone, since it also included the
effects of the higher world oil prices in the policy case. In the SAIC
analysis, these impacts are solely attributed to the effect of the
greenhouse gas cap-andtrade policy. We shared this concern with both
the contractor and the report sponsors.
state-by-state results
Question 2. The ACCF/NAM study also provides state-by-state results
for a whole range of possible impacts, such as impacts on gross state
product, energy prices, and jobs. These state-level results were
presumably derived from the NEMS modeling analysis done by ACCF and
NAM. Does NEMS provide state-level results? Do you know how these
results were derived from the NEMS model for the ACCF/NAM analysis?
Answer. The National Energy Modeling System (NEMS) does not produce
state-level results. The regional-level results it produces vary by
module (energy sector). All of the energy demand modules (including the
macroeconomic module) provide regional results for each of the nine
census divisions. The energy supply modules produce regional results
for differently defined regions, depending on the markets that they are
trying to represent. Appendix F of the Annual Energy Outlook 2007,
which can be found on the EIA website, illustrates the regions used in
the NEMS.
According to page 19 of ACCF/NAM analysis, it used the census
division results and applied historical trends based on Census state
population projections and historical relationships between states and
Census regions to obtain population and gross-state-product-weighted
results for income, jobs, industrial production and state-level prices.
These results were not based on a detailed state model.
Responses of Howard Gruenspecht to Questions From Senator Domenici
KYOTO PROTOCOL MISSES EMISSIONS REDUCTION TARGETS
Question 1. What are the major factors causing signatories to the
Kyoto Protocol to miss their greenhouse gas emission reduction targets
and are those shortcomings similarly foreseeable for the United States
under a cap and trade regime?
Answer. The first commitment period for the Kyoto Protocol
signatories began this year and runs through 2012. Greenhouse gas
emissions in the European Union (EU) have risen slightly in recent
years, reducing the likelihood of meeting the Kyoto targets. In a
recent report on the emissions cap and trade system set up in the EU
for a 2005 to 2007 ``trial'' period, ``The European Union's Emissions
Trading System in Perspective,'' the authors from MIT argue (page iii)
that the challenges faced in implementing the Emissions Trading System
(ETS) were not unexpected. They go on to state that
The development of the EU ETS and the experience with the
trial period provides a number of useful lessons for the U.S.
and other countries.
Suppliers quickly factor the price of emissions allowances
into their pricing and output behavior.
Liquid bilateral markets and public allowance exchanges
emerge rapidly and the ``law of one price'' for allowances with
the same attributes prevails.
The development of efficient allowance markets is
facilitated by the frequent dissemination of information about
emissions and allowance utilization.
Allowance price volatility can be dampened by including
allowance banking and borrowing and by allocating allowances
for longer trading periods.
The redistributive aspects of the allocation process can be
handled without distorting abatement efficiency or competition
despite the significant political maneuvering over allowance
allocations. However, allocations that are tied to future
emissions through investment and closure decisions can distort
behavior.
The interaction between allowance allocation, allowance
markets, and the unsettled state of electricity sector
liberalization and regulation must be confronted as part of
program design to avoid mistakes and unintended consequences.
This will be especially important in the U.S. where 50 percent
of the electricity is generated with coal.(pages iii-iv)
EPA SULFUR DIOXIDE PROGRAM CONTRAST
Question 2. I hear supporters of a cap and trade approach to global
climate change mitigation consistently refer to the sulfur dioxide
program at the Environmental Protection Agency and compare it to the
potential implementation of this legislation. Please compare the size
and scope, including the ways in which regulated entities complied with
sulfur dioxide limits and can be expected to comply with limits on
carbon dioxide, of the two programs so that we may have a better sense
of perspective on this comparison.
Answer. Compared to the greenhouse gas cap and trade program called
for in S. 2191, the sulfur dioxide (SO2) cap and trade
program created in the Clean Air Act Amendthents of 1990 affected a
relatively small group of large power plants and industrial facilities.
With approximately 9.5 million allowances issued every year and a
current SO2 allowance price trending towards $400 per ton,
the total market value of the SO2 allowances issued each
year is approximately $3.8 billion dollars. In contrast, in EIA's
analysis of S. 2191, the market value of the allowances issued in 2030
ranged from $235 billion to $603 billion, roughly 2 orders of magnitude
larger. We defer to EPA regarding the behavior of regulated utilities
under the two programs.
NUCLEAR PLANT CONSTRUCTION LIMITATIONS
Question 3. The NRC anticipates 29 applications for new nuclear
reactor units by the end of this year. Those applications represent
approximately 40 gigawatts of new capacity and are likely to be the
majority of new reactor license applications that the NRC will receive
by the end of 2010. Even under the very ambitious schedules, only the
very first of these plants will be coming on line in the 2015 to 2020
time-frame.
How do you justify the assumption made in your model that 264
gigawatts--over 6 times the 40 gigawatt estimate--of new nuclear
generating capacity will become available by 2030?
Answer. EIA agrees that many factors may constrain the amount of
new nuclear capacity that can be added between now and 2030. These
include material costs, manufacturing limits, labor shortages,
potential permitting bottlenecks, and public acceptance problems. As a
result, our analysis of S. 2191 analysis includes alternative cases
that assume higher costs and limited availability for new nuclear
facilities. The amount of new nuclear added across the S. 2191 cases
ranges from 17 gigawatts to 286 gigawatts.
While we agree that it is very unlikely that anything approaching
the higher end of this range would occur, the existence of an allowance
cost on fossil fuel use will make new nuclear plants very attractive
and will likely stimulate increased investments in all segments of the
industry. In addition, the existing fleet of approximately 100
gigawatts of nuclear capacity was nearly all added over a 20-year
period, during which another 150 gigawatts of planned nuclear capacity
was cancelled.
NUCLEAR COMPONENT FABRICATION
Question 4. We currently have no domestic capacity for the
fabrication of large nuclear components such as pressure vessels, and
we are told that our existing workforce can support the construction of
no more than three reactors at a time.
Have you analyzed how many reactors we are physically capable of
building by 2030?
Answer. EIA has not prepared an analysis of how many reactors could
physically be built in the U.S. by 2030. Moreover, as noted in the
answer to the previous question, EIA agrees that many factors may
constrain the amount of new nuclear capacity that can be added between
now and 2030. These factors are what led us to include alternative
cases about the potential cost and availability of new nuclear plants
in our analysis of S. 2191. However, a greenhouse gas cap and trade
program, by increasing the costs of continuing to rely on fossil fuels
for electricity generation, should provide substantial incentive for
increased investment in all sectors of the nuclear industry. Only a few
years ago there were no new nuclear license applications at the Nuclear
Regulatory Commission, but they now report having received combined
license applications for 15 new nuclear generating units (as of April
18, 2008) and the Nuclear Energy Institute has compiled a list of 14
additional units that are expected to file applications shortly.
Colleges are also beginning to report growing enrollment in nuclear
engineering programs. For example, the University of California at
Berkeley reported that between 1996 and 2006 the number of nuclear
engineering majors nearly tripled, while the number of freshman
applications for the major doubled over five years (Mass High Tech, May
12, 2006). Similarly, a recent study of the 31 U.S. universities with
nuclear engineering programs reported that 346 bachelor's degrees were
awarded in 2006, the highest number reported in ten years and a 30
percent increase from 2005 (Oak Ridge Institute of Science and
Education, June 20, 2007).
HOW DO HIGHER NATURAL GAS PRICES AFFECT PROPOSED LIEBERMAN-WARNER
LEGISLATION COMPLIANCE COSTS
Question 5. The Annual Energy Outlook for 2008 forecasts that in
2015, natural gas prices will be $5.21 per million BTU. The current
price is much higher than that, and NYMEX futures contracts for May
2015 are at around $9.00 per million BTU right now. Many of the models
in these studies rely upon your baseline prices to determine the cost
of compliance with a cap and trade regime.
Given that, how significant would the impact of higher-than-
projected natural gas prices be on the costs of compliance with the
Lieberman-Warner legislation?
Answer. Generally, higher natural gas prices would make natural gas
less attractive as a greenhouse gas (GHG) compliance fuel, and would
make switching to natural gas for GHG compliance more expensive than
would otherwise be the case under lower natural gas prices. However, in
our Lieberman-Warner analysis cases that allow for the rapid adoption
of nuclear, coal with carbon capture and sequestration, and renewables,
such as the ``core'' case, natural gas consumption is lower than in the
reference case because considerable energy production shifts to nuclear
and renewables. Therefore, higher natural gas prices would generally
not increase GHG compliance costs. In cases where nuclear and
renewables are constrained, such as in the ``limited alternatives''
cases in our analysis, natural gas consumption is higher with the
legislation, GHG compliance costs are higher than the ``core'' case
results, and the GHG compliance cost risk is more directly related to
the price of natural gas.
LONG-TERM NATURAL GAS SUPPLY PROSPECTS
Question 6. I am very concerned about the long-term supply
prospects for natural gas. Rumors of a natural gas cartel continue to
make the news and U.S. production of natural gas is trending toward a
steep decline in the coming years.
Has EIA changed its import projections in recent years to account
for these and other developments? If a natural gas cartel is formed and
U.S. natural gas production declines steeply, are you capable of
modeling its potential impact on supply and prices for natural gas?
Answer. EIA does not expect an effective natural gas cartel to form
in the future, nor do we expect steep declines in U.S. natural gas
production in the coming years. In fact, our reference case projections
of future natural gas imports have declined in recent years as higher
natural gas prices are expected to limit demand growth, especially in
the power sector, and stimulate increased domestic natural gas
production. We are capable of modeling the effects of reduced global
gas supply (the expected effect of a gas cartel) and reductions in U.S.
natural gas production. The soon to be released Annual Energy Outlook
2008 will include a ``Limited Natural Gas Supply'' side case that
presents the supply and price effects of such a scenario.
The natural gas market is becoming increasingly globalized, but the
formation of an effective cartel seems unlikely, for a number of
reasons. The primary reason is that natural gas demand is more elastic
than oil demand, since natural gas must compete with coal, nuclear, and
renewables in the power sector. The existence of these viable
alternatives greatly reduces the market power of a potential cartel. In
addition, natural gas reserves are more widely dispersed than oil
reserves.
We do not see evidence that U.S. natural gas production is trending
toward a steep decline. Production for December 2007 was 1700 billion
cubic feet, the highest since 1980. While we are seeing clear sustained
declines in a number of areas where conventional production sources
dominate, other areas such as in the deep waters of the Gulf of Mexico
and unconventional plays, such as gas shales, are showing strong gains.
The growth in these areas is the result of both higher natural gas
prices and significant technological advances.
COMPLIANCE MECHANISM
Question 7. These anayses tend to list natural gas, nuclear clean
coal, renewables and other forms of electrical generation as ways n
which the caps in S.2191 cab be adhered to. As a result, we get some
odd results that are likely impossible to achieve.
Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
Answer. All of the greenhouse gas mitigation proposals that have
recently been analyzed by EIA rely on mechanisms to reduce greenhouse
gas emissions or promote low or no carbon technologies that pass the
cost of compliance along to consumers through energy prices. The
economy is only affected through the impact these proposals have on
energy suppliers and consumers. There are, no doubt, other command and
control mechanisms that, if implemented, would more directly impact the
economy, but they have not been examined by EIA.
ALLOWANCE PERMITS
Question 8. As we discuss issues that relate to the share of
allowances that will be be auctioned or given away, what would be the
consequences of these permits being bought up by people who don't
intend to emit greenhouse gases?
What would that do to the cost to emitters and their ability to
comply with S. 2191?
Answer. In an efficient carbon allowance market, the price of
allowances would depend on the quantity supplied and demanded. If the
owners of allowances intend to limit the supply, then, all else being
equal, the price would increase. The economic burden imposed on a
particular firm in a carbon reduction program depends on its ability to
pass through costs, the price elasticity of consumer demand, and
emission reduction opportunities. Some available research indicates
that consumers and businesses at the end of the energy supply chain may
bear the largest share of costs. Also, certain firms or industrial
sectors may face difficulty in passing through increased costs and
would pay an increased share of the burden, such as those firms that
compete with foreign suppliers that do not face similar emission
constraints. For an effective carbon reduction program, all energy
producers and users should face the same incentive to reduce emissions.
BASELOAD GENERATION EXPANSION
Question 9. Our country hasn't had to increase its baseline
generation for nearly two decades, but that trend will soon come to an
end. What impact does this impending shift have on your economic
analysis, particularly in light of local opposition to infrastructure
construction?
Answer. Since 1990, nearly 320 gigawatts of new generating capacity
has been added and integrated into the U.S. electricity grid. While
nearly 83 percent of this capacity reported natural gas as their
primary fuel, it still represents a fairly large investment in
infrastructure. Over the same time period, there has been a significant
increase in both coal and nuclear generation, but it has come from the
increased use of existing plants rather than the addition of new
plants. In fact, between 1990 and 2006, the combined increase in
generation from coal and nuclear plants, 605 billion kilowatthours,
exceeded the 435 billion kilowatthour increase in generation from
natural gas plants.
In EIA's Annual Energy Outlook 2008, we do see the need for renewed
investment in large baseload facilities such as new coal and nuclear
plants, but the bulk of these facilities are expected to be needed in
2015 and beyond. If local opposition were to preclude these additions,
the industry likely would continue to invest in new natural gas
capacity and consumers would face higher electricity prices. In our
analysis of S. 2191, we included cases limiting the addition of new
baseload capacity like nuclear and coal power plants with carbon
capture and sequestration. In the most limiting scenario, the Limited
Alternatives / No International Offsets case, the allowance price
reached $156 per metric ton carbon dioxide equivalent, much higher than
the $61 per metric ton carbon dioxide equivalent reached in the most
optimistic case. Similarly, electricity prices in the most limiting
case were 64 percent above the reference case level in 2030, again much
higher than the 11 percent increase seen in the most optimistic case.
Natural gas generation in this limiting case was over 2.4 times the
level seen in the reference case in 2030.
Responses of Howard Gruenspecht to Questions From Senator Menendez
IMPACT UNDER HIGHER ENERGY PRICES
Question 1a. Current oil prices are nearly double those assumed in
EIA's and EPA's analysis of climate policy. We can already see that
high gasoline prices are inducing changes in consumer driving and
vehicle purchasing behavior. Goldman Sachs recently estimated that oil
prices might climb to $150-$200 per barrel within the near future. How
might the projected costs of Lieberman-Warner and other climate
policies change if the models were run with the higher (and more
realistic) energy prices that we are already seeing today?
Answer. There are two opposing effects of higher energy prices on
compliance costs that cloud the issue: a cost-reducing effect arising
because the emissions reduction to meet a given cap is less under high
prices, and a cost-increasing effect that can occur if increased use of
natural gas occurs in the effort to comply with the capand-trade
policy. Under the first effect, projected costs of emission cap and
trade policies would tend to be lower under higher energy price
scenarios, because higher energy prices would tend to suppress the
projected growth in fossil fuel use and carbon dioxide emissions in the
absence of a cap. Therefore, the reduction in emissions required to
meet a given emissions cap would also tend to be lower under higher
energy prices, and the allowance prices, a key indicator of compliance
costs, would be driven lower. For example, relative to the EIA's Annual
Energy Outlook 2008 (AE02008) reference case, meeting the S. 2191
emission cap requires a cumulative reduction in emissions from 2012 to
2030 of 37.7 billion metric tons in carbon dioxide equivalence.
Relative to emissions in the forthcoming AE02008 high price case, which
assumes higher oil and natural gas prices than in the reference case,
the required emissions reduction over the same period is 35.1 billion
metric tons (6 percent lower than in the reference case).
An opposing effect would arise if compliance with a cap-and-trade
policy led to an increased use of natural gas, as might occur if
alternatives such as nuclear, biomass, or offsets were not available or
more costly. Under higher energy prices, the cost of any incremental
use of natural gas would be higher, leading to higher compliance
expenditures.
Question 1b. Does this mean that allowance prices and the total
cost to the economy of the cap will be lower than current models
suggest? Can the EPA or EIA rerun the models with estimates that
reflect a future with sustained high prices for petroleum and other
fossil fuels?
Answer. Allowance prices and the effect on the economy could tend
to be somewhat lower under a higher energy price scenario because the
emissions reduction to meet the cap would be lower. However, in cases
where compliance resulted in increased use of natural gas, an opposing
effect on compliance costs would influence the results, as explained in
the response to the first part of the question. Given the time
necessary to conduct, review, and present additional modeling cases,
EIA could not publish any further modeling cases of S. 2191 prior to
planned floor debates in early June. As illustrated by the range of
results in the five cases presented in EIA's analysis, the economic
impacts of the bill can vary widely based on assumptions about
technology availability and costs, as well as offset assumptions. While
the cost results would be shifted somewhat under higher energy price
assumptions, the overall conclusions drawn by the report would not be
changed materially.
Responses of Howard Gruenspecht to Questions From Senator Sanders
ASSUMPTIONS ABOUT OFFSETS
Question 1a. The use of offsets is being defined in the models as a
cost avoidance mechanism, but there is more to offsets than cost
avoidance. Now, I understand the theory that paying someone to do
something can be easier than changing your own behavior, but if we
don't actually ensure emissions reductions, it doesn't really matter.
What are the assumptions regarding the actual emissions reductions
from offsets? Do the models assume a 1 to 1 relationship or do the
models include some calculation for the fact that offsets can be
difficult to quantify, or even difficult to verify?
Answer. EIA assumes that the domestic offsets from certified
greenhouse gas mitigation projects represent actual emission
reductions, in the sense that emissions projections assume that any
offsets supplied represent actual reductions from the baseline or
reference case emission levels. However, in defining the market
potential of offsets, EIA discounts the potential supply to account for
such factors as additionality, which is a test that demonstrates that
the emission reductions from a project or action are additional to what
would have happened in the absence of the project or action, and
permanence, and further reduces the economic potential to reflect a
gradual market penetration of offsets over time.
EIA's model focuses on energy and reductions in energy-related
carbon dioxide emissions. For projections of non-CO2
greenhouse gases, EIA relies in part on information from the
Environmental Protection Agency (EPA). EPA provided EIA with economic
relationships that characterize the economics of offset projects in
terms of ``marginal abatement cost'' curves. The curves were developed
in a series of engineering-economic studies EPA conducted in recent 20
years. The curves indicate the emission reductions that would be cost-
effective to develop at various allowance prices. In evaluating the
information, EIA assumed that the quantity of domestic offsets actually
supplied at a given allowance price would be reduced 25 percent from
the cost-effective level given by the abatement curves, based on market
factors and the transaction costs of certification and verification. In
addition, EIA assumed that market penetration of offsets would not
occur immediately, but be introduced gradually into the market over
time.
OFFSETS
Question 1b. Does the usage of offsets create opportunity costs for
the adaptation of renewable technologies, such as wind and solar, that
reduce our overall emissions? Said another way: does the use of offsets
have the potential to, in any way, delay a transition to renewables,
since polluters could just pay someone to plant a tree instead of
actually moving to sustainable energy?
Answer. Since offsets provide an alternative means of complying
with allowance obligations, offsets may compete, in a sense, with
renewable energy. If offsets were not permitted, and the overall
emissions cap was not relaxed accordingly, then the price of allowances
would be driven higher. At higher allowance prices, additional sources
of renewable energy would become economical. For example, in EIA's S.
2191 No International Offsets case, projected consumption of renewable
energy in 2030 is 18.2 quadrillion British thermal units (Btu),
compared to 16.7 quadrillion Btu in the S. 2191 Core case which assumes
that up to 15 percent international offsets are allowed and generally
competitive.
PERMANENCE
Question 1c. Also, what are the assumptions in the models that
determine the permanence of offsets? Is there a discount factor for
offsets that fail because of natural or manmade reasons?
Answer. In developing assumptions for offsets, EIA has discounted
the economical potential for offsets to account for certification and
other transaction costs, as well as other market penetration issues. S.
2191 requires that the EPA administrator issue regulations to certify
offset allowances to ``ensure that those offsets represent real,
verifiable, additional, permanent, and enforceable reductions in
greenhouse gas emissions or increases in sequestration.'' The bill also
describes accounting standards for offsets that would be developed for
agriculture and forestry sequestration projects and specifies
discounting factors to reflect uncertainty. EIA assumed that these
regulations and procedures would be reflected in the offset market and
affect the supply available. Therefore, EIA applied a 25 percent
discount factor to abatement cost curves provided by EPA.
ADDITIONALITY
Question 1d. How is additionality worked into the models?
Answer. This answer has been provided in the response to questions
A1(a) and A1(c).
failure to assess the benefits of action on global warming
To date, all of the analyses of Lieberman-Warner and other bills
assess only the costs of acting--they do not assess the benefits of
acting and avoiding or mitigating global warming. Agencies typically
analyze the costs AND benefits of their regulations. However, in the
case of climate change, economists have a long way to go in monetizing
benefits, assuming many of the benefits like preventing catastrophic
events such as hurricanes, droughts, and other extreme weather events,
along with the spread of diseases, wars over resources, and the
extinction of specie's--can even be monetized. The analyses of
Lieberman-Warner by EIA and EPA do not attempt to quantify the
benefits. They thus run the risk of focusing attention on the costs of
climate legislation without balancing that information with the
benefits of reducing climate change.
Question 2a. Do your analyses assess the benefits of avoiding or
mitigating climate change? Aren't there important benefits that have
not been considered at all? Examples that come to mind include the
avoidance of risks from increased or more severe droughts, floods,
hurricanes and wildfires: increases air pollution; catastrophic events
such as melting ice sheets; unrest overseas affecting U.S. national
security and changing disease patterns.
Answer. The Energy Information Administration (EIA) analyses focus
on the energy market impacts of the proposed rules, regulations or
legislation that we are asked to review. EIA does not have expertise in
climate system analysis that would be required to assess the potential
benefits of avoiding or mitigating climate change.
Question 2b. A related, but different, question is: do the
``Business as Usual'' scenarios included in your models (or the models
you have seen, in the case of CRS) assume increased costs from the
types of events I just mentioned, given that we are told that the
events will become increasingly common unless we reduce global warming.
Answer. EIA does attempt to capture the impacts of changing climate
trends on energy supply and demand. However, the types of models that
address the impact of greenhouse gas emissions on climate conditions
are usually referred to as Integrated Assessment Models. These models
are very complex because they attempt to capture all of the
interactions of the climate system. As a result, they do not focus on
energy markets and can not address the types of questions from the
energy committees of the Congress and others to which the energy models
typically respond.
Question 2c. What efforts is your agency making to assess the value
of the benefits of climate change mitigation?
Answer. Consistent with our legislative mandate, EIA analyses focus
on the energy market and economic impacts of the proposed rules,
regulations or legislation that we are asked to review. EIA does not
have expertise in climate system analysis that would be required to
assess the potential benefits of avoiding or mitigating climate change.
UNTAPPED POTENTIAL FOR RENEWABLES AND ENERGY EFFICIENCY
Electricity from coal, nuclear power, and other traditional energy
sources appear prominently in the modeling of Lieberman-Warner. Several
renewable technologies, however, are available today that can generate
inexpensive electricity without emitting carbon.
Concentrating Solar Power uses the sun to provide heat that drives
a steam power plant. This one resource could provide up to 17% of our
nation's electricity. A typical CSP plant being built today produces
250 Megawatts of power, emits very little CO2, and costs 1-2
billion dollars (about the same as a traditional coal plant and
significantly less than a new nuclear plant, which can run between 4-12
billion). Over its operating life, today's CSP plants deliver power at
$0.13 per kilowatt-hour, but the Department of Energy estimates that
the costs for CSP will drop below $0.08 per kilowatt-hour once
economies of scale are achieved. There are close to 400 Megawatts of
CSP already operating in the southwest, and at least 3,000 Megawatts
are in various stages of development.
Wind is another major opportunity. Just last week the Department of
Energy's National Renewable Energy Laboratory released a report showing
that wind could provide up to 20% of our nation's electricity needs by
2030. This resource will only cost $0.05 per kilowatt-hour, which is
competitive with what we are paying for coal today.
Geothermal is another great opportunity. A report for the U.S.
Department of Energy by the Massachusetts Institute of Technology
suggests that geothermal energy could provide 100,000 Megawatts of new
carbon-free electricity at less than $0.10 per kilowatt-hour,
comparable to cost projections for coal with carbon capture and
storage. This single renewable resource could account for almost 10% of
our nation's electricity needs in the future.
There are many other the possibilities, for biomass, photovoltaics,
hydropower, and other renewable technologies, for example. But, once
you add it all up, the United States could meet 2/3 of its electricity
needs from sustainable energy.
Now, add on what we could be doing with energy efficiency, and it
gets really exciting. According to the McKinsey Report, released last
year, we have the technologies needed to reduce greenhouse gases at our
disposal today.
Question 3. Do your analyses take into account the strategies
identified in the McKinsey Report for reducing greenhouse gases,
including improving the economy's energy efficiency?
Answer. With regard to your discussion of renewable generation
technologies, we agree that theses sources have considerable potential
to make an increased contribution to electricity generation,
particularly if actions are taken to limit energy-related carbon
dioxide emissions. The mix of renewable and non-renewable low- and no-
carbon technologies that will ultimately be deployed will depend on the
relative costs of different technologies, technology characteristics
such as intermittency and dispatch ability, and public acceptance
issues surrounding both renewable and non-renewable technologies.
Decisions regarding additions of new generation capacity, both
renewable and non-renewable, reflect competition among different
technologies that might be added as well as competition between those
technologies and existing capacity. Displacement of existing capacity,
whose fixed costs are already invested, can present significant
economic challenges even for renewable technologies that are well-
placed to compete with other new capacity sources. For example, over
300,000 megawatts of existing conventional coal-fired generation
currently provides about one-half of the nation's total electric
generation. At average delivered prices of coal well under $2.00 per
million Btu, the forward-looking costs of operating existing coal
plants is roughly $0.02 per kilowatt hour. In the absence of actions to
limit greenhouse gas emissions, EIA would expect the vast majority of
the existing coal-powered fleet to remain in use through 2030, with
many units continuing to operate after that date. Replacing existing
coal-fired capacity with alternative renewable or non-renewable
sources, which many believe are among the most cost-effective actions
to reduce greenhouse gas emissions, is likely to engender significant
costs, even under optimistic assumptions about the costs of low-and no-
carbon technologies for new generation capacity.
Turning to the strategies identified in the recent McKinsey report,
our view is that while it identifies a large technical potential for
improving energy efficiency and investing in renewable technologies, it
is silent on the policies that might be needed to take advantage of
these options. In fact, a letter included in the report from the
Conference Board, co-publishers of the report, states:
The McKinsey team looked primarily at the technical
feasibility and cost of those options. How quickly consumers
modify behavior and adopt different options will have a major
effect on the ultimate economic benefits of those options.--
Preface letter
The report goes on to say:
Unlocking the negative cost options would require overcoming
persistent barriers to market efficiency, such as mismatches
between who pays the cost of an option and who gains the
benefit...--page xii
In EIA's analysis of S. 2191, large improvements in energy
efficiency and increased investment in renewables are stimulated by the
higher costs of continuing to use fossil fuels under a greenhouse gas
cap-and-trade program. For example, the average annual growth in
electricity demand between 2006 and 2030 falls from 1.1 percent in the
reference case to between 0.9 percent and 0.6 percent in the S. 2191
cases. These rates of growth are all less than half the 2.4 percent
annual growth that occurred in the 1990s. With respect to renewables,
between 112 gigawatts and 357 gigawatts of new renewable generation
capacity are added in the S. 2191 cases; much more than the 47
gigawatts that are added in the reference case without S. 2191.
Responses of Howard Gruenspecht to Questions From Senator Akaka
HAWAII ELECTRIC PRODUCTION TRANSITION TO BIOFUELS
Question 1. Hawaiian Electric Company is uniquely a liquid fuel
utility, with over 75% of its electricity produced from imported oil.
We understand Hawaiian Electric Company is moving toward biofuel
substitution for fossil fuel in their existing generating units. How
can we assure that whatever program is put in place at the national
level will create incentives for this Hawaii utility to proceed
expeditiously with biofuel substitution? Equally important, how can we
be assured that a broad national program will not produce barriers to
this fuel transition?
Answer. The allowance costs associated with the national greenhouse
gas cap-and-trade program called for in S. 2191 will increase the costs
of continuing to use fossil fuel in power generation, and should make
increasing the use of biofuels as a substitute for oil more attractive.
In EIA's analysis, average distillate fuel oil prices--including the
costs of holding allowances--are 21 percent to 52 percent higher than
in the reference case in the S. 2191 cases.
PREMIUM FOR LOCAL OFFSET PROJECTS
Question 2. Do you see any categorical problem with states such as
Hawaii considering a premium local payment for locally developed and
implemented offset projects, with the objective of retaining funds
within the state economy?
Answer. It does not appear that categorical funding restrictions
under S. 2191 would restrict the use of proceeds from States' allowance
allocation for subsidizing local offset projects. Under S. 2191, States
will be allocated 4.5 percent of allowances based on the state shares
of population, LIHEAP program expenditures, and carbon dioxide embodied
in coal mined, natural gas processed, and oil refined in the State.
State proceeds from the sales of those allowances could be considered
categorical funds because the bill specifies that 95 percent of the
allowance proceeds be used for any of a list of 15 distinct purposes,
which include the following:
to encourage advances in energy technology that reduce or
sequester greenhouse gases,
to address local or regional impacts of climate change
policy, including providing assistance to displaced workers,
and
to fund any other purpose the States determine to be
necessary to mitigate any negative impacts as a result of
global warming or new regulatory requirements resulting from
the Climate Security Act.
Therefore, using allowance proceeds to subsidize local offset
projects would appear to be a legitimate use of funds.
Provisions of S. 2191 suggest that State governments could purchase
specific offset allowances associated with projects developed in their
States, or enter into agreements with developers to finance offset
projects through premium payments or other means. Under Sec. 2402, a
unique serial number would be assigned to offset allowances, and the
project developer would own the offset allowance initially, unless
otherwise specified in a legally-binding contract or agreement. The
offset allowances may then be sold, traded, or transferred, which would
allow State governments to purchase offsets from projects originating
in the State.
PLUG-IN HYBRIDS
Question 3. Plug-in hybrid electric vehicles will effectively
transfer greenhouse gas emissions from the transportation sector to the
electric utility sector, although on a reduced basis. How will this
beneficial potential be taken into account in the allocation of credits
under a cap and trade program? Can market mechanisms be structured to
promote rather than impede the development and commercialization of
plug-in hybrid electric vehicles?
Answer. Under S. 2191, the allowance allocation provisions do not
appear to have any negative material impact on economic incentives for
plug-in hybrid electric vehicles. Under S. 2191, the primary market
incentive that could affect the economics of plug-in hybrids is the
allowance requirement for carbon dioxide emitted by fossil fuels,
directly increasing the price of petroleum fuels and indirectly raising
the cost of electricity. The differential cost impacts on electricity
and petroleum would influence the relative economics of plug-in hybrids
versus other vehicles.
______
Responses of Larry Parker and Brent Yacobucci to Questions From
Senator Bingaman
Question 1. [For Larry Parker]. Your testimony and report ask us to
take a skeptical stance toward modeling, because of the larger number
of assumptions that need to be made in order to arrive at any
particular economic conclusion. In this regard, it seems that one
should approach regional (state-level) projections and projections
about jobs with even greater skepticism because of the greater number
of assumptions that need to be invoked in these cases. To follow-up on
our discussion at the hearing, what is your sense of the reliability of
regional estimates, sectoral estimates and estimates of job creation
and loss in such models compared to the reliability of aggregate
estimates?
Answer. As noted on page 15 of the CRS report, ``the uncertainty
about the future direction of the basic drivers of greenhouse gas
emissions and the economy's responsiveness (economically,
technologically, and behaviorally) illustrate the inability of models
to predict the ultimate macroeconomic costs of reducing greenhouse
gases.'' If one cannot project the fundamental drivers of a dynamic,
additional complexity in the form of aggregation or disaggregation
(depending on the architecture of the specific model) may not increase
accuracy and, indeed, may further mask the underlying uncertainties.
For models that use a modular construction with separate sector-level
models, CRS noted on page 70: ``baseline forecasts are even less
accurate at a sector level than they are at an aggregate national
level. As noted by Winebrake and Sakva, sector level baseline forecasts
have significantly higher errors compared with aggregate estimates, nor
have sector estimates improved over the past two decades:
We find that low errors for total energy consumption are
concealing much larger sectoral errors that cancel each other
out when aggregated. For example, 5-year forecasts made between
1982 and 1998 demonstrate a mean percentage error for total
energy consumption of 0.1%. Yet, this hides the fact that the
industrial sector was overestimated by an average of 5.9%, and
the transportation sector was underestimated by an average of
4.5% We also find no evidence that forecasts within each sector
have improved over the two decades studied here.\1\
---------------------------------------------------------------------------
\1\ James J. Winebrake and Denys Sakva, ``An Evaluation of Errors
in US Energy Forecasts: 1982-2003,'' Energy Policy 34 (2006), p. 3475.
Interestingly, the largest forecasting errors have occurred for the
areas of the industrial sector (over-estimated energy use) and for
transportation (under-estimated energy)--two key sectors frequently
targeted for controlling greenhouse gas emissions. This is not to say
that disaggregation is inherently misleading; there are regional
differences in energy supply that, all else being equal, would result
in potentially higher costs for some regions under S. 2191. However, to
move beyond recognition of regional differences in energy supply to
then make precise state-by state projections of impacts (frequently to
two or more ``significant'' digits) 20 years after enactment of
legislation propels the analysis from ``worthy of some skepticism''
toward a ``fallacy of misplaced concreteness.''\2\
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\2\ ``Fallacy of misplaced concreteness'' is a term used by the
philosopher Alfred North Whitehead to describe a situation where
someone mistakes an abstract belief, opinion or concept about the way
things are for a physical (i.e., ``concrete'') reality. See: Alfred
North Whitehead, An Enquiry concerning the Principles of Natural
Knowledge (1925).
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This situation is compounded further when attempting to estimate
secondary cost impacts, such as jobs. At this level of analysis, an
additional layer of assumptions must be added to the calculus,
including: worker productivity trends, wage rates (usually national
averages), and workweek trends (usually national averages). Projecting
these trends out to 2030 or 2050 is more an act of faith than analysis.
Add to this effects on industry of S. 2191 that are likely very site-
specific (p. 70), and one sees projections that are based more on
philosophy than analysis.
Question 1. [For Brent Yacobucci]. Your results suggest that the
Low Carbon Fuel Standard could raise energy prices dramatically. Could
you explain how this standard interacts with the underlying cap-and-
trade system and why prices rise so significantly in the presence of
such a standard if the overall emissions cap remains unchanged?
Answer. One of the key reasons that the Low Carbon Fuel Standard
(LCFS) could raise energy prices is that the standard, as proposed in
S. 2191, would have no interaction with the capand-trade system. As
noted in the report (p. 56):
The assumptions for the amount of low-carbon fuel available,
the expected emission reductions for that fuel, and the total
amount of fuel subject to the requirements would significantly
affect the costs and feasibility of the LCFS program. The way
the provisions are written in S. 2191, the LCFS program is
separate from the cap-and-trade program, and there is no way to
purchase credits or offsets from other sectors. If the
necessary amount of low-carbon fuel is not available, then
under the program fuel providers must reduce the amount of fuel
they sell, or pay civil penalties. In its analysis of S. 2191,
NMA/CRA states that in 2015 the LCFS ``can only be met by a
decrease in gasoline consumption to allow the limited supplies
of low carbon biofuel to meet the averaging requirements of the
standard.''\3\ Further, the model estimates that because of the
decrease in supply, motor fuel prices increase 140% in 2015
over the baseline case.\4\ The NMA/CRA analysis suggests that
if the LCFS is construed to include all ground transportation
fuels without exception, then it may be difficult to achieve it
without reducing fuel demand.
---------------------------------------------------------------------------
\3\ CRA International, Economic Analysis of the Lieberman-Warner
Climate Security Act of 2007 Using CRA's MRN-NEEM Model (April 8,
2008). p. 29.
\4\ Ibid. p. 22.
The magnitude of price increases projected by CRA may or may not be
valid, but CRA's analysis does point out the lack of flexibility in S.
2191's LCFS provision. Also, recent experience suggests that fuel
demand is very price inelastic (i.e., it takes a very large increase in
price before demand decreases significantly).
Responses of Larry Parker and Brent Yacobucci to Questions From
Senator Domenici
Question 1. What are the major factors causing signatories to the
Kyoto Protocol to miss their greenhouse gas emission reduction targets
and are those shortcomings similarly foreseeable for the United States
under a cap and trade regime?
Answer. While the domestic emissions of some parties to the Kyoto
Protocol may exceed their emissions targets, many of these countries
maintain that they will meet their obligations through the use of
credits from other countries, as allowed under the Protocol. As noted
in CRS Report RL33826, Climate Change: The Kyoto Protocol, Bali
``Action Plan,'' and International Actions, by Susan R. Fletcher and
Larry Parker (p. 13):
The EU [European Union] has consistently stated that it will
meet its commitments under the Kyoto Protocol and is currently
developing targets for the post-2012 period. In 2006, the
European Environmental Agency (EEA) projected the 15 EU Members
that had jointly agreed to reduce GHGs by 8% below 1990 levels
during the Kyoto compliance period would meet their obligation
as a whole, although seven of those countries would not meet
their individual obligations.
Meeting the EU target on a regional basis is allowed by the
Protocol. As shown in Figure 1 (p. 15) of the same report, emissions
above Kyoto targets by Canada, the EU-15, and Japan could be more than
offset through emissions credits from Eastern Europe, Russia, and
Ukraine. This experience outlines the valuable role that international
offsets and credits can play in a cap-and-trade system. To the extent
that a U.S. program allows international offsets, costs faced by
covered entities would be lower than without offsets, at least in the
short-term.
Specific reasons for the difficulties some countries are
experiencing in achieving Kyoto targets differ. For example, the rising
level of greenhouse gas emissions from 1999-2004 in the EU-15 countries
was the result of increased electricity and heat generation from coal-
fired facilities and increased energy use in the transport sector.
However, these trends reversed between 2004 and 2005 as the EU-15
countries reduced their reliance on coal-fired generation, overall
transportation CO2 emissions declined, and Europe
experienced a milder winter than previous years.\5\ These sorts of
uncertainty are reflected in the wide range of baseline estimates of
U.S. greenhouse gas emissions provided in the report. Under S. 2191,
the higher the baseline emissions, the greater the reductions necessary
to meet the proposed emissions cap, and the more difficult it would be
to comply with the cap.
---------------------------------------------------------------------------
\5\ European Environment Agency, Greenhouse Gas Emission Trends and
Projections in Europe 2007 (Copenhagen, 2007), pp. 25-26.
---------------------------------------------------------------------------
Question 2. I hear supporters of a cap and trade approach to global
climate change mitigation consistently refer to the sulfur dioxide
program at the Environmental Protection Agency and compare it to the
potential implementation of this legislation.
Please compare the size and scope, including the ways in which
regulated entities complied with sulfur dioxide limits and can be
expected to comply with limits on carbon dioxide, of the two programs
so that we may have a better sense of perspective on this comparison.
Answer. On pages 17 and 18, CRS makes some comparisons of the size
and scope of the SO2 program and a program to limit
greenhouse gases:
Compared with the complexity of implementing a greenhouse gas
cap-and trade scheme, the SO2 program was trivial.
Conceptually, a CO2 tradeable permit program could
work similarly to the SO2 program. However,
significant differences exist between acid rain and possible
global warming that affect current abilities to model
responses. For example, the acid rain program involves up to
3,000 new and existing electric generating units that
contribute two-thirds of the country's SO2. This
concentration of sources makes the logistics of allowance
trading administratively manageable and enforceable. The
imposition of the allowance requirement is straightforward. The
acid rain program is a ``downstream'' program focused on the
electric utility industry. The allowance requirement is imposed
at the point of SO2 emissions so the participant has
a clear price signal to respond to. The basic dynamic of the
program is simple, although not necessarily predictable.
A comprehensive greenhouse gas cap-and-trade program would
not be as straightforward to implement. Greenhouse gas
emissions sources are not concentrated. Although over 80% of
the greenhouse gases generated comes from fossil fuel
combustion, only about 33% comes from electricity generation.
Transportation accounts for about 26%, direct residential and
commercial use about 8%, agriculture about 6%, and direct
industrial use about 16%.\6\ Thus, small dispersed sources in
transportation, residential/commercial, agriculture, and the
industrial sectors are far more important in controlling
greenhouse gas emissions than they are in controlling
SO2 emissions. This greatly increases the economic
sectors and individual entities that may be required to reduce
emissions.
---------------------------------------------------------------------------
\6\ U.S. Environmental Protection Agency, U.S. Inventory of
Greenhouse Gas Emissions and Sinks: 1990-2006 (April 2008), p. ES-8.
Further, the report notes that ``the diversity of sources creates
significant administrative and enforcement problems for a tradeable
permit program if it is meant to be comprehensive (p. 17).''
However, the report also comments that (p. 18):
The flexibility envisioned by most cap-and-trade programs
exceeds that of the SO2 program. Acid rain is a
regional problem that resulted in independent responses by the
United States and Canada. The United States chose a cap-and-
trade program that included important flexibility mechanisms
like banking; Canada chose a variety of approaches and the
entire process was later codified by treaty. Offsets (emission
reductions made by entities not directly covered by the
program) are not a major component of the SO2
program. Uncovered industrial entities that want to participate
in the program must become covered entities with their own
baselines and monitoring equipment. The bill also sets up a
small reserve of allowances to reward reductions through
conservation and renewable energy efforts. With the sulfur
dioxide cap-andtrade system being limited to the United States,
there is no international trading in the acid rain program.
In contrast, most GHG cap-and-trade proposals expand the
supply of available allowances by permitting offsets from a
wide variety of sources, including agricultural practices,
forestry projects, sequestration activities, and alternative
energy projects. These diverse sources multiply as the trading
extends globally and as other non-CO2 greenhouse
gases are included in the supply mix. Finally, the interaction
of these various supply sources and the demand of other
countries also reducing emissions (or who may decide to reduce
in the future) provide for an almost infinite number of
possible scenarios. Crucially, the availability of offsets may
have a significant impact on compliance costs, particularly in
the short-term.
It should also be noted that there were several options available
in 1990 for reducing SO2 emissions (e.g., scrubbers, low-
sulfur coal). With greenhouse gases, widespread technical solutions may
not be as readily available. However, it should be noted that before
the SO2 program was enacted, many thought that it would not
be feasible to use low-sulfur western coal in boilers originally
designed to use higher-sulfur eastern coal. As events unfolded, the
development of the ability to use such coal in these boilers has been
an important factor in keeping down the cost of the SO2
program. This experience highlights the difficult nature of predicting
the use, availability, and cost-effectiveness of future technology in
the absence of a market currently for that technology.
Question 3. According to the Congressional Budget Office's cost
estimate for S. 2191, its cap and trade regime will generate roughly
$1.2 trillion between 2009 and 2018.
How much would Congress have to raise the federal gas tax, which is
currently at 18.4 cents per gallon, to generate the same amount of
revenue between 2009 and 2018?
Answer. The Energy Information Administration projects that the
United States will consume roughly 1.5 trillion gallons of motor
gasoline between 2009 and 2018.\7\ To generate an additional $1.2
trillion through increased gasoline tax revenue, the tax rate would
need to increase by roughly 80 cents per gallon, assuming all gasoline
is used for taxable purposes, and assuming no discount rate. Please
note that this calculation assumes no reduction in gasoline demand
resulting from the price increase and is based on gasoline use only;
diesel fuel is not included.
---------------------------------------------------------------------------
\7\ Energy Information Administration, Annual Energy Outlook 2008
with Projections to 2030 (Revised Early Release) (March 2008),
Reference Case Table 11.
---------------------------------------------------------------------------
Question 4. These analyses tend to list natural gas, nuclear, clean
coal, renewables, and other forms of electrical generation as ways in
which the caps in S. 2191 can be adhered to. As a result, we get some
odd results that are likely impossible to achieve.
Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
Answer. All of the models allow for economic slowdown resulting
from compliance with a greenhouse gas reduction program; however,
economic contraction is not employed as a compliance mechanism, per se.
The models also project slower GDP growth under S. 2191 than under
their baseline (``business-as-usual'') cases. For most of the cases,
the effect on GDP per capita in 2030 was a 0.3%-2.7% reduction from
their respective ``business as usual'' baselines. Instead of growing by
between 62% to 85% from 2010 to 2030 in the baseline projections, GDP
is projected to grow 61% to 84% under S. 2191.\8\ In no case (including
various sensitivity analyses) does the economy contract. As noted in
the CRS report, the United States has a massive economy that can absorb
substantial shocks with limited longterm effect (page 25).
---------------------------------------------------------------------------
\8\ The cases with the largest reductions in GDP growth rest in the
middle of the baseline cases. For example, EPA's IGEM model showed GDP
growth from 2010 to 2030 dropping from 78% to 73% under S. 2191.
---------------------------------------------------------------------------
Question 5. As we discuss issues related to the share of allowances
that will be auctioned or given away, what would be the consequences of
these permits being bought up by people who don't intend to emit
greenhouse gases?
What would that do to the cost to emitters and their ability to
comply with S. 2191?
Answer. There are two potential issues raised by your question. The
first is the role of non-covered entities (e.g., states) that receive
allowance allocations at no cost. The second is the role of non-covered
entities in the secondary allowance market.
In the first case, most proposed legislation--including S. 2191--
that gives allowances to non-covered entities, requires those entities
to generate ``fair market value'' within some time frame, usually
within one year of receipt. These non-covered entities may not bank or
retire allowances. Likewise, since they must generate fair market
value, they may not sell allowances at a reduced rate (or give them
away) to preferred industries or firms.
The second case is the role of traders (who may or may not be
covered entities). Under current law, carbon allowances would be
regulated as an exempt commodity--any person or firm could buy and sell
them like any other commodity. To the extent that market participants
hold on to allowances for the future, reducing the available supply,
prices are likely to increase. The potential for investor fraud,
insider trading, and market manipulation in such a market is discussed
in a separate CRS report.\9\
---------------------------------------------------------------------------
\9\ For a further discussion of this subject, see CRS Report 34488,
Regulating a Carbon Market: Issues Raised By the European Carbon and
U.S. Sulfur Dioxide Allowance Markets by Mark Jickling and Larry
Parker.
---------------------------------------------------------------------------
Question 6. The proposed Lieberman-Warner legislation seeks to
reduce domestic greenhouse gas emissions by 66 percent by 2050. In the
absence of international action, where other countries also take steps
to reduce their emissions at similar rates, what effect would this
domestic decrease have on projected global greenhouse gas emissions in
2050?
Answer. CRS attempts to put S. 2191 into a global context on pages
67-69. As climate change is a global problem, the potential effects on
greenhouse gas concentrations from U.S. action must be considered in a
global context. As noted by the Massachusetts Institute of Technology
(MIT):
...it is not possible to connect specific U.S. policy targets
with a particular global concentration or temperature target,
and therefore the avoided damages, because any climate gains
depend on efforts in the rest of the world.... If a cooperative
solution is at all possible, therefore, a major strategic
consideration in setting U.S. policy targets should be their
value in leading other major countries to take on similar
efforts.\10\
---------------------------------------------------------------------------
\10\ 1Sergey Paltsev, et al., Assessment of U.S. Cap-and-Trade
Proposals, MIT Joint Program on the Science and Policy of Global
Change, Report No. 146 (April 2007). p. 55.
Based on the MIT analysis discussed on pages 67-69, the estimated
effect of S. 2191 in conjunction with similar action by all other
developed countries (Annex 1 countries) who are signatories to the
Kyoto Protocol would be to reduce by 0.5 degrees C the projected 3.5 to
4.5 degree C increase in global mean temperatures suggested by the
simulations (p. 67). Illustrating the need for global participation in
---------------------------------------------------------------------------
responding to climate change, the report's conclusion notes (page 75):
S. 2191's climate-related environmental benefit is best
considered in a global context and the desire to engage the
developing world in the reduction effort. It is in this context
that the United States and other developed countries agreed
both to reduce their own emissions to help stabilize
atmospheric concentrations of greenhouse gases and to take the
lead in reducing greenhouse gases when they ratified the 1992
United Nations Framework Convention on Climate Change (UNFCCC).
This global scope raises two issues for S. 2191: (1) whether S.
2191's greenhouse gas reduction program and other provisions
would be considered sufficiently credible by developing
countries so that schemes for including them in future
international agreements become more likely, and (2) whether S.
2191's reductions meet U.S. commitments to stabilization under
the UNFCCC and occur in a timely fashion so that global
stabilization may occur at an acceptable level. [Emphasis in
original]
Question 7. I am greatly concerned about the securitization of
carbon dioxide emissions credits, which could eventually lead to a
situation similar to the recent housing crisis. What steps could be
taken to prevent this from happening?
Answer. CRS has a separate report on regulating carbon markets
entitled Regulating a Carbon Market: Issues Raised By the European
Carbon and U.S. Sulfur Dioxide Allowance Market.\11\ Noting the
potential regulatory fragmentation of the carbon market, CRS draws an
analogy to the stock market crash of 1987. That event revealed
differences of opinion among the CFTC, the SEC, and the Federal
Reserve. In response, ``President Reagan created the President's
Working Group on Financial Markets, which remains active, conducting
studies and making recommendations on intermarket issues, as well as
providing a forum for regulatory coordination. A similar umbrella group
might help to prevent regulatory gaps or conflicts in the emissions
market.''\12\
---------------------------------------------------------------------------
\11\ CRS Report RL34488 by Mark Jickling and Larry Parker.
\12\ ibid., p. 37-38.
---------------------------------------------------------------------------
Question 8. Should the Carbon Market Efficiency Board have
authority to provide bail-outs for covered entities, similar to the
Federal Reserve's decision to open up its lending window for Bear
Stearns earlier this year?
Answer. Under S. 2191, the Carbon Market Efficiency Board can only
take actions that apply to all covered entities, for example allowing
greater use of offsets or reducing the interest rate on borrowed
allowances. CRS does not make recommendations on legislative proposals
but could analyze the advantages and disadvantages of any future
proposal to change the scope of the authority of the Board. Whether the
Board should have authority to address individual entities' concerns
would depend on one's view of the proper role of Board.
Responses of Larry Parker and Brent Yacobucci to Questions From
Senator Menendez
Question 1. Your report touches on the difficulty in monetizing the
benefits of GHG reduction. Your illustrative example mentions the
results of The Stern Report, and the conclusion that the net present
value (NPV) of S. 2191 's estimated reductions would range from $4.2
trillion to $5.5 trillion. I note that this is very close to the costs
estimated in the NMA/CRA analysis. As you know, the complexity inherent
in interacting economic, social and political systems makes it very
difficult to predict the costs and impacts of this legislation. Why is
it any more difficult to predict the benefits of avoided warming?
All of the studies you considered exclude averted GW costs and
other environmental benefits, the primary reason for climate change
legislation. How small or large might these be compared to the
regulatory costs projected by the models? Do you consider your
illustrative example to be realistic?
As suggested on page 62, both long-term cost and benefit estimates
are fraught with uncertainty. Many of the uncertainty issues are the
same between long-term cost and benefit analyses (e.g., baseline
uncertainty, unknown future events). As discussed on pages 25-29, the
perspective of the modelers has a strong influence on both their view
of projected costs and perceived benefits of addressing climate change.
As illustrated on these pages, cost estimates reflect the
technological, economic, and ecological perspective behind the
assumptions used. As stated again later with respect to benefits, CRS
quotes the Stern Review: ``It is very important ... to stress that such
estimates reflect a large number of underlying assumptions, many of
which are very tentative or specific to the ethical perspectives
adopted (page 67).'' Benefit analysis may appear harder because the
analyst is attempting to put impacts that currently have no markets or
prices into an evaluative context of markets and prices. For example,
as noted in the discussion of the impact of analysts' perspective on
results (pages 25-29), some view issues such as intergenerational
equity in ethical terms that should not be considered as commodities to
be bought, sold, or discounted. Also, benefit analysis may appear
harder because fewer resources have been devoted to it. As CRS notes on
page 62: ``more research and resources devoted to benefits analysis are
necessary before more comprehensive reports will be available.''
CRS's illustrative example is based on the assumptions of the Stern
Review and the analytical methodology employed by the UK Government. If
the analysis were conducted with the much lower social cost of carbon
estimate used by the National Highway Traffic Safety Administration
(NHTSA), then the benefit estimate would be much lower (page 66). As
noted on pages 28-29, meta-analysis suggests that inclusion of climate-
related benefits analysis can have a significant effect on lowering the
overall costs of a greenhouse gas reduction program and that ``as none
of the models reviewed in this report quantify any environmental
benefits in their analyses, all models' results can be considered
`worst-case' scenarios.'' (p. 29) The possibility that including all
environmental benefits of a climate change program could result in a
positive cost-benefit ratio is illustrated by Figure 1 on page 24. All
the data points above the zero line indicate a positive cost-benefit
result.
Question 2. Nobody wants to see massive global warming. The
questions, then, are what to do and when to act. I would like to focus
now on the latter. How much more expensive will it be to wait to begin
reducing GHG emissions than to act now? Our country faces an urgent
need to invest in its infrastructure, including the transportation and
electrical systems. If we begin to invest without a plan to address
global warming, what potential do you see for inefficient investment?
One of the arguments in favor of doing nothing is the idea that
``technological advances'' will occur which will make emissions
reduction cheaper in the future. What lessons does the SO2
cap and trade regime offer in that regard? Could the innovations which
made that program cheaper than expected have materialized without
legislative action?
Answer. In CRS report RL33799, Climate Change: Design Approaches
for a Greenhouse Gas Reduction Program, we offer observations on the
timing issue with respect to reducing greenhouse gas emissions (p. 12):
This situation leads to disputes over how time should be
managed under a GHG reduction program. One argument is that
modest cuts (or slowing of the increase) early, followed by
steeper cuts later, is the most cost-effective. Generally,
three cost-related arguments are made in favor of this
approach. First, over the long-term, sustained GHG reductions
involve a turnover in existing durable capital stock--a costly
process. If the time frame of the reduction is long enough to
permit that capital stock to be replaced as it wears out, the
transitional costs are reduced. Second, increased time to
comply would permit the development and deployment of new, less
carbon-intensive technologies that are more cost-effective than
existing technology. Third, assuming a positive rate of return
on current investment, less money needs to be set aside today
to meet those future compliance costs.\13\
---------------------------------------------------------------------------
\13\ Robert Repetto and Duncan Austin, The Costs of Climate
Protection: A Guide for the Perplexed (World Resources Institute,
1997), p. 21.
A counter-argument to the above focuses on the risks of delay, both
in terms of scientific uncertainty and technology development. First,
in terms of scientific uncertainty, there is no consensus on what
concentration of greenhouse gases should not be exceeded if undesirable
climate change is to be avoided. If the stabilization level needed is
relatively low, any delay in beginning reductions could be costly, both
economically and environmentally.\14\ Second, given the sometimes long
lead times for technology development, both a long-term price signal
and research and development funding may need to be initiated quickly
to encourage technology development and deployment in time to hold GHG
concentrations to a level that limits unacceptable damages. In the same
vein, an early signal with respect to climate change policy is likely
necessary to discourage investment in durable long-lived (50-60 years)
carbon-intensive technologies.\15\ As stated by Jaccard and Montgomery:
---------------------------------------------------------------------------
\14\ Cambridge Energy Research Associates (CERA) Advisory Service,
Design Issues for Market-based Greenhouse Gas Reduction Strategies:
Special Report (February 2006), pp. 54-55.
\15\ CERA Advisory Service, Design Issues for Market-based
Greenhouse Gas Reduction Strategies: Special Report (February 2006),
pp. 54-55; Robert Repetto and Duncan Austin, The Costs of Climate
Protection: A Guide for the Perplexed (World Resources Institute, 1997)
p. 22.
The window of opportunity for reducing cost implies a need
for immediate and continuing action to develop new low-carbon
technologies and to begin shifting long-lived investment
decisions toward alternatives that lower carbon emissions.
Absent these actions, the rapid future emissions reductions
included in the delayed emissions scenario may be more costly
than more evenly paced, and earlier reductions.\16\
---------------------------------------------------------------------------
\16\ M. Jaccard and W.D. Montgomery, ``Costs of Reducing Greenhouse
Gas Emissions in the USA and Canada,'' Energy Policy, Volume 24, Issues
10-11 (1996), pp. 889-898.
With respect to lessons from the acid rain program, CRS discusses
the acid rain program on pages 10-12 of RL34489. As noted on page 11,
lower than projected costs were the result of several factors,
including lower transportation costs, productivity increases in coal
production, costs for scrubbers that were cheaper than expected, and
new boiler adaptations to allow use of different types of coals. With
the exception of increasing boiler flexibility, none of these would be
considered ``technological advances'' or innovations. The increased
boiler flexibility probably would not have occurred in the absence of
legislation as there would have been no need for it. With respect to
the scrubber cost savings, the commercial availability of two dozen
scrubber systems and a competitive market with European and Japanese
manufacturers competing with U.S. manufacturers helped ensure market
prices to utilities and sufficient capacity.\17\
---------------------------------------------------------------------------
\17\ See Larry Parker, ``Scrubbers: A Proven Technology,'' Forum
for Applied Research and Public Policy (Spring 1989), pp. 35-39.
---------------------------------------------------------------------------
Question 3. As was the case with the estimates of the cost of
SO2 regulation, none of the LW [Lieberman-Warner] cost
studies assume that new legislation will occur that will advance
investments in energy efficiency and alternatives, resulting in
lowering the costs of LW. Can you discuss what some of the associated
policies might be and how likely they are?
Answer. Projecting the likelihood of--and provisions of--future
legislative initiatives over the long-term time frame of S. 2191, be it
energy efficiency or other alternatives, would be an uncertain
enterprise. There are currently over 350 energy efficiency and
renewable energy bills introduced in the 110th Congress. These bills
cover a wide range of policy and issue areas that include
appropriations, authorizations, budget, research and development (R&D),
grants, loans, financing, regulation (including a renewable fuel
standard), tax incentives, goals, plans, impacts, and the environment/
climate change. Most of these bills have focused on grants and tax
incentives. The bills also cover a range of sectors and topics that
include buildings, transportation, defense, education, federal lands
and energy management, farms, American Indians, and international
activities. Thus far, the sector of international activities has
generated the greatest number of bills. For more information, see CRS
Report RL33831, Energy Efficiency and Renewable Energy Legislation in
the 110th Congress, by Fred Sissine, Lynn J. Cunningham, and Mark
Gurevitz.
Responses of Larry Parker and Brent Yacobucci to Questions From
Senator Sanders
ASSUMPTIONS ABOUT OFFSETS
The use of offsets is being defined in the models as a cost
avoidance mechanism, but there is more to offsets than cost avoidance.
Now, I understand the theory that paying someone to do something can be
easier than changing your own behavior, but if we don't actually ensure
emission reductions, it doesn't really matter.
Question 1. What are the assumptions regarding the actual emissions
reductions from offsets? Do the models assume a 1 to 1 relationship or
do the models include some calculation for the fact that offsets can be
difficult to quantify, or even difficult to verify?
Does the usage of offsets create opportunity costs for the
adaptation of renewable technologies, such as wind and solar, that
reduce our overall emissions? Said another way: does the use of offsets
have the potential to, in any way, delay a transition to renewables,
since polluters could just pay someone to plant a tree instead of
actually moving to sustainable energy?
Also, what are the assumptions in the models that determine the
permanence of offsets? Is there a discount factor for offsets that fail
because of natural or manmade reasons?
How is additionality worked into the models?
Answer. Based on the documentation provided by the various cases,
there appears to be a one-to-one relationship assumed between offsets
used and reduction achieved.
As noted in our testimony: ``the cases generally indicate that
domestic carbon offsets and international carbon credits could be
valuable tools for entities covered by S. 2191 not only to potentially
reduce costs, but combined with the bill's provisions permitting the
banking of allowances, to provide companies more time to develop long-
term investment and strategic plans, and to pursue new technologies.''
To the extent that offsets bring down allowance prices, there may be
less incentive for developing new technology or employing renewable
resources.\18\
---------------------------------------------------------------------------
\18\ See CRS Report RL34436, The Role of Offsets in a Greenhouse
Gas Emissions Cap-and-Trade Program: Potential Benefits and Concerns,
by Jonathan L. Ramseur, p. 22.
---------------------------------------------------------------------------
Based on the documentation provided by the various cases, it
appears that the cases assume the offsets are permanent. Likewise,
there is no apparent discount factor for the possibility of offset
failure.
CRS cannot determine from the documentation provided how, or if,
the issue of additionality is addressed by the cases it examined.
FAILURE TO ASSESS THE BENEFITS OF ACTION ON GLOBAL WARMING
To date, all of the analyses of Lieberman-Warner and other bills
assess only the costs of acting--they do not assess the benefits of
acting and avoiding or mitigating global warming. Agencies typically
analyze the costs AND benefits of their regulations. However, in the
case of climate change, economists have a long way to go in monetizing
benefits, assuming many of the benefits--like preventing catastrophic
events such as hurricanes, droughts, and other extreme weather events,
along with the spread of diseases, wars over resources, and the
extinction of species--can even be monetized. The analyses of
Lieberman-Warner by EIA and EPA do not attempt to quantify the
benefits. They thus run the risk of focusing attention on the costs of
climate legislation without balancing that information with the
benefits of reducing climate change.
Question 2. Do your analyses assess the benefits of avoiding or
mitigating climate change? Aren't there important benefits that have
not been considered at all? Examples that come to mind include the
avoidance of risks from increased or more severe droughts, floods,
hurricanes and wildfires; increased air pollution; catastrophic events
such as melting ice sheets; unrest overseas affecting U.S. national
security; and changing disease patterns.
A related, but different, question is: do the ``Business as Usual''
scenarios included in your models (or the models you have seen, in the
case of CRS) assume increased costs from the types of events I just
mentioned, given that we are told that the events will become
increasingly common unless we reduce global warming.
What efforts are others making in the public and private sectors?
Answer. The CRS report addresses benefits on pages 62-70.
Specifically, the report provides some illustrations of efforts to
monetize benefits from reducing greenhouse gases, and attempts to put
the reductions proposed by S. 2191 into a global context. With respect
to climate risks, table 15 (page 64) provides a matrix of climate risks
that illustrates the broad range of potential consequences of climate
change and the difficulty in monetizing those potential effects. As
stated in the report: (page 63)
However, most current attempts to monetize environmental
benefits are incomplete. The matrix presented in Table 15
illustrates the problem. Most studies that attempt to monetize
benefits focus on the market impact of predictable, average
changes in climate (the ``easiest to measure'' box of Table
15). Only a few attempt to value non-market impacts or extreme
events and fewer still consider catastrophes or socially
contingent impacts.\19\ In reviewing 28 studies the UK
Government had analyzed in re-examining its estimate of an
appropriate Social Cost of Carbon, Ackerman and Stanton
observed:
---------------------------------------------------------------------------
\19\ Frank Ackerman and Elizabeth Stanton, Climate Change--the
Costs of Inaction, Report to Friends of the Earth England, Wales and
Northern Ireland (October 11, 2006), p. 26.
That is, all of the studies that estimate the social
cost of carbon base their numbers on an incomplete
picture of climate risks--often encompassing only the
simplest and most predictable corner of the vast,
troubling canvas that has been painted by climate
science. There is, of course, no way to assign monetary
values to the global response to the possibility of
widespread droughts across large parts of Asia, or an
increase in the probability of a sudden change in ocean
currents that would make the UK as cold as Canada, but
in the understandable absence of such impossible
monetary values, it is important to remember the
disclaimer from the DEFRA [Department for Environment,
Food & Rural Affairs] review: all estimates of the SCC
[Social Cost of Carbon] omit some of the most important
unpriced risks of climate change. The same disclaimer
applies to virtually any quantitative economic estimate
of climate impacts.\20\
---------------------------------------------------------------------------
\20\ ibid., p. 26.
None of the cases CRS examined included any increased costs or
suppressed economic growth from the events listed in your question.
With respect to efforts by others to analyze benefits, CRS notes on
page 62: ``more research and resources devoted to benefits analysis are
necessary before more comprehensive reports will be available.'' An
example of recent work in this area is provided in a separate CRS
report entitled Climate Change: Current Issues and Policy Tools which
also discusses the challenges of benefit analysis, the potential global
costs of climate change, and the potential costs of climate change to
the U.S. economy.\21\ (pages 13-17)
---------------------------------------------------------------------------
\21\ CRS Report RL34513, Climate Change: Current Issues and Policy
Tools, by Jane A. Leggett.
---------------------------------------------------------------------------
UNTAPPED POTENTIAL FOR RENEWABLES AND ENERGY EFFICIENCY
Electricity from coal, nuclear power, and other traditional energy
sources appear prominently in the modeling of Lieberman-Warner. Several
renewable technologies, however, are available today that can generate
inexpensive electricity without emitting carbon.
Concentrating Solar Power uses the sun to provide heat that drives
a steam power plant. This one resource could provide up to 17% of our
nation's electricity. A typical CSP plant being built today produces
250 Megawatts of power, emits very little CO2, and costs 1-2
billion dollars (about the same as a traditional coal plant and
significantly less than a new nuclear plant, which can run between 4-12
billion). Over its operating life, today's CSP plants deliver power at
$0.13 per kilowatt-hour, but the Department of Energy estimates that
the costs for CSP will drop below $0.08 per kilowatt-hour once
economies of scale are achieved. There are close to 400 Megawatts of
CSP already operating in the southwest, and at least 3, 000 Megawatts
are in various stages of development.
Wind is another major opportunity. Just last week the Department of
Energy's National Renewable Energy Laboratory released a report showing
that wind could provide up to 20% of our nation's electricity needs by
2030. This resource will only cost $0.05 per kilowatt-hour, which is
competitive with what we are paying for coal today.
Geothermal is another great opportunity. A report for the U.S.
Department of Energy by the Massachusetts Institute of Technology
suggests that geothermal energy could provide 100,000 Megawatts of new
carbon-free electricity at less than $0.10 per kilowatt-hour,
comparable to cost projections for coal with carbon capture and
storage. This single renewable resource could account for almost 10% of
our nation's electricity needs in the future.
There are many other possibilities, for biomass, photovoltaics,
hydropower, and other renewable technologies, for example. But, once
you add it all up, the United States could meet 2/3 of its electricity
needs from sustainable energy.
Now, add on what we could be doing with energy efficiency, and it
gets really exciting. According to the McKinsey Report, released last
year, we have the technologies needed to reduce greenhouse gases at our
disposal today.
Question 3. Do your analyses take into account the strategies
identified in the McKinsey Report for reducing greenhouse gases,
including improving the economy's energy efficiency?
Answer. CRS did not conduct an independent analysis of the
technologies necessary to meet S. 2191's goals, but reviewed the
results of six studies. The amount of renewables each model assumed
would be built under S. 2191 is provided in Table 11 (p. 46). CRS notes
on page 47 that the cases it examined result in a 10-30% reduction in
electricity demand from basecase levels. However, CRS does not know if
the models incorporated the specific technologies mentioned above. As
noted in the report (page 53-54), two of the cases CRS examined used
proxies to at least partially model the effects of the various
incentives contained in S. 2191:
Specifically, CATF/NEMS simulated the incentives for low and
no carbon power technologies by using a production tax credit
for CCS and extending the wind production tax credit to 2030.
CATF/NEMS also used EIA's ``Best Available Technology'' case as
a proxy for the appliance and building standards included in
the bill. The results are some of the lowest overall cost
estimates of any of the cases, along with substantial
development of coal-fired CCS, nuclear power and renewables.
Other innovative approaches were taken by EIA/NEMS, to
attempt to mimic the impact of energy efficiency incentives by
reducing the incremental cost of the most energy-efficient
residential appliances by half--simulating a rebate for buying
more efficient appliances. Likewise EIA/NEMS mimicked the
incentives for stronger building codes by tightening the
residential codes in the model by 30% in 2015 and 50% in 2025
compared with basecase levels. These proxies come in addition
to the EISA [Energy Independence and Security Act of 2007]
provisions that are contained in the preliminary AEO 2008
basecase used by EIA/NEMS. The proxies contribute to some of
the lowest cost estimates of any of the cases.
The only other model to incorporate these initiatives was
NMA/CRA, which incorporated the preliminary AEO 2008 baseline
that includes the EISA provisions. However, the NMA/CRA results
do not separate out the efficiency standards from the new
Corporate Average Fuel Economy (CAFE) or renewable fuel
standard (RFS) requirements.
______
Responses of Brian J. McLean to Questions From Senator Bingaman
Question 1. In his testimony, Larry Parker from CRS aptly quoted a
former director of EIA, Dr. Lincoln Moses, who said: ``There are no
facts about the future''. I think we can all appreciate the relevance
of this statement to the debate in front of us. Since EPA was heavily
involved in the previous sulfur dioxide trading regime, I am wondering
if you would care to comment on the factors that caused early estimates
of SO2 allowance prices to be lower than originally
projected and on the relevance of those factors to the question of
CO2 allowance prices.
Answer. Two significant assumptions in our analysis of both
SO2 and NOX programs led us to overestimate
allowance prices. First, end-of-pipe pollution control solutions were
more effective than expected. In the case of SO2, incentives
were put in the bill to encourage state-of-the-art scrubbers that
achieved 90% efficiency, but as the bill was being finalized, scrubbers
with 98% efficiency became available. Today new scrubbers routinely
attain 98% emission removal efficiency. Similarly, in the case of NOx,
we assumed selective catalytic reduction (SCR) could achieve 70% to 80%
emission reductions and that the lowest rates that could be achieved
were around 0.06 lbs of NOximmBtu. SCRs have performed better than that
(upwards of 90%) and we have seen rates on many units below 0.06 lbs/
mmbtu.
Second, we did not anticipate the full suite of low cost options
that have been deployed. In the case of SO2, competition
among railroads shipping low-sulfur coal led to substantial reductions
in transport costs, a major component of coal cost. As low-sulfur coal
became more readily available, it competed with scrubber design and
equipment advances, reducing the cost of abatement. All of this
contributed to medium-sulfur coal becoming marketable in the absence of
a coal sulfur content limit which had existed under the traditional
regulatory program. In the case of NOx, improved combustion controls
reduced costs.
Depending on the precise terms of the legislation approved, EPA
could expect to see similar performance as companies respond to the
CO2 price signal by developing and deploying technologies
and innovative compliance strategies in ways that differ from the
assumptions in our models.
Question 2. Both EIA and EPA project that the amount of CCS
deployed under the Lieberman-Warner bill would be less than the amount
deployed under the Bingaman-Specter bill, even though the implied bonus
to CCS (on a per ton basis) is greater under the Lieberman-Warner bill.
Could you comment on the factors driving these differences in CCS
deployment? How do the costs of CCS compare the cost of nuclear in
these models?
Answer. While it is correct to say that the bonus ratio for CCS (on
a per ton basis) is greater under the Lieberman-Warner bill, the total
number of bonus allowances available for CCS projects is lower. In
Section 3601 of S. 2191, the bill instructs the Administrator to create
a Bonus Allowance Account for carbon capture and storage deployment and
to allocate 4 percent of the emission allowances to the account for
each calendar year from 2012 through 2030. The Bingaman-Specter bill
does not contain any such limitation on the number of bonus allowances
available for CCS projects. This limit on the total number of bonus
allowances is the main factor driving the differences in EPA's modeled
results of CCS deployment under the two bills.
Nuclear power is one of the lower-cost low-carbon generating
options in our model when a carbon constraint is imposed, and the model
builds as much as possible within the resource constraints. Advanced
coal generation with CCS is a more expensive low-carbon electricity
generation option that generally gets built after new nuclear
generation capacity reaches the model constraint. During the 2015-2020
time period, our model finds that CCS is cost-effective only if the
bonus allowances are available. Without the bonus allowance provisions,
the model would not build CCS capacity until CO2 allowance
prices are high enough to make it attractive relative to other
generation alternatives. The allowance prices reach this point by 2025
under EPA modeling and assumptions.
Question 3. All of the model analyses of Lieberman-Warner show that
offsets are an important part of the compliance strategy in early
years. If offsets are assumed not to be available as widely as the
provisions allow, then the early targets become much more difficult to
achieve at low cost. Since EPA generates the offset supply curves that
other modeling groups employ, could you describe in some detail the
steps that were taken to determine whether sufficient number of offsets
would be available to meet the Lieberman-Warner targets and to
calculate the cost and implied carbon price of such projects?
Answer. EPA drew on experience gained through its government-
industry greenhouse gas partnership programs to develop mitigation cost
data for the non-CO2 greenhouse gases in the energy, waste
and industrial sectors, as well as for the forestry and agriculture
sectors. These analyses were peer reviewed and published in EPA reports
on Global Mitigation of Non-CO2 Greenhouse Gases (EPA 430-R-
06-005, 2006) and Greenhouse Gas Mitigation Potential in U.S. Forestry
and Agriculture (EPA 430-R-05-006, 2005). Domestic and international
offset supply curves were initially developed for EPA's analysis of the
Lieberman-McCain bill (S. 280) and described in EPA's March 26, 2007
memo to EIA. These offset supply curves were subsequently adapted for
use in EPA's analyses of the Bingaman-Specter bill (S. 1766), and the
Lieberman-Warner bill (S. 2191). In developing these offset supply
curves EPA evaluated each individual domestic and international
mitigation option to determine potential eligibility and feasibility
over time for a future mitigation program. The offset supply curves
therefore represent the costs associated with the ``eligible''
mitigation options. This detailed vetting of individual options, based
on EPA's substantial emissions inventory and mitigation program
expertise, substitutes and improves upon previous post-processing
adjustments to the offset supply curves. The previous post-processing
adjustments involved an across the board 50% reduction of the offset
supply curves at every price. The detailed vetting of individual
options results in a reduction of the offset supply curves that is
similar in size to the previous post-processing adjustment.
The EPA reports, our memo to EIA, additional detailed explanations,
and the data used for development of the offset supply curves which are
all available on our web site: http://www.epa.gov/climatechange/
economics/economicanalyses.html.
Responses of Brian J. McLean to Questions From Senator Domenici
Question 4. What are the major factors causing signatories to the
Kyoto Protocol to miss their greenhouse gas emission reduction targets
and are those shortcomings similarly foreseeable for the United States
under a cap and trade regime?
Answer. Signatories to the Kyoto Protocol (KP) are required to meet
their emission limitation and reduction commitment under the Protocol
for the five-year period from 2008 to 2012. Parties are not expected to
report emissions data for 2008 until 2010. Because these commitments
can be met by domestic action, through emissions trading or by
acquiring reductions from either the Clean Development Mechanism or
through Joint Implementation activities, national inventories for one
year do not necessarily indicate whether a country will be in
compliance at the end of the commitment period. Compliance will be
determined after 2012 on the basis of whether or not a Party has
sufficient Kyoto allowances to cover its emissions over the entire
five-year period.
Although the U.S. can learn from steps being taken under the Kyoto
Protocol as well as lessons learned from current U.S. cap and trade
programs, we are not bound to any shortcomings that might ultimately be
found in the Kyoto Protocol system.
Question 5. I hear supporters of a cap and trade approach to global
climate change mitigation consistently refer to the sulfur dioxide
program at the Environmental Protection Agency and compare it to the
potential implementation of this legislation.
Please compare the size and scope, including the ways in which
regulated entities complied with sulfur dioxide limits and can be
expected to comply with limits on carbon dioxide, of the two programs
so that we may have a better sense of perspective on this comparison.
Answer. The U.S. experience with cap and trade since the passage of
the 1990 Clean Air Act Amendments has been very successful and forms
the basis on which other countries have modeled cap and trade programs,
and are modeling their greenhouse gas (GHG) reduction programs.
The sulfur dioxide cap and trade program, known as the Acid Rain
Program, began in 1995, targeting 110 coal-fired power plants (263
individual sources) in 21 eastern and Midwestern states. In 2000, Phase
2 of the program affecting virtually all electric power generators
created the robust and dynamic market that has resulted in reducing
emissions by nearly 50% and achieving the cap levels ahead of schedule.
Currently, over 3,500 individual sources participate in the Acid Rain
Program (2007 data). The flexibilities inherent in the program allowed
for cost-effective decision making on a case-by-case basis by the owner
or operator of a facility, without government interference, as to how a
source chose to comply with the program requirements. If a source chose
to change its method of compliance, it was free to do so without
government review or approval. This resulted in huge economies of scale
previously unimagined in traditional regulation (sometimes referred to
as command-and-control). What made this possible were basic and
straightforward requirements in the cap and trade program design that
were easily understood by everyone: each ton of SO2
emissions had to be offset by an allowance; if you wished to reduce
below your allocation, you were free to sell your extra allowances or
bank them for future use; if you emitted beyond your allocation, you
needed to and were able to buy allowances from the market; at the end
of the year, your emissions had to be equal to or less than the
allowances you held in your account. A firm cap ensured the
environmental goal was met and stringent continuous monitoring and
reporting assured the integrity of every allowance, while providing the
accountability that makes flexibility possible. All program data is
made publicly available. Market and data transparency instilled public
confidence in the process. Compliance is over 99%; the few instances of
excess emissions have had compensating allowances automatically
subtracted from accounts and stiff penalties automatically applied. EPA
has issued a progress report every year on the status of the program.
(For more detailed information, please see http://www.epa.gov/
airmarkets/progress/progress-reports.html.)
The scope of the SO2 program and a potential U.S. GHG
mitigation program would be different. Currently, there are roughly
1,200 facilities covered by the existing Acid Rain Program (or roughly
3,500 individual sources of emissions). EPA estimates that 2,0003,000
facilities would be covered by S. 2191. The primary difference is that
the source category for the Acid Rain Program focuses on electricity
generators; while for the Lieberman-Warner proposal, source categories
contributing to GHG emissions that cover the breadth of the economy
have been discussed. The scale of the needed emission reductions under
a future CO2 program, as specified in bills EPA has
analyzed, is both larger and more complex than under the SO2
program. The electricity generation sector made up over 70% of the
SO2 contribution of total nationwide emissions, and
restricting those emissions greatly reduced the acid rain problem and
transport of SO2. CO2 emissions from electricity
generation comprise about 30% of the total U.S. CO2
emissions and other sectors, such as industry and transportation,
contribute a significant portion of the total emissions.
Even though the scale of the problem is different, much of the
experience that has been gained from the existing EPA cap and trade
programs can be applied to GHG cap and trade programs, including the
establishment of a robust market, a strong institutional
infrastructure, and cooperative relationships with States and industry
that focus on results and assisting with compliance.
It might also be useful to consider how a GHG cap and trade program
would compare to the NOx cap and trade program used to reduce ozone
transport in the Eastern U.S. In that case electricity generators and
other industrial sources included in the program represented about 30%
of the NOx emissions. The NOx Budget Trading Program successfully
reduced those emissions by more than 70%. Because NOx contributes to
the formation of ground level ozone, such reductions significantly
contributed to a reduction in ozone transport. Coupled with significant
reductions from mobile sources, 80% of the ozone nonattainment areas in
the East were brought into attainment.
Question 6. I am concerned that the effect Lieberman-Warner would
have on global greenhouse gas concentrations, as opposed to emissions,
has been consistently overlooked. In the absence of meaningful
reductions by other countries, I am told that your agency's analysis of
S. 2191 finds that global concentrations would be reduced by about 1
percent by 2050.
What is the probable impact of a 1 percent reduction in global
greenhouse gas concentrations? What potential consequences of global
climate change would such a reduction prevent?
Answer. Legislative action by any one country--including the U.S.--
would not be able to reduce GHG concentrations in the atmosphere enough
to have much impact on the climate challenge. Global participation--
especially by major economies--is needed. Our analysis of the
Lieberman-Warner bill presents both the impact of the US acting alone,
which would result in a 1.3% reduction in global CO2
concentrations by 2050 taking into account the emissions leakage; and
one possible assumption, based on a recent MIT report, where the Annex
I Kyoto countries (except Russia) gradually reduce emission levels to
50% below 1990 levels and the rest of the world gradually reaches 2000
levels by 2050, which would result in a 9.7% reduction in global
CO2 concentrations. However, it is noteworthy that only the
European Union and Norway have made pledges to meet or exceed the 50%
target by 2050 and very few countries have policies in place to set
them on a trajectory to meet such targets.
The current analytic capabilities of EPA, and of the climate change
research community in general, do not allow us to quantify with
confidence what the specific change in endpoint impacts (e.g., on human
health, agricultural production, water resource availability) would be
due to an incremental change in concentrations. The climate change
research community has traditionally not examined the differences in
potential future impacts between two incrementally different scenarios,
but has instead focused on the impacts associated with different
scenarios that diverge more significantly over time.
Nevertheless, because we know, from the scientific literature
assessed by the Intergovernmental Panel on Climate Change, that risk to
human health, society and the environment increases as the rate and
magnitude of climate change increases, near term mitigation actions
reduce long-term risks (including risk of exceeding critical
thresholds), and increase our chances of eventually reaching lower
stabilization targets.
Question 7. We currently have no domestic capacity for the
fabrication of large nuclear components such as pressure vessels, and
we are told that our existing workforce can support the construction of
no more than three reactors at a time.
Have you analyzed how many reactors we are physically capable of
building by 2030?
Answer. We have not performed a comprehensive analysis of the
number of new reactors that could be built in the U.S. by 2030;
however, a 2005 study performed for the Department of Energy concluded
that the necessary infrastructure is available or can be readily
available to support the construction of 8 units in the 2010 to 2017
time period. In developing our projections for nuclear power, we drew
on analyses performed for the Climate Change Science Program as well as
the Electric Power Research Institute. Currently there are a number of
factors constraining the ability to build reactors. For example, there
is only one manufacturer (located in Japan) currently capable of
manufacturing nuclear-grade, ultra-heavy (>350 tons) forgings needed to
build a nuclear reactor and since there has been limited activity in
the nuclear field since the early 1990s there is only a small trained
US workforce in this area. However, Japan Steel Works has indicated
that it is going to increase capacity and a number of other
manufacturers have indicated their intention to develop capabilities
needed for increased nuclear construction. In addition, the nuclear
industry, recognizing the potential shortage of skilled workers and
professionals, is actively recruiting and implementing training
programs to ensure workforce adequacy for new construction.
Question 8. These analyses tend to list natural gas, nuclear, clean
coal, renewables, and other forms of electrical generation as ways in
which the caps in S. 2191 can be adhered to. As a result, we get some
odd results that are likely impossible to achieve.
Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
Answer. EPA's models do not use an economic slow-down as a
compliance mechanism. In EPA's analysis, the first step is to develop a
reference case for projected economic growth, technology deployment,
and GHG emissions. EPA's reference case is traditionally benchmarked to
the reference case in EIA's Annual Energy Outlook. The next step in the
analysis is to estimate the effect of changes in technology investments
that result from the climate mitigation policy on reductions in GHG
emissions, economic growth, and energy and other commodity prices.
Question 9. As we discuss issues related to the share of allowances
that will be auctioned or given away, what would be the consequences of
these permits being bought up by people who don't intend to emit
greenhouse gases?
What would that do to the cost to emitters and their ability to
comply with S. 2191?
Answer. It is possible that individuals or institutions may
purchase allowances with no intention of submitting them as compliance
for the targeted emission levels of greenhouse gases. Such purchases
may be made for several reasons. The purchase of an allowance could be
used as a financial asset in the hope that this investment may result
in higher returns than may be available elsewhere.
Individuals or groups may also decide to purchase allowances simply
to retire them, thus effectively lowering the cap. This has occurred to
a very limited extent in the Acid Rain program, but has not been enough
to significantly affect the cap or allowance prices. Given the size of
the market created by a bill like S .2191, EPA does not believe that
such purchases would significantly affect the cap level or costs.
Responses of Brian J. McLean to Questions From Senator Menendez
Question 10. Current oil prices are nearly double those assumed in
EIA's and EPA's analysis of climate policy. We can already see that
high gasoline prices are inducing changes in consumer driving and
vehicle purchasing behavior. Goldman Sachs recently estimated that oil
prices might climb to $150-$200 per barrel within the near future. How
might the projected costs of Lieberman-Warner and other climate
policies change if the models were run with the higher (and more
realistic) energy prices that we are already seeing today?
Does this mean that allowance prices and the total cost to the
economy of the cap will be lower than current models suggest? Can the
EPA or EIA rerun the models with estimates that reflect a future with
sustained high prices for petroleum and other fossil fuels?
Answer. EPA's economy-wide models are designed to compare responses
across policy and reference scenarios, not to forecast energy prices.
To compare policy responses, we benchmark the EPA models to reference
scenarios from EIA's Annual Energy Outlook. If we were to benchmark the
models to the EIA High Energy Price Case, GDP would be slightly lower
and total GHG emissions would also be lower compared to our standard
reference case that had lower energy prices. If we modeled the
Lieberman-Warner bill off of the High Price case, allowance prices
would likely be lower than in our standard case, although it is
difficult to estimate the precise impact. In a scenario that also
limits the availability of nuclear and carbon capture and storage
technologies, where we expect to see an increase in natural gas usage
in the electricity sector, the increased cost of natural gas usage
would likely offset some of the potential decrease in allowance prices.
Yes, EPA can run scenarios with sustained high prices for petroleum
and other fossil fuels.
Responses of Brian J. McLean to Questions From Senator Sanders
ASSUMPTIONS ABOUT OFFSETS
Question 11a. The use of offsets is being defined in the models as
a cost avoidance mechanism, but there is more to offsets than cost
avoidance. Now, I understand the theory that paying someone to do
something can be easier than changing your own behavior, but if we
don't actually ensure emission reductions, it doesn't really matter.
What are the assumptions regarding the actual emissions reductions
from offsets? Do the models assume a 1 to 1 relationship or do the
models include some calculation for the fact that offsets can be
difficult to quantify, or even difficult to verify?
Answer. The data and approach developed for EPA's assessment of
offset potential is described in the answer to Senator Bingaman's third
question. When applying the offset supply curves, EPA evaluates a
variety of issues related to each mitigation option and adjusts the
curve accordingly. The adjustments account for challenges in measuring,
monitoring, and verifying offset reductions, as well as the lack of a
clear market signal that the allowance price in the model run assumes.
To illustrate the approach, for international energy-related
CO2 emissions, the full abatement potential is included in
the offset supply curve when a region has a market based greenhouse gas
policy in place. When a region does not have a market-based emissions
policy in place, the abatement potential is reduced by 90 or 75
percent, depending on the year. The approach used to estimate both
domestic offsets and international credits is described in detail in
EPA's March 26, 2007 memo to EIA which is on our web site: http://
www.epa.goviclimatechange/economics/economicanalyses.html.
Question 11b. Does the usage of offsets create opportunity costs
for the adoption of renewable technologies, such as wind and solar,
that reduce our overall emissions? Said another way: does the use of
offsets have the potential to, in any way, delay a transition to
renewables, since polluters could just pay someone to plant a tree
instead of actually moving to sustainable energy?
Answer. To the extent offsets reduce the costs of achieving an
emissions cap and the allowance price, they can delay the adoption of
higher cost technologies. At the same time, the ability of offsets to
reduce costs can provide the private sector more time to develop new
advanced technologies, including renewables. Determining which higher-
cost mitigation options might be delayed and by how much is dependent
on the specific policy proposal as well as the assumptions made about
the cost and performance of various technologies.
If one believed that offsets were delaying deployment of available
technologies one could set a lower cap, set it sooner, or restrict the
amount of offsets. Cap levels and timing and the availability of
offsets should all be considered together.
Question 11c. Also, what are the assumptions in the models that
determine the permanence of offsets? Is there a discount factor for
offsets that fail because of natural or manmade reasons?
Answer. Our analysis takes a comprehensive accounting of GHG
emissions, both crediting emission reductions and debiting emission
increases. Therefore, we do not use a discount factor for offsets
related to the possibility of failure.
Our analysis does include adjustments to the total amount of
potential offsets. The adjustments made to mitigation potential for
each offset category are designed to account for difficulties in
measuring, monitoring, and verifying offset reductions in countries
without a market-based greenhouse gas emissions policy. These
adjustments include verifying that the offset emission reductions are
achieved.
Question 11d. How is additionality worked into the models?
Answer. Since mitigation in our modeling is a function of a GHG
allowance price, all mitigation undertaken is by definition additional
to the reference case, that is, it would not have taken place in the
absence of a GHG allowance price.
FAILURE TO ASSESS THE BENEFITS OF ACTION ON GLOBAL WARMING
Question 12a. To date, all of the analyses of Lieberman-Warner and
other bills assess only the costs of acting--they do not assess the
benefits of acting and avoiding or mitigating global warming. Agencies
typically analyze the costs AND benefits of their regulations. However,
in the case of climate change, economists have a long way to go in
monetizing benefits, assuming many of the benefits--like preventing
catastrophic events such as hurricanes, droughts, and other extreme
weather events, along with the spread of diseases, wars over resources,
and the extinction of species--can even be monetized. The analyses of
Lieberman-Warner by EIA and EPA do not attempt to quantify the
benefits. They thus run the risk of focusing attention on the costs of
climate legislation without balancing that information with the
benefits of reducing climate change.
Do your analyses assess the benefits of avoiding or mitigating
climate change? Aren't there important benefits that have not been
considered at all? Examples that come to mind include the avoidance of
risks from increased or more severe droughts, floods, hurricanes and
wildfires; increased air pollution; catastrophic events such as melting
ice sheets; unrest overseas affecting U.S. national security; and
changing disease patterns.
Answer. Current analyses do not include the benefits of avoided
climate change. At this time, these analyses only estimate the cost of
achieving the levels of greenhouse gas emission reductions specified in
the proposed legislation.
Although we cannot yet provide a cost-benefit analysis of proposed
legislation, EPA is assessing the benefits of climate change
mitigation. EPA has developed preliminary ranges of estimates for the
marginal benefit of carbon dioxide reductions (Social Cost of Carbon).
These estimates include many of the climate impacts listed in your
question. We recognize, however, that the IPCC concluded that current
estimates are still ``very likely'' to be underestimated because they
do not include significant impacts that have yet to be monetized.
Current estimates do not capture many of the main reasons for concern
about climate change, i.e., non-market damages, the effects of climate
variability, risks of potential extreme weather (e.g., droughts, heavy
rains and wind), socially contingent effects (such as violent
conflict), and potential long-term catastrophic events. We are thus
reviewing available literature on a range of climate impacts to develop
more robust and complete estimates of the benefits of greenhouse gas
mitigation.
Question 12b. A related, but different, question is: do the
``Business as Usual'' scenarios included in your models (or the models
you have seen, in the case of CRS) assume increased costs from the
types of events I just mentioned, given that we are told that the
events will become increasingly common unless we reduce global warming.
Answer. No, most modeling of legislative proposals do not address
the costs of climate change impacts under Business as Usual scenarios.
Question 12c. What efforts is your agency making to assess the
value of the benefits of climate change mitigation?
Answer. See answer to the first part of Question 2.
UNTAPPED POTENTIAL FOR RENEWABLES AND ENERGY EFFICIENCY
Question 13. Electricity from coal, nuclear power, and other
traditional energy sources appear prominently in the modeling of
Lieberman-Warner. Several renewable technologies, however, are
available today that can generate inexpensive electricity without
emitting carbon.
Concentrating Solar Power uses the sun to provide heat that drives
a steam power plant. This one resource could provide up to 17% of our
nation's electricity. A typical CSP plant being built today produces
250 Megawatts of power, emits very little CO2, and costs 1-2
billion dollars (about the same as a traditional coal plant and
significantly less than a new nuclear plant, which can run between 4-12
billion). Over its operating life, today's CSP plants deliver power at
$0.13 per kilowatt-hour, but the Department of Energy estimates that
the costs for CSP will drop below $0.08 per kilowatt-hour once
economies of scale are achieved. There are close to 400 Megawatts of
CSP already operating in the southwest, and at least 3,000 Megawatts
are in various stages of development.
Wind is another major opportunity. Just last week the Department of
Energy's National Renewable Energy Laboratory released a report showing
that wind could provide up to 20% of our nation's electricity needs by
2030. This resource will only cost $0.05 per kilowatt-hour, which is
competitive with what we are paying for coal today.
Geothermal is another great opportunity. A report for the U.S.
Department of Energy by the Massachusetts Institute of Technology
suggests that geothermal energy could provide 100,000 Megawatts of new
carbon-free electricity at less than $0.10 per kilowatt-hour,
comparable to cost projections for coal with carbon capture and
storage. This single renewable 11 resource could account for almost 10%
of our nation's electricity needs in the future.
There are many other the possibilities, for biomass, photovoltaics,
hydropower, and other renewable technologies, for example. But, once
you add it all up, the United States could meet 2/3 of its electricity
needs from sustainable energy.
Now, add on what we could be doing with energy efficiency, and it
gets really exciting. According to the McKinsey Report, released last
year, we have the technologies needed to reduce greenhouse gases at our
disposal today.
Do your analyses take into account the strategies identified in the
McKinsey Report for reducing greenhouse gases, including improving the
economy's energy efficiency?
Answer. EPA modeling takes into account many of the strategies
identified in the McKinsey Report. Our model results show more than 55
GW of additional new renewable energy capacity relative to the
reference case by 2025, and much of the new capacity is from wind
power. For energy efficiency, the models include the consumer response
to higher electricity prices and capture some energy efficiency
investments. EPA recognizes that energy efficiency is an important,
readily available resource that can, under the right circumstances, be
implemented at relatively low cost, and we are drawing on the expertise
gained through these programs to improve the representation of energy
efficiency opportunities in our models. Our review of the McKinsey
analysis indicates that we have consistent estimates of mitigation
available in 2030 for comparable costs. We also recognize that
technologies continuously evolve and improve and thus we have an
ongoing commitment to incorporate new information on cost and
performance into our models.
The modeling approaches used by EPA and for the McKinsey analysis
are different, however. The McKinsey analysis identifies a number of
specific technologies and strategies to reduce emissions at a cost of
less than $50 per ton of CO2e. Our models do not explicitly
represent individual end-use technologies, but rather represent changes
in end-use demand for energy in aggregate. In addition, our models
represent capital markets and can show the effect on the economy of
increased investment in the energy sector, as well as mitigation
tradeoffs across sectors. Despite these differences, the McKinsey
analysis and our models have fairly consistent estimates of mitigation
available in 2030 for similar CO2 prices.
______
Responses of Peter R. Orszag to Questions From Senator Domenici
Question 1. What are the major factors causing signatories to the
Kyoto Protocol to miss their greenhouse gas emission reduction targets
and are those shortcomings similarly foreseeable for the United States
under a cap-and-trade regime?
Answer. While many of these countries actually increased emissions
between 1997 and 2008, their commitments to reduce emissions are not
binding until 2008 to 2012.
One reason why emissions did not fall during the initial pilot
period was that some signatories allocated too many allowances, so
there was no real need to reduce emissions. Furthermore, high natural
gas prices during the period encouraged an increase in the use of coal
to generate electricity. This pilot period was useful for the European
countries in that it provided a great deal of data on emissions,
enabling them to correctly allocate allowances for the 2008-2012 period
in order to meet their commitments.
Provided that the United States implemented the cap ``upstream'' on
producers and importers of fossil fuels or ``downstream'' only for
large electricity generators, a U.S. program should be able to avoid
this problem, because the country already has a great deal of detailed
information on energy production and fossil-fuel imports. Furthermore,
large electricity generators are already required to continuously
monitor emissions of several pollutants, including carbon dioxide
(CO2).
The choice of 1990 as a base year for the Kyoto Protocol is another
factor that has caused some countries' emission trends to exceed their
Kyoto targets. The choice of 1990 made it difficult for signatory
countries that have experienced high rates of economic growth since
then (for example, Spain and Ireland) to meet their targets.
Question 2. I hear supporters of a cap-and-trade approach to global
climate change mitigation consistently refer to the sulfur dioxide
program at the Environmental Protection Agency and compare it to the
potential implementation of this legislation.
Please compare the size and scope, including the ways in which
regulated entities complied with sulfur dioxide limits and can be
expected to comply with limits on carbon dioxide, of the two programs
so that we may have a better sense of perspective on this comparison.
Answer. The size and scope of a market for carbon dioxide emissions
will be a function of policy design. The number of covered entities may
or may not be more or less similar to the number in the current sulfur
dioxide (SO2) program depending on the design of the
CO2 program, but the value of the emission allowances in the
programs currently being considered by the Congress is considerably
larger for CO2 than for SO2.
Should policymakers choose to place the cap upstream on producers
or importers of fossil fuels or adopt a hybrid system that would
directly cap large electricity generators but would place an upstream
cap on other sources, then the number of regulated entities would be
roughly comparable to the number in the current SO2 program,
which covers about 3,000 generating units. As was the case with
SO2, S. 2191 would allow nonregulated firms to participate
in the allowance market--entities that are not required to submit
allowances for their emissions (such as brokers) would be allowed to
buy and sell allowances.
In contrast to the number of regulated entities, the magnitude of
the CO2 market, as measured by the value of the allowances
traded, is likely to be much larger than the roughly $3 billion
SO2 market. In November 2007, the Congressional Budget
Office (CBO) estimated that the bills under consideration by the
Congress at that time would result in an allowance market that totaled
between $50 billion and $300 billion (in 2006 dollars) in 2020. On the
basis of CBO's estimate of the cost of S. 2191, the value of the
allowances in 2018 would be about $200 billion.
The SO2 program is implemented largely by the U.S.
Environmental Protection Agency (EPA) and is national in scope. The
agency runs electronic allowance and emission registries and is
responsible for verification of emission data. Regulated firms are
allowed to comply either by reducing their emissions or by retiring an
allowance for each ton of SO2 that they emit. Firms are
allowed to bank an unlimited amount of current allowances for use in
future years. Banking provides an incentive for firms to undertake more
emission reductions than are required to meet the cap in low-cost years
and, thus, helps smooth allowance prices over time. In spite of this,
researchers have found that prices for SO2 allowances have
been far more volatile than stock prices.
How similar or different firms' compliance options are under a
CO2 cap-and-trade program and the existing SO2
program would depend on policymakers' decisions in designing the
policy. Under S. 2191, firms would be able to comply by retiring an
allowance or by purchasing a qualifying ``offset,'' which could be
obtained from entities that sequestered carbon emissions or from
entities that reduced greenhouse gas emissions but were not subject to
the cap. Should policymakers choose to include a ``safety valve'' in a
cap-and-trade program (not included in S. 2191), regulated entities
would have an additional compliance option: They could comply by
purchasing an allowance from the government at the safety-valve price.
Question 3. According to your cost estimate of S. 2191, its cap-
and-trade regime will generate roughly $1.2 trillion between 2009 and
2018.
How much would Congress have to raise the federal gas tax, which is
currently at 18.4 cents per gallon, to generate the same amount of
revenue between 2009 and 2018?
Answer. The Joint Committee on Taxation (JCT) has estimated that
raising federal excise taxes on gasoline and diesel fuel by 50 cents
per gallon, to 68.4 cents for gasoline and 74.4 cents for diesel fuel,
would increase federal revenues by $49.3 billion in 2008 and by a total
of $685.3 billion over the 10 years from 2008 through 2017 (CBO is
required by law to use JCT's estimates for revenue proposals). Because
excise taxes reduce the tax base of income and payroll taxes, higher
excise taxes would lead to reductions in income and payroll tax
revenues. The estimates reflect those reductions.
CBO is not aware of any published estimates by JCT of the effects
of an increase beyond 50 cents per gallon. Estimates of the additional
increase in excise taxes needed to generate $1.2 trillion over 10 years
would depend on assumptions about the response of consumers to higher
tax rates and the effects of higher rates on compliance.
Question 4. Your cost estimate looks at revenues and outlays
through 2018, within the budget window. I am concerned about the costs
of this legislation over a longer period of time.
Answer. CBO estimates that enacting S. 2191, as ordered reported by
the Senate Committee on Environment and Public Works with an amendment,
would increase revenues by about $1.21 trillion over the 2009-2018, net
of income and payroll tax offsets. Over that period, we estimate that
direct spending from distributing those proceeds would total about
$1.13 trillion. The additional revenues would exceed the new direct
spending by an estimated $78 billion, thus decreasing deficits (or
increasing surpluses) by that amount over the next 10 years.
Assuming that the same pattern of revenue collection and spending
would occur over the life of the program (2009-2050), the federal
government would continue to collect revenue from the auctions and
would spend some of those funds on a variety of programs as specified
in the legislation. Because S. 2191 would require a portion of the
auction proceeds to be deposited into a Climate Change Deficit
Reduction Fund, and because that fund would be available for spending
only as provided in future appropriations bill, CBO estimates that over
the 2009-2050 period, net revenues also would exceed new direct
spending.
Question 5. These analyses tend to list natural gas, nuclear, clean
coal, renewables, and other forms of electrical generation as ways in
which the caps in S. 2191 can be adhered to. As a result, we get some
odd results that are likely impossible to achieve.
Do any of the models you have looked at allow for economic slow-
down as a compliance mechanism?
Answer. Nearly all efforts to model the economic impacts of cap-
and-trade programs include a feedback by which restrictions on
emissions raise energy prices, reduce incomes and slow the
macroeconomy, and thus modestly reduce energy demand and energy-related
emissions.
Question 6. As we discuss issues related to the share of allowances
that will be auctioned or given away, what would be the consequences of
these allowances being bought up by people who don't intend to emit
greenhouse gases?
What would that do to the cost to emitters and their ability to
comply with S. 2191?
Answer. Factors that would affect allowance prices include the
stringency of the cap, weather, conditions in energy markets, economic
activity, available technologies for producing low- or zero-carbon
energy and for sequestering carbon, and expectations about those
factors. Permitting allowances to be bought and sold by entities that
are not required to submit allowances for their emissions, but intend
to resell them, would widen the market, creating a larger and
potentially more diverse view of those key factors that influence
current and future prices. Such broadening of the market would increase
liquidity and could reduce volatility, provided that additional
investors were well informed about the market.
Individual participants or groups of participants (for example,
sovereign wealth funds or investment funds formed by energy-producing
cartels) could influence the price of allowances only if they were able
to obtain a sufficiently large share of the market. Given the size of
the allowance market, it would take a large amount of wealth to
influence the price of allowances.
In order to reduce the risk of market manipulation, current
regulation to prevent manipulation of commodity markets could also be
applied to CO2 allowance trading. In addition, policymakers
could choose to set an upper limit on the price of allowances by
allowing firms to purchase them from the government at a safety-valve
price.
Allowing nonemitters to purchase allowances would also create the
possibility that entities could choose to buy allowances in order to
retire them, thus making the cap more stringent. To the extent that
that occurred, it would tend to increase the price of allowances.
Question 7. Before the Senate Finance Committee on April 24, 2008,
you stated that, ``Under a cap-and-trade program, firms would not
ultimately bear most of the costs of the allowances but instead would
pass them along to customers in the form of higher prices.''
Would anyone be disproportionately impacted by these higher energy
prices? And how would the revenues raised by S. 2191 be distributed--
who, in effect, would be choosing which technologies are advanced, and
which programs receive funding?
Answer. A cap-and-trade program would increase the prices of energy
and energy-intensive goods and services. Those higher prices would
impose a larger financial burden on low-income households than on high-
income households for two reasons. First, energy-related expenditures
make up a larger share of the purchases of low-income households than
of high-income households. Second, low-income households typically
spend a larger fraction of their income.
S. 2191 would require that auction proceeds be deposited into seven
funds established by the Department of the Treasury:
The Energy Assistance Fund ($64 billion) would support
various energy assistance programs for low-income persons and
other initiatives;
The Climate Change Worker Training Fund ($12 billion) would
primarily support training programs for workers;
The Adaptation Fund ($31 billion) would primarily support
research and education activities by the Department of the
Interior to assist fish and wildlife in adapting to the impacts
of climate change;
The Climate Change and National Security Fund ($16 billion)
would finance steps to implement recommendations stemming from
the International Climate Change Adaptation and National
Security Program established under this legislation;
The Bureau of Land Management Emergency Firefighting Fund
($2 billion) would support fire suppression activities on
federal wildlands;
The Forest Service Emergency Firefighting Fund ($6 billion)
would support fire suppression activities on federal wildlands;
and
The Energy Independence Acceleration Fund ($6 billion) would
support research activities by the Department of Energy.
In addition, the legislation would establish the Climate Change
Credit Corporation, which would be responsible for auctioning the
allowances and using the proceeds to finance various initiatives
through the Energy Technology Deployment Program. By CBO's estimates,
spending for that program would total about $123 billion over the next
10 years. In total, direct spending from those funds (including the
Energy Deployment Program) would total about $30 billion over the 2009-
2013 period and about $260 billion over the 2009-2018 period, CBO
estimates. In addition, some proceeds would be deposited into the
Climate Security Act Management Fund; however, spending from that fund
could not occur without further appropriation action.
Question 8. Commodities like gold, copper, natural gas, oil, corn,
grain, and steel are experiencing unprecedented demand, and sharp price
spikes as a result. Some point to supply-demand fundamentals altered by
increased consumption in developing countries; others point to a
speculative bubble as being responsible.
How does S. 2191 prevent this from happening to the commodity you
refer to as the ``right to emit carbon''?
Answer. As described above, numerous factors would influence the
price of allowances. S. 2191 includes two provisions to help prevent
price spikes (or prolonged high prices). S. 2191 would allow firms to
``borrow'' a limited number of future allowances for use in the current
period as a method of addressing short-term price spikes. In addition,
S. 2191 would establish a Carbon Market Efficiency Board, which would
be allowed to take a variety of actions to lower prices, including
transferring future allowances into the current period. Both of those
provisions could help reduce the likelihood that prices would reach
higher levels than policymakers had intended but would be a less
reliable method of doing so than establishing a ceiling, or safety
valve, for allowance prices. Moreover, giving the Carbon Market
Efficiency Board overly broad discretionary powers to control prices or
allowance quantities could undermine the integrity of the allowance
market.
Question 9. This commodity--a right to emit--will presumably have a
value in the global market. What is the impact on American economic
competitiveness of imposing a cost in the U.S. that is not imposed in
emerging economies if, in fact, we are creating a commodity?
Answer. A cap-and-trade program would increase prices for energy
and energy-intensive goods and services and could, in some cases, cause
a decrease in the demand for U.S. goods. Sectors that could potentially
lose market share to foreign producers as a result of a carbon
reduction policy are those with relatively high energy use and that
have relatively high trade flows (that is, potentially a ``covered
good,'' as discussed in S. 2191). The Energy Information Administration
lists the following manufacturing sectors as energy-intensive: food
products, paper and pulp products, chemicals, glass products, cement
products, iron and steel products, and aluminum products. Energy use
from those seven sectors constitutes approximately 14 percent of total
U.S. energy consumption and results in approximately 10 percent of
total U.S. carbon emissions. Those sectors contribute approximately 9.5
percent of gross domestic product, 7.4 percent of U.S. imports, and 9.4
percent of U.S. exports. Of those sectors, the iron and steel sector
has a relatively large amount of exports to and imports from China.
S. 2191 contains a provision that addresses cross-border
adjustments for carbon-intensive goods. According to the bill,
beginning in 2020, in order to import a ``covered good'' from a
``covered country'' (as defined in S. 2191), the importer shall verify
that the good has an accompanying number of allowances purchased from
the international reserve of allowances at a price set not to exceed
the market price for domestic allowances. To calculate the number of
allowances required per unit of covered good, the total emissions
(above an established baseline) from the country's sector is divided by
the total goods produced in that country. ``Covered goods'' are those
goods that are primary products, manufactured items for consumption, or
products that create greenhouse-gas emissions during their production
and that are close substitutes for energy-intensive goods produced in
the United States that will be affected by the Act (for example, iron,
steel, aluminum, bulk glass, nonmetal minerals, and paper). If that
country has implemented ``comparable actions'' to reduce greenhouse-gas
emissions, then the country is not a ``covered country.'' Similarly, if
the country is either a ``least developed country'' or is a de minimis
emitter of greenhouse gases, then the country is not a ``covered
country.''
Question 10. I am greatly concerned about the securitization of
carbon dioxide emissions credits, which could eventually lead to a
situation similar to the recent housing crisis. What steps could be
taken to prevent this from happening?
Answer. The securitization of allowances would be unlikely to
create the same issues encountered in mortgage markets because, unlike
mortgages, carbon allowances would be homogenous and, hence, would not
require the endorsements or guarantees of performance that securitized
mortgage pools require. The original holders of allowances should be
able to sell them without complex financial intermediation (such as the
insurance, guarantees, and highly leveraged distribution vehicles that
were used to shift mortgages off banks' balance sheets).
Some users of allowances might wish to trade options or futures
contracts on allowances in order to secure access to allowances at a
predetermined price at some future date instead of buying and holding
them today. While such contracts are usually associated with minimizing
risk, hedge funds and other speculative investors seeking to earn
investment income on mispriced contracts will often take significant
risks in these markets. Such risk-taking should not pose a threat to
the integrity of the allowance trading program provided the trading
rules ensured minimal risks to counterparties, as is the case in
markets for commodity derivatives. For example, commodity derivative
exchanges impose margin and capital requirements on participants,
require daily settlement of open positions, and enforce the transfer of
an insolvent participant's open positions to a solvent party.
Question 11. Should the Carbon Market Efficiency Board have
authority to provide bailouts for covered entities, similar to the
Federal Reserve's decision to open up its lending window for Bear
Stearns earlier this year?
Answer. Providing bailouts could undermine a cap and the integrity
of the cap-and-trade program. An alternative method of preventing the
cost of complying with the cap from exceeding an acceptable level would
be to establish a ceiling, or safety valve, on the price of allowances.
If policymakers included both a price ceiling and a price floor in a
cap-and-trade program, as well as provisions to modify the ceiling and
floor over time, they could limit both price volatility and the overall
cost of meeting a long-term target for emissions.
Response of Peter R. Orszag to Question From Senator Menendez
Question 1. Your analysis of S. 2191 accounts for decreases in
federal revenues and the expenses associated with a cap-and-trade
regime. But how do you account for the impacts of global warming in
your baseline (business as usual) projections? For example, rising sea
levels will bring a vast number of new costs to the federal government.
So too will increases in tropical diseases, heat waves, water
shortages, and violent storms. Last, but not least, we could face
increased national security expenses due to political instability tied
to climate change.
We have seen the devastation of Hurricane Katrina and the Myanmar
cyclone, as well as unprecedented battles for water in the Southeast.
Obviously, it is problematic to causally link these individual events
to climate change. But we do know that we will see more of them as the
planet warms.
What expense might the federal government incur if sea levels rise
by 10's of feet? What impact would that have on the Federal Flood
Insurance program?
Can the CBO undertake an analysis of S. 2191 which accounts for
some of these events? Would the assumption that a large reduction in
U.S. GHG [greenhouse-gas] emissions averts global warming dramatically
change the scoring of S. 2191?
Answer. Human activities around the world--primarily fossil-fuel
use, forestry, and agriculture--are producing growing emissions of
greenhouse gases, most importantly carbon dioxide. The accumulation of
those gases in the atmosphere and oceans is expected to have extensive,
potentially serious, and costly but highly uncertain impacts on
regional climate and ocean conditions throughout the world. Future
developments are sufficiently uncertain that over the next century and
beyond, climate-related changes could be relatively modest or very
extensive. The uncertain links between carbon emissions, specific
disasters or consequences of climate change, and the federal response
to such events makes it extremely difficult to model or estimate
changes in federal spending from reduced carbon emissions.
Moreover, the timing of costs and benefits of reducing emissions
are very different. Reducing emissions would require firms and
households to make changes in their behavior (for example, driving or
flying less) and their investments (for example, investing in more
energy-efficient equipment, relying on renewable energy sources, or
investing in carbon capture and sequestration). Those actions would
impose near-term costs.
The benefits of reducing emissions, in contrast, would be realized
decades or even centuries after the reductions were made. The reason is
that each ton of CO2 generates a rise in the average global
temperature that peaks 40 years after the CO2 is emitted and
then dissipates slowly, with a half-life of about 60 years. As a
result, any reduction in federal spending that might be brought about
by the benefits (such as potential decreases in hurricanes) resulting
from S. 2191 would be well outside the 10-year window that CBO uses
when it estimates the impact of legislation on the federal budget.
Response of Peter R. Orszag to Question From Senator Akaka
Question 1. A carbon tax seems like a more straightforward way of
implementing greenhouse-gas regulation. During the hearing, you
responded that a tax is more efficient; however, by using auctioning,
and allowing significant flexibility in timing of efforts to reduce
emissions (by using a floor and ceiling), cap-and-trade can be brought
closer in line with a tax policy. Are there additional challenges that
island states and U.S. territories face (in using a cap-and-trade
instead of a tax credit), given their unique characteristics (e.g.,
being geographically separate from the continental U.S., relying
exclusively on airlift and shipping for transporting goods, as well as
being a ``closed'' energy system)?
Answer. Either a tax or a cap-and-trade program would reduce carbon
dioxide emissions by increasing the price of fossil fuels, with the
price increases reflecting the CO2 released when the fuels
were combusted. As a result, either approach would create an incentive
for households and firms to reduce their use of such fuels. If the
price of an allowance under a cap-and-trade program was equal to the
level of a tax, either approach would be likely to impose roughly the
same costs (with any distribution of the auction proceeds or tax
revenues not considered). The price increases resulting from a cap-and-
trade program, however, would be more uncertain. The price of
allowances would need to climb high enough to reduce emissions to the
level required by the cap. That price would fluctuate over time
depending on economic activity, weather, technological developments,
conditions in fossil-fuel markets, and other factors.
Since either a tax or a cap-and-trade program would induce
reductions in emissions by driving up prices for energy and energy-
intensive goods and services, it does not seem likely that either one
would provide a relative advantage or challenge to island states or
U.S. territories.