[Senate Hearing 111-253]
[From the U.S. Government Publishing Office]
S. Hrg. 111-253
CLIMATE CHANGE LEGISLATION
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
TO
RECEIVE TESTIMONY ON ENERGY AND RELATED ECONOMIC EFFECTS OF GLOBAL
CLIMATE CHANGE LEGISLATION
__________
OCTOBER 14, 2009
Printed for the use of the
Committee on Energy and Natural Resources
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COMMITTEE ON ENERGY AND NATURAL RESOURCES
JEFF BINGAMAN, New Mexico, Chairman
BYRON L. DORGAN, North Dakota LISA MURKOWSKI, Alaska
RON WYDEN, Oregon RICHARD BURR, North Carolina
TIM JOHNSON, South Dakota JOHN BARRASSO, Wyoming
MARY L. LANDRIEU, Louisiana SAM BROWNBACK, Kansas
MARIA CANTWELL, Washington JAMES E. RISCH, Idaho
ROBERT MENENDEZ, New Jersey JOHN McCAIN, Arizona
BLANCHE L. LINCOLN, Arkansas ROBERT F. BENNETT, Utah
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
EVAN BAYH, Indiana JEFF SESSIONS, Alabama
DEBBIE STABENOW, Michigan BOB CORKER, Tennessee
MARK UDALL, Colorado
JEANNE SHAHEEN, New Hampshire
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
McKie Campbell, Republican Staff Director
Karen K. Billups, 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
Elmendorf, Douglas W., Director, Congressional Budget Office..... 4
Harvey, Reid P., Chief, Climate Economics Branch, Office of Air
and Radiation, Environmental Protection Agency, Accompanied by
Allen Fawcett.................................................. 28
Murkowski, Hon. Lisa, U.S. Senator From Alaska................... 2
Newell, Richard, Administrator, Energy Information
Administration, Department of Energy........................... 22
Parker, Larry, Specialist in Energy and Environmental Policy,
Congressional Research Service................................. 31
APPENDIX
Responses to additional questions................................ 61
CLIMATE CHANGE LEGISLATION
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WEDNESDAY, OCTOBER 14, 2009
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 10:03 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. I'm informed that
Senator Murkowski is on her way and will be here shortly, but
we should proceed.
As the Senate continues to consider ways to deal with the
global environmental problem of climate change, much of the
discussion centers around overall costs and benefits of such a
program; how the costs and benefits will be distributed
throughout our economy. Addressing the issue of climate change
will require major transformation of our energy sectors. So,
this committee will continue to take a interest in the topic in
the months ahead.
Our last hearing on climate change examined different
policy options to contain both the long-term costs and the
short-term price volatility of an economywide program to reduce
greenhouse gas emissions. As a follow-on to that discussion, in
today's hearing we will receive testimony on the various
economic models and analyses of the American Clean Energy
Security Act, or ACES, which was passed by the House of
Representatives this June.
While no one can say for certain what the future holds,
scientific and economic models can be used as tools to
approximate reality and to help us understand how the
environment or the economy may react to policies that we adopt.
Models can be very useful tools for estimating what a
particular program may cost, showing how particular goals may
be best achieved and revealing where the economy may be most
sensitive to the choices that we make. We understand they are
imperfect tools, however, and models have often been used or
manipulated to make a predetermined point or to show favorable
or unfavorable results for any given policy.
Over the course of our discussions on climate change
legislations, this has been particularly true. Interest groups
and stakeholders have circled Capitol Hill with various
analyses, some showing that cap-and-trade legislation will
wreck the economy and provide nothing but costs, others showing
only the benefits of job creation and new industry.
In the case of cap-and-trade programs and climate
legislation, we can use real-world experiences alongside model
analyses to keep us grounded in reality. For example, the cap-
and-trade system for sulfur dioxide that was put in place by
the 1990 Clean Air Act amendments was an unprecedented
environmental success in combating acid rain and turned out to
cost only about a quarter of the price that economic models at
the time were projecting.
My impression is that the greenhouse gas emissions trading
program in Europe has shown that emissions trading can be
successful at reducing emissions without having a disastrous
effect on the economy. While it's true that the European
emissions trading program experienced significant volatility in
its initial experimental phase, they have learned from their
trial period, and they've made important improvements to that
system. We need to learn from the experience that they've had.
Today, the witnesses will explain the strengths and
weaknesses of the different models that have been used to
analyze the House-passed legislation and what they,
collectively, may tell us about the proper design of climate
legislation.
Let me call on Senator Murkowski for any opening statements
she'd like to make.
[The prepared statement of Senator Bunning follows:]
Prepared Statement of of Hon. Jim Bunning, U.S. Senator From Kentucky
Thank you Mr. Chairman. I look forward to the hearing today to
discuss the economic effects of enacting a cap and trade program.
Efforts to reduce carbon emissions through the imposition of strict
federal mandates as outlined in a cap and trade system are nothing more
than a national energy tax.
It will bankrupt our industries, cost Americans jobs and cause
energy prices to skyrocket. It is wrong for Kentucky and wrong for
America.
Estimates show that if enacted a cap and trade system will only
reduce global greenhouse gas emissions by four percent, while imposing
one of largest tax increases in American history.
In these tough economic times it is irresponsible and reckless to
enact legislation that would have such a small effect on global warming
while imposing substantial costs on all American households.
It will affect the prices we pay to fill up our gas tanks, heat and
cool our homes and use electricity as well as the costs of practically
all goods and services.
And the costs will be disproportionally shouldered by the states
that have more carbon based resources than other states.
In my home state of Kentucky over 95% of electricity is generated
by coal. Estimates show that if passed Kentucky will be one of the
highest impacted states by cap and trade legislation.
Make no mistake. Cap and trade is an anti-growth proposal that will
hurt American industries and American families more than it will help
them.
I thank the witnesses for appearing before the committee today and
appreciate their comments. I look forward to continuing the
conversation on this issue and discussing the entire scope of the cost
of enacting climate change legislation.
Thank you Mr. Chairman.
STATEMENT OF HON. LISA MURKOWSKI, U.S. SENATOR
FROM ALASKA
Senator Murkowski. Thank you, Mr. Chairman.
Welcome, to those of you who have joined us this morning.
The cost estimates that we are here to discuss are clearly
very important, and will significantly impact the Senate's
ability to pass climate legislation.
Last May, at about the same point in the climate debate, we
learned that every major analysis of cap-and-trade projected
higher energy prices and lower economic growth. These costs
were exceeded by one factor, and that factor was uncertainty.
When it became clear that we could expect minimal environmental
benefit unless other nations made similar cuts, the outcome of
the eventual floor debate was predictable.
For the bills introduced this year, the story hasn't been
much different. Each analysis projects significant costs and,
among assessments, there's great uncertainty.
The EPA analysis of the House bill includes 7 different
scenarios. EIA's contain a total of 11. Yet, neither accounts
for the cumulative impact of every provision. Limitations and
caveats and constraints are routinely noted.
I don't mean to criticize these reports instead, the
underlying legislation. The House bill's cap-and-trade
provisions draw most of the attention, but in reality take up
only about 200 of its 1400 pages. The rest creates an
unprecedented web of command-and-control regulations that would
be layered on top of cap-and-trade, each other, as well as
existing law, which makes estimating costs difficult, to say
the least.
With the Senate now headed down the same road, many of the
same difficulties will be encountered when the bill from
Senators Kerry and Boxer is complete enough to be analyzed.
That measure is already 821 pages, and counting, even though
many blanks remain and the work of 5 other committees has not
yet been added.
I appreciate the work the agencies and understand the need
for sensitive analysis, but I also recognize that these are
sweeping proposals that will affect every facet of our economy
for decades to come. It is incredibly difficult, but incredibly
important to know how they might work and what they may cost.
We all know we're in the midst of a recession that is
costing us millions of jobs, trillions of dollars. Even as it
begins to ease, we continue to face high unemployment and
massive Federal deficits. We must ensure that climate
legislation does not endanger our recovery. We must seek to
reduce energy prices, not drive them up. Americans are hoping
that when the economy turns around, it will stay strong.
They're hoping, in the meantime, at a minimum, that Congress
won't make life any harder than it already is.
I do believe that climate change must be addressed, but
only after considering all of our options. Before we ask our
constituents to do more, we need to make absolutely sure that
we can't ask less, perhaps much less, and still achieve the
same results.
Estimates of the House bill's price tag are high and
varied, as were the estimates for last year's bills. When
Alaskans ask me how much cap-and-trade legislation is going to
cost them and my best answer still is, ``A lot, I think,'' that
tells me that we're not yet on the right track.
I suspect that I'm not alone in this thinking. Just this
past weekend, Senator Kerry and Senator Graham joined together
and they laid out a framework for climate policy that would
mark a significant departure from where we are today. Now, to
be sure, they wrote a column; they didn't write a bill. Their
outline could be improved, and there's no guarantee legislation
along those lines would pass the Senate, but, in my opinion,
the framework that they laid out in 1,000 words is already
better than the policies it took the House 1,400 pages to
impose.
I'm hopeful that their column will mark a shift in the
climate debate. Instead of cutting emissions at any cost, we
should be working on a policy that incorporates the best ideas
of both parties, a policy that accounts for our near-term
energy needs, limits costs, and is flexible enough to work
under different economic circumstances.
With that, Mr. Chairman, I thank you for the time this
morning, and I look forward to the comments from the witnesses,
and good discussion on this very important topic.
The Chairman. Thank you very much.
Before I introduce the witnesses, let me just advise all
Senators we're--there's a cloture vote, I'm told, at 11:15. Our
hope was that members would go and vote, once that vote is
called, and then return here, and we--if we get--can get 12
members, about 11:30, when we return, we would then vote out a
couple nominations at that point, and then proceed with
additional questions. I'm sure we won't be through with our
questions by then. But, that's the hope, if we can pursue it.
Let me introduce our witnesses today. We have a very
distinguished group of witnesses. Dr. Doug Elmendorf, who's the
director of the Congressional Budget Office. Thank you very
much, for being here. He'll begin with an overview of the
economic impacts of different climate policy choices made in
the House-passed legislation. Dr. Richard Newell, from the
Energy Information Agency. Mr. Reid Harvey, from the
Environmental Protection Agency. They will discuss the results
of their analyses. Mr. Harvey is accompanied by Dr. Allen
Fawcett, and we appreciate him being here, as well. Then, Dr.
Larry Parker, from the Congressional Research Service, will
conclude with a description of their new report that provides a
comparison--a fairly exhaustive comparison of seven different
analyses of the House-passed bill, from a wide range of groups.
So, Dr. Elmendorf, we promise not to keep you here as long
as the Finance Committee kept you yesterday. So, we're glad to
have you here.
STATEMENT OF DOUGLAS W. ELMENDORF, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Elmendorf. Thank you, Mr. Chairman. You have my eternal
gratitude for that.
Thanks, to you and Senator Murkowski and the other members
of the committee, for inviting us to be here today. I
appreciate the invitation to testify on the economic effects of
legislation to reduce greenhouse gas emissions.
As you know, global climate change poses one of the
Nation's most significant long-term policy challenges. Human
activities are producing increasingly large quantities of
greenhouse gases, especially carbon dioxide. A strong consensus
has developed in the expert community that, if allowed to
continue unabated, the accumulation of greenhouse gases in the
atmosphere will have extensive, highly uncertain, but
potentially serious and costly impacts on regional climates
throughout the world. Moreover, the risk of abrupt and even
catastrophic changes in climate cannot be ruled out.
Those expected and possible harms may motivate policy
actions to reduce the extent of climate change. However, the
cost of doing so could be significant, because it would entail
substantial reductions in U.S. emissions and to the emissions
from other countries over the coming decade.
Achieving such reductions in this country would probably
involve some combination of three broad changes: transforming
the U.S. economy from one that runs on carbon-dioxide-emitting
fossil fuels to one that increasingly relies on nuclear and
renewable energy; accomplishing substantial improvements in
energy efficiency; and implementing a large-scale capture and
storage of carbon dioxide emissions.
As you consider policies to reduce the dangers of climate
change, my testimony makes five points regarding the economic
implications of the policies you choose:
First, the economic impact would depend, importantly, on
the design of the policy. Decisions about whether to reduce
greenhouse gases, primarily through market-based systems, such
as taxes or a cap-and-trade system, or primarily through
traditional regulatory approaches that specify performance and
technology standards, would influence the total costs of
reducing emissions and the distribution of those costs. The
costs would also depend, of course, on the stringency of the
policy, whether other countries impose similar policies, the
amount of flexibility about when, where, and how emissions will
be reduced, and the allocation of allowances if a cap-and-trade
system was used.
My second point is that reducing the risk of climate change
would come at some cost to the economy. A cap-and-trade system,
for example, would lead to higher prices for energy from fossil
fuels and for energy-intensive goods, which would, in turn,
provide incentives for households and businesses to develop
energy sources that emit smaller amounts of carbon dioxide.
Changes in the relative prices for energy and energy-
intensive goods would also shift income among households at
different points in the income distribution and across
industries and regions of the country.
Policymakers could counteract some of those income losses
and shifts by having the government sell emission allowances
and use the proceeds to compensate certain households or
businesses, or by having the government give allowances away to
certain households and businesses. But, even so, some income
losses--and certainly shifts--would occur. For example, CBO
concludes that the cap-and-trade provisions of H.R. 2454--the
American Clean Energy and Security Act of 2009--would reduce
GDP below what it would otherwise have been by roughly one-
quarter to three-quarter percent in 2020 and by between 1 and 3
and a half percent in 2050. By way of comparison, CBO projects
that real--that is, inflation-adjusted--GDP will be roughly two
and a half times as large in 2050 as it is today. So, these
changes would be comparatively modest.
In the models that CBO has reviewed, the long-run cost to
households would be somewhat smaller than the changes in GDP
because consumption falls by less than GDP and because
households benefit from more time spent in nonmarket
activities. Moreover, these measures of potential costs do not
include any benefits from averting climate change.
A third point is that climate legislation would cause
permanent shifts in production and employment away from
industries that produce carbon-based energy and energ-intensive
goods and services and toward industries that produce
alternative energy sources and less energy-intensive goods and
services. While those shifts were occurring, total employment
would probably be reduced a little, compared with what it would
have been without such a policy, because labor markets would
most likely not adjust as quickly as would the composition of
demand for final outputs.
Fourth, CBO has estimated the loss in purchasing power that
would result from the primary cap-and-trade program in H.R.
2454. CBO's measure reflects the higher prices that the
households would face and the compensation they would receive
primarily through the allocation of allowances or the proceeds
from their sale. However, our measure omits some channels of
influence on households' well-being that cannot be readily
quantified. It appears that CBO's measure probably understates
the true burden, to a small degree. As estimated, the loss in
purchasing power would be modest and would rise over time as
the cap became more stringent, accounting for two-tenths of a
percent of after-tax income in 2020 and 1.2 percent in 2050.
Fifth, the distribution of the loss in purchasing power
across households depends, importantly, on policymakers'
decisions about how to allocate the allowances. According to
CBO's calculations, households in the lowest fifth of
households, when arrayed by income, would see gains in
purchasing power, in both 2020 and 2050, because the
compensation they would receive would exceed the costs they
would bear. However, households in the middle fifth would see
net losses in purchasing power amounting to six-tenths of a
percent of after-tax income in 2020 and 1.1 percent in 2050.
Thank you. That concludes my prepared remarks.
[The prepared statement of Mr. Elmendorf follows:]
Prepared Statement of Douglas W. Elmendorf, Director, Congressional
Budget Office
Chairman Bingaman, Senator Murkowski, and Members of the Committee,
thank you for the invitation to testify on the economic effects of
legislation to reduce emissions of carbon dioxide (CO2) and
other greenhouse gases.
Global climate change poses one of the nation's most significant
long-term policy challenges. Human activities are producing
increasingly large quantities of greenhouse gases, especially
CO2. A strong consensus has developed in the expert
community that, if allowed to continue unabated, the accumulation of
greenhouse gases in the atmosphere will have extensive, highly
uncertain, but potentially serious and costly impacts on regional
climates throughout the world. Those impacts are expected to include
widespread changes in the physical environment, changes in biological
systems (including agriculture), and changes in the viability of some
economic sectors. Moreover, the risk of abrupt and even catastrophic
changes in climate cannot be ruled out.\1\
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\1\ For additional information, see Congressional Budget Office,
Uncertainty in Analyzing Climate Change: Policy Implications (January
2005).
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Those expected and possible harms may motivate policy actions to
reduce the extent of climate change. However, the cost of doing so may
be significant because it would entail substantial reductions in global
emissions over the coming decades. U.S. emissions currently account for
roughly 20 percent of global emissions. As a result, substantially
reducing global emissions would probably entail large reductions in
U.S. emissions as well as emissions in other countries. Achieving such
reductions would probably involve transforming the U.S. economy from
one that runs on CO2-emitting fossil fuels to one that
increasingly relies on nuclear and renewable fuels, accomplishing
substantial improvements in energy efficiency, or implementing the
large-scale capture and storage of CO2 emissions.
One option for reducing emissions in a cost-effective manner is to
establish a carefully designed cap-and-trade program. Under such a
program, the government would set gradually tightening limits on
emissions, issue rights (or allowances) consistent with those limits,
and then let firms trade the allowances among themselves. Such a
capand-trade program would lead to higher prices for energy from fossil
fuels and for energy-intensive goods, which would in turn provide
incentives for households and businesses to use less carbon-based
energy and to develop energy sources that emit smaller amounts of
CO2.
Changes in the relative prices for energy and energy-intensive
goods would also shift income among households at different points in
the income distribution and across industries and regions of the
country. Policymakers could counteract some but not all of those income
shifts by authorizing the government to sell CO2 emission
allowances and using the revenues to compensate certain households or
businesses, or to give allowances away to some households or
businesses.
My testimony makes the following key points:
Climate change is an international problem. The economic
impacts of climate change are extremely uncertain and will vary
globally. Impacts in the United States over the next 100 years
are most likely to be modestly negative in the absence of
policies to reduce greenhouse gases, but there is a risk that
they could be severe. Impacts are almost certain to be serious
in at least some parts of the world.
The economic impact of a policy to ameliorate that risk
would depend importantly on the design of the policy. Decisions
about whether to reduce greenhouse gases primarily through
market-based systems (such as taxes or a cap-and-trade program)
or primarily through traditional regulatory approaches that
specify performance or technology standards would influence the
total cost of reducing those emissions and the distribution of
those costs in the economy. The cost of a policy to reduce
greenhouse gases would also depend on the stringency of the
policy; whether other countries also imposed similar policies;
the amount of flexibility about when, where, and how emissions
would be reduced; and the allocation of allowances if a cap-
and-trade system was used.
Reducing the risk of climate change would come at some cost
to the economy. For example, the Congressional Budget Office
(CBO) concludes that the cap-andtrade provisions of H.R. 2454,
the American Clean Energy and Security Act of 2009 (ACESA), if
implemented, would reduce gross domestic product (GDP) below
what it would otherwise have been--by roughly \1/4\ percent to
\3/4\ percent in 2020 and by between 1 percent and 3 \1/2\
percent in 2050. By way of comparison, CBO projects that real
(inflation-adjusted) GDP will be roughly two and a half times
as large in 2050 as it is today, so those changes would be
comparatively modest. In the models that CBO reviewed, the
long-run cost to households would be smaller than the changes
in GDP. Projected GDP impacts include declines in investment,
which only gradually translate into reduced household
consumption. Also, the effect on households' well-being of the
reduction in output as measured by GDP (which reflects the
market value of goods and services) would be offset in part by
the effect of more time spent in nonmarket activities, such as
childrearing, caring for the home, and leisure. Moreover, these
measures of potential costs imposed by the policy do not
include any benefits of averting climate change.
Climate legislation would cause permanent shifts in
production and employment away from industries focused on the
production of carbon-based energy and energy-intensive goods
and services and toward the production of alternative energy
sources and less-energy-intensive goods and services. While
those shifts were occurring, total employment would probably be
reduced a little compared with what it would have been without
a comparably stringent policy to reduce carbon emissions
because labor markets would most likely not adjust as quickly
as would the composition of demand for different outputs.
CBO has estimated the loss in purchasing power that would
result from the primary cap-and-trade program that would be
established by the ACESA. CBO's measure reflects the higher
prices that households would face as a result of the policy and
the compensation that households would receive, primarily
through the allocation of allowances or the proceeds from their
sale. The loss in purchasing power would be modest and would
rise over time as the cap became more stringent and larger
amounts of resources were dedicated to cutting emissions,
accounting for 0.2 percent of after-tax income in 2020 and 1.2
percent in 2050.
The expected distribution of the loss in purchasing power
across households depends importantly on policymakers'
decisions about how to allocate the allowances. The allocation
of allowances specified in H.R. 2454 would impose the largest
loss in purchasing power on households near the middle of the
income distribution. Which categories of households would
ultimately benefit from the allocation of allowances is more
uncertain in 2020 than in 2050. A large fraction of the
allowances in 2020 would be distributed to households via
private entities, and the distribution of the allowance value
would depend on whether those entities passed the value on to
customers, workers, or shareholders. In contrast, most of the
value of allowances in 2050 would flow to households directly.
aggregate economic impacts of climate change
Many of the natural changes that are likely to result from climate
change (such as more frequent storms, hurricanes, and floods) will
affect agriculture, forestry, and fishing; the demand for energy; and
the nation's infrastructure. Despite the wide variety of projected
impacts of climate change over the course of the 21st century,
published estimates of the economic costs of direct impacts in the
United States tend to be small.\2\ Most of the economy involves
activities that are not likely to be directly affected by changes in
climate. Moreover, researchers generally expect the growth in the U.S.
economy over the coming century to be concentrated in sectors--such as
information technology and medical care--that are relatively insulated
from climate effects. Damages are therefore likely to be a smaller
share of the future economy than they would be if they occurred today.
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\2\ For additional information, see Congressional Budget Office,
Potential Impacts of Climate Change in the United States (May 2009).
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As a consequence, a relatively pessimistic estimate for the loss in
projected real gross domestic product is about 3 percent for warming of
about 7 Fahrenheit (F) by 2100.\3\ However, even for the levels of
warming that have been examined, most of the estimates cover only a
portion of the potential costs. Other costs in the United States could
come from nonmarket impacts (which are not measured in GDP) and from
the potential for abrupt changes:
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\3\ See Dale W. Jorgenson and others, U.S. Market Consequences of
Global Climate Change (Arlington, Va.: Pew Center on Global Climate
Change, 2004), p. 36.
Nonmarket impacts.--Some types of impacts are very difficult
to evaluate in monetary terms because they do not directly
involve products that are traded in markets. Although such
difficulties apply to effects on human health and quality of
life, they are particularly significant for biological impacts,
such as loss of species' habitat, biodiversity, and the various
resources and processes that are supplied by natural
ecosystems. Experts in such issues generally believe that those
nonmarket impacts are much more likely to be negative than
positive and could be large.
The potential for abrupt changes.--Experts believe that
there is a small possibility that even relatively modest
warming could trigger abrupt and unforeseen effects during the
21st century that could result in large economic costs in the
United States. Two examples of such possible effects are shifts
in ocean currents that could change weather patterns and affect
agriculture over large areas, and rapid disintegration of ice
sheets, which could dramatically raise sea levels around the
world. The sources and nature of such abrupt changes, their
likelihood, and their potential impacts remain very poorly
understood.
The most comprehensive published study includes estimates of
nonmarket damages as well as costs arising from the risk of
catastrophic outcomes associated with about 11F of warming by 2100.\4\
That study projects a loss equivalent to about 5 percent of U.S. output
and, because of substantially larger losses in a number of other
countries, a loss of about 10 percent of global output.
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\4\ William D. Nordhaus and Joseph Boyer, Warming the World:
Economic Models of Global Warming (Cambridge, Mass.: MIT Press, 2000),
pp. 95-96.
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the effects of policy design choices
The economic impact of any policy to reduce greenhouse-gas
emissions would depend on a variety of policy and program design
decisions that would be made by the Congress or the regulatory agencies
that implemented such a policy. Most importantly, the economic impact
would depend on whether the policy worked primarily through taxes on
emissions, a cap-and-trade program for emissions, regulatory standards
to reduce emissions, or a combination of those approaches. The economic
impact would also depend on the stringency of the cap, whether other
countries also adopted programs to reduce emissions, and other factors
that would be specific to the approach chosen.
Approaches to Reducing Emissions
The most fundamental choice facing policymakers is whether to adopt
conventional regulatory approaches, such as standards for energy-using
machinery and equipment, or to employ market-based approaches, such as
taxes on emissions or cap-and-trade programs. Market-based approaches,
most experts conclude, would generally limit emissions at a lower cost
than command-and-control regulations would. Whereas conventional
regulatory approaches would impose specific requirements that might not
be the least costly means of reducing emissions, market-based
approaches would provide more latitude for firms and households to
determine the most cost-effective means of accomplishing that goal.
A tax per unit of emissions would effectively fix the incremental
cost of reducing emissions in any given period. Proposals for such
taxes would generally specify rates that gradually increased year by
year, with the aim of making activities that produced emissions
increasingly expensive. A cap-and-trade system, by contrast, would
explicitly restrict the annual quantity of emissions. Under such
programs, allowances would be allocated or sold, and the trading of
allowances would permit emissions reductions to be achieved in the
lowest-cost manner. If caps increased in stringency over time, then the
incremental costs of reducing emissions would rise as well.
If policymakers had full and accurate information about the cost of
reducing emissions, taxes and caps could be equivalent: Policymakers
could set a cap, and they would know what allowance price it would
yield, or they could set a tax at that same allowance price and achieve
the same reduction in emissions as under the cap. However, because
policymakers face uncertainty, there is a crucial difference between
the two approaches: A tax would leave the resulting amount of emissions
uncertain, whereas a fixed cap would leave the resulting allowance
price uncertain.
Most economists conclude that in the face of uncertainty about the
cost of reducing emissions, a policy that set a year-by-year price path
for greenhouse-gas emissions (such as a gradually increasing tax) would
probably cost less overall than a policy that specified year-by-year
emissions targets.\5\ That conclusion is based on three observations:
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\5\ For additional information on the difference between taxes and
cap-and-trade programs, see Congressional Budget Office, Policy Options
for Reducing CO2 Emissions (February 2008).
Climate change results from the accumulation of greenhouse
gases in the atmosphere over many decades and centuries. As a
result, reducing the potential risk of climate change would
entail reducing cumulative emissions of greenhouse gases over
multiple decades, but year-to-year fluctuations in emissions
have little effect on the climate. By contrast, the economic
cost of reducing emissions can vary a lot from year to year--
depending on the weather, economic activity, and the prices of
fossil fuels. A tax would motivate firms to cut their emissions
more when the cost of doing so was relatively low and allow
them to emit more when the cost of cutting emissions was high.
A cap-and-trade program would offer firms less flexibility
(although such a program could incorporate features, such as
banking and borrowing of allowances, that would allow a degree
of flexibility, as described below).
There is such great uncertainty about how a given quantity
of emissions would ultimately affect global temperatures that
there is very little additional certainty to be gained from
choosing a fixed emissions goal (even one that is set over
multiple decades) rather than a price path that is expected to
achieve the same emissions goal--but that may exceed or may
fall short of it depending on actual cost conditions. In
essence, the additional certainty that a cap-and-trade program
could provide about the amount of cumulative emissions would be
bought at a relatively high cost without yielding corresponding
certainty about the amount of climate change that would occur.
The greater certainty about the price of emissions in the
future that a tax would offer would provide affected firms and
households with greater certainty about the conditions they
would face in adjusting to restrictions than a cap would
provide. That greater certainty would ease planning for capital
investments and could lower the risk associated with developing
new technologies.
Many proposals would augment basic cap-and-trade or tax provisions
with subsidies for activities that reduced emissions or with
regulations (such as standards for energyusing machinery and
equipment). Some such approaches--subsidies for basic energy research,
for example--would probably be useful and effective supplements to
market-based approaches. Standards might also be the most effective
regulatory approach in cases where market forces are unable to convey
appropriate incentives, such as when a tax on energy would not provide
an incentive for building owners to make efficiency improvements when
renters are responsible for their electricity bills. Moreover,
subsidies could help protect certain people or industries from the
adverse economic effects of reducing emissions. However, to the extent
that such additional elements supplanted the effective reliance on
market forces to determine the lowestcost means of reducing emissions,
they might increase the overall economic costs of the program even
though they might result in a lower allowance price in a cap-andtrade
program.\6\
---------------------------------------------------------------------------
\6\ Congressional Budget Office, How Regulatory Standards Can
Affect a Cap-and-Trade Program for Greenhouse Gases, Issue Brief
(September 16, 2009).
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Government policy beyond research and standards directly tied to
climate change would also indirectly affect the cost of restricting
emissions. The tax treatment of investment could influence the cost and
availability of particular technologies. Many experts believe that
nuclear power could easily displace a significant amount of fossil fuel
use, but only if the regulatory framework was adjusted to allow it.
Similarly, existing land-use regulations and highway building might
limit efforts to increase urban density and to foster the development
of public transportation networks.
Cap-and-Trade Design Features
Many proposals for reducing emissions would include cap-and-trade
systems to limit emissions of carbon dioxide and other greenhouse
gases. Such systems raise numerous design issues. Four issues are
especially important in considering the economic effects of a cap-and-
trade system: the coverage and stringency of the cap, the degree of
international coordination, flexibility in the timing of emissions
reductions, and the allocation of emission allowances.
Coverage and Stringency.--Under a cap-and-trade system,
policymakers would face decisions about which emissions to control and
when and how much to reduce them. Coverage could sharply affect costs:
A given quantity of reductions in greenhouse-gas emissions could be
achieved at a lower cost if the cap covered more types of gases and
more sources of emissions. For example, although carbon dioxide
emissions account for roughly 80 percent of greenhouse-gas emissions,
some cuts in emissions of other greenhouse gases, such as methane or
nitrous oxide, could be achieved at a relatively low cost. Likewise,
even though research suggests that the bulk of reductions in
CO2 emissions would probably come from the electricity-
generating sector, cost-effective reductions could also be found in
other sectors, such as the transportation and residential sectors.
Thus, a cap-and-trade program that covered as many types of greenhouse
gases and sources of emissions as possible would be most likely to
yield the most cost-effective reductions.
Most recent policy proposals would control nearly all
CO2 emissions from the burning of fossil fuels and would
cover at least some emissions of non-CO2 gases. In
recognition of the difficulties in monitoring and measuring emissions,
no proposal would include all types of emissions from all sources.
Nevertheless, many proposals would provide incentives for sources of
emissions that are not covered under the program to voluntarily
participate. For example, landowners could earn credits by planting
trees that absorb CO2 from the atmosphere--credits that
might then be sold to covered entities who would submit them in lieu of
emission allowances. Some proposals would limit the use of such
``offsets'' to a fixed annual amount or a fixed fraction of total
emissions. Greater latitude for such activities by uncovered sources
could help moderate the costs of achieving a given emissions target
because cheap reductions by uncovered sources could substitute for
expensive reductions by covered ones. However, difficulties in ensuring
the credibility and permanence of offsets could at least partially
undermine their effectiveness in reducing overall costs.\7\
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\7\ For additional information, see Congressional Budget Office,
The Use of Offsets to Reduce Greenhouse Gases, Issue Brief (August 3,
2009).
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Cumulative U.S. greenhouse-gas emissions through 2050 are projected
to total more than 300 billion metric tons of CO2 equivalent
(CO2e). Recent legislative proposals vary in the magnitude
of the reduction in cumulative emissions that they would require.
Because requiring larger cuts in emissions would typically require
deploying increasingly costly technologies, doubling the magnitude of
the cuts required would be expected to more than double the cost of
achieving them.
International Coordination.--Climate change is an international
problem that cannot be resolved without significant international
cooperation and coordination. Emissions from anywhere in the world
contribute to the global change in climate, so reducing emissions in
any single country--even the United States--will do relatively little
to avert climate change. Moreover, the stringency of foreign efforts to
reduce emissions could strongly influence the cost of limiting them
domestically. As long as a significant fraction of the world did not
adopt similar policies, some of the reductions in the United States
would probably be offset by increases in emissions elsewhere. For
example, foreign consumption of oil would rise as declining domestic
consumption pushed down international oil prices, and energy-intensive
production overseas (and exports of such products to the United States)
would most likely grow as domestic manufacturing costs rose relative to
foreign costs. Such emissions ``leakage'' would lead countries that
were controlling emissions to incur greater costs while achieving
smaller reductions in global emissions.
Leakage could be avoided if most or all countries restricted
emissions at the same time. Moreover, if a domestic cap-and-trade
system was linked to similar systems in other countries, the United
States might benefit from being able to buy low-cost foreign
allowances--or it could find that prices for domestic allowances were
driven up by foreign demand.
Flexibility in the Timing of Emissions Reductions.--Offering firms
subject to the cap flexibility as to when they made cuts in greenhouse
gases--by including provisions that would require them to meet the
annual caps only on average--could result in substantial cost savings
while producing the same effect on the climate.\8\ The ability to shift
efforts to cut emissions over time could lower costs while achieving an
equivalent reduction in warming because of the long-run nature of
climate change.
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\8\ For additional information, see the statement of Douglas W.
Elmendorf, Director, Congressional Budget Office, before the House
Committee on Ways and Means, Flexibility in the Timing of Emission
Reductions Under a Cap-and-Trade Program (March 26, 2009).
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Options for granting flexibility in the timing of emissions
reductions fall into two categories. The first category would permit
firms to transfer allowances across time. One important such provision
would allow regulated entities to ``bank'' allowances in any given year
for use many years after they were initially allocated. If, for
example, reducing emissions this year proved less costly than expected,
a firm might choose to do so and save some allowances for use in future
years. A similar ``borrowing'' provision would allow firms to use
allowances from future years (to be repaid with interest) during
earlier periods when particularly high demand led to spikes in the cost
of reducing emissions. A variant would create a ``reserve pool'' of
allowances from future years that could be used in earlier years only
under certain circumstances, such as when allowance prices rose above a
threshold.
The second category of provisions would allow regulators to manage
the price or quantity of allowances in a manner that induced a cost-
effective time pattern of emissions reductions by specifying a path for
allowance prices over time. For example, one such provision would allow
annual caps to be exceeded if the market price for allowances rose
above some specified value (referred to as a ``safety valve''). That
value--typically specified to rise over time--would determine the
maximum incremental cost in any given period. An alternative provision
would set a ceiling and a floor--sometimes called a ``price collar''--
for the price of allowances.\9\
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\9\ Ibid.; also see the statement of Douglas W. Elmendorf,
Director, Congressional Budget Office, before the Senate Committee on
Finance, The Distribution of Revenues from a Cap-and-Trade Program for
CO2 Emissions (May 7, 2009).
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Allocation of Allowances.--A key decision is how to distribute the
value of the allowances. One option would be to have the government
capture the value of the allowances by selling them, as it does with
licenses to use the electromagnetic spectrum. Another possibility would
be to give the allowances to energy producers, some energy users, or
other entities at no charge. The European Union has used that approach
in its cap-and-trade program for CO2 emissions, and nearly
all of the allowances issued under the 14-year-old U.S. cap-and-trade
program for sulfur dioxide emissions are distributed in that way.
Giving the allowances away to specific entities is equivalent to
selling the allowances and giving the entities cash because those
allowances could be sold in a liquid secondary market and thus could be
easily converted into cash.
How policymakers decided to use the value of the allowances would
affect the overall cost of a policy. For instance, the government could
use the revenues from auctioning allowances to reduce existing taxes
that tend to dampen economic activity. Some of the effects of a
CO2 cap would be similar to those of raising such taxes: The
higher prices caused by the cap would reduce real wages and real
returns on capital, which would be like raising marginal tax rates on
those sources of income. Using the value of the allowances to reduce
taxes could help mitigate the overall economic impact of a cap.
Alternatively, policymakers could increase the cost of meeting the
desired cap on emissions if they gave the allowances away in a manner
that undermined the market incentives that the cap-and-trade program
was intended to provide. For example, if electricity generators were
given allowances on the basis of the amount of electricity that they
produced with no further restrictions, they would be less likely to
pass on the cost of meeting the cap to their customers in the form of
higher prices. As a result, their customers would lack an incentive to
find cost-effective ways to reduce their use of electricity. Moreover,
as discussed below, decisions about how to allocate the allowances
would have significant implications for the distribution of gains and
losses among U.S. households.
the american clean energy and security act of 2009
H.R. 2454, the American Clean Energy and Security Act of 2009, as
passed by the House of Representatives on June 26, 2009, would create
two cap-and-trade programs for greenhouse-gas emissions--one applying
to CO2 and most other greenhouse gases, and a much smaller
one for hydrofluorocarbons--and make a number of other significant
changes in climate and energy policy. The cap-and-trade program would
restrict greenhouse-gas emissions from covered entities to 17 percent
below 2005 levels by 2020 and 83 percent below 2005 levels by 2050.
In the main cap-and-trade program, covered entities would be phased
into the program between 2012 and 2016. When the phase-in was complete,
the cap would apply to entities that account for roughly 85 percent of
total U.S. greenhouse-gas emissions. H.R. 2454 would not restrict the
types of entities or individuals that could purchase, hold, exchange,
or retire emission allowances in the main cap-and-trade program. An
unlimited number of allowances could be banked for future use or sale,
and a limited number of allowances could be borrowed from future
allocations. A portion of each entity's compliance obligation could be
met by purchasing offset credits from either domestic or international
providers; in the aggregate, entities could use offset credits in lieu
of reducing up to 2 billion tons of greenhouse-gas emissions annually,
or more than half the emissions reductions projected around the middle
of the policy period (roughly in 2030).
CBO estimates that the price of the allowances under H.R. 2454
would be $15 in 2012, the initial year that the cap took effect, and
would rise at an annual real rate of 5.6 percent over the course of the
policy, reaching $23 in 2020 and $118 by 2050 (all in 2007
dollars).\10\ As a result of the price on emissions, the prices of
goods and services throughout the economy would increase in rough
proportion to the emissions associated with their production and
consumption. At the same time, the allowances would become a source of
income for the government or others. The government could capture the
value of the allowances by selling them, or it could allow others to
capture the value by giving them the allowances for free.
---------------------------------------------------------------------------
\10\ For additional information, see Congressional Budget Office,
cost estimate for H.R. 2454, the American Clean Energy and Security Act
of 2009, as ordered reported by the House Committee on Energy and
Commerce on May 21, 2009 (June 5, 2009). The costs in that estimate
refer to federal budgetary costs and not the effects on the U.S.
economy described in this testimony. The cost estimate reports
allowance prices in nominal dollars. CBO estimates that the price of
allowances in nominal dollars will rise from $16 in 2012 to $26 in
2019.
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Key design features of H.R. 2454's cap-and-trade policy that
influenced CBO's price estimate included:
Coverage and stringency.--CBO found that allowing firms to
comply by purchasing offset credits (from both domestic and
international providers) would reduce the allowance price by 70
percent.
Timing flexibility.--If covered entities were required to
use all of their allowances in the designated year, then the
price of the allowances would rise at a rate that was dictated
by the speed at which the cap became more stringent. Banking
helps to smooth out the price path--and compliance costs--over
time. In CBO's projections, firms would bank allowances in the
early years of the program, when the cap was relatively
lenient, leading them to make more emissions reductions than
necessary under the cap and pushing up the price of allowances.
The accumulated supply of banked allowances would enable firms
to meet their requirements under the cap in succeeding periods,
helping to moderate allowance prices in later years. Firms
would continue to bank allowances up to the point at which the
rate of increase in the price of allowances was 5.6 percent,
CBO's projection of the rate of return that they would make on
alternative investments.
Allocation.--In general, the allocation of allowances in a
cap-and-trade program would not affect the allowance price. An
exception to that conclusion would occur if the allowances were
allocated in a manner that would tend to undo the higher prices
for energy-intensive goods and services that would result from
the cap-andtrade program. CBO estimated that the allowance
allocation in H.R. 2454 would have a small effect on the
allowance price.
Standards and subsidies.--In general, the imposition of some
regulatory standards and the provision of subsidies to develop
new technologies would reduce the price of allowances to the
extent that those standards or subsidies would change the
source of emissions reductions from those that would have
occurred with just the cap-and-trade program alone to others
that would be motivated by the standard or subsidy. CBO
estimated that the standards and subsidies in H.R. 2454
(including those for energy efficiency and for electricity
generation that would capture and store CO2) would
lower the allowance price by roughly 10 percent. Most of that
reduction would stem from the subsidy for carbon capture and
storage. (However, reductions in allowance prices stemming from
standards and subsidies could lead to higher, not lower,
economywide costs because--to the extent that they generated
changes in emissions patterns different from those that would
arise from the cap-and-trade program alone--those reductions
would not all be made in the most cost-effective manner.)
economywide effects of the cap-and-trade provisions of the acesa
By gradually increasing the prices of fossil fuels and other goods
and services associated with greenhouse-gas emissions, climate
legislation--including the cap-and-trade provisions of H.R. 2454--would
tend to reduce long-run risks from climate change. Such legislation
would also reduce economic activity through a number of different
channels, although the total effect would be modest compared with
expected future growth in the economy. The key channels are:
Shift production, investment, and employment away from
industries involved in the production of carbon-based energy
and energy-intensive goods and services and toward industries
involved in the development and production of alternative
energy sources and non-energy-intensive goods and services;
Reduce the productivity of existing capital and labor, which
are currently geared to relatively inexpensive energy;
Reduce domestic households' income, thus tending to reduce
domestic saving;
Discourage investment by increasing the costs of producing
capital goods, which is a relatively energy-intensive process;
Reduce net inflows of capital from abroad (because lower
productivity and higher production costs for capital goods in
the United States would make it more attractive for investors
to invest in other countries);
Reduce the total supply of labor by raising the prices of
consumer goods and thus reducing workers' real wages; and
Interact with the distortions of economic behavior imposed
by the existing tax system.
Taken together, those changes would affect the levels and
composition of gross domestic product and employment and would thus
influence households' economic well-being.
Effects of Emissions Restrictions on Gross Domestic Product
Researchers often report the likely effect of climate policies on
the economy in terms of their projected impact on GDP. On the basis of
a review of estimates by other analysts, CBO concluded that climate
legislation that would significantly reduce greenhouse-gas emissions in
the United States would probably reduce GDP by a modest amount compared
with what it would be without the legislation. The studies reviewed by
CBO yielded a wide range of estimates of losses in GDP from climate
policies, but all of them concluded that, all else being equal, higher
prices for emission allowances would impose greater losses in GDP. On
the basis of those studies, CBO concluded that GDP losses over the
entire period of the policy were likely to fall in the range of 0.01
percent to 0.03 percent per dollar of allowance price.\11\ CBO then
estimated losses in GDP by combining its own estimates for the prices
of allowances under H.R. 2454 with the range of predicted GDP losses
per dollar of allowance price.
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\11\ In a 2003 review of studies of the potential impacts of the
Kyoto Protocol, CBO concluded that GDP would be reduced by 0.018
percent to 0.028 percent per dollar of allowance price (measured in
2007 dollars) for each metric ton of CO2 equivalent,
depending on how the policy was implemented. See Mark Lasky, The
Economic Costs of Reducing Emissions of Greenhouse Gases: A Survey of
Economic Models, CBO Technical Paper 2003-3 (May 2003). A more recent
review of estimates of the economic effects of H.R. 2454 and similar
policies found that the predictions differ considerably for the short
and medium term, mainly because the studies incorporate different
assessments about the rates at which important markets can be expected
to adjust in response to the new policies, but the long-term
predictions agree much more closely. After 2030, point estimates of the
percentage losses in GDP per dollar of allowance price yield average
values similar to the range implied by the 2003 CBO analysis but
suggest a wider range. (The high end of that range comes from a model
that assumes that the supply of labor responds very sharply to changes
in wages.) The studies that CBO reviewed include Environmental
Protection Agency, Office of Atmospheric Programs, ``EPA Analysis of
the American Clean Energy and Security Act of 2009 H.R. 2454 in the
111th Congress'' (June 23, 2009); Energy Information Administration,
Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner
Climate Security Act of 2007, Report No. SR-OIAF/2008-1 (April 2008);
Sergey Paltsev and others, The Cost of Climate Policy in the United
States (Cambridge, Mass: MIT Joint Program on the Science and Policy of
Global Change, April 2009); Warwick McKibbin and others, ``Consequences
of Cap and Trade'' (fact sheet, Brookings Institution, 2009); and David
Montgomery and others, Impact on the Economy of the American Clean
Energy and Security Act of 2009, H.R. 2454 (Washington, D.C.: CRA
International, May 2009).
---------------------------------------------------------------------------
Using that approach, CBO concluded that the cap-and-trade
provisions of H.R. 2454 would reduce the projected average annual rate
of growth of GDP between 2010 and 2050 by 0.03 to 0.09 percentage
points, resulting in progressively larger reductions in the level of
GDP over time relative to what would otherwise occur (see Table 1).* To
place the size of those changes into perspective, CBO projects that
real GDP in the United States will grow at an average annual rate of
about 2.4 percent between now and 2050 and will be roughly two and a
half times as large in 2050 as it is today.
---------------------------------------------------------------------------
* All tables and figures have been retained in committee files.
---------------------------------------------------------------------------
The uncertainty about the effects of H.R. 2454 on GDP is probably
even greater than is expressed by that projected range of effects, even
though the studies reflect a wide range of assumptions about possible
future technological developments that might decrease the cost of
reducing emissions, and about the degree to which people would adjust
their decisions about working, saving, and investing in response to the
legislation. All of the analyses that CBO reviewed characterize the
economy in a very similar manner; none of them accounts for all of the
possible economic effects of the legislation; and none explicitly
addresses the uncertainty of its point estimates.
Unchecked increases in greenhouse-gas emissions would also probably
reduce output over time, especially later in this century. Those
climate-change-induced reductions in output would be moderated if
actions that the United States took to reduce emissions were
accompanied by similar efforts by other major emitting countries.
Nonetheless, CBO concludes that the net effects on GDP of restricting
emissions in the United States--combining the effects of diverting
resources to reduce emissions and moderating losses in GDP by averting
warming--are likely to be negative over the next few decades because
most of the benefits from averting warming are expected to accrue in
the second half of the 21st century and beyond.
Effects of Emissions Restrictions on Employment
By raising the prices of goods and services in proportion to the
covered greenhousegas emissions associated with their production and
consumption, climate legislation would affect the total level of
employment as well as the distribution of employment among industries.
Although supply-and-demand responses in many markets would influence
the magnitude of industry-specific and total employment effects, a key
consideration is how quickly and extensively labor markets would
respond to sustained increases in energy prices. If businesses and
workers treated each successive increase in energy prices as a
surprise, then adjustment would be slow, and the policy would lead to
slightly higher unemployment for some time. If, conversely, businesses
and workers exercised foresight and acted in their self-interest,
adjustment would occur more quickly, and the policy would have little
effect on overall unemployment. In either case, a cap-and-trade program
would have adverse effects on workers in specific industries and
geographic areas; some provisions of H.R. 2454 are intended to
ameliorate those effects.
Economywide Employment.--The cap-and-trade program established by
H.R. 2454 would probably have only a small effect on total employment
in the long run, but changes induced by the program would still have
costs for workers. The increases in the price of energy caused by the
program would reduce workers' real wages. Total employment would be
lower in the long run to the extent that some workers chose to work
fewer hours or not at all--but for nearly all workers, the choice in
the long run would probably be to remain in the workforce and accept
the prevailing wage. Moreover, experience shows that, apart from
recessionary periods, the dynamic U.S. economy provides jobs for most
people who want to work.
Employment in Different Industries.--The small effect on overall
employment would mask a significant shift in the composition of
employment over time. A cap-and-trade program for carbon dioxide
emissions would reduce the number of jobs in industries that produce
carbon-based energy, use energy intensively in their production
processes, or produce products whose use involves energy consumption,
because those industries would experience the greatest increases in
costs and declines in sales. The industries that produce carbon-based
energy--coal mining, oil and gas extraction, and petroleum refining--
would probably suffer significant employment losses over time.
Reductions also would be likely to occur in industries that use those
forms of energy intensively or purchase emissions-intensive inputs to
their production process from other industries, including chemicals,
primary metals, minerals mining, nonmetallic mineral products,
transportation, and construction. Among those industries, employment
losses in chemicals and transportation services could be relatively
large.
The shifts in demand caused by the policy would also create new
employment opportunities in some industries. Businesses that produce
the machinery necessary to generate energy without CO2
emissions and that produce that energy--for example, electricity
generated by the wind or the sun--would hire more workers. Employment
would also probably increase in industry sectors that supply goods and
services that use less energy in their production or that require
consumers to purchase less energy when using the industry's product. In
the automobile industry, for instance, employment would shift from
producing vehicles that rely solely on internal-combustion engines
fueled by gasoline to producing vehicles with hybrid or electric
engines. The largest gains in employment would probably be in service
industries.
The shift in employment between sectors of the economy would occur
over a long period, as the cap on emissions became progressively more
stringent and the allowance price (and, therefore, the price of
emissions) became progressively higher. The experience of the U.S.
economy over the last half-century in adjusting to a sustained decline
in manufacturing employment provides evidence that the economy can
absorb such long-term changes and maintain high levels of overall
employment. From a peak of almost 20 million jobs in 1979,
manufacturing employment fell to about 14 million jobs in 2007.
Although manufacturing employment rose and fell with the business cycle
over the period, the larger story is one of offsetting job creation and
shifts of workers to other sectors of the economy. For example, from
2000 through 2007, employment in manufacturing fell by 3.5 million
jobs, while nonmanufacturing private employment increased by 8.2
million jobs.\12\
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\12\ For an analysis of the economy's adjustment to a declining
demand for U.S. manufacturing, see Congressional Budget Office, Factors
Underlying the Decline in Manufacturing Employment Since 2000, Issue
Brief (December 2008).
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Job turnover is always large in U.S. labor markets. In 2008, for
example, employers reported that they hired about 56 million workers
and that about 59 million workers left their jobs.\13\ In reviewing
several studies that addressed the aggregate employment effects of
climate legislation, CBO found a wide range of implied estimates of
annual workforce turnover--gross jobs created and gross jobs lost--and
concluded that the annual churning in the workforce might range from
hundreds of thousands of jobs to several million jobs depending on the
year.\14\ Even at the high end of that range, the churning of jobs that
would be spurred by climate legislation would be small compared with
what normally occurs.
---------------------------------------------------------------------------
\13\ See Department of Labor, Bureau of Labor Statistics, Job
Openings and Labor Turnover: January 2009, USDL 09-0245 (March 10,
2009), Tables 11 to 14.
\14\ CBO reviewed a number of studies that addressed the effects of
policies like those that H.R. 2454 would put in place, including David
Kreutzer and others, The Economic Consequences of Waxman-Markey: An
Analysis of the American Clean Energy and Security Act of 2009, CDA09-
04 (Washington, D.C.: The Heritage Foundation, August 5, 2009);
McKibbin and others, ``Consequences of Cap and Trade''; Environmental
Protection Agency, Office of Atmospheric Programs, ``EPA Analysis of
the American Clean Energy and Security Act of 2009 H.R. 2454 in the
111th Congress''; Montgomery and others, Impact on the Economy of the
American Clean Energy and Security Act of 2009 (H.R. 2454); Energy
Information Administration, Energy Market and Economic Impacts of S.
2191, the Lieberman-Warner Climate Security Act of 2007; Paltsev and
others, The Cost of Climate Policy in the United States; and Mun S. Ho,
Richard Morgenstern, and Jhih-Shyang Shih, Impact of Carbon Price
Policies on U.S. Industry, Discussion Paper 08-37 (Washington, D.C.:
Resources for the Future, November 2008).
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The process of shifting employment can have substantial costs for
the workers, families, and communities involved. For example, one-
quarter of the workers who were displaced from their jobs in 2003--that
is, workers who were permanently separated from their jobs because
their employers closed or moved, there was insufficient work for them
to do, or their positions were abolished--and who were subsequently
reemployed were jobless for 27 weeks or more.\15\ Finding a new job
might require substantial worker flexibility. Some workers would need
to migrate to new geographic areas. An earlier study indicated that in
states whose industries were hit by significant adverse shocks between
1950 and 1990, the rate of unemployment generally decreased only when
workers moved to different states, a process that often took more than
five years to unfold.\16\ And some workers might need to acquire new
skills more suited to the employment opportunities available to them.
---------------------------------------------------------------------------
\15\ Data for people who lost jobs in 2003 are from Congressional
Budget Office, Long-Term Unemployment (October 2007), p. 11.
\16\ Oliver Jean Blanchard and Lawrence F. Katz, ``Regional
Evolutions,'' Brookings Papers on Economic Activity, no. 1 (1992).
---------------------------------------------------------------------------
Moreover, some workers would never find the new employment they
were seeking. Some might end up working fewer hours than they might
prefer. And some might leave the labor force entirely. Almost half of
the unemployment spells completed in 2003 ended with the individuals
leaving the labor force rather than becoming employed.\17\ Women, less-
educated workers, and older workers who lose their jobs appear to be
more likely to leave the labor force than men, more-educated workers,
and younger workers who lose their jobs.\18\ Some workers leaving the
labor force, especially older or less-educated workers, might opt to
seek disability payments that they would not have claimed otherwise.
---------------------------------------------------------------------------
\17\ See Randy Ilg, ``Analyzing CPS Data Using Gross Flows,''
Monthly Labor Review (September 2005), pp. 10-18.
\18\ Henry Farber, ``What Do We Know About Job Loss in the United
States? Evidence from the Displaced Workers Survey, 1984-2004,''
Economic Perspectives (2005), pp. 13-28.
---------------------------------------------------------------------------
Even workers who find new jobs might suffer permanent adverse
effects. For example, reductions in employment that occur rapidly in
particular geographic areas or industries could lead to significant
reductions in the lifetime earnings of some affected workers. Even 15
to 20 years later, men who separated from their stable jobs in a mass
layoff during the 1982 recession had annual earnings that were 20
percent lower than similar workers who did not experience such a job
loss.\19\
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\19\ Till von Wachter, Jae Song, and Joyce Manchester, Long-Term
Earnings Losses Due to Mass Layoffs During the 1982 Recession: An
Analysis Using U.S. Administrative Data from 1974 to 2004 (April 2009),
www.columbia.edu/vw2112/papers/mass_layoffs_1982.pdf.
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Provisions of H.R. 2454 Intended to Ameliorate Those Employment
Effects.--Some provisions of the bill--those that would subsidize the
development and deployment of technologies that reduced emissions or
that would subsidize production by specific industries and firms--would
dampen the effects of the policy on employment in industries and areas
where they are expected to be most severe.
Selected provisions of the bill would subsidize petroleum
refiners through 2026 and trade-exposed, energy-intensive
industries--those in which domestic firms compete with foreign
firms that do not bear the cost of complying with comparable
policies to control emissions--through 2035. Those subsidies
would be linked to output, causing the firms receiving them to
produce more than they otherwise would under the cap-and-trade
system and in doing so employ more people (although that
process also dampens the reallocation of output and employment
to industries that produce fewer carbon emissions).
The bill also includes measures that would decrease the
negative effects of the capand-trade system on output and
employment in the coal mining and processing industries. Those
provisions would establish and provide funding for the Carbon
Storage Research Corporation. That entity would, in the 15
years after enactment of the bill, support the development of
technologies to capture and store carbon, potentially enabling
coal-fired plants to generate electricity without releasing
greenhouse gases into the atmosphere. Through 2050, utilities
or merchant generators that invested in and operated plants
that used those technologies to generate electricity would be
paid subsidies to offset the higher costs of that technology.
Those subsidies would increase demand for coal and boost output
and employment in the coal industry relative to what would
occur under the emissions restrictions in the legislation but
without those subsidies.
The bill also would establish the Climate Change Worker
Adjustment Assistance program and provide funding of $4.1
billion through 2019 for that program. That program would aim
to cushion the effects of the emissions-control policies on
workers who lost their job as a consequence of the policy. It
also would seek to complement the flexibility evident in U.S.
labor markets by providing job training and assisting workers
searching for employment.
The Overall Burden on Households
Households' well-being depends on the amount and composition of
goods and services they consume as well as how much time they have for
nonmarket household activities including leisure. Policies to restrict
emissions could affect all elements of households' well-being, and the
legislation's overall burden would be determined by the value that
people place on those various elements. For example, if people found
products and activities that were not greenhouse-gas-intensive to be
good substitutes for ones that were, they would be more willing to
switch between them. As a result, they would find rising prices for
greenhouse-gas-intensive products and activities less burdensome than
if there were no good substitutes for them.
Some of those components of well-being--mainly the consumption of
marketed goods and services--are included in GDP, but other components
are not. Conversely, some components of GDP, such as exports and
investment, do not directly affect households' well-being in the same
way that consumption does, although they support jobs and provide for
the future. A substantial proportion of projected GDP impacts are due
to declines in investment, mainly from the increased costs of producing
energy-intensive capital goods. Declines in investment translate only
gradually into reduced household consumption. As another example, if
the policies caused output and real wages to fall, the burden of lower
consumption might be partly offset if people also chose to supply less
labor and instead devoted more time to valuable nonpaid activities not
included in GDP, such as childrearing, production within the home, and
leisure activities.
Measuring the overall burden of policies like those embodied in
H.R. 2454 requires estimates not only of supply and demand responses in
many markets but also of households' valuation of activities that take
place outside markets. Such estimates are difficult to obtain and very
uncertain. Only two of the analyses of H.R. 2454 reviewed by CBO
provide estimates of the overall burden, and the results differ
considerably, reflecting differences in assumptions about households'
behavior.\20\ On the basis of those estimates and of estimates of the
burden of other types of policies such as tax shifts and trade
liberalization, CBO concludes that the overall burden of H.R. 2454 is
likely to be smaller than the projected loss in GDP.
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\20\ Some models--including one that provides an estimate of the
burden--assume that households are very willing to work less and to
shift their consumption away from goods and services that become
relatively more expensive. Such models conclude that cap-and-trade
policies to reduce carbon dioxide emissions would have a larger effect
on GDP (because households would provide less labor to produce goods
and services and would save less as well) but would impose only a small
overall burden (because households could easily substitute relatively
cheaper goods and services for more expensive ones and substitute
household production or leisure for work). Much empirical work suggests
that the supply of labor is significantly less flexible than those
models assume, and CBO's own models and analyses in other areas
generally assume less flexibility. By contrast, models that assume that
households are relatively inflexible about shifting their consumption
of goods, services, and leisure generally (including the other model in
CBO's review that provides an estimate of the burden) conclude that
policies would have smaller effects on GDP but larger effects on the
overall burden (although still somewhat smaller than the GDP effects).
Those estimates of the burden do not include any value people place on
averting climate change by reducing emissions.
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CBO developed an estimate of households' loss in purchasing power
as a rough indication of the direct effect that the cap-and-trade
program established in H.R. 2454 would have on households. That loss in
purchasing power equals the costs of complying with the policy minus
the compensation that would be received as a result of the policy.\21\
Compliance costs include the cost of purchasing allowances and offsets,
and of reducing emissions--costs that businesses would generally pass
along to households in the form of higher prices. Compensation includes
the free allocation of allowances, receipt of proceeds from the sale of
allowances, and profits earned from producing offsets; much of that
compensation would be passed to households from businesses and
governments.
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\21\ Once the compensation received by U.S. households is deducted
from the compliance costs, the remaining loss in purchasing power stems
from the cost of reducing emissions and producing domestic offsets,
expenditures on international offsets, and the value of allowances that
would be directed overseas.
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Although CBO's measure of the loss in purchasing power provides an
estimate of the direct effect of the cap-and-trade program on
households, it ignores some channels of influence on economic activity
and households' well-being that cannot be readily quantified. Some of
the omitted channels lead CBO's measure to overstate households' true
burden, and some lead CBO's measure to understate the burden. The
latest research in this area does not reach a clear conclusion about
the relative magnitude of those channels, but it appears that CBO's
measure of the loss in purchasing power probably understates to a small
degree the true burden of the cap-and-trade program.
On the one hand, in keeping with the standard procedures followed
by CBO, the Office of Management and Budget, and the Congressional
Budget Committees in identifying federal budgetary costs, CBO estimated
the price path for allowances that would reduce emissions to the levels
defined by the annual caps without accounting for the effect that the
policy might have on GDP. Because the program would reduce GDP (and
thus lessen the overall demand for energy), the allowance price
required to meet the cap would be slightly lower than CBO's estimate. A
lower allowance price, in turn, would lead to a smaller loss in
purchasing power. CBO's estimate of the loss in purchasing power,
therefore, is slightly larger than would be the case if the agency had
accounted for the potential decline in GDP when it estimated the price
of allowances. In addition, CBO's measure ignores ways in which the
program might interact with distortions of economic behavior (and,
thus, costs ultimately imposed on households) generated by the existing
tax system. Some of those interactions would tend to reduce overall
economic costs. For example, the existing incentive for overconsumption
of housing from the mortgage interest deduction might be countered to
some extent by higher energy prices, as housing is energy intensive.
On the other hand, CBO's estimate of the loss of purchasing power
does not capture all of the ways in which the cap-and-trade program
could impose costs on households. There would be transition costs of
lost earnings by workers who would become temporarily unemployed or
underemployed during the adjustment to higher prices for energy from
fossil fuels. There would also be indirect effects on household
consumption relative to what would happen in the absence of the cap-
and-trade program. The premature obsolescence of existing long-lived
capital, such as coal-fired power plants that would no longer generate
as much electricity, would reduce household wealth a little (through
shareholders' losses) and in turn reduce consumption. Both lower
household wealth and higher costs of producing energy-intensive capital
goods would reduce domestic saving and investment, leading to slightly
lower economic growth and household consumption. Finally, some
interactions of the cap-and-trade program with existing taxes could
tend to add to economic costs. For example, the increase in prices for
fossil fuel energy and energy-intensive goods and services would tend
to aggravate distortions in the labor market caused by existing taxes
on earnings.
The loss in purchasing power would rise over time as the cap became
more stringent and larger amounts of resources were dedicated to
cutting emissions--for example, by generating electricity from natural
gas rather than coal or by improving energy efficiency. As a share of
GDP, the aggregate loss of purchasing power would be 0.1 percent in
2012 and 0.8 percent in 2050, CBO estimates, and would average 0.4
percent over the entire 2012-2050 period. Measured at the projected
2010 level of income, the average per-household loss in purchasing
power would be $90 in 2012 and $925 in 2050 and would average about
$455 per U.S. household per year over the 2012-2050 period.
effects on households in different income groups
Estimates of the average loss in purchasing power per household do
not reveal the range of effects that the program would have on
households in different circumstances, including their income level,
sectors of the economy in which they work, and regions of the country
in which they live. CBO does not have the capability to estimate
effects by region or by sector of employment, but the agency does
estimate effects on households of different income levels.
Specifically, CBO estimated the effects of the cap-and-trade
program established by H.R. 2454 on households in each fifth of the
population arrayed by income (and adjusted for household size) on the
basis of the provisions of the program as defined for both 2020 and
2050. The loss in purchasing power that would be faced by households at
each point in the income distribution would depend on the amount of
compliance costs they would bear minus the amount of offsetting real
income they would receive as a result of the policy. To show the burden
of the loss in purchasing power that households would experience, CBO
presents those losses as shares of after-tax income.
Avenues by Which Households Would Incur Costs and Receive Compensation
Estimating the effects of the cap-and-trade program on households
in different income brackets entails accounting for the various means
by which households would bear compliance costs and receive
compensation in their various roles as consumers, workers,
shareholders, taxpayers, and recipients of government services.
Compliance Costs.--CBO assumed that businesses would pass the costs
of acquiring emissions allowances, purchasing domestic and
international offset credits, and reducing emissions on to their
customers through higher prices for goods and services. (That
assumption, which is standard in distributional analyses, stems from
the fact that the price of an item in the long run generally reflects
the incremental cost of producing that item.) CBO estimated price
increases for categories of goods and services using a model of the
U.S. economy that relates final prices of goods to the costs of
production inputs. Households and governments would bear those costs
through their consumption of goods and services. Households account for
the bulk of total spending, and they would bear an estimated 87 percent
of the compliance costs. Those costs were allocated among households on
the basis of their consumption of those goods and services as reported
in the Consumer Expenditure Survey from the Bureau of Labor
Statistics.\22\
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\22\ The database for the analysis was constructed by statistically
matching income information from the Statistics of Income data (from
the Internal Revenue Service), households' characteristics from the
Current Population Survey (reported by the Census Bureau), and data on
households' expenditures from the Consumer Expenditure Survey (from the
Bureau of Labor Statistics). The data are from 2006, the latest year
for which information from all three sources was available, and thus
reflect the patterns of income and consumption in that year. The data
were extrapolated to 2010 levels using the estimated overall growth in
population and income. For the purposes of this analysis, CBO allocated
the cost of reducing all of the gases covered in the cap-and-trade
program among households and governments on the basis of their
contributions to emissions of carbon dioxide, which constitute more
than 85 percent of greenhouse gases.
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The federal government and state and local governments would bear
the remainder of compliance costs (an estimated 13 percent) through
their spending on goods and services. CBO did not distribute
governmental costs across households because their incidence was
unclear. If governments chose to increase taxes across the board, the
cost would fall on households in proportion to their share of federal,
state, and local taxes. In contrast, if governments chose to cover the
additional expenses by cutting back on the services they provide, the
cost would fall on households that no longer received those services.
Emissions Allowances.--
Under H.R. 2454, the distribution of allowances would change
between 2020 and 2050, which would alter the distribution of the loss
in purchasing power across households.
In 2020, the government would issue most of the allowances at no
cost to private entities, state governments, or the federal government.
More specifically:
15 percent of the value of the allowances would be set aside
for an energy rebate program for households whose gross income
does not exceed 150 percent of the federal poverty level or
that are receiving benefits through the Supplemental Nutrition
Assistance Program, the Medicare Part D low-income subsidy, the
Supplemental Security Income program, or other low-income
assistance, and for an expansion in the earned income tax
credit payable to individuals without qualifying children;
16 percent of the value of the allowances would be given to
companies that distribute electricity and natural gas, with
instructions to pass those benefits on to their residential
customers;
29 percent of the value of the allowances would be given to
those same distributors of electricity and natural gas, with
instructions to pass the value on to their commercial and
industrial customers;
15 percent of the value of the allowances would be given to
what are termed trade-exposed, energy-intensive industries--
which would be less able to pass their compliance costs on to
their customers than would other industries facing less
international competition--and oil refiners;
18 percent of the value of the allowances would be directed
to the federal government and to state governments to spend
within the United States (not including the amount used to fund
the energy rebate and tax credit). For example, the bill would
direct a portion of the value to be spent encouraging the
development of particular technologies (such as electricity
generation that includes the capture and storage of carbon
dioxide) and improvements in energy efficiency; and
7 percent of the allowance value would be spent overseas, to
fund efforts to prevent deforestation in developing countries,
encourage the adoption of more efficient technologies, and
assist those countries in adapting to climate change.
The allocation of allowances under the 2050 provisions of the ACESA
is quite different from that in 2020, with a much larger fraction of
the allowance value flowing directly to households:
15 percent of the value of the allowances would continue to
be used to fund the energy rebate program and the expansion in
the earned income tax credit;
54 percent of the allowance value would be used to fund a
Climate Change Consumer Refund Account and would be paid on a
per capita basis;
21 percent of the value would be directed to federal and
state governments (not counting the shares allocated for
household rebates, tax credits, and refunds) to be spent on
various objectives, including encouraging investments in clean
energy technology, increasing energy efficiency, facilitating
adaptation, and protecting wildlife; and
10 percent of the value would be spent overseas to fund
efforts to prevent deforestation in developing countries,
encourage the adoption of more efficient technologies, and
assist those countries in adapting to climate change.
For the allowances given to local distributors of electricity or
national gas with instructions to pass the benefits on to their
residential customers, CBO assumed that the value of those allowances
would be received by those households. For the allowances given to
those local distributors with instructions to pass the benefits on to
their commercial and industrial customers, CBO assumed that the value
of those allowances would be received by shareholders, because that
allocation of allowances would not generally reduce the cost of
producing an incremental unit of output and thus would not generally be
passed through to households in the form of lower prices.\23\ For the
allowances given to trade-exposed industries and oil refiners, CBO
assumed that the value would be passed through in the form of lower
prices for customers.\24\ With the exception of the allowances used to
fund household rebates, refunds, or tax credits, CBO lacked sufficient
information to distribute the value of allowances that were given to
federal or state governments to spend within the United States. CBO
also did not distribute among U.S. households the value of allowances
that would be spent overseas.
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\23\ All increased profits, net of taxes, were allocated to
households according to their holdings of equities, which were
estimated from the Federal Reserve's Survey of Consumer Finances for
2004. Those holdings include equity held through mutual funds and
private pension accounts.
\24\ That approach was used to account for CBO's inability to
distribute the initial cost of the cap among such firms. The cost of
the emissions cap would tend to fall on workers and shareholders in
those industries; correspondingly, the relief aimed at those industries
(which would be linked to their level of production) would tend to
offset costs that workers and shareholders in those industries would
otherwise incur. Because of data limitations, CBO assumed for this
analysis that the cost of complying with the cap would lead to price
increases for those industries. Correspondingly, CBO reflected the
value of allowances allocated to those industries as offsetting price
decreases.
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Domestic Offset Credits.--Covered entities would purchase domestic
offset credits to comply with the cap under both the 2020 and 2050
provisions of ACESA. Spending on domestic offsets would rise over time
because the increase in the price of allowances would make it cost-
effective for firms to comply by purchasing increasingly costly
offsets. Suppliers of domestic offset credits would experience
increases in net income--the gross income received from selling the
offsets minus the costs incurred to generate them.\25\
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\25\ Like other profits, increased after-tax net income by
providers of domestic offsets was allocated to households according to
their holdings of equities, which were estimated from the Federal
Reserve's Survey of Consumer Finances for 2004. Those holdings include
equity held through mutual funds and private pension accounts.
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Additional Financial Transfers and Costs That Would Affect
Households.--The cap-and-trade program under H.R. 2454 would result in
some additional transfers of income--and additional costs--that are not
reflected in the gross compliance costs, the disposition of the
allowance value, or the net income from domestic offset production.
Households would receive additional income in three ways:
The value of the rebates and tax credits for low-income
households in excess of the 15 percent of the allowance value
that the bill would set aside to pay for them\26\.--That amount
would add to the sums received by households but would also
increase the cost to the government.
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\26\ Estimates of the low-income rebates and tax credits were made
by CBO and the staff of the Joint Committee on Taxation, respectively.
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Increases in government benefit payments that are pegged to
the consumer price index, such as Social Security benefits.--
Under the assumption that the costs of compliance would be
passed through to consumers in the form of higher prices and
that the Federal Reserve would not act to offset those price
increases, the rise in the consumer price index would trigger
increased cost-of-living adjustments in benefits from certain
government programs. The increase in those transfer payments
would help offset the higher expenditures for the households
that received them but would also impose a cost on the federal
government.
Reduced federal income taxes.--Because the federal income
tax system is largely indexed to the consumer price index, an
increase in consumer prices with no increase in nominal income
would reduce households' federal income tax payments. That
effect would increase households' after-tax income but would
also add to the federal deficit. Because each of those
transfers of income would have equal and offsetting costs
(increased Social Security benefits would ultimately need to be
paid for by higher taxes or reductions in other government
spending, for example), they would neither add to nor reduce
the loss in purchasing power associated with the policy.
However, because CBO was able to distribute the benefits
associated with the transfers but lacked sufficient information
to distribute the costs, the transfers do affect the estimated
distribution of the loss in purchasing power described below.
Effects of the Policy's Provisions in 2020
CBO estimates that households in the lowest income quintile in 2020
would see an average gain in purchasing power of 0.7 percent of after-
tax income, or about $125 measured at 2010 income levels. Households in
the highest income quintile would see a loss in purchasing power of 0.1
percent of after-tax income, or about $165 at 2010 income levels (see
Figure 1 and Table 2), and households in the middle quintile would
experience a loss in purchasing power equivalent to 0.6 percent of
after-tax income, or about $310 at 2010 income levels.
Although households in the lowest income quintile would experience
a net gain in purchasing power in 2020 under the provisions of H.R.
2454, they would experience the largest financial burden prior to
compensation. The price increases triggered by the compliance costs
would cause a loss in purchasing power of 2.5 percent of aftertax
income for households in the lowest quintile, compared with 0.7 percent
of aftertax income for households in the highest quintile. Although the
dollar increase in outof-pocket expenditures stemming from the
compliance costs would be substantially larger for high-income
households ($1,400) than for low-income households ($430), it would
impose a larger proportional burden on low-income households because
those households consume a larger fraction of their income and because
energyintensive goods and services make up a larger share of
expenditures by low-income households.
In estimating households' loss of purchasing power, CBO lacked
sufficient information to allocate across households in different
income brackets the benefits of some proposed government spending
programs. In addition, the agency was not able to allocate across
households the 13 percent of compliance costs that would be borne by
the government as well as other expenditures that the federal
government would face as a result of the policy and that would not be
funded by revenue from the allowances. The government could finance
those expenditures in various ways, including increasing taxes or
reducing other spending, which could have very different effects on
households at different points in the income spectrum. In 2020, the
aggregate amounts of benefits and costs that CBO was not able to
allocate across households roughly canceled each other out. As a
result, the loss in purchasing power that CBO allocated across
households in different income brackets was nearly the same as the
average loss in purchasing power experienced by all households in
aggregate (0.2 percent of after-tax income, or $160 per household when
measured at 2010 income levels).\27\
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\27\ That average loss in purchasing power in 2020 is slightly
lower than the $175 reported in CBO's June 2009 analysis (and which CBO
referred to as ``net economywide cost'') because of refinements in
CBO's methodology and subsequent changes in legislative provisions. In
addition, the allocation of the loss in purchasing power across
households is different than in the June 19th analysis because the
final version of the bill targeted more relief at households in the
lowest income quintile. For more information, see Congressional Budget
Office, ``The Estimated Costs to Households from the Cap-and-Trade
Provisions of H.R. 2454,'' letter to the Honorable Dave Camp (June 19,
2009).
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Effects of the Policy's Provisions in 2050
The cap-and-trade program in H.R. 2454 would have different impacts
across households in 2050 than in 2020. CBO estimates that households
in the lowest income quintile in 2050 would see an average increase in
purchasing power equal to 2.1 percent of their after-tax income, or
$355 measured at 2010 income levels (see Table 3 and Figure 2).
Households in the highest income quintile would see a loss in
purchasing power of 0.7 percent of after-tax income, or about $1,360
measured at 2010 income levels, and households in the middle quintile
would have a loss in purchasing power of 1.1 percent of after-tax
income, or about $590 at 2010 levels.
In 2050, the aggregate amount of costs that CBO was unable to
allocate across households would exceed the aggregate amount of
unallocated benefits. In particular, the magnitude of the rebates and
tax credits for low-income households in 2050 would be significantly
larger than the 15 percent of the allowance value set aside to pay for
them. In addition, more revenue would be required to fund the increases
in indexed benefits (such as Social Security income) that would be
triggered by higher prices. As a result, the loss in purchasing power
allocated across households in different income brackets is only about
60 percent of the estimated aggregate loss in purchasing power (1.2
percent of after-tax income, or $925 per household when measured
against 2010 income levels).
Comparison of the Effects of the 2020 and 2050 Policy Provisions
The 2020 and 2050 policy provisions and the losses in purchasing
power associated with them have some similarities and some differences.
First, the loss in purchasing power stemming from both the 2020 and
2050 policy provisions would impose the largest burden (measured as a
fraction of after-tax income) on households in the middle and next-to-
highest income quintiles (see Figures 1 and 2).
Second, the amount of compensation received by households in the
lowest income quintile would be substantially higher in 2050 than in
2020. Households in the bottom quintile would receive greater relief in
2050 because they would continue to receive protection in their loss of
purchasing power through the low-income rebate and tax credit
provisions and would also receive refunds through the Climate Change
Consumer Refund Account. If the low-income rebates and tax credits that
households received were reduced to account for the Climate Change
Refunds that they would also receive, the net gain by the average
household in the lowest quintile would be about $135.
Third, the ultimate beneficiaries of the value of the allowances
would be more certain in 2050 than in 2020 because most of the
allowances in 2020 would be distributed to households via private
entities or government programs designed to promote new technologies or
energy efficiency. As a result, CBO had to make assumptions as to how
the allowances given to private entities would ultimately accrue to
households. In contrast, most of the allowance value in 2050 would flow
to households directly via rebates from the federal government.
The Chairman. Thank you very much.
Why don't we go ahead with the other witnesses before we
ask questions.
Mr. Newell, I understand this is your first hearing before
our committee in your new position as administrator at Energy
Information Administration. We welcome you and wish you well in
that job.
Mr. Newell. Thank you very much.
It is, and I appreciate the opportunity.
STATEMENT OF RICHARD NEWELL, ADMINISTRATOR, ENERGY INFORMATION
ADMINISTRATION, DEPARTMENT OF ENERGY
Mr. Newell. Mr. Chairman and members of the committee, I
appreciate the opportunity to appear before you today. The
Energy Information Administration is the statistical and
analytical agency within the U.S. Department of Energy. By law,
our data, analyses, and forecasts are independent of approval
by any other officer or employee of the U.S. Government.
Therefore, our views should not be construed as representing
those of the Department of Energy or the administration.
The cap-and-trade program that is the centerpiece of H.R.
2454, the American Clean Energy and Security Act, establishes
caps on covered greenhouse gas emissions through 2050. EIA's
analysis focuses on the 2012 to 2030 period, during which the
cumulative cap on covered emissions represents a 21-percent
reduction requirement from the 113 billion metric tons of
covered emissions in EIA's baseline projection. The actual
reduction in covered emissions over the 2012 to 2030 period
could be larger if covered entities decide to build a
significant bank of allowances by 2030, or smaller if they
decide to purchase less expensive offsets as a substitute for
reductions in covered emissions.
I'll focus now on certain key findings and insights from
the analysis.
First, I should say that, while I believe it is critical to
undertake analyses of the type discussed here today, one must
be humble and cautious when making projections decades into the
future. There are a number of important but uncertain
assumptions that must be made and that are critical to
understanding the ultimate results of analysis.
All analyses of this type must establish a baseline
projection against which the effects of a policy scenario are
measured. These baseline assumptions are one of the most
important determinants of the estimated impacts of any change
in policy relative to that baseline. EIA's baseline uses the
April 2009 revision of the Annual Energy Outlook Reference
Case, which takes into account impacts of the recent economic
slowdown, as well as the American Recovery and Reinvestment
Act.
EIA's analysis shows that the estimated impacts of H.R.
2454 on energy prices, energy use, and the economy are highly
sensitive to assumptions about the availability and cost of
both international offsets as well as no- and low-carbon
technologies for power generation. The six main analysis cases
considered in EIA's report reflect a range of different
assumptions about these factors. The scenarios help inform
decisions about policy design and provide insight into how
policies might perform under alternative conditions.
As shown in figure 1 of my written testimony, allowance
prices through 2030 are more than four times larger, using the
least favorable assumptions, than using the most favorable
ones. EIA's other cases, which we believe to be more likely,
lie within this range. Future energy prices are additional
factors in future allowance-price uncertainty.
Another important factor is policy design, including
provisions for allowance trading, banking, and borrowing, which
can increase the opportunities for cost-effective reductions.
Provisions for allowance price ceilings and floors can also
reduce price uncertainty.
Regarding consumer energy prices, as shown in figure 2 of
my testimony, EIA's result suggests that the free allocation of
allowances to electricity and natural gas distributors
significantly lowers direct impacts on consumer electricity and
natural gas bills prior to 2025.
EIA also modeled the combined efficiency and renewable
electricity standard included in H.R. 2454. We found it does
not play a significant role in driving the generation mix
because its requirements appear likely to be met as a result of
existing State-level mandates, Federal incentives for renewable
energy, and the carbon price itself.
Turning to energy system impacts, as shown in figure 4 of
my testimony, electricity-related reductions account for 80 to
88 percent of overall reductions in energy-related
CO2 emissions in 2030, even though electricity
comprises 41 percent of such emissions. Among other things,
this result occurs because over 90 percent of coal is used in
the electricity sector, yet, there are several alternative no-
and low-emission electricity generation technologies already
demonstrated, and others are being developed.
In contrast, the transportation sector is 95 percent
dependent on petroleum, with comparatively few low-and no-
greenhouse gas alternatives that work readily within the
current system. Therefore, while transport comprises 34 percent
of U.S. energy-related CO2 emissions in 2030, a
relatively smaller 5 to 8 percent of reductions come out of the
transportation sector in EIA's analysis.
Turning to the aggregate economic impacts, the left-hand
panels of figure 6 in my written testimony compare the
cumulative reductions in gross domestic product, or GDP, and
consumption across different analysis cases. All impacts are
measured relative to the Reference Case. The total discounted
GDP change over the 2012-to-2030 period is -0.3 percent in the
Basic Case, with a range from -0.2 percent to -0.9 percent
across the main cases that we analyzed.
The change in personal consumption is somewhat lower than
this and other measures of economic impact, such as consumption
per household and impacts on household energy bills, are also
developed and discussed in the detailed report.
Mr. Chairman, members of the committee, this concludes my
testimony, and I'd be happy to answer any questions.
Thank you.
[The prepared statement of Mr. Newell follows:]
Prepared Statement of Richard Newell, Administrator, Energy Information
Administration, Department of Energy
Mr. Chairman, and members of the Committee, I appreciate the
opportunity to appear before you today to discuss the recent U.S.
Energy Information Administration (EIA) analysis of the energy and
economic impacts of H.R. 2454, the American Clean Energy and Security
Act of 2009 (ACESA).
EIA is the statistical and analytical agency within the U.S.
Department of Energy. EIA collects, analyzes, and disseminates
independent and impartial energy information to promote sound
policymaking, efficient markets, and public understanding regarding
energy and its interaction with the economy and the environment. EIA is
the Nation's premier source of energy information and, by law, its
data, analyses, and forecasts are independent of approval by any other
officer or employee of the United States Government. The views herein
therefore should not be construed as representing those of the
Department or the Administration.
EIA's analysis of ACESA focuses on those provisions that can be
readily analyzed using our National Energy Modeling System (NEMS). Key
provisions of ACESA that are represented include:
the cap-and-trade program for greenhouse gases (GHGs) other
than hydrofluorocarbons, including provisions for the
allocation of allowances to electricity and natural gas
distribution utilities, low-income consumers, State efficiency
programs, rebate programs, energy-intensive industries, and
other specified purposes;
the combined renewable electricity and efficiency standard
for electricity sellers;
the carbon capture and storage (CCS) demonstration and early
deployment program;
Federal building code updates for both residential and
commercial buildings; and
Federal efficiency standards for lighting and other
appliances.
Provisions that are not represented in EIA's analysis include the
Clean Energy Deployment Administration, the strategic allowance
reserve, the separate cap-and-trade program for hydrofluorocarbon
emissions, the GHG performance standards for activities not subject to
the cap-and-trade program (e.g., methane emissions from coal mines and
landfills), the distribution of allowances to coal merchant plants, new
efficiency standards for transportation equipment, and the effects of
increased investment in energy research and development.
The choice of a baseline is one of the most influential assumptions
for any analysis of climate and energy legislation. The starting point
for EIA's analysis is an updated version of the Annual Energy Outlook
2009 (AEO2009) Reference Case issued in April 2009 that reflects the
projected impacts of the American Recovery and Reinvestment Act, which
was enacted in February 2009. The AEO2009 also reflects other
significant energy laws, including the Energy Improvement and Extension
Act of 2008, the Energy Independence and Security Act of 2007, and the
Energy Policy Act of 2005 (the latter two laws, following their
enactment, were reflected in AEOs prior to the 2009 edition).\1\ This
baseline projection through 2030 is not meant to be an exact prediction
of the future but rather represents a plausible energy future given
technological and demographic trends, current laws and regulations, and
consumer behavior as derived from available data. EIA recognizes that
projections of energy markets extending more than 20 years into the
future are highly uncertain and subject to many events that cannot be
foreseen, such as energy 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 the report, are likely to be more robust than the specific
projections for any one case.
---------------------------------------------------------------------------
\1\ The development of the updated Reference Case is described in a
recent EIA report, An Updated Annual Energy Outlook 2009 Reference Case
Reflecting Provisions of the American Recovery and Reinvestment Act and
Recent Changes in the Economic Outlook, SR/OIAF/2009-03 (Washington,
DC, April 2009), web site http://www.eia.doe.gov/oiaf/servicerpt/
stimulus/index.html.
---------------------------------------------------------------------------
Relative to their emissions in 2005, sources covered by the ACESA
cap-and-trade program must reduce their emissions 3 percent by 2012, 17
percent by 2020, 58 percent by 2030, and 83 percent by 2050. Over the
2012 to 2030 period covered by EIA's analysis, the cumulative cap on
covered emissions totals 89 billion metric tons (BMT) of carbon
dioxide-equivalent (CO2e), representing a 21-percent or
24.6-BMT reduction requirement from the 113 BMT of covered emissions in
EIA's baseline over the same period. The actual reduction in covered
emissions over the 2012 to 2030 period could be either larger or
smaller than this requirement. Actual reductions could be larger during
this period because covered entities may have an incentive to hold a
significant bank of allowances in 2030 to help them meet increasingly
stringent caps that apply between 2030 and 2050. Actual reductions in
covered emissions could be smaller than required to the extent offsets
are used as a substitute.
This testimony briefly summarizes projected impacts on energy
prices, energy use, and economic activity as well as several key
findings and additional insights drawn from EIA's analysis. The
complete analysis report, which includes a description of the bill,
EIA's modeling approach and results, as well as a discussion of
uncertainties, caveats, and additional analysis cases, has been
provided to the Committee and is available on EIA's web site
(www.eia.doe.gov).
Starting with key findings and insights, EIA's analysis shows that
the estimated impacts of the ACESA on energy prices, energy use, and
the economy are highly sensitive to assumptions about the availability
and cost of international offsets as well as no- and low-carbon
technologies for power generation. The six main analysis cases
considered in EIA's report reflect a variety of different assumptions
regarding these factors, with the Zero Bank and High Offsets cases
representing the most favorable situations for ease of compliance with
the ACESA cap-and-trade program and the No International/Limited Case
representing the least favorable situation. As discussed below, GHG
allowance prices and economic impacts through 2030 are more than 4
times larger using the least favorable assumptions than using the most
favorable ones. EIA's other cases, which we believe to be more likely,
lie in between these alternative cases.
It is well-known that some key technologies for reducing emissions
face a variety of technical challenges (e.g., CCS) and, in some cases,
additional questions regarding public acceptance of their widespread
deployment arising from concerns unrelated to global climate change
(e.g., nuclear power). As noted in EIA's previous analyses, barriers to
potentially cost-effective low-and no-emissions technologies can be
directly influenced by policy choices, including regulatory planning
and siting decisions, incentives for early technology deployment, as
well as the design of a cost-containment mechanism.
EIA's results also suggest that the free allocation of allowances
to electricity and natural gas distributors significantly lowers direct
impacts on consumer electricity and natural gas prices prior to 2025,
when it starts to be phased out. While this result may serve goals
related to regional and overall fairness of the program, the overall
efficiency of the cap-and-trade program is reduced to the extent that
the price signal that would encourage cost-effective changes by
consumers in their use of electricity and natural gas is delayed.
In previous hearings, EIA has been asked about the main factors
contributing to allowance price uncertainty under a cap-and-trade
program. In addition to uncertainty regarding the cost and availability
of international offsets and key no-and low-carbon technologies, 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 in allowance price behavior, including the
design of provisions for allowance trading, banking, and borrowing,
additional cost-containment mechanisms, and market oversight. The
strategic allowance reserve in ACESA, which is not addressed in EIA's
analysis, focuses on the important issue of short-term volatility in
allowance prices but does not appear to address longer-term cost
containment. Specifically, following a startup period, the strategic
allowance reserve in ACESA relies on a ``trigger price'' for auctions
that is set in relation to recent allowance prices, which does not
appear to preclude a scenario in which allowance prices evolve along a
relatively high trajectory given underlying conditions that would
support such an outcome, such as those examined in the No International
and No International/Limited cases.
Let me now turn briefly to the specific results of EIA's analysis.
allowance and energy price impacts
Figure 1* shows that, under ACESA, allowance prices--the key driver
of energy price impacts--vary widely depending on assumptions regarding
the availability and cost of international offsets and key no-and low-
carbon electricity technologies such as nuclear and coal with CCS.
---------------------------------------------------------------------------
* All figures have been retained in committee files.
---------------------------------------------------------------------------
ACESA increases delivered energy prices, but effects on electricity
and natural gas bills of consumers are substantially lessened through
2025 by the allocation of free allowances to regulated electricity and
natural gas distribution companies. For example, Figure 2 shows that
electricity prices in five of the six main ACESA cases range from 9.5
to 9.6 cents per kilowatthour in 2020, lower than recent prices and
only 3 to 4 percent above the Reference Case level.\2\ Average impacts
on electricity prices in 2030 are projected to be substantially
greater, reflecting both higher allowance prices and the phase-out of
the free allocation of allowances to distributors between 2025 and
2030. By 2030, electricity prices in the ACESA Basic Case are 19
percent above the Reference Case level, with a wider band across all
six main policy cases. As shown in Figure 3, electricity price impacts
in 2030 vary significantly by region--in general, larger price impacts
occur in those regions that are most reliant on coal and have
competitive wholesale power markets.
---------------------------------------------------------------------------
\2\ The average electricity price in the No International/Limited
case in 2020 is 10.7 cents per kilowatthour. The recent 12-month
rolling average electricity price through the end of May 2009 was 10.06
cents per kilowatthour.
---------------------------------------------------------------------------
Almost all of the increase in household energy costs prior to 2025
arises from the increases in the delivered price of motor fuels,
stemming from the requirement that fuel producers or importers hold
enough emissions allowances to cover the emissions that result when
their product is used by consumers. Even so, the gasoline price changes
anticipated to result from ACESA are much smaller than the changes
experienced over the past several years.
energy system impacts
As shown in Figure 4, the vast majority of reductions in energy-
related emissions are expected to occur in the electric power sector.
Across the ACESA main cases, the electricity sector accounts for
between 80 percent and 88 percent of the total reduction in energy-
related carbon dioxide (CO2) emissions relative to the
Reference Case in 2030, even though electricity comprises only 41
percent of such emissions. Emission reductions in the electricity
sector come primarily from reducing conventional coal-fired generation,
which in 2007 provided 50 percent of total U.S. generation. A portion
of the electricity-related CO2 emissions reductions results
from reduced electricity demand stimulated both by consumer responses
to higher electricity prices and incentives in ACESA to stimulate
greater energy efficiency.
There are several reasons for the concentration of emissions
reductions in the electric power sector. First, over 90 percent of
coal, the fuel with the highest carbon content, 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 generation sources already demonstrated (e.g.,
natural gas, renewables, and nuclear) and others are being developed
(e.g., fossil with CCS). Third, changes in electricity generation fuels
do not require fundamental changes in distribution infrastructure or
electricity-using equipment.
In contrast, the transportation sector is 95 percent dependent on
petroleum for fuel, with its own dedicated distribution network and
associated vehicle technologies, and comparatively few low-or no-GHG
alternatives that work readily within this system. Recent U.S.
experience and relatively high fuel prices over an extended period in
Europe and other world regions illustrate that major shifts in
transportation energy use are not likely to be induced by the impact of
the ACESA cap-and-trade program on the price of motor fuels. Therefore,
while transport comprises 34 percent of U.S. CO2 emissions
in 2030, a relatively smaller 5 to 8 percent of reductions come out of
the transportation sector in EIA's analysis.
In addition to changing the projected mix of electricity generation
sources, as shown in Figure 5, ACESA is likely to increase the total
amount of new electric capacity that must be added between now and 2030
in most of our analysis cases. The requirement for capacity additions
beyond the Reference Case, which poses siting challenges for 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 GHG emissions required
under ACESA.
gdp and household consumption impacts
In the process of reducing GHG emissions, ACESA increases the cost
of producing energy, which reduces real economic output, reduces
purchasing power, and lowers aggregate demand for goods and services.
While a broad economic assessment of ACESA would also take into account
the benefits of GHG reductions--through lower climate change impacts--
this is beyond the scope of EIA's modeling capacity. EIA's analysis
therefore focuses on the cost side of this balance, while the benefits
can be inferred from the magnitude of resulting emission reductions.
The result is that projected real gross domestic product (GDP) is
generally lower relative to the Reference Case, as are emissions. Note,
however, that even including the highest cost scenario analyzed by EIA,
the economy is still projected to continue to grow at a rate of 2.5
percent or more on average from 2012 to 2030. The left-hand panels of
Figure 6 compare the cumulative reductions in GDP and consumption over
the 2009-through-2030 period across cases. All impacts are relative to
the Reference Case. The total discounted GDP change over the 2012-to-
2030 time period is -0.3 percent in the ACESA Basic Case, with a range
from -0.2 percent to -0.9 percent across the main ACESA cases.
Similarly, the cumulative discounted change in personal consumption is
-0.2 percent in the ACESA Basic Case and ranges from -0.1 percent to -
0.7 percent across the main cases.
Consumption and energy bill impacts can also be expressed on a per
household basis in particular years. In 2020, the reduction in
consumption is $134 per household (2007 dollars) in the ACESA Basic
Case, with a range of $30 to $362 across all main ACESA cases. In 2030,
household consumption is reduced by $339 in the ACESA Basic Case, with
a range of $157 to $850 per household across all main ACESA cases. By
2030, the estimated reductions in household consumption in the ACESA No
International/Limited Case, at the top of these ranges, are
approximately double the impacts in the ACESA High Cost Case, which has
the next highest level of impacts.
While addressing GHG emissions is a challenge of unprecedented
scale in terms of its implications for our energy system, the scale of
the economy itself is also huge. Therefore, the same estimated economic
impacts from any given analysis can be expressed in ways that may
appear either large or small. Figure 6, which in its right hand panels
presents the same results discussed above but in terms of the absolute
levels of GDP and consumption in 2020 and 2030, shows how this framing
matters. EIA strives, however, to present our results as neutrally as
possible.
Mr. Chairman and members of the Committee, this concludes my
testimony. I would be happy to answer any questions you may have.
The Chairman. Thank you very much.
Mr. Harvey, why don't you go right ahead and give us the
EPA's perspective.
STATEMENT OF REID P. HARVEY, CHIEF, CLIMATE ECONOMICS BRANCH,
OFFICE OF AIR AND RADIATION, ENVIRONMENTAL PROTECTION AGENCY,
ACCOMPANIED BY ALLEN FAWCETT
Mr. Harvey. Thank you, Mr. Chairman and Ranking Member
Murkowski, members of the committee. Thank you for the
opportunity to testify about EPA's analysis of H.R. 2454.
EPA's overall cost estimates of the bill are similar to
those of CBO's and EIA's; and so, in view of that, I'll focus
on several policy implications of our analyses that may be
useful to you in the Senate as you continue your deliberations.
The details of our analyses are available on EPA's Web site.
It is important to note at the outset that EPA's analysis
did not assess the costs if we don't act to reduce greenhouse
gases, to weigh the cost of action against the cost of
inaction, or to compare the costs of H.R. 2454 with other
policy approaches to reduce greenhouse gas emissions.
The U.S. Global Change Research Program, in its June 2009
report, described the impacts that we're already seeing and
that are likely to dramatically increase, this century, if we
allow global warming to continue unchecked. In the report, it
documents how communities throughout America would experience
increased costs, including for more sustained droughts,
increased heat stress on livestock, more frequent and intense
spring floods, and more frequent and intense forest wildfires.
Over the last several years, EPA's analyses of cap-and-
trade approaches in climate change legislation have shed light
on three key factors that are important to the cost of a cap-
and-trade program: one, the coverage and cumulative reductions
of the cap; two, the type and availability of offsets; three,
the penetration of new technologies and existing technologies.
I'll describe each of these in turn.
First, our analysis of H.R. 2454 and related Senate bills
tells us that what affects overall costs are the cumulative
emissions reductions that the bills would achieve over decades,
rather than the cap level that they set for any particular
year. Because H.R. 2454, like several recent Senate bills,
allows emissions allowances to be banked over time, its 2050
cap drives overall behavior and encourages banking in the early
years of the cap-and-trade program. In other words, just
changing the 2020 cap alone does not have a significant effect
on total costs if all else stays the same. Costs will be lower
the sooner that we start acting, but a national commitment to
meeting these long-run emissions targets is key.
Second, allowing capped sources to meet some of their
obligation through offsets lowers costs significantly. Our
analysis of offsets was aided by our experience managing and
analyzing emissions trading programs and voluntary programs,
such as our methane programs. We found, through several
scenario analyses, that delaying or limiting the ability to use
low-cost international or domestic offsets to meet compliance
obligations increased costs substantially, compared to the core
case with full availability of offsets. For example, if no
international offsets were allowed, allowance prices would be
89 percent higher than the core case.
Moreover, we found that the number of international offsets
purchased is sensitive to other policy provisions in the bill.
For example, we conducted sensitivities with respect to the
energy efficiency provisions of H.R. 2454 that we modeled for
the core case. Without the energy efficiency provisions, we
found that the allowance price increased by about 2 percent.
But, the number of international offsets purchased under that
scenario rose by 11 percent, to compensate.
So, it's important to note that the cost and availability
of international offsets will be influenced by factors beyond
U.S. policy choices, including the efforts of other nations to
mitigate their emissions, and that there will always be some
uncertainty about the future cost and availability of offsets.
Third, penetration of low- or no-carbon technologies, such
as renewable technologies, nuclear power, and carbon capture
and storage, increases substantially by 2050 under H.R. 2454
and similar Senate bills in the 110th Congress that we
analyzed. For H.R. 2454, we estimated that these technologies
would grow as a share of primary energy by 18 percent to 2020,
to 26 percent by 2030, and to 38 percent by 2050, compared to a
steady share of 14 percent in the business-as-usual case. So,
these results demonstrate the key importance of placing a price
on carbon emissions to incentivize the deployment of low- or
no-carbon technologies.
However, there's much uncertainty about the rate at which
various technologies will penetrate. For example, the
availability of nuclear power has a significant impact on our
results. We used estimates of the costs of nuclear power from
EIA, and we constrained the growth of nuclear power generation,
using the same assumptions as those used by the U.S. Climate
Change Science Program, which assumes that nuclear generation
could increase by 150 percent by 2050.
We also conducted sensitivity analyses, holding nuclear
power to reference levels. We found that if the additional
nuclear capacity were not available, allowance prices would
increase by 15 percent. We also saw, in the short term, that
H.R. 2454 would reduce overall electricity demand.
Furthermore, financial incentives, such as bonus allowances
for early deployment of carbon capture and sequestration, were
found to increase deployment of cleaner technology in the near
term.
Overall, our analysis of H.R. 2454 highlights some of the
factors that will affect the costs of meeting particular
emissions targets that are inherently uncertain, such as the
availability of offsets or the potential for technological
advances. How these underlying uncertainties translate into
uncertainty about the cost of a cap-and-trade program depends
on the kinds of cost-containment provisions that are
incorporated in the program.
In conclusion, these three factors and their effects on
costs are among the most important to consider in crafting
climate change legislation. Our work, along with those of the
other agencies represented on this panel, hopefully will
provide some guidance on the likely outcomes of different
policy choices.
Thank you, again, for this opportunity to discuss EPA's
analyses, and I look forward to any questions you may have.
[The prepared statement of Mr. Harvey follows:]
Prepared Statement of Reid P. Harvey, Chief, Climate Economics Branch,
Office of Air and Radiation, Environmental Protection Agency
Mr. Chairman, Ranking Member Murkowski, and Members of the
Committee, thank you for the opportunity to testify today about EPA's
analysis of H.R. 2454, the American Clean Energy and Security Act.
EPA's overall cost estimates of the bill are similar in many
respects to those of the Congressional Budget Office (CBO) and the
Energy Information Administration (EIA). In view of those similarities,
I will focus on several policy implications of our analyses that may be
useful as the Senate continues its deliberations. The details of our
analyses, along with the underlying data and spreadsheets, are
available on EPA's website (www.epa.gov/climatechange/economics/
economicanalyses.html).
It is important to note at the outset that EPA's analysis did not
attempt to assess the costs if we don't act to reduce greenhouse gases;
to weigh the costs of action against the costs of inaction; or to
compare the costs of H.R. 2454 with other policy approaches to address
GHG emissions. The U.S. Global Change Research Program (in its June
2009 report, ``Global Climate Change Impacts in the United States'')
described the impacts that we are already seeing and that are likely to
dramatically increase this century if we allow global warming to
continue unchecked. In the report, it documents how communities
throughout America would experience increased costs, including from
more sustained droughts, increased heat stress on livestock, more
frequent and intense spring floods, and more frequent and intense
forest wildfires.
Over the last several years, EPA's analyses of cap-and-trade
approaches in climate change legislation have shed light on three key
factors that are important to the costs of a cap-and-trade program:
1. the coverage and cumulative reductions of the cap;
2. the type and availability of offsets; and
3. the penetration of new and existing technologies.
I'll describe the implications of each of these factors in turn.
First, our analysis of H.R. 2454 and related Senate bills tells us
that what affects overall costs are the cumulative emissions reductions
the bills would achieve over decades, rather than the cap level they
set for any particular year. Because H.R. 2454 (like several recent
Senate bills) allows emission allowances to be banked over time, its
2050 cap (an 83% reduction from 2005 levels by 2050) drives overall
behavior and encourages banking in the early years of the cap-and-trade
program. In other words, just changing the 2020 cap alone does not have
a significant effect on total costs if all else stays the same. Costs
will be lower the sooner we start acting but a national commitment to
meeting these long-run emission reduction targets is key.
Second, allowing capped sources to meet some of their obligation
through offsets--emission reductions achieved by non-capped sources--
lowers costs significantly. Our analysis of offsets was aided by EPA's
experience managing and analyzing emissions trading and voluntary
programs, such as our methane programs. We found through several
scenario analyses that delaying or eliminating the ability to use low-
cost international or domestic offsets to meet compliance obligations
increased costs substantially compared to the core case with full
availability of offsets. For example, if no international offsets were
allowed, allowance prices would be 89 percent higher than the core
case. Moreover, we found that the number of international offsets
purchased is sensitive to other policy provisions in the bill. For
example, we conducted sensitivities with respect to the energy
efficiency provisions of H.R. 2454 that we modeled for the core case.
Without the energy efficiency provisions, we found that the allowance
price increased by about two percent, but the number of international
offsets purchased under that scenario rose by 11 percent to compensate.
It is important to note that the cost and availability of international
offsets will be influenced by factors beyond U.S. policy choices,
including the efforts of other nations to mitigate emissions, and that
there will always be some uncertainty about the future cost and
availability of offsets.
Third, penetration of low or no-carbon technologies, such as
renewable technologies, nuclear power, and carbon capture and storage
(CCS), increases substantially by 2050 under H.R. 2454 and similar
Senate bills in the 110th Congress that we have analyzed. For H.R.
2454, we estimated that these technologies would grow, as a share of
primary energy, to 18 percent by 2020, to 26 percent by 2030, and to 38
percent by 2050, compared to a steady share of 14 percent in the
business-as-usual case. These results demonstrate the key importance of
placing a price on carbon emissions to incentivize the deployment of
low and no-carbon technologies. However, there is much uncertainty
about the rate at which various technologies will penetrate. For
example, the availability of nuclear power has a significant impact on
our results. We used estimates of the cost of nuclear power from EIA,
and constrained the growth of nuclear power generation using the same
assumptions as used by the U.S. Climate Change Science Program in
developing their Scenarios of Greenhouse Gas Emissions and Atmospheric
Concentrations report, which assumes that nuclear generation could
increase by 150 percent by 2050. We also conducted sensitivity analyses
holding nuclear power growth to reference levels and found that, if the
additional nuclear capacity were not available, allowance prices would
increase by 15 percent. We also saw in the short-term that H.R. 2454
would reduce overall electricity demand. Furthermore, financial
incentives, such as bonus allowances for early deployment of carbon
capture and sequestration were found to increase deployment of cleaner
technology in the near term. Overall, our analysis of H.R. 2454
highlights some of the factors that will affect the costs of meeting
particular emission targets that are inherently uncertain, such as the
availability of offsets or the potential for technological advances.
How these underlying uncertainties translate into uncertainty about the
cost of a cap-and-trade program depends on the kinds of cost-
containment provisions that are incorporated in the program.
In conclusion, these three factors and their effects on costs are
among the most important to consider when crafting climate change
legislation. Our work, along with those of the other agencies
represented on this panel, hopefully will provide some guidance on
likely outcomes of different policy choices. Thank you again for this
opportunity to discuss EPA's analyses and I look forward to any
questions you may have.
The Chairman. Thank you very much.
Mr. Fawcett, you're available to answer questions, is that
right?--but didn't plan to testify?
Mr. Fawcett. Correct.
The Chairman. All right.
Dr. Parker, why don't you go right ahead, with your
testimony.
STATEMENT OF LARRY PARKER, SPECIALIST IN ENERGY AND
ENVIRONMENTAL POLICY, CONGRESSIONAL RESEARCH SERVICE
Mr. Parker. Thank you, sir. My name is Larry Parker. On
behalf of the Congressional Research Service, Brent Yacobucci
and I would like to thank the committee for its invitation to
testify here today about cost projections of H.R. 2454.
CRS has completed a review and synthesis of seven studies
that attempt to project the cost of the bill's cap-and-trade
program. Before I summarize these analyses, I must state a
caveat. It is difficult, and some would consider it unwise, to
project costs out 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 loom as critical issues that cannot be
modeled. Hence, long-term projections are, at best, speculative
and should be viewed with attentive skepticism. The finer and
more detailed the estimate presented, the greater the
skepticism should be.
But, if models cannot accurately predict the future, they
can indicate the sensitivity of a program's provisions to
various economic, technological, and behavioral assumptions
that may assist policymakers in designing a greenhouse gas
reduction strategy.
The various cases presented here do provide some important
insights in the costs and benefits of H.R. 2454 and its many
provisions. We have summarized these into six points:
No. 1, if enacted, the ultimate cost of H.R. 2454 would be
determined by the response of the economy to the technological
challenges presented by the bill. The potential for new
technology to reduce the cost of H.R. 2454 is not fully
analyzed by any of the cases, nor can it be. The process of
technology development and dissemination is not sufficiently
understood at the current time for models to replicate with any
long-term confidence. In the same vein, it is difficult to
determine whether or not the various incentives provided by the
bill are directed in an optimum manner. In many cases, the bill
focuses on specific technologies and not on broader research
and development strategies.
No. 2, the distribution of allowance value under 2454 will
determine who bears much of the program's cost. The allowances
created by H.R. 2454 are essentially licenses to emit
greenhouse gases, and therefore, will have market value based
on supply and demand. Total allowance value could approach or
exceed $100 billion annually. The bill transfers that value to
a wide range of covered and noncovered entities. Those entities
receiving that value will bear less of the program's cost,
compared to those who do not. The major impact of H.R. 2454's
allowance allocation scheme is not in changing the cost
required to comply with the program's requirement, instead it
is to change who bears those costs.
No. 3, the cases studied generally indicate that the
availability of offsets, particularly international offsets, is
a major factor in determining the cost of H.R. 2454.
Sensitivity analysis found that eliminating international
offsets would raise allowance prices by 60 percent or more. In
general, those studies that assumed a restrictive supply of
offsets projected higher allowance prices than cases that
ramped up the availability of offsets.
No. 4, the interplay among the various cases between
nuclear power, renewables, natural gas, and coal-fired capacity
with carbon capture and storage emphasizes the need for a low-
carbon source of electric generating capacity in the mid- to
long-term. The cases presented here do not agree on the amount
of new generating capacity necessary under the bill, or the mix
of fuels and technologies that would be employed. The estimated
amount of capacity constructed depends on the case's assumption
about the need for new capacity and the replacement or
retirement of existing capacity, along with consumer-demand
response to the rising prices and incentives contained in the
bill.
No. 5, attempts to estimate household effects or conduct
other fine-grained analysis are fraught with numerous
difficulties. Estimates generated reflect more on the
philosophies and assumptions of the cases reviewed than on any
credible future effect. Decisions about appropriate welfare
measure, household size, and discounting, and, indeed, the
value of government services in general, dwarf any insight that
can be gained from these estimates. For example, estimates of
household effects in the studies reviewed vary by an order of
magnitude even when normalized by household size and accounting
method.
No. 6, H.R. 2454's climate-related environmental benefit is
best considered in a global context and the desire to engage
the developing world in the reduction effort. When the United
States and other developed countries ratify the 1992 United
Nations Framework Convention on Climate Change, they agreed
both to reduce their own emissions to help stabilize greenhouse
gas emissions, but to take the lead in reducing those gases.
This global scope raises two issues for H.R. 2454; first,
whether the bill'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 becomes more likely; and
second, whether the bill's reductions meet U.S. commitments to
stabilization under the international treaty and would occur in
a timely manner.
Thank you. I will be happy to answer any questions you may
have.
[The prepared statement of Mr. Parker follows:]
Prepared Statement of Larry Parker and Brent Yacobucci, Specialists in
Energy and Environmental Policy, Congressional Research Service
My name is Larry Parker. On behalf of the Congressional Research
Service, Brent Yacobucci and I would like to thank the Committee for
its invitation to testify here today about cost projections of H.R.
2454, which would establish a cap-and-trade program to reduce U.S.
greenhouse gas emissions through the year 2050. CRS has just completed
a review and synthesis of seven studies that attempt to project the
costs of H.R. 2454 to the year 2030 or 2050.
Before I summarize the analyses, I must state a caveat: It is
difficult (and some would consider it unwise) to project costs out 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. The finer and more detailed the
estimate presented, the greater the skepticism should be. In the words
of the late Dr. Lincoln Moses, the first Administrator of the Energy
Information Administration: ``There are no facts about the future.''
But if models cannot accurately predict the future, 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
examined here do provide some important insights on the costs and
benefits of H.R. 2454 and its many provisions. We have summarized these
insights into six points.
First, if enacted, the ultimate cost of H.R. 2454 would be
determined by the response of the economy to the technological
challenges presented by the bill. The bill provides numerous price,
research and development, deployment, and regulatory incentives for
technology innovation. The potential for new technology to reduce the
costs of H.R. 2454 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 with any long-term confidence. In the same vein, it is
difficult to determine whether the various incentives provided by the
bill are directed in an optimal manner. In many cases the bill focuses
on specific technologies and not on broader research and development
strategies.
Second, the distribution of allowance value (either through free
allocations or auction revenue) under H.R. 2454 will determine who
bears much of the program's cost. The allowances created by H.R. 2454
are essentially licenses to emit a metric ton of carbon dioxide
equivalent, and, therefore, will have market value based on supply and
demand. Total allowance value could approach or exceed $100 billion
(2005$) annually---significantly more than the projected resource costs
to comply with the bill's emissions reduction requirement. H.R. 2454
transfers that value to a wide range of covered and non-covered
entities. Those entities receiving that value will bear less of the
program's costs compared with those who do not. The major impact of
H.R. 2454's allowance allocation scheme is not in changing the resource
costs required to comply with the program's requirement; instead, it is
in changing who bears those costs.
Third, the cases studied generally indicate that the availability
of offsets (particularly international offsets) is a major factor in
determining the cost of H.R. 2454. Sensitivity analyses generally found
that eliminating international offsets would raise allowance prices by
60% or more. In general, those studies that assumed restrictive (and in
some cases, declining) offset supply projected higher allowance prices.
Cases that ramped up availability of offsets generally projected lower
allowance prices. No case assumed that the full amount of offsets
permitted under H.R. 2454 would be available or used immediately in
2012.
Fourth, the interplay between nuclear power, renewables, natural
gas, and coal-fired capacity with carbon capture and storage (CCS)
among the cases emphasizes the need for a low-carbon source of electric
generating capacity in the mid-to long-term. A considerable amount of
low-carbon generation will have to be built under H.R. 2454 in order to
meet the reduction requirement. The cases presented here do not agree
on the amount of new generating capacity necessary under the bill, 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 H.R. 2454, along with consumer demand response to the
rising prices and incentives contained in the bill. Here again,
technological development will be critical.
Fifth, attempts to estimate household effects (or conduct other
fine-grained analyses) are fraught with numerous difficulties;
estimates generated reflect more on the philosophies and assumptions of
the cases reviewed than on any credible future effect. Decisions about
appropriate welfare measure, household size, and discounting, and,
indeed, the value of government services in general, dwarf any insight
that could be gained from such estimates. For example, estimates of
household effects in the studies reviewed vary by an order of
magnitude, even when normalized by household size and accounting
method. Likewise, fine-grained analysis of effects on specific states
and/or economic sectors are similarly suspect.
Sixth, H.R. 2454's climate-related environmental benefit is best
considered in a global context and the desire to engage the developing
world in the reduction effort. When the United States and other
developed countries ratified the 1992 United Nations Framework
Convention on Climate Change (UNFCCC), they agreed both to reduce their
own emissions to help stabilize atmospheric concentrations of
greenhouse gases and to take the lead in reducing greenhouse gases.
This global scope raises two issues for H.R. 2454: (1) whether the
bill'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 the bill's reductions meet U.S.
commitments to stabilization under the UNFCCC and occur in a timely
fashion so that global stabilization of atmospheric greenhouse gas
concentrations may occur at an acceptable level.
Thank you, We will be glad to answer any questions you may have.
The Chairman. Thank all of you for your excellent
testimony.
Let me start with 5 minutes of questions, and then we'll
just take turns and get through as many questions as we can.
One issue--and maybe, Dr. Elmendorf, you could comment on
this first--this whole issue of the baseline that we're talking
about here is one that I think is particularly troublesome--the
baseline projection of economic growth going forward and also
of emissions, particularly in light of the recession that we
find ourselves in. My understanding is, there's been about an
8-percent reduction in emissions from 2007 levels that we're
experiencing this year. What is CBO's view of what the
appropriate projection ought to be--or baseline projection--if
we're talking about a 20-percent cut in emissions--or maybe 17
percent is what the House bill calls for--17 percent from 2005
levels by 2020. Where does that 17 percent start getting
counted from?
Mr. Elmendorf. So, Mr. Chairman, as several witnesses have
emphasized, the baseline plays a crucial role in the estimates.
We and, I think, many of the modelers use the baseline
emissions projections of the Energy Information Administration.
Maybe Richard could speak to the logic that underlies that
baseline. But, that's what we and others tend to follow. You're
right, that is one of the many sources of uncertainty and
sensitivity in our analysis.
The Chairman. Dr. Newell, did you have any thoughts about
the appropriate baseline?
I guess one question that has to be answered in order to
develop one of these models is, Are we expecting to get back to
the 2007 level of GDP, here, in the near future, and then build
off of that? Or, is this a new level we're starting at here?
How do you answer those issues, Dr. Newell.
Mr. Newell. As I mentioned in my testimony, the baseline
that EIA has used was an update of the Annual Energy Outlook
2009 forecast. Every year, EIA puts out a forecast of energy
supply, demand, and CO2 emissions through 2030. This
year we'll actually do it through 2035.
In April, due to the significant changes in the near-term
outlook, particularly due to the economic downturn, and then,
in response, the Recovery and Reinvestment Act, EIA actually
did an unusual thing and updated its forecast.
In the near-term, that forecast was lower than it was
before, primarily due to the economic downturn. As you pointed
out, our estimate for this year is that emissions are likely to
be 5.9 percent lower than they were last year, primarily,
again, due to the economic downturn.
In terms of what that's going to look like, moving forward,
a lot of that, over the next several years, depends on the rate
of economic recovery, which, as we know, has a significant
degree of uncertainty associated with it. But, over the longer
term, we expect that, in the absence of additional policies of
the type that we're discussing around here today, emission
growth would return roughly to what it was before the economic
downturn.
The Chairman. Let me ask about this offset issue, here.
EPA's analysis of the House-passed legislation has shown that
having no offsets at all in the first 10 years of the program
results in a very small increase in the overall price of carbon
allowances. I gather you do that by assuming that the offsets
that will be acquired in those early years of the program will
not be used for compliance obligations; instead, they will be
used for banking. They will be banked for future years. Am I
understanding your analysis correctly? Is this assumption
you're making, that all of these allowances are going to be
banked, is this the same assumption that others are making, as
well? Or are you sort of an outlier on that issue?
Mr. Harvey. That's correct. Our analysis showed that if you
delay the international offsets' availability by about 10
years--so, instead of being available in 2012, they were
available in 2022--the effect on the overall allowance prices
would be about 3 percent. We're using a model that has
foresight out to 2050, and so, people are looking at the
availability of the international allowances occurring after
2022, and their behavior reflects that long-term approach. So,
it's an outcome of our model and of other models that would
reflect banking.
The Chairman. My impression is that this is very different
from the assumptions built into some of the other analyses that
have been made. Let me ask Dr. Parker if that's accurate.
Mr. Parker. Of course, a couple of the other analyses, in
fact, restrict the use of offsets altogether. For example, the
one by the Heritage Foundation does not allow any banking
whatsoever and also has a declining availability of offsets
over time. Likewise, the study done for the National
Association of Manufacturers has a very high effective discount
rate of 10 percent on future investments. Therefore, you would
not tend to bank very much there, because you're thinking very
short-term. So, most of the studies, I would say, follow the
line that EPA is, that if these allowances are--if these
offsets are available at less than the current allowance price,
that people will buy them, bank them in anticipation of higher
allowance prices down the road.
So, I would say most of the studies follow the logic of
EPA. But, there are these couple of other studies which use
higher effective discount rates, and therefore, people are
thinking much shorter-term. They do not bank.
Mr. Elmendorf. Mr. Chairman, could I just add, for----
The Chairman. Sure.
Mr. Elmendorf. [continuing]. On behalf of CBO, that because
of--we do expect there will be banking of offsets and
allowances in the early years that would be--then be used
later, when the caps become more stringent.
Because of the possibility of banking, what matters for the
price of allowances in the near term is the entire expected
path of demand for allowances and the supply of allowances and
the supply of offsets. So, the total amount of offsets
available over the entire next 40 years plays a very important
role in the price of allowances that we estimate. But, taking
allowances away for just a few years doesn't matter very much,
because that's only a small share of all the allowances that
will be available over the entire period, and it doesn't matter
as much when they're available because of this possibility of
banking. So, the total supply of offsets is critically
important in the estimates, as several of us have discussed,
but we expect that the supply would increase a good deal over
time as more international agreements were negotiated so that
there--we don't think there's as much offset supply in the
first few years. That's part of why that amount itself is not
as important for the allowance price as the total amount of
offsets.
The Chairman. Thank you very much.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Elmendorf, let's start with you. In the CBO analysis,
you have identified a cost figure of about $175 a year, and
that's been kind of catchy, because it is ``a postage stamp a
day'' has been cited. In that analysis, you're looking at the
year 2020. By 2020 it's probably fair to say that the most
severe and the most drastic of the greenhouse gas limits
haven't gone into effect, so the costs--we would expect them to
be somewhat lower.
Dr. Parker has suggested that it is ``skeptical''. When
looking beyond 2020, the crystal ball gets a little more
difficult to read. Why did you choose 2020 as the--year to set
this analysis? Can CBO produce an analysis, or estimates, for
the years 2030, 2050, with any degree of reliability, when we
know this is when we anticipate these more drastic cuts?
Mr. Elmendorf. So Senator, our initial analysis was about
2020. We chose that as a year at which the provisions of the
House bill--this is what we were referring to at the time--
would have been, essentially, phased in. Everything would be up
and running. But yet, it was not so far off as to seem so
completely hypothetical. I mean, it is certainly true, that the
uncertainties are very large, even for 2020. They get larger
over time. So, we thought it had a concreteness--more
tangibility to it, in a way that would be useful for people.
But, we understand that's only one snapshot, in a sense, of the
effects of the legislation. In the report we released a few
weeks ago in preparation for this hearing, we, in fact, have
redone the distributional analysis for 2050, as well as for
2020. 2020 numbers are slightly different, because the final
version of the House bill that we've now used was different
than the version that we used at the time.
So, our estimate that the net loss in purchasing power in
2020 would be $160 per household, but in 2050 would be $925 per
household. Those are both expressed, I should say, in
comparable years. The actual nominal amounts would be much
greater. So, just as you suspect, and as others suspect, the
cost in 2050 is many times the cost in 2020--it's from $160 to
$925.
Senator Murkowski. I have got some questions. I think we
could spend all morning here, with you but I would like to
follow up, in the next round, about the whole aspect of
discounting and appreciating how that factors in.
Mr. Harvey, I wanted to ask you a question, because you had
suggested in your comments this morning that the impacts of
climate change on the globe, whether it's drought, whether it's
intense spring flooding, fires--the impact is real. But, in
looking at the costs that we're talking about, with the various
analyses that are out there, none of them really tell us
whether or not the bill will achieve the stated objective of
mitigating global climate change. When you were analyzing the
House bill, did you take into consideration the impact of
projected greenhouse gas levels, or did you look at whether or
not temperatures are increasing, whether sea levels will
increase?
Mr. Harvey. No, Senator, we did not do that analysis for
the House bill. We did something similar for that in the Senate
several years ago, but not for the House bill.
Senator Murkowski. Why didn't you do it in the House one,
then?
Mr. Harvey. We weren't asked to.
Senator Murkowski. OK.
This will need to be a quick question for whoever wants to
answer. When discussing the importance of climate change, one
of the underlying reasons that we should move forward is from a
national security perspective, because it will allow us to
reduce the amount of oil that we have to import. Can any of you
speak to the extent to which the House bill is projected to
reduce our reliance on foreign imports of oil?
Mr. Elmendorf, you're saying, ``No.''
Mr. Newell.
Mr. Newell. Yes, as part of our analysis, we did look at
that issue, and we find that oil imports decline by 8 to 24
percent, or 1 to 2 million barrels per day. That's by 2030,
under a range of scenarios. So, yes, it does lead to a
reduction in petroleum consumption and most of that reduction
in petroleum consumption actually comes out of imports, in our
projections.
Senator Murkowski. Dr. Harvey, you looked at the same?
Mr. Harvey. We did not look at the import question, no.
Senator Murkowski. Dr. Parker.
Mr. Parker. Basically, three of the models gave us enough
information to talk about the general use of oil--not
necessarily imports, but oil itself. The EIA did it. MIT did
it. They showed a somewhat larger reduction in oil supply. By
2030, they said the amount of oil would go down by almost 20
percent. So, if that 20 percent of total oil usage came out of
imports, that's obviously a much higher percentage of oil that
would be--oil imports that would be reduced. If you assume it's
about half or three-quarters imports, that would all come out
of that sector. So, that analysis was done for them.
Also, one of the EPA models, the ADAGE model provided,
also, its reductions in oil usage, and that number is roughly
the same as EIA's number.
Senator Murkowski. Thank you, Mr. Chairman.
Mr. Fawcett. Explicitly, the ADAGE model shows, in 2030,
700,000 barrels-per-day savings in oil primary energy use.
The Chairman. Senator Shaheen.
Senator Shaheen. Thank you, Mr. Chairman.
Mr. Elmendorf, you testified that your analysis looked at
the costs of the House bill, but not any potential gains from
the changes that are being talked about. Why is that?
Mr. Elmendorf. We were able to quantify the direct costs
for households, meaning both the gross costs of complying with
legislation and the return of money to them through the
allowance value, and so on. Assessing the economic impacts of
climate change in that quantitative way is very, very
difficult. The uncertainty that we've all talked about looms
very large there.
We have written about the effects of climate change drawing
on other people's research, in terms of both the climate and
the economy. We talk about some of those in my written remarks.
One estimate that we draw on, what seems to us to be
perhaps the most comprehensive estimate now, is that by 2100--
in other words, the end of this century--there could be a loss
equivalent to about 5 percent of U.S. output. That's not just
in measured GDP, it also incorporates nonmarket damages and
costs associated with the risk of a catastrophic outcome; puts
that cost--that loss as equivalent to about 5 percent of U.S.
output.
Most of that loss would be later in the century, as we
understand--everybody understands; it's the cumulative amount
of greenhouse gases that lead to these climate changes. So,
those costs tend to be backloaded over the coming century. So,
our view is that, over the next few decades, the economic
losses from policies to avert climate change would exceed the
economic gains, in terms of climate change. At some point over
the longer term, those lines may cross as the expected risk and
the--the expected costs and the risk of climate change rise.
But, we just aren't able to quantify those, and the crystal
ball really does just get too hazy for us to want to be
attaching exact dollar values to that. It's just a limitation,
I think, of the science.
Senator Shaheen. So, let me run this question to other
people on the panel.
Has anybody looked at the potential gains to the economy
from transition to new energy technologies and energy
efficiency, in terms of job created, manufacturing output
increases or reductions, anything like that?
Mr. Harvey.
Mr. Harvey. I was going to say that we have not assessed
the benefits of the legislation. But, in our analysis of our
vehicle rule recently, we showed that the benefits of that to
address--to reduce greenhouse gas emissions from vehicles would
be about $250 billion over the lifetime of the vehicles that
were sold from 2012 to 2016. Those benefits really greatly
exceed the costs, which are less than $60 billion. That's not
just the greenhouse gas benefits of the vehicle rule, but it's
also fuel savings, particulate-matter benefits, and energy
security.
We haven't analyzed the job question in our model, because
it's a full-employment model.
Senator Shaheen. Has anybody else?
Dr. Newell, have you looked at potential gains as the
result of some of these policy changes, as well as costs?
Mr. Newell. No. EIA's modeling capacity is limited to
focusing on the energy sector and the CO2 emissions
associated with that.
Senator Shaheen. Dr. Parker.
Mr. Parker. The only ones who claim to have done work on
the green jobs issue was CRA International. But, they found in
their study that the green job benefit was completely overcome
by the losses in the more traditional manufacturing sector. So,
it was a net deficit.
Mr. Elmendorf. Senator, could I just add that in our----
Senator Shaheen. Yes.
Mr. Elmendorf. I was speaking before to our analysis of the
effects climate change itself.
Senator Shaheen. Right.
Mr. Elmendorf. In terms of the employment, we do talk
about, and have drawn on some outside research on, trying to
quantify that. As I said, there's certainly a decline in
employment in fossil-fuel-intensive parts of the economy. There
is an increase in employment in nonfossil-fuel-intensive parts
of the economy. The net effect of that, we think, would likely
be some decline in employment during that transition, because
labor markets do not move that fluidly. Workers live in certain
places, with particular skills, and they can't, immediately
turn out living in some other place, with a different set of
skills.
But, there's no doubt that the--there's a--very significant
shifts from some places to other places in the economy, and the
GDP effects that we draw on from other people's estimates in
our own work, are meant to incorporate both sides of that, both
the losses in some areas and the gains in others.
Senator Shaheen. Thank you.
My State of New Hampshire is part of the Regional
Greenhouse Gas Initiative that is already involved in a program
to address carbon reductions among our utilities. One of the
things that modeling for RGGI has shown is that investing in
energy efficiency has considerable benefits: to cut energy
consumption and to reduce demand for emission allowances in the
underlying costs of electricity.
Have any of these models looked at the potential benefits
for energy efficiency and what that would mean if there were an
emphasis on energy efficiency as part of a policy change to
address climate change?
Mr. Harvey.
Mr. Harvey. Sure. Yes. We have looked at some of the energy
efficiency provisions that were in the House bill, and we see
improvements in energy efficiency that are driven by two
factors. The first is energy efficiency results in the modest
increases in energy prices that result from the cap. So,
there's increased investment in more energy efficient
technologies, and that leads to reduced energy demand. Then,
second, we modeled some of the specific provisions of the bill
which contained--for example, combined efficiency renewable
electricity standard, building codes, and allowance allocations
to States and to gas utilities, in support of energy
efficiency. What we found in some of the areas where we took
out the energy efficiency provisions to try to isolate their
effect, and, without those provisions, that we found that the
price changes result in the reduction of electricity demand of
about almost 7 percent by 2030. When we modeled the energy
efficiency provisions, they found that they reduced demand by
about 5 percent. So, they definitely have an effect.
Senator Shaheen. Did anybody else do anything that you
think is significant in this area?
Dr. Newell.
Mr. Newell. Yes. The Energy Information Administration, in
our analysis, also incorporated most of the provisions related
to energy efficiency that were in the H.R. 2454, and they do
provide a cost-effective means of reducing greenhouse gas
emissions, along with the other supply side alternatives.
Senator Shaheen. Thank you.
Mr. Elmendorf. Senator, I could just add quickly, if I
might, that our estimate of allowance prices is built off
estimates from the literature about how responsive the economy
will be over time to changes in prices. That incorporates,
implicitly, some assumption about the development of new
technologies.
We looked explicitly at the renewable electricity standard
in the House bill, but our view is similar to those of others,
that it was not likely to be a binding standard; that, in fact,
that amount of renewable electricity would be created anyway
under the other incentives in the bill.
Beyond that, there are other standards and subsidies in the
House bill that we think would lead to some additional energy
efficiency improvements, and that would hold down our estimate
of the allowance price by a little bit.
Senator Shaheen. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Before we go on to more questions, we did notify folks we
were going to try to report two nominations today.
[Recess.]
The Chairman. Senator Corker, you're next.
Senator Corker. Thank you, Mr. Chairman.
Thank all of you for your testimony. It's much appreciated.
To Dr. Elmendorf and Newell, since the point of cap-and-
trade is to reduce carbon emission by increasing the price of
carbon, therefore reducing consumption--I mean, I think that's
the point of all of this--isn't it counterproductive to give
away free allowances to the utility sector, in that what you're
doing is causing that pricing mechanism that is there to reduce
consumption not to be, if you will, ``learned,'' if you will,
by the consumers? Doesn't that also cause the cost of the
program to be even greater, because that moves it over to other
sectors?
If both of you could respond to that, I'd appreciate it.
Mr. Elmendorf. So, Senator, it would be counterproductive
to give away allowances in a way that reduced the price of
electricity--of using an extra kilowatt-hour of electricity.
Because, you're right that the purpose--the way in which the
cap-and-trade system encourages development of alternative
energy sources and encourages efficiency is to raise the price
of electricity. So, if one counteracts that price signal, then
one's diminished that channel of influence. But if, on the
other hand, one can give allowances to a utility and say,
``We'll give them back to the customers, not on a reduction in
the price per kilowatt-hour, but just give back a flat amount
per customer,'' for example--if you do it that way, then that
doesn't change my incentive to turn up the air-conditioning,
because I would still pay the same incremental cost of having a
cooler house. So, it depends, critically, on not just who
they're given to, but what the restrictions are on how that
money can be used in affecting the price to the ultimate users.
Senator Corker. Dr. Newell, agree? Disagree?
Mr. Newell. I would roughly agree.
The issue of the allowance allocation, be it to electrical
utilities or to others, depends on how that is then used. If
it's used to keep prices lower than they otherwise would be,
due to increased cost of carbon emissions--which is purpose of
the policy, then you would be eliminating an incentive for a
cost-effective emission reductions through conservation or
energy efficiency.
Senator Corker. Since we're on the subject right now, I'll
skip down to another question, that--wouldn't we be better off
just selling or auctioning all of the allowances and reducing--
either giving a dividend back to taxpayers or reducing some
other cost, instead of creating the sort of Rube Goldberg
mechanism that this bill envisions?
Mr. Elmendorf. So, Senator, you know, the CBO does not make
policy recommendations. I think that----
Senator Corker. From the standpoint of having----
Mr. Elmendorf [continuing]. The differences----
Senator Corker [continuing]. The proper result.
Mr. Elmendorf [continuing]. In how the--as long as one
doesn't distort the price signal to--for greater energy
efficiency and for substituting other forms of fuel, then how
one gives away those allowances--the value of the allowances--
whether by giving the allowance away or by selling them and
giving the money away, is basically a distributional question.
It's who bears the burden. That is incredibly important,
perhaps, in the design of the policy, but not something about
which economists have a particular comparative advantage in
judging. But, it is very important, as you said, if you want
the maximum efficiency in reducing carbon emissions, to not
give the allowances away in a fashion that reduces the price
signal.
Senator Corker. My fear is, it's going to be very difficult
to give them out to the utilities and that not be the case.
Mr. Elmendorf. It's a challenge in policy design. Yes,
Senator.
Senator Corker. So, one would have to say, if someone were
looking at the flaws in how this might work, that would be an
area one might examine.
Mr. Elmendorf. I would say it's an area that one needs to
construct very carefully to preserve that price signal. Yes,
sir.
Senator Corker. So, to you Dr. Newell, I noticed, in your
testimony, you talked a lot about many of the uncertainties
that exist. Wouldn't we be just a whole lot better off to
alleviate the uncertainties, especially as it relates to
offsets and those kinds of things, by just utilizing a carbon
tax and lowering another tax so that there's no net gain, if
you will, by government consumption of taxes?
Mr. Newell. There are a number of different design options
within either a cap-and-trade system or a carbon tax to address
issues of what the price of carbon would be.
In fact, when you start getting into the specific designs,
the distinctions between them become grayer. Within a cap-and-
trade system, you can incorporate price ceilings, price floors,
which----
Senator Corker. Which is like putting in place a tax,
right? If you have a price ceiling and a price floor, it's a
backhanded way of just having a tax, isn't it?
Mr. Newell. A cap-and-trade system, at a fundamental level,
is a policy that allocates emission allowances. So, there are
distinctions, as opposed to being written into the tax code.
The other distinction is that, in terms of an energy tax, a
cap-and-trade system is on emissions, as opposed to energy, per
se. So----
Senator Corker. It just seems that it would be a far more
transparent way of dealing with this issue. You know, we're
creating this policy, or at least this bill contemplates
creating a policy, that has a lot of human giving away of free
allowances, all kinds of things that distort the market, and it
just seems that if, truly, the goal was to lower the amount of
carbon, there would be a proposal just to tax it and to lower
some other tax and be done with it. It seems to me that the
Treasury Secretary, or somebody, could raise or lower that over
time, to try to hit 2020 targets and we'd be done with this,
instead of this mechanism where, in essence, we're--sort of
have a command-and-control situation through central
government. It just seems like if you're going to get from A to
B, a better way to get from A to B.
But, I realize my time is up. Mr. Chairman, thank you for
the 1-minute-and-45-seconds indulgence.
The Chairman. Not a problem.
Senator Landrieu.
Senator Landrieu. Thank you.
Let me follow up on those questions, because I think
they're very important, about market volatility. In the current
economic climate, this is a major issue that many are concerned
about.
As you all know, oil closed at 71.77 a barrel just on
Friday. But, analysis that I've looked at shows that there's a
two-thirds probability that oil will be as high as $99 or as
low as $43. You all are all familiar with the ups and downs of
this market. So, my question is, Does the House bill help us to
reduce volatility in this price, or will it contribute to the
volatility of this price? Have you all analyzed that? If so, if
you'd comment.
Mr. Elmendorf. So, Senator, we have not analyzed the
effects of this proposal on the volatility of oil prices. I
think the issue of volatility in the price of allowances, and
the way that would pass through to the prices that households
and businesses faced, is a very real one. That's one of the
reasons that a lot of analysts would favor a carbon tax over a
cap-and-trade system, as Senator Corker was suggesting. In
fact, a number of features of the cap-and-trade system, though,
as it is written into the House legislation, are designed to
reduce the volatility of allowance prices to----
Senator Landrieu. By setting the ceiling and the floor.
Mr. Elmendorf [continuing]. To move that system in the
direction of a carbon tax, in terms of trying to maintain a
steadier price on carbon emissions.
Senator Landrieu. Because I would argue that one of our
goals should be--I mean, not just cleaning the environment, but
stabilizing these prices in a way that allow industries to make
smart decisions. Part of problem with our current system, but
also part of the problem with the House approach, is that it's
not really doing anything to reduce the volatility. I think
that's a big problem. At least, it is from the State that I
represent, that can't seem to get a handle on where prices are
going, so they don't know whether to invest money, whether to
rent the rigs. We've got low rig counts while we have a lot
more oil and gas out there, and a lot more opportunities to
produce.
So, I'm glad that you mentioned that, and I'm glad that
Senator Corker raised it, because I think it's a real
challenge, as we move forward.
Let me move on, though, to another aspect that I'm
concerned about. Senator Murkowski questioned you about the
reduction of crude oil, based on your analysis. You said that
crude oil will be reduced by 20 percent, or something. I'm not
sure which one of you. Analysis that I've been reading, while
they recognize that crude oil might be reduced, but refined
petroleum products, they're claiming, will be increased because
of the loss of manufacturing and refinery capacity, or the
results or consequences on the refining industry.
Could you, No. 1, clarify if it is actually true, and why?
Is it a volume reduction, or is it a percentage of reduction
which is--I think it's a significant difference of crude--and
then, how it affects refined products--did you all do any
analysis on that?
Mr. Newell. The numbers that I had given earlier, which
were a to-24-percent reduction in petroleum-based liquid
fuels, would include both crude oil and refined products--that
would be the reduction in 2030. In terms of the breakdown
between crude and refined products, I don't have that with me
right now. But, I'd be happy to get that to you.
Senator Landrieu. But, focused on imports, we understand
that we will be--if we stay on the same path as the House bill,
the impact to the domestic refining industry will be contracted
so that we will not be refining our own product, we'll be
refining our products offshore and importing them. Is that what
your analysis shows? Or should we look again?
Mr. Newell. Again, I don't have the specific numbers in
front of me on the implications for domestic petroleum versus
imported petroleum products.
[The information follows:]
Petroleum import disposition: What is the breakdown of the
projected impact of H.R. 2454 on imports of refined products, versus
the impact on crude oil imports?
Net petroleum imports are projected to decline from 12.1 million
barrels per day in 2007 to 8.3 million barrels per day in 2030 in the
AEO2009 reference case. In 2007, crude oil imports accounted for 83
percent of all petroleum imported. Beyond 2007, EIA projects that the
crude oil share of total petroleum imports will rise slightly due to an
overall decrease in petroleum consumption, caused first by higher
prices and then by the recession. However, by 2030, EIA projects the
crude oil share of imports will return to about 83 percent. In the main
cases of EIA's analysis of H.R. 2454, net petroleum imports are
projected to decline to between 7.6 and 6.3 million barrels per day in
2030. Crude oil isprojected to continue to account for the vast
majority--between 84 and 87 percent--of petroleum imported into the
United States.
While we are confident that crude oil will continue to represent
the predominant share of net petroleum imports, EIA recognizes that the
share of net imports of refined products in total net petroleum imports
can be sensitive to the future implementation of H.R. 2454. For
example, regulations to be developed under proposed section 787 of the
Clean Air Act (CAA) in H.R. 2454 to allocate among refiners the
allowances provided to the refinery sector by proposed CAA section 782,
will play a significant role in determining the net impact of H.R. 2454
on the cost of energy used at domestic refineries. Changes in domestic
refiners' cost of energy used on-site relative to that borne by their
foreign competitors will also depend to a significant extent on the
details of emissions reduction programs that affect foreign refiners.
Lacking clear guidance in the language of H.R. 2454 or the details of
emissions reduction efforts in other countries, these issues were not
examined in our analysis. Beyond changes in relative energy cost, other
factors that will continue to affect trade flows in refined products
are differences in regional production and consumption slates, and the
competitiveness of individual refinery configurations, which depend on
price differentials across different grades of crude oil and different
product types.
Senator Landrieu. If you all would look at that--because
it's very important--because another focus that I'm going to
have is not just cleaner environment, but more economic
security and national security. Having to import more refined
products is not moving us in the right direction.
I know I have only 8 seconds, so I'm going to ask my
question and then ask you to submit it in writing.
Have you all analyzed the approach, maybe using cap-and-
trade for the utility sector, but using a different approach
for the transportation energy sector? You know, sort of looking
at the sectors differently. The utility electric sector using
one approach and maybe getting to our goals through the
transportation sector a different way?
I know that's not what the bill contemplates in the House,
but just any broad analysis, real quickly?
Mr. Elmendorf. So, we have not, I think, looked at that
question, specifically. I think the general point to remember
is that the broader the coverage of sources of carbon dioxide
emissions, and the more they're included in the bill, and the
more flexibility that households and businesses have in
choosing where and when and how to reduce carbon emissions, the
lower will be the overall cost of a given amount of emissions
reductions. The more that you and your colleagues specify
particular sources of emissions reductions, the less you are
allowing the market forces to determine what is the most cost-
effective way of reducing those emissions.
Senator Landrieu. Thank you.
The Chairman. Senator Barrasso.
Senator Barrasso. Thank you very much, Mr. Chairman.
Thank you all for being here today.
Mr. Elmendorf, if I could, in your testimony you said ``If
this bill passes, I think, that it would come at a cost to the
economy, that there would be permanent job shifts, and that,
while those shifts were occurring, total unemployment would be
reduced so that unemployment would essentially go up; for
families, there would be a loss in purchasing power, and that
that loss of purchasing power could get worse as the caps
become more stringent.''
You talked about certain industries that produced carbon-
based energy--coal-mining, very important in Wyoming; oil and
gas extraction; petroleum refining--that they would probably
suffer significant employment losses over time.
Where are those jobs going to go? Is that impact going to
be significant in--more significant in some States rather than
others?
Mr. Elmendorf. So, you summarized the raw conclusions just
the way we wrote them, Senator. The shifts will be significant.
As we said, there will be reductions in employment in
industries that produce fossil fuels, that use fossil fuels
intensively, or that make products whose use by households
involves a lot of fossil fuel use. Instead, jobs will emerge in
industries that develop nonfossil fuel energy or use less
energy.
We talk, in the written testimony, about the experience of
the United States with the transition from manufacturing
employment over the last several decades, significant decline
in manufacturing employment. Nonetheless, apart from this,
obviously, very deep recession we're in now, total employment
has grown rather rapidly.
But, very clearly we say in the testimony--and I want to
leave no misunderstanding--that that aggregate performance--the
fact that jobs turn up somewhere else for some people--does not
mean that there aren't substantial costs borne by people,
communities, firms in affected industries in affected areas. I
mean, we saw that in manufacturing and we would see that in
response to the sort of changes this legislation would produce.
Senator Barrasso. I appreciate your candor in that. Thank
you very much. Because I'm looking at this from--in terms of
alternative energy sources, and I'm wondering, Will those
sources be available in the next 10 years to, one, replace the
jobs and, two, replace the carbon-based energy that--in terms
of the capacity of that energy for fueling the country?
Mr. Elmendorf. So, and as a number of us has discussed, one
of the great uncertainties about the costs of reducing carbon
emissions is how readily the economy can move toward an economy
which uses different sorts of energy. There are some very
serious technological challenges; also, of course, in the
country, tremendous technological abilities. Guessing the rate
at which that sort of evolution can occur is--and I use the
word ``guess'' deliberately--is difficult for those of us in
the projection business. We do say, in the testimony, that we
think the effect on overall unemployment would be small. But,
again, there are in particular areas, in particular industries,
there will be significant effects.
Senator Barrasso. Thank you.
Dr. Newell, you talked about a reduction in CO2
and coming from the electricity sector--in terms of the
modeling in the Waxman-Markey bill--I think you said this is
going to decrease the amount of coal consumed, and decrease the
amount of natural gas consumed, and increase the amount of
renewable energy consumed. Is that your assessment? Is that
correct?
Mr. Newell. On coal, that is correct. On renewables, that
is correct. It would increase our natural gas use, but it
depends on the circumstances of the policy and the time at
which you're talking.
Senator Barrasso. OK. Now, in terms of the nuclear energy,
how many new nuclear power plants are we going to need to build
to achieve the range that are consistent with your studies?
Mr. Newell. It depends on which scenario. We looked at a
range of different scenarios, as I just described earlier. In
our Basic Case, my recollection is that it's 96 gigawatts of
new nuclear power by 2030. Under other assumptions, we looked
at a range of assumptions, due to the degree of uncertainty.
Senator Barrasso. For folks listening, about how many new
nuclear power plants are you talking about to do that? How many
plants are going to need to be constructed to give you that
number of gigawatts?
Mr. Newell. I don't have that number right in front of me,
in terms of the number of plants.
[The information follows:]
What does your analysis of H.R. 2454 project in terms of new
nuclear plants by 2030 that would be needed in order to meet the
emission reductions called for in the bill?
In our analysis, the role played by new nuclear power generation
varied with assumptions about the cost of availability of international
offsets and low/no-carbon-emitting electricity generating technologies.
In our Basic Case, 96 gigawatts of new nuclear capacity was added, or
roughly 74 plants if each is assumed to be 1.3 gigawatts in capacity.
(The actual number of plants would depend on plant capacity, which
could range from well under 1 gigawatt up to 1.5 gigawatts per plant,
based on planned configurations.) This level of additions roughly
equals the amount of new U.S. nuclear capacity that was added between
1970 and 1990. However, across the main alternative cases in our
analysis, the amount of new nuclear capacity added varied from 11
gigawatts to 135 gigawatts, or roughly 8 to 104 plants if each is
assumed to be 1.3 gigawatts in capacity.
Senator Barrasso. Do you know how many were built in the
last 20 years in the United States?
Mr. Newell. That number, though 96 gigawatts, is roughly
consistent with the rate of increase in nuclear power over the
1970 to 1990 period.
Senator Barrasso. OK. Secretary Chu recently announced an
ambitious timetable for deployment of a carbon-capture
technology--also to Dr. Newell--said the U.S. could have 10 to
12 commercial demonstration projects operational in the next 7
years. Does your modeling assume similar success with
deployment of carbon-capture technology?
Mr. Newell. I would have to go back and check our
projections, as opposed to what you laid out regarding the
Secretary. But we do have significant penetration of coal with
carbon-capture and storage in our projections under the Markey-
Waxman bill.
[The information follows:]
In our analysis, the role played by new coal plants with CCS varied
with assumptions about the cost and availability of international
offsets and low/no carbon-emitting electricity generating technologies.
In our Basic Case, 5 gigawatts of new CCS capacity was added through
2017. Across the main alternative cases in our analysis, the amount of
new CCS capacity added through 2017 varied from 2 gigawatts to 6
gigawatts. Assuming that the early plants would be fairly small--200-
400 megawatts or less--the level of additions we show is in line with
the statement by Secretary Chu.
Senator Barrasso. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Cantwell.
Senator Cantwell. Thank you, Mr. Chairman.
I would like to submit, for the record, a study that is
called ``Unlocking the Green Economy: How Carbon Pricing Can
Open the Floodgates of Private Investment in Clean Energy.''*
---------------------------------------------------------------------------
* The study has been retained in committee files.
---------------------------------------------------------------------------
To say that there aren't reports out there that show that
there is a linkage between the stability that can come from
more price predictability is, I think, missing at least one
report, and I'm sure there are others.
I'd like to go back to Senator Corker's question.
Mr. Elmendorf, good to see you.
Mr. Elmendorf. Good to see you again, Senator.
Senator Cantwell. Out of the frying pan, into the fire.
Although, I actually think that CBO's determining outcome is
probably easier on climate than it is on healthcare. Would you
agree?
Mr. Elmendorf. Every day, Senator, I am overwhelmed by the
uncertainties in all of the things we're trying to do.
Senator Cantwell. OK.
One certainty you seem to have on the CBO estimates on the
House bill as it related to giving emission allowances to local
electricity companies--and I just want to emphasize, because I
think Senator Corker brought up an important point, and that
is, in your analysis, that the--40 percent of the allowances
would end up in the pockets of the residential consumers, but
more than 60 percent would go to the utilities. Your analysis
is that they would not pass those savings on to the consumer;
the utilities would keep is a profits, rather than pass on to
the consumers.
Mr. Elmendorf. Assessing the effects of giving allowances
to utilities is--or a local distribution companies--is
difficult. One of the things that we say in this testimony
today is that it's easier to assess the distributional
consequences of the legislation in 2050 because the allowances
are auctioned and the revenues collected and distributed by the
government, rather than having so many allowances given away in
particular categories. I think that's related to Senator
Corker's concern about the transparency, or lack thereof, in
what's going on.
So, we have made assumptions about the ways in which the
utilities and the local distribution companies would behave. As
you said, we think the money directed to residential customers
would, in fact, be passed through to households. The ones
dedicated to commercial and industrial customers, we think
would end up in profits.
Senator Cantwell. So, basically, skip the middleman. If you
want more predictability about getting the money into the hands
of consumers, skip the middleman and give it directly to them.
Mr. Elmendorf. Certainly increases the predictability. Yes,
Senator.
Senator Cantwell. Thank you.
On EPA, on this question--well, you know what? I'm going to
come back to this because the allowances--I'll let you think
about the 1.4 trillion we're going to give to foreign
governments, as far as allowances--I don't even think there is
enough. I think that's more than seven times our current total
emissions. That's what the House bill would do, in giving money
away to allowance--I don't even know if you could accomplish
that.
But, anyway, back to this question my colleagues were
talking about--several of my colleagues--the predictability
that comes, or, I should say, when predictability exists in the
market--and this is for Mr. Harvey or Mr. Newell--that it
allows investment to occur. So, it's not putting a specific
price at any moment, but the certainty and the predictability
then leads to the investment. So, could either Mr. Newell or
Mr. Harvey talk about that, particularly as it relates that
dynamic, having a consistent price signal, giving innovators
the signal to make investments, particularly in the area of
nuclear power.
Mr. Newell. There are a number of different factors that
govern the degree of technological investment or innovation in
any particular area. One of them is certainly the expected
allowance price under a cap-and-trade system. Providing more
certainty about that price, or putting within a range, I think
would increase the predictability for investors and would
encourage that kind of innovation.
Senator Cantwell. Back to Senator Landrieu's--we don't have
that right now. The fluctuation she's talking about is not
going to generate that, correct? It's not going to generate the
certainty in the market to get the investment.
Mr. Newell. EIA did not specifically analyze the
uncertainty, in short periods of time, of the Waxman-Markey
bill. The provision in the Waxman-Markey bill, though, for the
strategic reserve has a strategic reserve price which has a 36-
month rolling average, plus 60 percent. So, in terms of
providing a stable ceiling on prices, it doesn't do that over
any extended period.
Senator Cantwell. Mr. Harvey.
I'm not talking about so much--I'm talking about the fact
that our current state of affairs, for the next 30 years, is
likely to be a roller coaster on price.
Mr. Harvey. Sure. As I mentioned earlier, you know, we're
using a long-term model over 2050, so we're not capturing the
shorter-term market fluctuations.
I think, in the design of the program, our experience with
the acid rain programs, with the NOX-trading
program, with RGGI, with the EU system, has shown that they've
been able to weather, you know, ups and downs in the overall
energy markets. So, I think we do have some experience, at
least since the 1990s, of running the acid rain program, seeing
that that's been able to be addressed.
There are features in the House bill, such as the banking
provisions, that also address the concerns about volatility, as
well as borrowing, which is not a feature that we currently
have in the acid rain program.
So, I would also mention the strategic reserve allowance,
which is sort of a price-ceiling feature, as well.
So, all of those are design mechanisms that you may want to
consider.
Senator Cantwell. Thank you.
Thank you, Mr. Chairman. My time's up.
The Chairman. Senator Bunning.
Senator Bunning. Thank you, Mr. Chairman.
Dr. Newell, good to see you, again. Thank you, for being
here.
In your cost analysis of the House-passed bill of cap-and-
trade, you relied very heavily on the assumption that nuclear
power would provide a large amount of low carbon emission
power. I've always said that's absolutely needed if we're going
to get from here to where we want to get to.
Given that we have not licensed any nuclear reactors in
over 30 years, do you believe that we will have any new nuclear
online by 2012?
Mr. Newell. The different scenarios that we looked at, due
to the degree of uncertainty, as you pointed out, in matters
such as the deployment of new nuclear power had a range of
increase in nuclear power from 11 to 135 gigawatts, across
different cases.
Senator Bunning. But, would you please answer my question?
Mr. Newell. In terms of what's likely to happen between now
and 2012?
Senator Bunning. 2012.
Mr. Newell. No, nothing new by 2012.
Senator Bunning. Nothing new. Thank you. That's what I
thought.
Dr. Parker, under the cap-and-trade system do you believe
that the technology needed to further develop advanced coal
technologies and coal with carbon-capture and storage can
remain a cost-competitive option for utilities to invest in?
Mr. Parker. The analysis that we--oh, I'm sorry.
Senator Bunning. Thank you.
Mr. Parker. Yes. Sorry.
The analysis that we looked at were considerably less
enthusiastic about carbon-capture and storage than they were
last year, when these analyses were done, on the Lieberman-
Warner bill. The most optimistic analysis was that conducted by
EIA in their basic case. Other analyses assumed anywhere
between no carbon-capture and storage being available through
the year 2030, to very minimum amounts through the year 2030.
This is due both to the fact that estimates of the cost of
CCS has gone up over the last year and, second, the price of
its primary competitor, which is natural gas. The assumptions
of availability have gotten more optimistic over the last year.
These 2 things have combined to have a less hopeful outlook
for CCS than if you had asked me that question last year.
Senator Bunning. Thank you.
Being from Kentucky, since we produce 95 percent of all of
our electric power from coal-based or coal-fired generation,
you can imagine the cost-shifting that will be required in the
next 20 years, to 2030, and the job loss that will occur not
only in Wyoming, but Kentucky and anybody that produces
electricity from coal-fired generation.
Mr. Elmendorf, it's great to see you again--since I spent 5
hours with you yesterday, it's great to see you again today. In
you testimony, you described the rise of an annual real rate of
5.6 percent over the course of a cap-and-trade system. As a
result, the price of goods and services throughout the economy
will increase in proportion to the emissions associated with
their production and consumption. What is the proportion of
increase, and why did the CBO not score these specific costs to
consumers?
Mr. Elmendorf. So, let me--I think, a couple of questions
in that, Senator.
The 5.6 percent is our assumption about the rate of return
that businesses will earn, on average over that whole period,
on investments of all sorts. We assume that their decisions
about whether to sell a carbon emission allowance today, or to
bank it, will be a decision that they will use the same rate of
return in that calculation that they think they can earn on
other investments. But, that's----
Senator Bunning. You haven't anticipated that they would
get a higher return by banking them now and using--10 years
down the road--that they wouldn't be worth more, 10 years down
the road than----
Mr. Parker. Oh, no. So, we think they will bank them now.
Senator Bunning. Oh. OK.
Mr. Parker. We think they will bank them to the point at
which through the banking, they will bank them to the point at
which the price will rise at this 5.6 percent. Because if they
expected the price to rise faster, that would be a good
investment; they would bank even more, and that additional
banking would then serve to bring down the--push up the price
today and bring down the price in later years. So, it is the
banking that enables that to happen. The effect of that is that
our allowance price, as we project it, rises by 5.6 percent a
year over that period. But, it's the banking that makes that
happen.
In our assessment of the consequences of the legislation
for households, we definitely take account of the way in which
the higher prices for fossil fuels would percolate through all
the connections in the economy. We use input-output tables to
do this, into the prices of the goods and services that
households consume, and that is what underlies our estimate of
the effect on households in 2020 and in 2050, and the later
numbers are a larger cost, because the prices are higher.
Senator Bunning. OK. Thank you.
My time is expired.
The Chairman. Senator Sessions.
Senator Sessions. Thank you, all of you. I appreciate your
statements of humility and recognize--that you recognize this--
your inability to predict the future and economic factors and
technological advancements.
But, I think we are participating in something in which our
conceit is such that we think we can manage the climate. We
think we can manage a huge portion of the most dynamic economy
the world has ever known. I'm wary of it. Just let me tell you.
My experience says that when we get into this, things don't end
up very well. They end up less efficient than if we could
figure out a more free-market way to handle it. As I want to
say sometimes, ``Oh, what a tangled web we create when we first
begin to regulate.'' So, I just would say to you, that's a
fundamental concern about it.
Has anybody calculated the number of regulators that are
going to be necessary for this? Recognizing, of course, this is
wealth extracted from the economy and placed into an area of
the economy that produces no clean energy, have any of you all
calculated that from--I see, ``no,'' Dr. Newell----
Mr. Elmendorf. So, Senator, I'm told that we did
incorporate, in our cost estimate for the House-passed
legislation, an estimate of the cost of administering the
program, as part of the discretionary costs that we think
would----
Senator Sessions. For example, did----
Mr. Elmendorf [continuing]. Be required by the bill, but I
don't have the----
Senator Sessions [continuing]. Did you include things--I'd
like to have those numbers, if you would submit them.
Do you include things like FBI agents and investigators to
do fraud? EPA got a 3-percent increase in their budget this
year. You should be happy, Mr. Harvey. But, that may just be
the beginning.
Mr. Elmendorf. So, we'll submit that for the record to you,
Senator. I don't know, offhand. We're pretty careful about
the----
Senator Sessions. One more----
Mr. Elmendorf [continuing]. Effect----
Senator Sessions [continuing]. Thing you should calculate.
You should calculate what every regulated business in America
will have to add to their payroll, because the CEO, I assume,
Mr. Harvey, will certify how many CO2 molecules are
emitted, how much ton of carbon is emitted, and he's got to
hire somebody that he trusts to do that, and that person won't
be producing clean energy; that person will just be counting
and certifying. So, we trade a large amount--so, I just would
say to us--insofar as we're humanly possible, I think our focus
should be to move our wealth to areas that create clean energy,
and not regulators.
Mr. Elmendorf. So, Senator, I could say briefly, our cost
estimate includes, as they generally do, an assessment of the
intergovernmental and private-sector impacts of the
legislation. This is from the Unfunded Mandates Reform Act that
Congress passed more than a decade ago. So, we talk at some
length about the imposition of the mandates. We note here that
we don't have information to quantify the costs of all of them.
Senator Sessions. So, you haven't quantified the billions
that would be expended which could be utilized to build a
nuclear power plant, for example, that would actually do
something worthwhile.
Mr. Elmendorf. Sir, there are some costs that we do
quantify here, but there are others that we do not.
Senator Sessions. Now, am I correct, does anybody dispute
the testimony we've had, that the net of this would be some at
least diminishment of employment?
[No response.]
Senator Sessions. All right. So, I think it's fair to say
that it is not a good argument to contend that a cap-and-trade
program will increase employment. In fact, a study in Spain
showed a rather significant reduction.
Also, it can reduce employment in areas like steel
manufacturing, the chemical industry, which is already being
savaged in America because of energy prices. They find lower
places around the world. Fertilizer manufacturing will always
be damaged by higher energy costs.
Isn't it a fact--I guess, Mr. Elmendorf, that I'll ask
you--that an international offset transfers wealth and jobs
overseas?
Mr. Elmendorf. So, Senator, I think an international offset
is like other sorts of imports. When we import a regular good
or a service from overseas, we do pay for it, but we do that,
in general, because we think it is less expensive to obtain
from overseas than to grow that or make that, or whatever,
ourselves.
Senator Sessions. But, if you tax--an American corporation
that makes steel, in effect, to purchase an offset abroad that
makes their competitor more efficient economically, that can
cost jobs in our manufacturing, can it not? Are you scoring
that in this?
Mr. Elmendorf. So, that is part of our analysis, yes. I
mean, I think, again, we import something if we think it's
cheaper. In this case, it is cheaper to achieve that given
amount of carbon emissions----
Senator Sessions. I understand.
Mr. Elmendorf [continuing]. Reduction.
Senator Sessions. You're saying it's cheaper to buy the----
Senator Sessions [continuing]. Offset. Indeed, the numbers
I think you've said is that, if we didn't have international
offsets, the offsets would increase by 96 percent. But, if you
do have international offsets, you're taking American wealth
and transferring it to help make our competitors more
efficient.
Mr. Elmendorf. So, and the effects of that transfer are
included in our estimates of the--and the modelers on whom we
draw--estimates of the effect on American GDP and American
employment and on American households.
Senator Sessions. Thank you, Mr. Chairman. There are a lot
of things I'm convinced that we can do to be cleaner, improve
national security, and make this a more prosperous country.
We've just got to be very careful.
The Chairman. Senator Brownback.
Senator Brownback. Thank you, Mr. Chairman.
I want to thank the panel. It's been very informative.
You all are putting forward a lot of speculative
information. I think, Dr. Parker, I appreciate your statements
the most, about the speculative nature of what we're
speculating on here. I appreciate that, because I certainly am
a skeptic on this and the ability for us to be able to manage
and micromanage the impacts of this.
I want to give you, though, some real-world data that's
near-term. Always, around here, it seems like the further out
you project it, the less credible it probably is.
I just had a Kansas City, Kansas Board of Public Utilities
in my office this morning. They are saying, under H.R. 2454,
their costs to their customers will go up in 2012 by 25--in the
first year of this--by 25 percent, their utility rates, in
Kansas City, Kansas. That's a near-term--and they're saying
that's a pretty cheap price of an allowance for coal. They're
pretty heavy coal use, they also have some wind energy.
I also have in numbers, from Kansas City Power and Light
area, a broader region. They're saying their utility rates will
go up 33 to 44 percent under the scenario that's being put
forward on the trading. That's on the lower-to midrange of
allocation.
Then, McPherson, Kansas--they're in the middle of the
State, smaller community--they're projecting, just for their
community, a $5 million cost to comply, and then they've got a
oil refinery that's there that they project's going to go out
of business because they won't be able to compete as an oil
refinery.
I just want to give you some real-world numbers for this
speculative bill that we're putting forward, and its real-world
impact on people, which is a big reason why I'm such a skeptic
on going this route, because, while we're projecting these
things, people are having to deal with their basic lives on it,
and this is going to be very expensive.
Mr. Elmendorf, I gather, from your scenario and what you're
saying, that manufacturing will be further pressured to leave
the United States under this bill. Manufacturing that involves
any sort of energy use, from what I gather from page 12 of your
testimony. Would that be correct?
Mr. Elmendorf. So, I think there are some aspects of
manufacturing that would do well, others that would not do
well. Again, I think the main distinction to draw is between
those parts of the economy, manufacturing or other areas, that
are energy--fossil-fuel energy-intensive, and those that
aren't. So, certainly the energy-intensive aspects of
manufacturing would be particularly hard hit. We list some of
those industries here.
Senator Brownback. OK. It looks like, to us, in our State,
that we're going to hit pretty hard with this, being a fairly
high-energy-using State--agriculture is an industry that uses a
lot of energy--that you're likely to drive a fair amount of
that overseas to places with lower energy costs?
Mr. Elmendorf. It depends on what other countries did. If
other countries didn't act, then more would be driven overseas,
that's right.
I mean, one thing just to note, Senator--you mentioned
agriculture is obviously a very important part of the economy
in Kansas--that is one of the sectors of our economy that are
at some risk of--from climate change. The uncertainties----
Senator Brownback. We're very----
Mr. Elmendorf [continuing]. Around the----
Senator Brownback [continuing]. Familiar with that.
Mr. Elmendorf [continuing]. The damage of climate change
are also great, and many analysts believe that in the--and CBO
has written about this--these uncertainties at great length.
Many economists believe that the right response to that kind of
uncertainty is to take out some insurance, if you will, against
some of the worst outcomes.That's what motivates some of the--
--
Senator Brownback. If I could, because I'm going to lose my
time, here--if I could, on that, that's why we believe that
investment in innovation, rather than taxes and regulation, is
the way to go to address it, that you should go on a--just a
different model of this, and one that I don't think involves
near the speculation, nor the market manipulation, of what this
panel is talking about. You're talking about a massive market
manipulation, here, on a grand scale that has significant
impacts, it looks like to me, particularly on the Midwest and
the South in this country, for as far as what you're going to
do of moving of cost, and the likelihood for us to lose a lot
of jobs, a lot of businesses. It looks like oil refinery
processing, you're probably going to drive all overseas. We've
got several oil refineries in our State. So, I say, yes,
address it, but do it through investment and innovation, not
this sort of huge taxing and regulatory scheme.
Appreciate it, Mr. Chairman.
Mr. Elmendorf. So, I'll just be clear. So, obviously, I'm
not advocating for this bill, and I'm not trying to fight
against this bill. I'm just trying to explain what people talk
about in its workings.
You talk about innovation, and I think many people who
support putting a price on carbon emissions through a cap-and-
trade system, or through a tax, do so because they believe that
that sort of price signal is a very effective way of spurring
innovation and reaching the end that you have in mind.
But, of course, there are other ways that one might----
Senator Brownback. Such as us investing, us doing research
and--supportive of that--us subsidizing methane-production
electricity from landfills or from large livestock operations--
all those things would be a way of investing, rather than
putting a big tax on my customers of utilities in Kansas City,
Kansas.
The Chairman. Senator McCain.
Senator McCain. Thank you, Mr. Chairman.
I thank the witnesses.
Mr. Harvey, EPA's estimate includes a significant increase
in the deployment of nuclear power by 2050, and I hope that's
the case. Are there regulatory changes in the Waxman-Markey
bill that bring you this conclusion?
Mr. Harvey. I'm not aware of regulatory changes to nuclear
power in the Waxman-Markey bill, Senator.
Senator McCain. Wouldn't you then assume that, given the
state of nuclear power in the United States, that, unless there
are significant changes, that we're basically looking at a
stagnant industry, particularly in light of the fact that we're
going to close the facility that was intended to store spent
nuclear fuel?
Mr. Harvey. I think the biggest driver for us is the carbon
price, Senator, that's driving the penetration of new nuclear
power.
Senator McCain. Again--and we continue this discussion
endlessly, unfortunately--if you don't have recycle, if you
don't have a place to store, you don't have sufficient loan
guarantees, you don't have sufficient regulatory expedition of
the licensing process, you're not going to--you're going to
repeat what's been happening for the last 20 years. So, in all
due respect, it's a bit presumptuous of you to take into your
calculations a significant increase in nuclear power when
there's nothing in the landscape that would indicate that
that's the case, and nothing in this legislation. I'll be glad
to be corrected in that assumption, if you have that for me.
Mr. Harvey. We did sensitivities on that. We did a case
where we held nuclear power to reference levels, with some
slight growth, and we found that allowance prices were about 15
percent higher. That was the major analysis we did.
You know, driving our analysis was input assumptions that
we brought in from EIA on the cost of nuclear power. You know,
we also are aware that there are about 20 projects currently in
the licensing process. So, you know, perhaps, you know, Dr.
Newell could speak more to EIA's projections about nuclear
power. But, I think, you know, we didn't assume it; it came in
because of the carbon prices, which are a significant
incentive.
Senator McCain. Do you want to comment, Dr. Newell.
Mr. Newell. In our reference case scenario--which would be
in the absence of this particular climate bill--there's an
assumption of 11 gigawatts of new nuclear power by 2030. This
is primarily induced by previous legislation--loan guarantees
and tax incentives and so on. But, due to the significant
degree of uncertainty about other conditions that would affect
the potential for nuclear power, such as long-term storage,
regulatory processes, public acceptance, we looked at a range
of different scenarios, holding that 11 gigawatts at its base
level and going up to as high as 135 gigawatts. But, as you
point out, there's a significant degree of uncertainty.
Senator McCain. Mr. Harvey, have you seen any estimates
that, without nuclear power, we could reach a goal of
significant renewable fuels by the year 2050 that would have a
significant impact on that, on our renewable energy
requirements?
Mr. Harvey. Again, I would sort of go back to the scenario
that we did, where we held nuclear power constant. We did reach
the goal, but carbon prices were higher. Alan, would you add
anything to that?
Mr. Fawcett. Yes. Holding nuclear power constant,
essentially, you know, there are other technologies that we see
coming in if the nuclear power isn't available. On higher
allowance prices, we see more carbon capture and sequestration,
more renewable power coming in, and greater use of offsets to
be able to still meet the targets.
Senator McCain. Boy, I'd love to see that, because the
previous estimates of the Department of Energy is that wind,
tide, solar, and all the others would reach about 20 to 25
percent, maximum, of our renewable requirements. So, I'd be
really interested in seeing your analysis.
Mr. Elmendorf, thank you for your great work. As I
mentioned to you before, your reward will be in heaven, not
here on Earth. Have you had a chance to look at the European
cap-and-trade system?
Mr. Elmendorf. We have looked at the European cap-and-trade
system, yes, Senator.
Senator McCain. It's been fits and starts, right?
Mr. Elmendorf. That's right. I'm not personally an expert,
but I have some colleagues, here, who may be able to help me if
you want to dig into that issue.
Senator McCain. The reason why I think it's important is
because the Europeans have been in the cap-and-trade business
for some years. So, it seems to me patently obvious that we
should look at what they've done, or haven't done, since they
have been involved in the experiment for, what, 10, 15 years?
Mr. Elmendorf. Yes, Senator. So, one thing I do know is--
about that example--is that some of the volatility that they've
seen stems from hindering flexibility in the timing of
achieving emissions reductions, so that the provisions that are
now discussed in--as part of cap-and-trade legislation in this
country, involving the banking of allowances, ability to borrow
allowances, reserve pools, and so on, are designed to try to at
least dampen some of that volatility, which, in my
understanding, has arisen in some of these cases in Europe from
hitting ends of periods in which there was no ability to shift
behavior into the next year. This flexibility in timing that's
now being contemplated for U.S. bills is designed to ameliorate
some of that. But, it is a risk.
Senator McCain. Let me strongly suggest, to all the
witnesses, that we look carefully at the European experiment.
It has not lived up to the expectations that were advertised at
the time that it was implemented. It was practically nirvana.
So, let's look carefully at the European experiment; let's also
look at our acid rain experiment, which succeeded; and find
out, at least, if you could submit to this committee, the
lessons learned from both of those cases, if we are going to
seriously--we certainly don't want to repeat the mistakes that
others have already made.
My time is expired. I thank you, Mr. Chairman.
I thank the witnesses.
Mr. Elmendorf. Mr. Chairman, I actually have an answer to
Senator Sessions' question from earlier. It is, in fact, in our
cost estimate for the House bill, but I had forgotten. We say,
``CBO estimates that fully funding Federal agencies'
administrative costs would require gross appropriations
totaling $8.2 over the 2010-2019 period. This estimate is based
on historical information on how large regulatory programs have
been implemented and on information provided by EPA, FERC, and
other agencies with significant administrative responsibilities
under the bill.''
Senator Sessions. Do you have actual employee numbers for
that?
Mr. Elmendorf. But, I don't think we have employee numbers.
But we have----
Senator Sessions. How can you calculate if you don't have
the employee numbers?
Mr. Elmendorf. There are different ways of coming at the
question.
Senator Sessions. I'd like to see what you've got. I know
time is short. Thank you for sharing that.
The Chairman. Let me just advise members, we've started a
vote. We can recess and come back and ask additional questions
if members want to do that, or we can go ahead and proceed for
another 6 or 8 minutes.
Yes, Senator McCain, did you have an opinion on what we
ought to do?
Senator McCain. I just had one additional question for
the----
The Chairman. OK.
Senator McCain. [continuing]. Panel if----
The Chairman. Let me see if Senator Cantwell had any
additional question, first, and then we'll go back over to this
side and take any additional question.
Did you have another question, or did you want----
Senator Cantwell. Thank you, Mr. Chairman. Now? You're
saying----
The Chairman. Yes, I'd like to see if we could finish up
before we----
Senator Cantwell. Thank you.
The Chairman [continuing]. Go vote, if we could.
Senator Cantwell. Yes. I would like to go back to Mr.
Harvey on this allowance question, because obviously EPA's
analysis of the House bill has a reliance on international
offsets that would result in 1.4 trillion in payments to
foreign governments and companies to purchase the offsets. I
just have serious concerns about why we would spend so much
money overseas making that kind of investment when we really
need to be making the investment here in the United States.
So, I know we had some experts, Mr. Chairman, here last--or
2 weeks ago--who didn't even believe in the analysis of the
original numbers.
So, maybe you could help us with that. What would happen if
the projects were not available?
Mr. Harvey. Thank you, Senator.
As I mentioned in my testimony, we ran a scenario where we
omitted the use of international offsets altogether, and the
costs would be 90 percent higher. The----
Senator Cantwell. How much? How much?
Mr. Harvey. Ninety percent--89 percent higher--if you just
had domestic offsets and the other technologies domestically.
So, there's support for international offsets, obviously from
people who are concerned about reducing the cost of meeting
these targets by the U.S. alone. So, allowing international
offsets does involve those transfers you talked about, but it
also reduces the cost to U.S. firms.
Senator Cantwell. But, we should spend $1.4 trillion
investing in----
Mr. Harvey. It's the general argument that--we were talking
a little bit about this, about international trade savings, as
well.
Senator Cantwell. I'd rather see $1.4 trillion invested in
U.S.----
Mr. Harvey. That's a policy choice for Congress.
Senator Cantwell. Yes. Thank you.
Thank you, Mr. Chairman.
The Chairman. Senator McCain, did you have a question?
Senator McCain: Just one.
The Chairman. Then, Senator Corker----
Senator McCain. Mr. Harvey, have you looked at the acid
rain experiment?
Mr. Harvey. Yes, I was actually an employee of the Clean
Air Markets division, before I worked on this, so I'm----
Senator McCain. How do you account for its success?
Mr. Harvey. It set clear, long-term goals. It reduced acid
rain emissions by about 50 percent. It got EPA out of the
business of telling companies how to make the reductions. They
went out, and they were innovative, and they found ways to meet
their goals at their least cost. So, it's been a great success,
both environmentally and from an economic point of view.
Senator McCain. But, it was simple.
Mr. Harvey. It was very simple. The rules were clear.
Congress defined the allocations. We had very few lawsuits
challenging the implementing rules. It's been quite a success
for us. We've been able to do it with a very small number of
employees.
The Chairman. Senator Corker.
Senator McCain. I thank you, Mr. Chairman.
Senator Corker. I want to thank all of you, for your
testimony.
Dr. Parker, I didn't ask any questions today, but I
continue to be appreciative of the great work you all do at
CRS, and all of you for your testimony today.
Going to Senator McCain's comment about the European
system--and certainly my comments are anecdotal, only from
personal experience. Senator Bingaman and I spend a good deal
of time meeting. Every policy person would come up to us after
the meetings that we had, and they would say, ``Whatever you
do, do not give away free allowances.'' That is the reason we
had so many problems with our European system, is giving away
free allowances. Obviously, that's what we do in this Rube
Goldberg system that's been put in place by the House. Would
you all mind commenting on the issue of how free allowances, in
essence, distort and make less simple a system like we're
talking about?
Mr. Elmendorf. So, again, Senator, I can't make a policy
recommendation. Many analysts do favor simpler approaches, and
they favor the simple approach in this context of auctioning
allowances and then having Congress decide what to do with
those proceeds in a more transparent fashion. I think, from a
substantive point of view, the crucial effects of the--giving
away the allowances depend, first of all, on whether they
change the prices, distort the price signals that the system is
trying to create. As I've suggested, there are ways from them
not to do that, but it is complicated. Second, there are very
important distributional consequences. That's a policy choice,
again, that you get to make. But, I agree that those choices
are more obscured by giving them away in this complicated
fashion.
Senator Corker. These free allowances are equal to
marketable securities. I mean, when you're giving away an
allowance, it's like giving away a share of IBM stock. You can
sell it immediately. So, we speak as if ``free'' means at ``no
money,'' but the fact is, it's huge transference of wealth that
does, in fact, make a system like this far less simple. Is that
correct?
Mr. Elmendorf. For just that logic, Senator, CBO includes
both the costs of giving that allowance away at market value
and we impute the revenue to the government budget that could
have been earned from selling that allowance.
Senator Corker. Thank you.
The Chairman. Senator Murkowski.
Senator Murkowski. Very quickly, Mr. Chairman.
I just want to note that Senator McCain brings up the issue
of acid rain and you know how did that worked. We need to
appreciate it was limited to what was happening here in this
country. It was a domestic issue, it didn't require
technological breakthroughs. We haven't had much discussion
today regarding what we will be putting in place through
climate change policy not only depends on innovative
technologies, but it also depends on the cooperation from other
countries over which we have very limited, if any, control at
all.
There has been great testimony this afternoon. I really
appreciate it, Mr. Chairman. However, I am reminded that so
much of what we're talking about is theoretical. In the cost-
containment hearing we had a couple of weeks ago, we kept
talking about the theoretical offsets. Now we're talking about
the technologies that will be needed. Nuclear technology isn't
new, but when we talk about our ability to get up and running
what we actually need--again, it goes back to the level of
skepticism that is out there.
We talk about Carbon Capture & Storage and where we're
going to be when our reality is that we're still trying to
figure out how we commercialize it. You know, we can't be
implementing policies that are ``a wish and a prayer'' policy.
We've got to know that this is tangible. We've got to push it,
absolutely. But, we talk at great lengths about the theoretical
aspects of it.
Mr. Chairman, I know we've got to go, and I appreciate your
indulgence. Thank you.
The Chairman. Thank you all. This is very useful testimony.
We appreciate your giving us the time and the effort.
That ends our hearing.
[Whereupon, at 11:59 a.m., the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Response of Douglas W. Elmendorf to Question From Senator Bingaman
Question 1. A key uncertainty is how the models handle the
recession and recovery. Do the models assume that growth and emissions
will return to trend (i.e., that there will be a period of higher than
normal growth after the recession ends as unused capacity is put into
service) or that there has been a step-change in GDP and after the
recession, growth rate will return to normal but that the US economy
will set out from a low base. This question is fundamentally important
because US emissions will have fallen by more than 8% from 2007 levels
by the end of this year. This is the initial condition from which the
models are being initiated. How they handle it is critical to
projecting 2020 and 2030 costs.
Answer. Most groups in the United States that model the effects of
climate policies, CBO included, rely on the Energy Information
Administration (EIA) for a projection of baseline emissions. That
projection is driven in part by EIA's expectations about future GDP
growth, which are similar to CBO's. Both CBO and EIA take into account
the substantial decline in GDP as a result of the recession and a
significant bounceback from it. However, for reasons largely unrelated
to GDP growth, EIA is projecting lower emissions through 2030 than it
projected a few years ago.
Responses of Douglas W. Elmendorf to Questions From Senator Murkowski
treatment of allowance allocation costs
Question 1. The creation of carbon allowances creates value, and
therefore wealth that can be distributed by the government. When
allowances are auctioned, it is my understanding that CBO assumes a 25%
reduction in net revenues because the purchase of allowances would be
tax deductible. Similarly, allowances given away for free are treated
as expenditures just as if they were cash payments. However, CBO
asserted in a letter earlier this year that.
``Depending on who would receive the allowances and what they would
be used for, the reduction in taxable income . . . could be accompanied
by a matching increase in taxable income elsewhere in the economy. If
so, the added tax revenues would offset the initial loss . . . In such
cases, the issuance of the allowances would be budget neutral-that is,
it would have no net effect on the budget deficit. In other
circumstances, however, that would not be the result''.
What are those other circumstances, and why would CBO tend to view
them differently than a situation in which allowances are given away
for free?
Answer. For the purposes of calculating the net impact on the
federal budget of distributing allowances, CBO makes no distinction
between allowances that are auctioned and those that are distributed
for free. Whether an allowance is auctioned or given away, CBO applies
a 25 percent revenue offset to the proceeds or to the allowance value
to account for the loss of income and payroll tax revenues that would
result because the acquisition and use of allowances would create an
additional business expense for companies that would have to comply
with the cap. Even if companies received the allowances for free, using
the allowances, rather than selling them, would result in forgone
income to those companies. Businesses might pass that cost on to their
customers, but it is a cost that would be borne and reduce tax
collections at some point in the economy.
---------------------------------------------------------------------------
\1\ See Congressional Budget Office, letter to Honorable Henry A.
Waxman, The Budgetary Treatment of Emission Allowances Under Cap-and-
Trade Policies (May 15, 2009), p.5.
---------------------------------------------------------------------------
Similarly, whether the federal government spends auction proceeds
or gives allowances away for free, there could be a matching increase
in income and payroll tax revenues, depending on who would receive the
money or the allowances and what they would be used for. In some cases
(whether using auction proceeds or issuing allowances for free), the
process of issuing and distributing allowances would be budget
neutral--that is, the initial loss of income and payroll tax revenues
(estimated at 25 percent of the allowance value) could be offset by
other increases in income and payroll taxes. That outcome would depend
on how the allowances or auction proceeds were used, not on whether the
``value'' is distributed through an auction or is freely allocated.
For example, under H.R. 2454, providing allowances free of charge
(as passed by the House) to businesses (such as merchant coal
generators, generators with long-term power purchase agreements, and
petroleum refiners) would fit into the category of transactions that
would be budget neutral because they would generate taxable income;
under the legislation, those entities could sell or use the allowances
and consequently increase their taxable incomes. Distributing auction
proceeds to businesses with no strings attached as to how that money
should be used would similarly be budget neutral.
In contrast, providing allowances to non-business entities-such as
states to support specific activities, or to other countries to support
efforts to reduce greenhouse gases-would not be budget neutral because
it would not generate taxable income. Spending by those entities would
simply substitute for spending elsewhere in the economy, generating no
additional taxable income. In the same way, use of auction proceeds by
the federal government for activities like research and development or
for distribution to low-income households who do not pay taxes would
not be budget neutral.
anticipated market volatility
Question 2. There is a great deal of variation among the cost
estimates that have been produced for the Waxman-Markey bill. While
that is generally a cause for concern, perhaps it gives a reliable idea
of the market volatility we can expect for carbon allowance prices over
the next four decades.
Assuming this is the case, can you provide us with an anecdotal
assessment of these potential fluctuations in allowance prices and how
they compare to volatility we have seen in the oil and gas markets
recently?
Answer. The variation in cost estimates for the Waxman-Markey bill
reflects different analysts' assumptions about a wide variety of
factors, including: the development of new technologies that regulated
entities might use to reduce their emissions; the availability of
domestic and international offset credits; trade-offs that regulated
entities would make between current and future costs, which would
govern their decisions about banking allowances for future use; and the
effect of subsidies and mandates that H.R. 2454 would provide for
energy efficiency, research and development, and specific technologies.
For example:
Studies that assumed that carbon capture and sequestration
or nuclear generation would be more readily available options
for lowering emissions tended to project lower compliance costs
than those that assumed more restricted availability;
Studies that assumed that domestic and international offsets
would not be readily available due to problems in meeting the
criteria established in the legislation or subsequent
regulations projected relatively high compliance costs;
Studies that assumed that firms would engage in relatively
more banking of allowances tended to predict higher costs in
the near term and lower costs in the future; and
Studies that assumed that subsidies for energy efficiency or
new technologies would have relatively large effects tend to
find lower compliance costs.
For a discussion of some of those factors see:
The Use of Offsets to Reduce Greenhouse Gases (CBO Economic
and Budget Issue Brief, August 3, 2009) which is available at
www.cbo.gov/ftpdocs/104xx/doc10497/08-03-Offsets.pdf
How Regulatory Standards Can Affect a Cap-and-Trade Program
for Greenhouse Gases (CBO Economic and Budget Issue Brief,
September 16, 2009) which is available at www.cbo.gov/ftpdocs/
105xx/doc10562/09-16-CapandStandards.pdf
CBO's cost estimate for H.R. 2454, the American Clean Energy
and Security Act of 2009, as ordered reported by the House
Committee on Energy and Commerce on May 21, 2009 which is
available at www.cbo.gov/ftpdocs/102xx/doc10262/hr2454.pdf
The prices for emission allowances that underlie various cost
estimates represent potential opening bids during a hypothetical
auction on the first day of trading in the carbon market. As regulated
entities, investors, entrepreneurs, and others who have information
about the cost of reducing emissions submit their bids, that market
would open with a single price that represents everyone's initial
knowledge and expectations about current and future demand for
allowances relative to their supply. The volatility that would occur
once that market was in operation would reflect changing market
conditions. For example, an announcement that the EPA is on the verge
of approving a large number of offset allowances could result in a
decrease in the allowance price because market participants would
expect the demand for allowances to fall because of the compliance
obligation that would be met by this new supply of offsets. Similarly,
allowance prices would rise if heat waves boosted consumer demand for
electricity to operate air conditioning units. Market participants
would foresee the need to hold additional allowances to cover the
increase in emissions resulting from meeting that increased demand for
electricity.
The price of allowances would generally be expected to rise over
time, but could vary widely from day-to-day or year-to-year depending
on the design of the market, economic growth, and other factors that
affect the use of fossil fuels. The price in the market for sulfur
dioxide (SO2), which causes acid rain, in the United States
and the price of carbon allowances in the European Union's Emission
Trading Scheme have both shown wide fluctuations over time, but the
design of those markets is different than the market that would be
established by H.R. 2454, which passed the House of Representatives,
and the prominent proposals that are under consideration in the Senate.
CBO is currently examining how financial instruments (such as futures
contracts) and regulatory instruments (such as price collars) might
affect volatility. However, that work is not yet complete.
discount rates
Question 3. The difficulty of looking decades into the future at
the impact of a climate policy is compounded by how much the value of a
dollar changes over time.
If we were to go back to 1969, and wanted to explain the value of a
$23,000, 2009 model-year car, there are a few ways we could attempt to
do so. We might adjust the 2009 price tag for inflation and say ``it
will cost the equivalent of $3,960 in today's dollars''. Or we could
say, ``put $562 in the bank, and at a 5% interest rate you will have
enough to buy the car in 2009''. This latter explanation would rely
upon a `net present value inflation adjusted' calculation, which is
what most of these reports use.
But it should be apparent that this is a very bad indication of
what something will actually cost in 40 years. Climate bills do not
require Americans to put away money now to cover costs later; they
simply impose those costs at some future date.
So I have to ask if there is something I am missing here. I
understand that discounting is a standard practice in the computer
models used by the agencies, but it seems like these models and the
numbers they generate are better for comparing two pieces of
legislation than providing a real idea of what costs we can expect.
Are there better ways to explain the costs of these bills, or at
least ways that would make more sense to my constituents?
What would the use of actual dollar amounts, simply adjusted for
inflation without discounting, do to the cost estimates produced for
these climate bills?
Answer. CBO reports the effect of legislation on the federal budget
in nominal terms; that is, there is no discounting or adjustment for
expected inflation. Correspondingly, CBO uses nominal estimates of
allowance prices for its estimate of the costs that H.R. 2454 would
impose on the federal budget.
CBO estimates the loss in purchasing power that households might
experience in future years as a result of the cap-and-trade program
defined in H.R. 2454. Those costs would be incurred in future years
when income levels are expected to be higher than they are currently.
In order to provide a current context for the magnitude of those future
costs, CBO reports the costs in the context of 2010 income levels. For
example, CBO estimates that the average per household loss in
purchasing power in 2020 would be 0.2 percent of after-tax income in
that year. Measured at 2010 income levels, 0.2 percent of after-tax
income would be $165. CBO's estimates of the loss in purchasing power
do not involve any discounting.
Responses of Douglas W. Elmendorf to Questions From Senator Barrasso
Question 1. Based on your analysis, would imposing a cap and trade
program like the one in Waxman-Markey cause job losses in the fossil
fuel sector similar to the massive job losses experienced by the
manufacturing industry since the 1970s? Which specific States will be
most impacted?
Answer. In 1979 about 19 million people were employed in the U.S.
manufacturing sector. By end of 2008 that number had decreased by
almost a third, a loss of over 6 million jobs. By comparison, in 2007
about 800,000 people in the United States were employed in the
industries that extract and process oil, natural gas, and coal,
according to the Bureau of the Census.
CBO reviewed several studies of the likely impact of climate policy
on employment. Those studies identified the fossil-fuel cluster of
industries as one in which employment would decline if a cap-and-trade
program like that provided for by H.R. 2454 were put in place. The
absolute number of jobs lost in those industries would be much lower
than the number of jobs lost in the manufacturing sector since 1979
simply because those industries are much smaller than the manufacturing
sector. However, some of the studies that CBO reviewed projected
percentage job losses, in coal mining, for example, comparable to those
experienced in the manufacturing sector over the past thirty years.
CBO has not analyzed the effects of H.R. 2454 on employment at the
state level.
Question 2. If Waxman-Markey passed, you stated in your testimony
that there would be ``significant shifts'' from emissions-intense
sectors such as oil and refining firms to low-carbon businesses such as
wind and solar power.
You also stated ``We want to leave no misunderstanding that
aggregate performance, the fact that jobs turn up somewhere else for
some people does not mean that there are not substantial costs borne by
people, communities, firms in affected industries and affected areas.
You saw that in manufacturing, and we would see that in response to
changes that this legislation would produce.''
You further stated that ``The net effect of that we think would
likely be some decline in employment during the transition because
labor markets don't move that fluidly.''
Would states in the West, such as Wyoming, which are heavily
dependent on coal, oil, and natural gas production and use, suffer
significant job losses in these sectors as a result of Waxman-Markey
passing? In the initial years, would the people in those sectors
displaced by the passage of the bill have the ``skill sets'' to
transfer into jobs in low carbon sectors of the economy? Would a likely
outcome include moving to other regions of the country to get jobs in
low carbon sectors of the economy?
Answer. A cap-and-trade program for greenhouse gases would cause
employment shifts in the economy. Such a program would decrease
employment in the production of carbon-intensive fuels, such as coal,
and in other industries that rely on such fuels. It would also create
employment opportunities in the production of less carbon-intensive
forms of energy and other goods and services that depend less on
carbon-intensive fuels.
If a cap-and-trade program like that provided for by H.R. 2454 were
put into place, employment would probably decline in industries such as
those that extract and process oil, natural gas and coal. Although CBO
has not done a state-by-state analysis of employment, the decline in
employment in those industries would translate into job losses in the
states in which those industries are concentrated. Some people who
would lose their jobs would find themselves lacking the skills to move
easily from one industry to the other. In addition, it is not clear
that new jobs would arise in the same areas of the country in which the
old jobs were lost, causing some people seeking new employment to move
to a new area that they believed to have better job prospects.
Question 3. Would states in the South, some of which are dependent
on off-shore oil exploration, oil refining, and coal production, and
states in the Midwest, which rely on coal production and use, suffer
similar losses? Would the impact in the initial years be the same in
these regions as in Western states?
Answer. As noted above, some of the industries that are at the
greatest risk of declining employment are those that produce carbon-
intensive fuels such as coal, oil, and natural gas. Although CBO has
not done a state-by-state or regional analysis of employment, declines
in employment in such industries would translate into job losses in the
states in which those industries are concentrated. The shift in the
economy to less reliance on carbon-intensive fuels, goods, and services
would also create employment opportunities elsewhere in the economy,
but those opportunities could be in other areas of the country.
Responses of Douglas W. Elmendorf to Questions From Senator Cantwell
Question 1. CBO's analysis of the House passed climate bill found
that the middle income quintiles bear most of financial burden under
H.R. 2454. While the lowest income households are kept whole through
government refunds of auction revenues, the system is strongly
regressive for the middle income households,
Could you provide a more detailed explanation of anticipated
distribution of costs under H.R. 2454?
Answer. CBO anticipates that businesses would largely pass the cost
of complying with a cap-and-trade program-the cost of purchasing
allowances, purchasing domestic and international offset credits, and
reducing emissions-on to their customers through higher prices for
goods and services. Higher income households would incur a larger
portion of that cost because they consume more than lower income
households. However, those compliance costs would impose a larger
financial burden measured as a share of income on lower income
households because those households tend to consume more of their total
income, and because energy-intensive goods and services generally make
up a larger fraction of their total consumption.
Although compliance costs would generally be distributed among
households based on their purchases of goods and services, policymakers
could substantially offset those costs for some households through the
allocation of allowances (or the revenue raised by selling allowances).
CBO developed an estimate of households' loss in purchasing power as a
rough indication of the direct effect that the cap-and-trade program
established in H.R. 2454 would have on households. That loss in
purchasing power equals the costs of complying with the policy minus
the compensation that would be received as a result of the policy.\2\
The combination of compliance costs and the allocation of allowances
specified in H.R. 2454 would impose the largest loss in purchasing
power on households near the middle of the income distribution.
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\2\ Once the compensation received by U.S. households is deducted
from the compliance costs, the remaining loss in purchasing power stems
from the cost of reducing emissions and producing domestic offsets,
expenditures on international offsets, and the value of allowances that
would be directed overseas.
CBO's analysis shows that the richest 20% of Americans pay
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less than the middle brackets, why is that the case?
Answer. CBO estimates that in 2020, compliance costs for the 20
percent of the population with the highest income would be about twice
that for households in the middle income group ($1,400 vs. $685,
measured at 2010 income levels).
That difference would be more than offset, however, by the impact
of the allowance allocations. In 2020, CBO estimates that roughly 35
percent of the allowances would be allocated in a manner that benefited
shareholders, who are more likely to be members of higher income
households. As a result, the loss in purchasing power-that is, the
compliance cost minus the compensation received as a result of the
policy-experienced by the average household in the top one fifth of all
households arrayed by income, $165 (measured at 2010 income levels),
would be less than the loss in purchasing power experienced by
households in the middle and fourth income quintiles-$310 and $375 (at
2010 income levels), respectively. The disparity in the loss in
purchasing power in 2020 would be larger when measured in relative
terms; that loss would be about 0.1 percent of after-tax income for the
average household in the top income quintile and 0.6 percent and 0.5
percent for the average household in the middle and fourth income
quintiles, respectively.
The results would be different in 2050, because a smaller fraction
of the allowance value would benefit higher income households, by CBO's
estimate. In that year, the dollar loss in purchasing power (measured
at 2010 income levels) would be largest for the average household in
the highest income quintile. Measured relative to after-tax income,
however, the loss in purchasing power would still be greatest for
households in the middle quintile (1.1 percent for that group vs. 0.7
percent for the highest income quintile).
Could the income distributional disparity be alleviated if
more--or all--allowances were auctioned, generating revenues
that could be distributed more equally and directly to American
families to offset energy cost increases?
Answer. Instructing the government to sell the allowances and use
the revenue to provide rebates to households would be a more direct
method of distributing the allowance value than giving the allowances
to private entities and instructing them in how to use the value of the
allowances to benefit customers. For example, it is unclear exactly how
the allowances given to local distributors of electricity under H.R.
2454 would ultimately accrue to households. CBO estimated that roughly
one-third of that value would be received by households in the form of
rebates while the other two-thirds would benefit commercial and
industrial businesses that are served by those distributors.
If the Congress wanted to ensure that each household received an
equal (uniform) amount of the allowance value, measured in dollars, it
could do so by requiring the sale of all of the allowances and using
the revenue to provide rebates to U.S. households. For households with
relatively low consumption levels, that rebate could more than offset
the higher costs that they would incur (by paying higher prices for the
goods and services that they consume) as a result of the policy.
Measured as a share of income, such a policy would impose a larger
burden (taking into account both compliance costs and the distribution
of allowance value) on higher income households than on lower income
households. Additional information about the distributional effects of
such a strategy is discussed in The Distribution of Revenues from a
Cap-and-Trade Program for CO2 Emissions (Statement of
Douglas W. Elmendorf, Director, CBO, before the Committee on Finance,
United States Senate, May 7, 2009) which is available at: http://
www.cbo.gov/ftpdocs/101xx/doc10115/05-07-Cap_and_Trade_Testimony.pdf.
Has CBO done any analysis on how different climate policies
differentially impact consumers in various regions of the
country?
Answer. CBO has not done such analysis itself. However, the agency
recently reviewed two studies that examined how the costs of complying
with a cap-and-trade program might vary across the country. Like CBO's
national level analysis, those studies-one produced by a team of
experts affiliated with the National Bureau of Economic Research (NBER)
and one by researchers at Resources for the Future (RFF)-assumed that
businesses would pass the cost of complying with the cap-and-trade
program on to their customers in the form of higher prices. The two
studies suggest that regional differences in the burden that those
higher prices would impose on households would be relatively small. In
particular, the NBER study suggests that the increase in households'
spending (resulting from the higher prices) would range from 1.9
percent of annual income in what it defines as the East South Central
region to 1.5 percent in the West North Central region.
The RFF study also finds only small regional differences, although
the differences are somewhat larger for low-income households.
Specifically, the increase in households' spending would range from 1.6
percent of annual income in the Ohio Valley to 1.3 percent in
California, New York, and the Northwest. Effects on households in the
bottom deciles of the income distribution would range from 5.5 percent
in the Ohio Valley to 4.0 percent in California. For more information
see: http://www.cbo.gov/ftpdocs/104xx/doc10432/07-09-
RegionalEffects_Cap-Trade.pdf.
Would an upstream point of regulation at the point of fossil
fuel production, in other words at the beginning of the value
chain, minimize regional disparities since the actual amount of
carbon consumed per capita is quite similar across the country?
Answer. The decision about where to place the cap would probably
not substantially affect the distribution of the compliance costs among
regions. As described above, most analysts anticipate that the bulk of
the compliance costs would be ultimately be borne by consumers in the
form of higher prices for the goods and services that they buy. Thus,
regional differences in the incidence of the compliance costs would
stem from differences in consumption patterns among regions, but would
be largely unrelated to the point of regulation.
Would an equal, per capita distribution of some portion of
revenues raised in an auction for emission allowances help
reduce regional disparities?
As indicated above, two studies that CBO reviewed found little
difference in the burden (measured as a share of income) that the cost
of complying with a cap-and-trade program would have on households in
different regions. An equal per capita rebate would provide greater
benefits to lower income households (as a share of income) and thus
would tend to benefit lower income regions of the country. Other
alternatives, such as giving revenues from the sale of allowances (or
the allowances themselves) to affected industries, could also change
the distribution of the net costs. That strategy would likely benefit
shareholders, who are typically from higher income households, and thus
would tend to benefit higher income regions of the country.
Question 2. I understand that the CBO's cost estimate for the House
climate bill was a net gain in federal revenues of $24 billion between
2010 and 2019, but I am wondering about the longer-term cost
implications of the bill and understand that CBO scores things a little
differently in the Senate, namely by adopting a longer timeframe when
assessing policy impacts.
Assuming for now that the Senate bill will be a companion to
the House bill and will have the same provisions, can you give
us your impression of what the CBO score on the House bill is
likely to be in the Senate?
Answer. By law, CBO is required to prepare a cost estimate for each
bill reported by any committee of the House of Representatives or the
Senate. Generally, those estimates provide CBO's assessment of effects
on spending subject to appropriation action (known as discretionary
spending), effects on direct spending (also sometimes referred to as
mandatory spending), and effects on revenues (incorporating estimates
by the Joint Committee on Taxation[JCT]). The Congressional Budget Act
requires that such estimates cover all the costs that would be incurred
in each of the five fiscal years beginning with the year that the
proposed legislation would become effective.
However, to assist both the House and Senate in carrying out the
annual budget resolution, CBO and JCT routinely provide estimates for
direct spending and revenue provisions for a period of 10 years. Such
10-year estimates are necessary for the Budget Committees'
determination of whether legislation complies with the pay-as-you-go
rules in each House.
Further, the Senate has an additional rule that pertains to longer-
term effects on federal deficits, covering a total period of 50 years.
As a result, CBO is required, pursuant to section 311(b) of the fiscal
year 2009 budget resolution (S. Con. Res. 70), to provide an estimate
of whether enactment of a bill would cause a net increase in deficits
in excess of $5 billion in any of the four 10-year periods following
the 10-year budget window covered by the pay-as-you-go rule.
In June 2009, CBO estimated that H.R. 2454, as passed by the House
of Representatives, would yield a reduction in deficits of about $9
billion between 2010 and 2019 (the 10-year period currently covered by
the pay-as-you-go rule). At that time, CBO did not provide any estimate
of the long-term budget effects of H.R. 2454. For potential Senate
consideration of H.R. 2454, consistent with section 311(b) of S. Con.
Res. 70, CBO estimates that enactment of the legislation would increase
budget deficits by significantly more than $5 billion in each of the
three 10-year periods following 2019. Finally, CBO estimates that
enacting the House bill would generate a reduction in deficits for the
10-year period beginning in 2050.
To understand the net budget impact of H.R. 2454, as passed by the
House, it is important to understand the budgetary treatment of
emission allowances. The cost of purchasing allowances, whether from
the government or from other entities that might receive allowances,
would become an additional business expense for companies. Such costs
would result in a decrease in taxable income in the economy and would
result in a loss of government revenue from income and payroll taxes.
Those losses would offset an estimated 25 percent of the revenues the
federal government would receive from auctioning allowances.
Depending on who would receive the allowances and what they would
be used for, the reduction in taxable income could be accompanied by a
matching increase in taxable income elsewhere in the economy. In those
cases, the added revenues from income and payroll taxes would offset
the initial loss of tax revenues from the sale of the allowances and
the whole transaction would be budget neutral-that is, it would have no
net effect on the budget deficit. In other circumstances, there would
be no offset to the initial tax loss so there would be a net loss of
revenues and hence an increase in the budget deficit.
By CBO's estimate, H.R. 2454, as passed by the House, would reduce
budget deficits by about $9 billion over the 2010-2019 period. That
budgetary gain would occur because spending of some of the proceeds
from the auction of allowances (about $25 billion over the 2010-1029
period) would be subject to subsequent Congressional action (and thus
would not add to the deficit unless provided for in future
appropriation bills). Those allowances that would be distributed during
that period would be allocated to entities in a way that would be
budget neutral. In the subsequent three decades (2020-2049), the bill
would add large amounts to budget deficits. Two major factors underlie
this shift from a net budgetary gain to net increases in deficits over
time:
First, most of the allowance allocations that would be
budget neutral (that is, allocations that would not generate
the net 25 percent revenue reduction) would be phased out in
the mid-2020s. The allowance allocations that would be budget
neutral are primarily those that would be given to businesses
either directly, such as the allowances that would be given to
trade-exposed energy-intensive businesses, or indirectly, such
as those given to commercial or industrial consumers of
electricity via their local distribution companies. When
businesses receive allowance value-and are not instructed how
to use that value-it generally increases their taxable income.
In those cases, the added tax revenue would offset the initial
loss in tax revenue from the cost of using allowances. By 2025,
most of the allowances given to businesses would be phased out.
Instead the revenue from auctioning allowances would be used to
fund payments for low-income households (see below) and the
Climate Change Consumer Rebate, a nontaxable rebate to all
households; the use of allowances in that way would not be
budget neutral because those payments would not be taxable
income to households and would not yield additional tax revenue
to offset the revenue losses (the 25 percent revenue reduction)
that would result from sale of the allowances.
Second, the payments for low-income programs created by the
bill would become much more expensive after 2020 relative to
the amounts set aside by the bill to fund them. Those household
payments would be an entitlement: low-income households would
receive payments equal to their ``loss in purchasing power'' as
determined by the Energy Information Administration. The size
of those payments would increase as the caps on emissions
became tighter over time.\3\ H.R. 2454 would set aside 15
percent of the allowance value to fund the payments to low-
income households. However, those funds would not be sufficient
to fund the payments in the latter years of the program because
the value of the allowances would not grow proportionately with
the loss in purchasing power that households would experience.
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\3\ The bill introduced in the Senate would do away with this
entitlement and specify that only 15 percent of allowance value will be
used to fund low-income programs.
CBO estimates a large surplus in the 2050-2059 period because a
large amount of the revenue collected during this period from the sale
of allowances would not be allocated or spent (that is, they would be
deposited in the Treasury). Those unallocated revenues would be counted
---------------------------------------------------------------------------
toward deficit reduction.
I also noticed that CBO found that the unfunded mandates
that the House bill would impose on industry and state and
federal government exceeds the threshold established by the
Unfunded Mandates Reform Act. Were these mandates reflected in
any way in the CBO's estimate of the House bill's cost?
Answer. CBO determined that H.R. 2454, as passed by the House,
would impose both intergovernmental and private-sector mandates as
defined in the Unfunded Mandates Reform Act (UMRA). We estimated that
the aggregate costs of those mandates would well exceed the annual
thresholds established in UMRA ($69 million for intergovernmental
mandates and $139 million for mandates on the private sector in 2009,
adjusted annually for inflation). CBO could not estimate the cost of
some of the mandates in the bill because we lacked adequate information
about the scope of future regulations.
The mandates CBO identified include: requirements that utilities,
manufacturers, and other entities reduce greenhouse gas emissions
through cap-and-trade programs and performance standards; requirements
that public and private entities provide information on greenhouse
gases to a federal registry; a requirement that public and private
utilities pay an annual assessment following a referendum by the
affected utilities; limitations on certain commodity transactions;
restrictions on the production and importation of hydrofluorocarbons;
new efficiency standards and required capabilities for lighting and
appliances; new standards for the manufacture of vehicles capable of
using alternative fuels such as ethanol, methanol, and biodiesel, and
for new heavy-duty vehicles and engines; and several preemptions of
state and local authority.
Some of the costs of complying with the mandates imposed by the
bill (for example, the expenditures covered facilities would have to
make to acquire allowances) are included in the cost estimate's tables
showing the budgetary impacts of H.R. 2454. That is because the
revenues we estimate would be collected by the federal government are
mandate costs to the entities that would have to pay those amounts.
Other compliance costs (for example, the cost of purchasing offset
credits, the costs of directly reducing emissions, and the costs or
preparing reports) are not included in those budgetary tables because
they would not directly affect the federal budget. All of the mandates
and their impacts on state, local, and private entities, however, are
discussed at length in the section entitled ``Intergovernmental and
Private-Sector Impact'' on pages 35-40 of CBO's cost estimate for H.R.
2454, as ordered reported by the House Committee on Energy and Commerce
on May 21, 2009, which is available at www.cbo.gov/ftpdocs/102xx/
doc10262/hr2454.pdf.
Did CBO's score of H.R.2454 assume the cost of a larger
federal bureaucracy? If yes, what were those costs and what
assumptions were they based on?
Answer. Several federal agencies, including the Environmental
Protection Agency (EPA), the Federal Regulatory Energy Regulatory
Commission (FERC), the Department of State, the Department of Energy,
and others would be responsible for administering programs under H.R.
2454. In total, CBO estimates that fully funding federal agencies'
administrative costs required to implement the provisions of H.R. 2454
would require gross appropriations totaling $540 million in 2010 and
$8.2 billion over the 2010-2019 period. A significant portion of the
estimated costs would be incurred by EPA to administer the proposed
greenhouse gas cap-and-trade program, including a roughly five percent
increase in personnel each year. Such personnel would be responsible
for developing regulations, preparing rulemakings, assessments, and
studies, distributing proceeds generated from the auctions, and other
activities related to the cap-and-trade program. Other agencies would
be responsible for supporting the proposed energy-efficiency and
renewable electricity standard, providing rebates to low-income
individuals and undertaking a variety of rulemakings and studies
related to the new programs authorized under the bill; consequently,
those agencies would incur costs for additional personnel, contractors,
and information technology. The estimates of cost are primarily based
on input from EPA and other federal agencies and on historical
information on how large regulatory programs have been implemented.
FERC, which has the authority to offset 100 percent of its
administrative costs through fees on regulated entities, would levy
additional fees sufficient to offset any increased administrative costs
incurred under H.R. 2454. Based on information from FERC, CBO estimates
that increased user fees to the agency would offset roughly $40 million
of annual estimated costs under H.R. 2454. Consistent with current
budgetary treatment, such fees would be recorded as offsetting
collections, thus reducing the net appropriations that would be
necessary to implement the legislation to roughly $7.8 billion over the
next 10 years. CBO estimates that net outlays resulting from that
amount of funding would total $390 million in 2010 and $7.5 billion
over the 2010-2019 period. Those costs are not counted for pay-as-you-
go purposes because they would be subject to future appropriation
action.
Question 3. Assuming the United States adopts cap-and-trade
legislation such as those currently under consideration in Congress,
are there any alternative cost containment options if verifiable
international offsets are not available in sufficient quantity?
Answer. Cap-and-trade programs could include a variety of design
features that would help contain compliance costs. Those options
include:
Allowing firms to transfer allowance requirements across
time-by defining compliance periods over multiple years, and by
allowing firms to ``bank'' allowances to use in a future year
or to ``borrow'' allowances from a future year for use in an
earlier year,
Allowing firms to purchase ``offset credits'' that are
generated by entities that reduce emissions that would not
otherwise be subject to the cap in approved ways,
Allowing firms to purchase an additional supply of
allowances at or above a stated price. One variant of this
approach is to create a ``reserve pool''. another variant is to
establish a ``price ceiling.'' Under the reserve pool approach,
the government would sell a limited number of allowances in
``reserve auction'' at or above a minimum reserve auction
price. Allowances sold in the reserve auction would be taken
from allocations in future years. Under the price ceiling
approach, the government would sell an unlimited number of
supplemental allowances (that is, in addition to the allowances
initially created under the legislation) at a pre-specified
``safety valve'' price.
H.R. 2454 and S. 1733 would utilize several of those cost
containment mechanisms. Both bills would allow firms to bank unlimited
numbers of allowances, to undertake limited borrowing of future
allowances, to comply over multiple years, and to purchase offset
credits as a way of containing the cost of meeting the cap.
CBO finds that allowing firms to comply by submitting offset
credits would significantly lower firms' compliance costs under this
legislation. For example, CBO estimates that the use of offset credits
would reduce the allowance price for H.R. 2454 by roughly 70 percent.
Further, CBO estimates that international offsets play a more
significant role in holding down costs than do domestic offsets: firms
are not projected to use the maximum number of domestic offset credits
allowed under H.R. 2454 (one billion) until 2042, while firms are
projected to reach the one billion limit on the use of international
offsets more than a decade earlier. (Firms would be able to use
additional international offsets to make up for the lack of
availability of domestic offsets in the intervening years). Thus, if
international offset credits were not as readily available as CBO
projects, compliance costs would be higher than CBO estimates.
Both H.R. 2454 and S. 1733 would establish a reserve pool to help
contain costs if costs were higher than anticipated. That reserve would
be initially stocked with a limited number of allowances withheld from
annual allocations at the onset of the program and could be refilled by
government purchases of international offsets. Specifically, the bills
would instruct the Administrator of the Environmental Protection Agency
to use the revenue obtained by selling allowances from the reserve pool
to purchase domestic and international offset credits. The
Administrator would be instructed to retire those credits and create a
number of allowances equal to the number of international offset
credits retired. Those allowances would be used to re-stock the reserve
pool. If international offset credits were not readily available,
restocking the reserve pool would be difficult.
Because a scarce supply of international offsets could both
increase the likelihood that firms would wish to purchase allowances
from the reserve pool and would limit the Administrator's ability to
restock that pool, the reserve pool would probably not hold down costs
in that situation. Legislation could seek to address this situation by
authorizing the Administrator to find other ways to restock the reserve
pool, for example, by using domestic offset credits, should they happen
to be more readily available than international offset credits.
Establishing a price ceiling, which would result in an increase in
the number of available allowances, could avoid the potential problem
of running out of additional allowances (that is, depleting the reserve
pool). Unlike what would occur in the case of the reserve pool, the
government would maintain the price ceiling by supplementing the total
number of allowances over the course of the policy. For example, under
the provisions of H.R. 2454, the government might agree to sell firms
as many allowances as they might wish to purchase at a price of $28 in
the initial year of the policy. That price ceiling could rise over
time. Although such an approach would avoid potential difficulties with
restocking the reserve pool, it would also create more uncertainty
about the quantity of emissions over the course of the policy.
Numerous variations of reserve pools and price collars could be
considered, with different implications for policy outcomes. CBO is
performing additional analysis on this topic.
For further information, see:
Flexibility in the Timing of Emission Reductions Under a
Cap-and-Trade Program (Statement of Douglas W. Elmendorf,
Director, CBO, before the Committee on Ways and Means, United
States House of Representatives, March 26, 2009) which is
available at: www.cbo.gov/ftpdocs/100xx/doc10020/03-26-Cap-
Trade_Testimony.pdf
Congressional Budget Office, Policy Options for Reducing
CO2 Emissions (February 2008), which is available
at: www.cbo.gov/ftpdocs/89xx/doc8934/02-12-Carbon.pdf
Question 4. Do you believe consumers need to feel a price signal in
order to undertake energy efficiency investments and make the
behavioral changes necessary to reduce national fossil fuel use? Do
measures meant to reduce the burden of higher electricity prices, such
as the significant share of emissions allowances allocated to local
electricity distribution companies (LDCs) under H.R. 2454, effectively
dampen the carbon price signal and thus consumers' incentives to make
choices and behavioral changes that will be needed to decarbonize the
economy?
Answer. Price signals are an effective and efficient way to
encourage consumers (and businesses) to reduce energy consumption and
increase investment in energy efficiency. Although other regulatory
approaches can achieve the same goals, under most circumstances, those
alternative approaches are a more expensive means to achieving the same
goal.
The cap-and-trade program for greenhouse gases (GHGs) that would be
created by H.R. 2454 would provide incentives for emissions reduction
in two ways. First, it would motivate generators that are covered by
the cap to reduce the amounts of GHGs that they emit directly in the
production of electricity. Second, it would result in higher prices for
goods and services whose production or consumption leads to relatively
large quantities of GHG emissions. Those higher prices would encourage
consumers to purchase fewer of those products.
H.R. 2454 would also provide rebates to electricity consumers
through local distribution companies (LDCs). Those rebates would be
provided as reductions to the fixed portion of electric bills rather
than as reductions to the rate charged for electricity. To the extent
that consumers view such rebates as unrelated to the price of
electricity, the rebates would not affect the incentive to reduce
consumption. Conversely, if consumers view the rebates as offsetting
the price increase, the rebates would eliminate the added incentive to
reduce their consumption of electricity.
CBO concluded that the share of emissions allowances allocated to
local electricity distribution companies (LDCs) in the manner described
in H.R. 2454 would dampen, but not eliminate, the carbon price signal
to residential electricity consumers. Although the fixed rebates that
LDCs would provide to customers would not, in theory, reduce incentives
to conserve energy, CBO concluded that not all residential consumers
would distinguish changes in the fixed portion of their bill from
changes in the what they pay based on their use of electricity.
Therefore, CBO estimated that rebates to residential consumers would
cut the price signal in half, but not completely eliminate it. That
dampening of the price signal for residential customers would cause the
overall price on emissions to rise slightly to generate additional
reductions in usage in other sectors of the economy.
______
Response of Larry Parker to Question From Senator Bingaman
Question 1. A key uncertainty is how the models handle the
recession and recovery. Do the models assume that growth and emissions
will return to trend (ie that there will be a period of higher than
normal growth after the recession ends as unused capacity is put into
service) or that there has been a step-change in GDP and after the
recession, growth rate will return to normal but that the US economy
will set out from a low base. This question is fundamentally important
because US emissions will have fallen by more than 8% from 2007 levels
by the end of this year. This is the initial condition from which the
models are being initiated. How they handle it is critical to
projecting 2020 and 2030 costs.
Answer. In general, the models do assume that smooth, steady
economic growth will return after the recession ends, but from a lower
starting point. In addition to the lower starting point, the reference
case scenario developed by the Energy Information Administration for
its Annual Energy Outlook has become increasingly pessimistic about
future U.S. economic growth. This is illustrated in our report, CRS
Report 40809, by Figure 3 on page 16.
Responses of Larry Parker to Questions From Senator Murkowski
anticipated market volatility
Question 1. There is a great deal of variation among the cost
estimates that have been produced for the Waxman-Markey bill. While
that is generally a cause for concern, perhaps it gives a reliable idea
of the market volatility we can expect for carbon allowance prices over
the next four decades.
Assuming this is the case, can you provide us with an anecdotal
assessment of these potential fluctuations in allowance prices and how
they compare to volatility we have seen in the oil and gas markets
recently?
Answer. Attached to this memorandum is a CRS powerpoint
presentation that discusses allowance volatility within existing cap-
and-trade programs.* As noted, volatility in allowance markets can be
caused by a variety of allowance supply, demand and market design
dynamics. In some cases (such as the European Union's Emissions Trading
Scheme (ETS)), the volatility can be substantial. Perhaps more
importantly with respect to allowance prices and energy market
volatility, analysis of ETS allowance prices during Phase 1 suggests
the most important variables in determining allowance price changes in
the European program were oil and natural gas price changes. See: Maria
Mansanet-Bataller, Angel Pardo, and Enric Valor, ``CO2
Prices, Energy and Weather,'' 28 The Energy Journal 3 (2007), pp. 73-
92.
---------------------------------------------------------------------------
* Attachment has been retained in committee files.
---------------------------------------------------------------------------
discount rates
Question 2. The difficulty of looking decades into the future at
the impact of a climate policy is compounded by how much the value of a
dollar changes over time.
If we were to go back to 1969, and wanted to explain the value of a
$23,000 2009 model-year car, there are a few ways we could attempt to
do so. We might adjust the 2009 price tag for inflation and say ``it
will cost the equivalent of $3,960 in today's dollars''. Or we could
say, ``put $562 in the bank, and at a 5% interest rate you will have
enough to buy the car in 2009''. This latter explanation would rely
upon a `net present value inflation adjusted' calculation, which is
what most of these reports use.
But it should be apparent that this is a very bad indication of
what something will actually cost in 40 years. Climate bills do not
require Americans to put away money now to cover costs later; they
simply impose those costs at some future date.
So I have to ask if there is something I am missing here. I
understand that discounting is a standard practice in the computer
models used by the agencies, but it seems like these models and the
numbers they generate are better for comparing two pieces of
legislation than providing a real idea of what costs we can expect.
Are there better ways to explain the costs of these bills, or at
least ways that would make more sense to my constituents?
What would the use of actual dollar amounts, simply adjusted for
inflation without discounting, do to the cost estimates produced for
these climate bills?
Answer. The general purpose of a discount rate is to convert future
revenues and costs into their value today so that they can be compared
to each other in a meaningful fashion. As noted in your example,
businesses use discount rates to account for the ``time value'' of
money in making investments (see discussion of discount rates in CRS
Report 40809, page 40). Since a first-order effect of climate change
legislation is the cost businesses incur in complying with the
reduction requirements, use of discount rates by the models reflects
standard business practice.
With respect to attempting to estimate impacts on consumers, model
results are problematic and should be viewed with the utmost skepticism
(CRS Report 40809, pages 76-82). The ``time'' issue here is not related
to making long-term investment decisions (as your example illustrates
correctly), but putting any costs in the context of the economy in
which they would occur at the time they would occur. Talking about a
cost to be incurred in 2020 in terms of today is mixing a 2020 cost
estimate with a 2009 economy (currently in recession) and 2009 wages.
If, as suggested by your question, one only adjusts for inflation, one
is assuming the U.S. economy and wages in real terms will not increase
for the next 10, 20, 30, or even 40 years (depending on the cost
estimate being used). All models project future real economy growth
(beyond inflation), and therefore, the economy of the future is assumed
to be larger than it currently is. Individuals in 2020, 2030, or 2050
are projected to have higher real income (beyond inflation) than they
have today. Thus, simply adjusting future costs to inflation may be
inadequate, unless one believes that the U.S. economy and people's
wages will remain stagnant and not increase in real terms for the next
decade or more.
The analyses by CBO and CRA International referenced in CRS Report
40809 recognize this problem by estimating their projected 2020 costs
in terms of a 2010 economy (i.e., the estimated impact in 2020 has been
scaled to represent an equivalent impact in terms of the size of the
2010 economy). Based on CBO's projections of GDP growth, population
growth, and inflation, CRS estimated the imputed real discount rate of
CBO's scaling methodology at 2% annually in real terms. By using this
discount rate, the impact of a 2020 costs can be converted into an
impact reflective of today's economy. This allows one to compare a cost
and an economy in the same time period (2010).
CRS Report 40809 presents household effect estimates for 2020 in
both undiscounted (Figure 17) and the CRS calculated discounted (Figure
18) forms. As stated in the Report on page 80:
The data for household effects in the various cases are
presented in either discounted or undiscounted form. As noted
earlier, discounting is a way in which economics expresses
time, and is a standard convention when examining a stream of
economic data across time. With respect to household effects,
discounting costs accounts for the fact that program costs will
occur in the future when incomes are expected to be higher. For
the purposes of this section, CRS has generally presented data
in undiscounted form, partly because the discount rates of the
studies vary substantially.
A second accounting issue is the context in which the
household effects estimates are presented. Most of the cases
here present their household effects estimates in the economic
context of the year in which they would occur; i.e., effects in
2020 are presented in terms of its impact on a 2020 economy.
Two cases, CBO and NBCC/CRA scaled their estimates in the
context of the 2010 economy. In its discussion of results
below, CRS attempts to normalize the various cases' household
effects estimates in the context a 2010 economy.
Because household estimates are problematic for reasons
suggested above, CRS focuses on those effects estimated for the
year 2020. Any estimate beyond that point, or any cumulative
estimate to 2030 or beyond, should be viewed with the utmost
skepticism.
Responses of Larry Parker to Questions From Senator Cantwell
Question 1. Assuming the United States adopts cap-and-trade
legislation such as those currently under consideration in Congress,
are there any alternative cost containment options if verifiable
international offsets are not available in sufficient quantity?
Answer. As noted in CRS Report 40809, all the analyses examined
agreed that international offsets were a critical cost containment
mechanism under H.R. 2454 (pages 46-47). The CRS has two other reports
that discuss a range of cost containment options that designers of a
cap-and-trade program could use instead of international offsets. These
reports are: (1) CRS Report RL33799, Climate Change: Design Approaches
for a Greenhouse Gas Reduction Program by Larry Parker, and (2) CRS
Report R40242, Carbon Tax and Greenhouse Gas Control: Options and
Considerations for Congress by Jonathan Ramseur and Larry Parker. As
discussed in CRS Report RL33799, there are three primary foci to
containing costs under a cap-and-trade program.
The tonnage requirement, and options include making the cap
more flexible (e.g., using emission rates rather than tonnage
caps based on historic emissions, expanding availability of
domestic offsets, imposing a carbon tax).
The timetable for compliance and options for delaying
compliance under certain conditions (e.g., triggering reduction
``circuit-breakers'' under specific economic or technology
development conditions).
The techniques and options covered entities are permitted to
use in coming into compliance (e.g., banking, borrowing,
auctioning of permits, safety valve).
Question 2. Do you believe consumers need to feel a price signal in
order to undertake energy efficiency investments and make the
behavioral changes necessary to reduce national fossil fuel use? Do
measures meant to reduce the burden of higher electricity prices, such
as the significant share of emissions allowances allocated to local
electricity distribution companies (LDCs) under H.R. 2454, effectively
dampen the carbon price signal and thus consumers' incentives to make
choices and behavioral changes that will be needed to decarbonizes the
economy?
Answer. All of the models examined by CRS assume some price-induced
demand response by consumers to higher prices (see CRS Report 40809,
pages 64-76). With respect to the potential dampening effect of a
rebate via the LDC, we state on pages 67-68:
The manner in which allowances are allocated does not reduce
the program's compliance cost,it only changes who bears the
cost.\1\ As stated by W. David Montgomery of CRA International
during congressional testimony:
---------------------------------------------------------------------------
\1\ There is research to suggest that using allowance value to
reduce other distorting taxes (e.g., income and payroll taxes), can
produce a more efficient tax system, and therefore reduce the overall
cost to the economy from the cap-and-trade program. However, H.R. 2454
does not use allowance value to reform the tax system.
---------------------------------------------------------------------------
The allocation of allowances cannot eliminate the cost of a
cap and trade program; it can only change who bears the cost.
Free allocations can remove some or all of the cost of
obtaining allowances that grant permission to emit up to the
stated caps; but no matter how allowances are distributed, none
of the cost of the actions that must be undertaken to bring
emissions down to satisfy the caps can be removed. At best,
that distribution can eliminate the cost of purchasing
allowances from the government. Nothing can eliminate the cost
of reducing emissions from their projected business-as-usual
level to the capped level, though there are many ways of hiding
or shifting that cost around.\2\
---------------------------------------------------------------------------
\2\ W. David Montgomery, Prepared Testimony. Hearing on Allowance
Allocation Policies in Climate Legislation. House. Committee on Energy
and Commerce, Subcommittee on Energy and Environment, (June 9, 2009),
p. 1.
---------------------------------------------------------------------------
Indeed, free allocation of allowances can increase the cost
of the program if it dilutes the price signal, resulting in
less economically efficient compliance schemes. As EPA stated
in its analysis of H.R. 2454:
Returning the allowance value to consumers of electricity via
local distribution companies in a non-lump sum fashion prevents
electricity prices from rising but make the cap-and-trade more
costly overall. This form of redistribution makes the cap-and-
trade more costly since greater emission reductions have to be
achieved by other sectors of the economy. Resulting changes in
prices of other energy-intensive goods also influence the
overall distributional impacts of the policy.\3\
---------------------------------------------------------------------------
\3\ U.S. Environmental Protection Agency, EPA Analysis of the
American Clean Energy and Security Act of 2009: H.R. 2454 in the 111th
Congress (June 23, 2009), p. 49.
---------------------------------------------------------------------------
In the case of H.R. 2454, this diluting effect does not seem
to dominate the cost analysis. For example, in analyzing the
May discussion draft that preceded the introduction of H.R.
2454, EPA assumed that the cap-and-trade program would allocate
its allowances entirely by auction-the most economically
efficient means of distributing allowances. In its June
analysis of H.R. 2454 as reported by House Energy and Commerce
Committee, EPA included scenarios that incorporated the free
allocation provisions of the bill in a manner that reduced
electricity price increases to consumers and which increased
electricity demand and associated emissions. However, in
comparing the overall impact of the two versions, the projected
allowance prices were less in the reported version than the
discussion draft-a result driven primarily by the reported
version's less stringent 2020 emissions cap and its provisions
permitting expanded use of international offsets.\4\ This
suggests that, in the case of H.R. 2454, there may be design
parameters, particularly the assumed availability of
international offsets, that could substantially outweigh
whatever economic inefficiencies are introduced by its free
allocation scheme.
---------------------------------------------------------------------------
\4\ The Heritage Foundation found that the less efficient
allocation of the reported version of H.R. 2454 overweighed the
reduction in the 2020 reduction requirements from the discussion draft.
However, the Heritage Foundation did not alter its somewhat restrictive
assumptions about the availability of offsets in recalculating H.R.
2454 costs. See The Heritage Foundation, Son of Waxman-Markey: More
Politics Makes for a More Costly Bill, (May 18, 2009).
---------------------------------------------------------------------------
In the case of H.R. 2454, there are three factors that affect
the efficiency of its allocation system. First, as indicated
earlier, H.R. 2454 uses a mixture of free allocation schemes
and auctions to distribute allowances. Over time, the
distribution becomes increasingly based on auctions with per-
capita rebates to consumers. Thus, the allocation system
becomes increasingly efficient economically over time with over
65% of allowances auctioned by 2030. Second, there is a
significant amount of free allowances allocated for other
purposes (state energy efficiency programs, international
activities, etc.,) that would have little or no effect on the
price signal. Third, the bill contains language that attempts
to prevent electricity and natural gas LDCs from using the free
allowances provided them to reward increased use of energy.
Alternatives include focusing on the fixed component of energy
bills and use of allowance value to fund energy efficiency
activities (mandated for one-third of natural gas LDCs'
allocation).
Of the analyses examined here, the EPA cases assume that the
allowances allocated to electricity LDCs do dilute the price
signal, resulting in the need for increased emission
reductions. However, the scenario most focused on by EPA
(scenario 2) incorporates some of the efficiency provisions of
H.R. 2454 that counteract this effect. The CRA International
analysis assumes that LDCs do distribute the allowances in the
manner mandated by the bill, preventing a dilution of the price
signal. Disagreeing with EPA's interpretation, CRA
International states: ``The specific provisions on the use of
the allowances do not allow the use of the allowances for
rebates based `solely on the quantity of electricity delivered
to such ratepayer.' [footnote to H.R. 2454 omitted] Since the
rebate is not to be based on electricity use it should not
distort the incentive for consumers to conserve
electricity.''\5\ For EIA, electricity allowances allocated
freely to load serving entities are reflected as a reduction in
``effective'' electricity rates to consumers.\6\ When asked by
CRS about how its study distributed allowance value, the
Heritage Foundation rejected the entire notion a priori that
allowance value could be used to reduce energy prices. Instead,
the Heritage Foundation models the macro-economic and pricing
effects of H.R. 2454 as if all the allowances are auctioned,
treating the allowance value created by H.R. 2454 as government
revenue (similar to a tax) regardless of whether they are
formally auctioned or not.\7\
---------------------------------------------------------------------------
\5\ CRA International, Impact on the Economy of the American Clean
Energy and Security Act of 2009 (H.R. 2454) (May 2009) p. 53.
\6\ EIA models the natural gas LDC allowance allocation similarly,
except for the \1/3\ that is designated for energy efficiency. EIA
models this provision by using \1/3\ of the value of allowances for
programs that accelerate penetration of more efficient technologies and
therefore lower gas demand.
\7\ The Heritage Center for Data Analysis, The Economic
Consequences of Waxman-Markey: An Analysis of the American Clean Energy
and Security Act of 2009 (August 5, 2009) p. 16.
---------------------------------------------------------------------------
______
Response of Richard Newell to Question From Senator Bingaman
Question 1. A key uncertainty is how the models handle the
recession and recovery. Do the models assume that growth and emissions
will return to trend (i.e., that there will be a period of higher than
normal growth after the recession ends as unused capacity is put into
service) or that there has been a step-change in GDP and after the
recession, growth rate will return to normal but that the US economy
will set out from a low base. This question is fundamentally important
because US emissions will have fallen by more than 8% from 2007 levels
by the end of this year. This is the initial condition from which the
models are being initiated. How they handle it is critical to
projecting 2020 and 2030 costs.
Answer. EIA's analysis of H.R. 2454 was prepared before the full
depth of the recessionas apparent. However, the analysis did
incorporate a fall in U.S. economic output and energy-related carbon
dioxide (CO2) emissions in 2008 and 2009. In the Updated
Annual Energy Outlook 2009 Reference Case (April 2009), U.S. energy-
related CO2 emissions do grow as the recession ends, but
they do not reach the 2005 level until the year 2024.
Responses of Richard Newell to Questions From Senator Murkowski
anticipated market volatility
Question 1. There is a great deal of variation among the cost
estimates that have been produced for the Waxman-Markey bill. While
that is generally a cause for concern, perhaps it gives a reliable idea
of the market volatility we can expect for carbon allowance prices over
the next four decades.
Assuming this is the case, can you provide us with an anecdotal
assessment of these potential fluctuations in allowance prices and how
they compare to volatility we have seen in the oil and gas markets
recently?
Answer. While EIA has not examined each of the published analyses
of H.R. 2454 in detail, we believe that the key drivers in the wide
range of cost estimates are assumptions about the longer-term cost and
availability of offsets and zero-and low-emitting electricity
generating technologies such as nuclear and fossil with carbon capture
and storage. As a result, we do not believe that the variation in
allowance cost estimates in these studies is a good measure of the
potential short-term volatility in allowance prices. Any short-term
price volatility would be more likely to be due to variation in energy
prices, weather, short-term energy supply and demand shocks, or other
factors. These short term changes are not typically assessed in
existing studies.
discount rates
Question 2. The difficulty of looking decades into the future at
the impact of a climate policy is compounded by how much the value of a
dollar changes over time.
If we were to go back to 1969, and wanted to explain the value of a
$23,000, 2009 model-year car, there are a few ways we could attempt to
do so. We might adjust the 2009 price tag for inflation and say ``it
will cost the equivalent of $3,960 in today's dollars.'' Or we could
say, ``put $562 in the bank, and at a 5% interest rate you will have
enough to buy the car in 2009.'' This latter explanation would rely
upon a `net present value inflation adjusted' calculation, which is
what most of these reports use.
But it should be apparent that this is a very bad indication of
what something will actually cost in 40 years. Climate bills do not
require Americans to put away money now to cover costs later; they
simply impose those costs at some future date.
So I have to ask if there is something I am missing here. I
understand that discounting is a standard practice in the computer
models used by the agencies, but it seems like these models and the
numbers they generate are better for comparing two pieces of
legislation than providing a real idea of what costs we can expect.
Are there better ways to explain the costs of these bills, or at
least ways that would make more sense to my constituents?
What would the use of actual dollar amounts, simply adjusted for
inflation without discounting, do to the cost estimates produced for
these climate bills?
Answer. EIA recognizes that there are multiple ways to express the
costs of complying with H.R. 2454 and, as a result, in our study we
provided costs during each year separately, as well as both discounted
and undiscounted cumulative costs. The undiscounted cumulative costs
are always higher; however, when one wants to compare alternative
policies and scenarios that have different time paths of costs and
benefits, discounting is necessary to put them on a comparable basis.
Discounting is the widely-accepted economic method for aggregating
impacts that occur at different points in time.
Responses of Richard Newell to Questions From Senator Cantwell
Question 1. Both the EPA and EIA analyses have addressed the
question of costs associated with various pieces of climate change
legislation, most recently H.R. 2454. Has either of these agencies, or
any other government agency, ever analyzed the potential economic costs
of business-as-usual, assuming that climate impacts projected by the
Intergovernmental Panel on Climate Change and the U.S. Climate Change
Science Program come to pass in the upcoming decades? How do the
economic costs of inaction compare with those of policy action on
climate change?
Answer. EIA has not performed such an analysis, and would defer to
EPA as to whether or not that agency has. A recent interagency effort
has focused on measures of the ``social cost of carbon.''.
Question 2. According to the EIA, in January of 2008, crude oil
cost $87 per barrel, in July itost $128 a barrel, and in December it
cost $37 a barrel, for an annual average cost of $94/barrel.
Does ETA's or EPA's modeling of H.R. 2454 give us any
indication of the extent to which seasonal energy price
volatility might result from a capand-trade policy?
Could a well-designed price collar mitigate this volatility?
Answer. EIA's analysis of H.R. 2454 assumes that allowance prices
will rise smoothly athe rate of return that investors would require. It
does not specifically address the volatility in prices that might occur
in the actual market. In principle, theanking provisions of the
legislation would tend to dampen any volatility because, if the
allowance price were to fall below a long-term expected value,
allowances would be banked for future use. In addition, a well-designed
price collar could likely dampen the volatility in prices that might
otherwise occur, depending on the price ceiling, the price floor, and
the amount of allowances available to support the price collar.
Question 3. To what extent does the length and complexity of H.R.
2454 increase the uncertainties and the sensitivities in the modeling
results?
Answer. While a shorter, less complex bill would likely be easier
to model, the keyompliance uncertainties would remain. These
uncertainties center on assumptions about the cost and availability of
offsets and zero- and low-emitting electricity generating technologies
such as nuclear and fossil with carbon capture and storage (CCS). Until
there is some significant market experience with offsets and several
new nuclear plants and fossil plants with CCS are built, it will be
difficult to reduce these uncertainties.
Question 4. To what extent does [sic] H.R. 2454's cost containment
measures, such as itseavy reliance on offsets to meet emission
reduction targets, increase the uncertainties and the sensitivities in
the modeling results?
Answer. EIA found that the use of offsets, particularly
international offsets, was a keyompliance option under H.R. 2454. In
fact, in our Basic Case, offsets account for nearly 60 percent of the
compliance through 2030. This led us to prepare several sensitivity
cases with alternative offset assumptions. Until there is some
significant market experience with offsets, it will be difficult to
reduce these uncertainties.
Question 5. To what extent does the development of a carbon market
in H.R. 2454, which will likely cause price changes independent of
supply and demand fundamentals, increase the uncertainties and the
sensitivities in the modeling results?
Answer. EIA's analysis of H.R. 2454 assumes that allowance prices
will rise smoothly athe rate of return that investors would require. It
does not specifically address the volatility in prices that might occur
in the actual market. In practice, there could be periods when prices
vary significantly and careful market monitoring would also be
required. Nonetheless, the use of a cap-and-trade system as the
centerpiece of H.R. 2454 would tend to lessen the sensitivity of the
bill's cost to various key factors. This is due to the flexibility of
cap-and-trade, which allows substitute compliance options to provide
cost-effective reductions when other options turn out to be limited or
of relatively high cost.
Question 6. Both the EIA and EPA analyses of the House bill show
significant expansion of nuclear power as the constraints on fossil
carbon get tighter in future decades. Could you talk about the
expansion of nuclear power and assumptions that facilitate it in your
models?
Is price the principal driver of nuclear power in the
models, or doovernment subsidies play a role in the industry's
expansion?
What role do you believe a clear and consistent carbon price
signal play [sic] in the future development of nuclear power?
How would you rate the impact of a carbon price signal on
future nuclear energy development relative to expansion of
existing industry subsidies and removal of other institutional
barriers?
How could we manage volatility in the carbon market to
ensure a consistent price signal for energy technology
innovators and investors?
Answer. Although the existing tax credits do play a role in
spurring the construction of amall number of new nuclear plants, the
emission allowance price is the primary factor that makes new nuclear
power generation attractive in EIA's analysis of H.R. 2454. Because
zero-emissions technologies such as nuclear and renewable power are
more readily available for electricity generation than for other energy
applications, there would be a substantial incentive to move toward
emissions-free sources of electricity as part of cost-effective plans
to meet a cap on covered emissions that requires an 83 percent
reduction in emissions by 2050.
Because new nuclear plants and other low-emitting electricity
generating technologies are very long-lived assets, uncertainty about
future costs, including allowance costs, is a key concern when
evaluating a potential investment. A policy instrument, such as an
allowance price collar, could contain this cost uncertainty and improve
the viability of such investments.
Nonetheless, substantial uncertainty about the future would'still
remain, which is why EIA's analysis contains several alternative cases,
including sensitivity cases around nuclear power. The ACESA Basic Case
represents an environment where key low-emissions technologies,
including nuclear, fossil with CCS, and various renewables, are
developed and deployed on a large scale in a timeframe consistent with
the emissions reduction requirements of ACESA and without encountering
any major obstacles.
The ACESA High Cost Case is similar to the ACESA Basic Case except
that the costs of nuclear, fossil with CCS, and biomass generating
technologies are assumed to be 50 percent higher. There is great
uncertainty about the costs of these technologies, as well as the
feasibility of introducing them rapidly on a large scale. Cost
estimates for these technologies rose rapidly from 2000 through 2008
and have only recently begun to moderate. The actual costs of these
technologies will not become clearer until a number of full-scale
projects are constructed and brought on line.
The ACESA Limited Alternatives Case represents an environment where
the deployment of key technologies, including nuclear, fossil with CCS,
and biomass, is limited to their Reference Case levels through 2030.
There is great uncertainty about how fast these technologies, the
industries that support them, and the regulatory infrastructure that
license/permit them might be able to grow and, for fossil with CCS,
when the technology will be fully commercialized.
Question 7. Any climate policy enacted into law today is unlikely
to start until at least 2012,but how much uncertainty is there
regarding the projected emissions in 2012? Does this uncertainty
suggest that Congress might want to defer to the executive branch and
give it the authority to set the base year emissions target in 2011 so
that more reliable estimates closer to the implementation date can be
used?
Answer. The cost of complying with H.R. 2454 is driven by the
cumulative emissions reductions required over the entire period covered
by the legislation. As a result, shifting the initial baseline year of
the bill would not have a large impact if all the targets in later
years remained unchanged. If, however, the targets for all years were
shifted with the baseline year, there could be a larger impact.
Question 8. The Natural Resources Defense Council (NRDC) recently
did their own analysis of the House-passed bill and predicted that
enhanced oil recovery from captured CO2 would increase
domestic oil production by 1.3 million barrels per day in 2020 and 2.6
million barrels per day by 2050.
How does NRDC's analysis compare to ETA's projections of
domestic oil production?
What does ETA's analysis tell us about petroleum use under
the House-passed bill and what does this imply about our
foreign oil dependence?
Answer. There are several important differences between the NRDC
and EIA analyses. First, the NRDC's analysis assigned all of the
production arising from the use of CO2-enhanced oil recovery
(EOR) technology to the passage of the legislation, whereas EIA's
Annual Energy Outlook 2009 (AE02009) Reference Case (April), already
projects 1.45 million barrels per day of domestic crude oil production
(20 percent of the total) from CO2-EOR in 2030 (the limit of
our modeling horizon)--with a portion of that CO2 supply
being provided by carbon capture at industrial facilities.
Second, in EIA's analysis the amount that oil producers using
CO2-EOR would be able to collect from emitters for taking
captured CO2 under either a carbon capand-trade scheme or
tax is limited by the cost of alternative CO2 sequestration
options available to emitters, such as storage in deep saline aquifers
and unminable coal seams. NRDC's analysis apparently allows oil
producers to collect a larger fee for taking and using CO2,
despite the availability of lower-cost options for emitters seeking to
sequester their captured CO2.
Third, the NRDC projections of CO2-EOR production
include both the onshore lower-48 and the offshore Louisiana regions.
The EIA excludes the offshore Louisiana region because of the
considerable cost of constructing offshore CO2 pipelines and
building new offshore platforms to accommodate CO2--EOR
facilities. EIA and NRDC also use different methodologies for assessing
the increment to the technically recoverable resource (TRR) base that
would arise from implementation of the CO2--EOR technology.
EIA's analysis of ACESA showed an incremental CO2--EOR
production of approximately 200,000 barrels per day above the AE02009
Reference Case across the cases that EIA analyzed. With regard to
domestic crude oil production, EIA projects that, under the AE02009
Reference Case, CO2--EOR will provide 20 percent of domestic
crude oil production by 2030 and that the technology for the
CO2--EOR capture at industrial facilities will be developed
and deployed without climate change legislation under projected crude
oil prices.
Projected U.S. petroleum use in 2030 is 20.9 million barrels per
day (bpd) in the AE02009 Reference Case, and ranges from 19.3 million
bpd to 20.1 million bpd across the main policy cases in EIA's analysis
of ACESA. Across the policy cases, more optimistic assumptions
regarding the cost and availability of offsets and low- and no-carbon
electric generation technologies tend to result in lower allowance
prices and higher levels of projected oil consumption. The share of net
crude and product imports in projected 2030 petroleum consumption is 40
percent in the Reference Case, and ranges from 34 to 38 percent across
the ACESA policy cases.
Question 9. I understand EIA recently started incorporating the
impact financial marketrading might be having on energy market prices.
Are there lessons from that effort that could be applied to better
predicting future prices under H.R. 2454? What impact do you think a
new multi-trillion carbon trading market might have on cash and future
carbon prices?
Answer. In September 2009, EIA launched the Energy and Financial
Markets Initiative toupplement EIA's data collection and analysis of
oil and natural gas fundamentals. Key actions under this Initiative
are: (1) collection of critical information on factors affecting energy
prices, (2) analysis through in-depth studies of energy market
behavior, (3) outreach to solicit feedback from a broad range of
experts on the interrelationship of energy and financial markets, and
(4) coordination with other Federal agencies engaged in energy market
information collection and analysis. Together, these actions should
help us better understand what drives short-term energy prices.
The fundamental supply and demand characteristics of a greenhouse
gas (GHG) allowances market are likely to be significantly different
from oil markets. Oil supply and oil demand are not very responsive to
prices in the short-run. New sources of supply have a long time
horizon, and transportation sector demand, a key part of the oil
market, does not have ready alternatives to petroleum and cannot
replace its stock of vehicles quickly. This means that there can be a
wide range of prices that are roughly consistent with a physical
balancing of supply and demand. Because of this, other factors, such as
hedging, investment, and speculative activities in futures and options,
also affect prices.
In contrast, the demand for GHG allowances should be relatively
more responsive to price changes because there are a number of
different options to substitute formitting GHGs, i.e, various low-
carbon energy sources as well as offsets. On the allowance supply side,
the government actually controls the supply of allowances, so it can
make the supply of allowances as flexible or inflexible as it desires.
Given the supply and demand characteristics of a GHG market, policy can
be designed to reduce the possibility of price volatility due to
financial market behavior. Cost containment mechanisms can adjust the
supply of allowances, limits can be placed on how far prices can move,
and offset provisions can be designed to expand abatement opportunities
and thus allowance supply.
Question 10. What assumptions does EIA make in its analysis of H.R.
2454 on the timing, scale, and cost of carbon capture and storage
deployments? Do these assumptions rely on any particular legislative
proposals in the bill or do they reflect the current state of
technology?
Answer. The role of coal plants with carbon capture and storage
(CCS) equipment varies in our analysis. There is significant
uncertainty about when this technology will be commercially available
and what the new plants will cost. As a result, several cases with
alternative assumptions about the technologies' cost and availability
were prepared. In our Basic Case, 5 gigawatts of new CCS capacity is
added through 2017. The cumulative additions through 2030 in our main
cases vary from 2 gigawatts when it is assumed the technology will not
be broadly available through 2030, to 69 gigawatts when it is assumed
that new additions will begin in 2016 and be widely available
thereafter with overnight construction costs (i.e., with no interest
costs incurred) starting just over $3,500 per kilowatt. The key drivers
for the additions are the emissions allowance price and the special
bonus allowances for new plants with CCS.
Question 11. If the U.S. does not enact any limits on greenhouse
gases, does EIA still project fossil fuel prices rising in the future?
What percentage increase is predicted for coal, oil, and natural gas
for the years 2015, 2020, 2025, and 2030? What level of volatility does
EIA project in fossil fuel prices over the next 20 years, and how does
that compare to the volatility we have experienced over the last
decade?
Answer. The table below shows the natural gas, coal and oil prices
in 2007 dollars in our updated 2009 Reference Case. As shown, prices
are expected to rise over time, though they do initially fall from the
high levels they reached in 2008. EIA's long-term projections only
provide average annual prices, so they do not address the market
volatility that will likely occur.
----------------------------------------------------------------------------------------------------------------
2007 2015 2020 2025 2030
----------------------------------------------------------------------------------------------------------------
Natural Gas (dollars per Mcf) 6.39 5.60 6.79 6.82 8.01
----------------------------------------------------------------------------------------------------------------
Coal (dollars per million Btu) 1.86 1.98 2.02 2.05 2.09
----------------------------------------------------------------------------------------------------------------
Oil (dollars per barrel) 72.33 98.88 116.79 122.63 130.92
----------------------------------------------------------------------------------------------------------------
Question 12. Assuming the United States adopts cap-and-trade
legislation such as those currently under consideration in Congress,
are there any alternative cost containment options if verifiable
international offsets are not available in sufficient quantity?
Answer. EIA found that the use of offsets, particularly
international offsets, was a key compliance option under H.R. 2454. In
fact, in our Basic Case, offsets account for nearly 60 percent of the
compliance through 2030. This led us to prepare several sensitivity
cases with alternative offset assumptions. When it was assumed that
international offsets were not available, the allowance price in 2030
was 64 percent above the Basic Case level. Besides offsets, other
potential cost control mechanisms include banking and borrowing (often
referred to as temporal flexibility), an explicit safety valve or price
ceiling that sets a maximum allowance price, or a price collar that
includes both a floor and ceiling price for allowances.
Question 13. Do you believe consumers need to feel a price signal
in order to undertake energy efficiency investments and make the
behavioral changes necessary to reduce national fossil fuel use? Do
measures meant to reduce the burden of higher electricity prices, such
as the significant share of emissions allowances allocated to local
electricity distribution companies (LDCs) under H.R. 2454, effectively
dampen the carbon price signal and thus consumers' incentives to make
choices and behavioral changes that will be needed to decarbonize the
economy?
Answer. A price signal for consumers would provide them an
incentive to increase their investments in energy efficiency. Absent
such a price signal, it would be more difficult to induce such
investments. The free allocation of allowances to LDCs could lower the
incentive of consumers to invest in efficiency if LDCs are not very
careful in how they pass on the allowance value to their consumers. If
the LDCs adjust their monthly bills to reflect the value of the freely
allocated allowances, many consumers, reacting to the final bills they
receive, may not even realize that energy prices have actually risen.
If, on the other hand, LDCs send adjustment checks separately from
their energy bills, or make adjustments infrequently (e.g., annually),
consumers will see the higher monthly prices and that will give them
more of an incentive to invest in energy efficiency.
______
Response of Reid P. Harvey to Question From Senator Bingaman
Question 1. A key uncertainty is how the models handle the
recession and recovery. Do the models assume that growth and emissions
will return to trend (ie that there will be a period of higher than
normal growth after the recession ends as unused capacity is put into
service) or that there has been a step-change in GDP and after the
recession, growth rate will return to normal but that the US economy
will set out from a low base. This question is fundamentally important
because US emissions will have fallen by more than 8% from 2007 levels
by the end of this year. This is the initial condition from which the
models are being initiated. How they handle it is critical to
projecting 2020 and 2030 costs.
Answer. EPA's models are calibrated to EIA's 2009 Annual Energy
Outlook (March release for ADAGE and IGEM, April release for IPM). The
AEO 2009 forecast projects that GDP growth in the years 2011-2013 is
approximately one percentage point higher than the average over the
entire forecast.
Responses of Reid P. Harvey to Questions From Senator Murkowski
anticipated market volatility
Question 1a. There is a great deal of variation among the cost
estimates that have been produced for the Waxman-Markey bill. While
that is generally a cause for concern, perhaps it gives a reliable idea
of the market volatility we can expect for carbon allowance prices over
the next four decades.
Answer. The models that have been used to analyze the Waxman-Markey
bill do not represent price volatility. The variation in cost estimates
reflects uncertainty about the realized cost of the bill.
Question 1b. Assuming this is the case, can you provide us with an
anecdotal assessment of these potential fluctuations in allowance
prices and how they compare to volatility we have seen in the oil and
gas markets recently?
Answer. EPA acknowledges that any market for carbon will have some
degree of volatility, although all recent legislative proposals include
mechanisms to reduce volatility. However, EPA models are not suited to
assess likely short-term market volatility and are instead designed to
assess the economic impacts of the policy over a longer time horizon.
Based on past experience with existing cap-and-trade markets in the
U.S., EPA has assessed the prices for SO2 allowances for the
Acid Rain Program from August 1994 to December 2003, to capture a time
period of market behavior in the absence of major regulatory
adjustments. The findings suggest that the volatility of SO2
allowance prices during this period were very comparable to the
volatility of other energy related prices, if not generally lower, for
the time period considered.
discount rates
Question 2a. The difficulty of looking decades into the future at
the impact of a climate policy is compounded by how much the value of a
dollar changes over time.
If we were to go back to 1969, and wanted to explain the value of a
$23,000 2009 model-year car, there are a few ways we could attempt to
do so. We might adjust the 2009 price tag for inflation and say ``it
will cost the equivalent of $3,960 in today's dollars''. Or we could
say, ``put $562 in the bank, and at a 5% interest rate you will have
enough to buy the car in 2009''. This latter explanation would rely
upon a `net present value inflation adjusted' calculation, which is
what most of these reports use.
But it should be apparent that this is a very bad indication of
what something will actually cost in 40 years. Climate bills do not
require Americans to put away money now to cover costs later; they
simply impose those costs at some future date.
So I have to ask if there is something I am missing here. I
understand that discounting is a standard practice in the computer
models used by the agencies, but it seems like these models and the
numbers they generate are better for comparing two pieces of
legislation than providing a real idea of what costs we can expect.
Answer. The net present value of the consumption loss in a future
period calculates the consumption loss today that would be equivalent
to the consumption loss estimated for a future period. For example, as
shown in table 4 of EPA's analysis of S. 1733, in 2020 H.R. 2454 would
result in a consumption loss of $0.23-$0.29 per day. The net present
value today of this loss would be $0.13-$0.16 per day. This means that
a household would be indifferent between a consumption loss of $0.29
that happens in 2020 and a consumption loss of $0.16 that happens
today.
Question 2b. Are there better ways to explain the costs of these
bills, or at least ways that would make more sense to my constituents?
Answer. There are many different ways to present the cost of these
bills. Examples of cost metrics included in EPA's analysis of H.R. 2454
include (all values are from ADAGE scenario 2 in 2030 unless otherwise
noted):
Allowance price: $27/tCO2e
Average annual net present value cost per household (2005
$): -$111
Change in average household energy expenditures (%): 2%
Change in GDP (billion 2005 $): -$83
Change in GDP (%): -0.37%
Question 2c. What would the use of actual dollar amounts, simply
adjusted for inflation without discounting, do to the cost estimates
produced for these climate bills?
Answer. On a per household basis, the undiscounted cost of H.R.
2454 is estimated to be $0.23 to $0.29 per day in 2020, $0.76 to $1.00
per day in 2030, and $2.50-$3.52 per day in 2050 in the core scenario
of EPA's analysis. All of these costs are presented in real 2005
dollars.
Responses of Reid P. Harvey to Questions From Senator Cantwell
Question 1. Both the EPA and EIA analyses have addressed the
question of costs associated with various pieces of climate change
legislation, most recently H.R. 2454. Has either of these agencies, or
any other government agency, ever analyzed the potential economic costs
of business-as-usual, assuming that climate impacts projected by the
Intergovernmental Panel on Climate Change and the U.S. Climate Change
Science Program come to pass in the upcoming decades? How do the
economic costs of inaction compare with those of policy action on
climate change?
Answer. EPA has not analyzed the total economic costs (damages)
associated with no action on climate change, nor are we aware of any
other government agency's work on this topic. For marginal (small)
changes in greenhouse gases, the benefits of action (the avoided
damages) have been estimated by EPA\1\, NHTSA\2\, and DOE\3\ and more
recently using newly developed interim values\4\ for the damages
associated with avoided damages. However, these values are more
appropriately applied to regulatory changes, rather than climate
legislation, because they were developed for marginal changes in
emissions, rather than the comparatively large changes resulting from
current climate proposals under review. To examine the avoided economic
costs from legislation, a different approach would be required and to
date EPA has not analyzed this. The June report from the U.S. Global
Change Research Program\5\ did, however, examine impacts on the United
States from lower versus higher greenhouse gas emission scenarios. This
report examined all regions and all sectors (e.g., agriculture, human
health, etc.) but did not attempt to estimate total costs.
---------------------------------------------------------------------------
\1\ U.S. Environmental Protection Agency. ``Regulating Greenhouse
Gas Emissions Under the Clean Air Act: Advance Notice of Proposed
Rulemaking-Technical Support Document on Benefits of Reducing GHG
Emissions'' (2008) and ``Proposed Rulemaking To Establish Light-Duty
Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel
Economy Standards'' (2009)
\2\ U.S. National Highway Transportation and Safety Administration.
``Average Fuel Economy Standards: Passenger Cars and Light Trucks Model
Year 2011: Final Rule'' (2009) and ``Proposed Rulemaking To Establish
Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate
Average Fuel Economy Standards'' (2009)
\3\ U.S. Department of Energy, ``Energy Conservation Program for
Commercial and Industrial Equipment: Packaged Terminal Air Conditioner
and Packaged Terminal Heat Pump Energy Conservation Standards: Final
Rule'' (2008)
\4\ For example, see Federal Register 40 CFR Parts 86 and 600,
September 28, 2009 ``Proposed Rulemaking To Establish Light-Duty
Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel
Economy Standards; Proposed Rule''.
\5\ U.S. Global Change Research Program, ``Global Climate Change
Impacts in the United States'' (2009).
---------------------------------------------------------------------------
Question 2. According to the EIA, in January of 2008, crude oil
cost $87 per barrel, in July it cost $128 a barrel, and in December it
cost $37 a barrel, for an annual average cost of $94/barrel.
Does EIA's or EPA's modeling of H.R. 2454 give us any
indication of the extent to which seasonal energy price
volatility might result from a cap-and-trade policy?
Answer. The models used for EPA and EIA's analyses of H.R. 2454 are
not designed to capture price volatility or seasonal energy price
fluctuations.
Could a well-designed price collar mitigate this volatility?
Answer. A well-designed price collar could mitigate potential price
volatility. Banking and borrowing provisions also help address price
volatility.
Question 3. To what extent does the length and complexity of H.R.
2454 increase the uncertainties and the sensitivities in the modeling
results?
Answer. EPA's analysis did not attempt to model all of the
provisions contained in H.R. 2454. Instead, the analysis focused on the
cap-and-trade provisions in Title III, the competitiveness provisions
in Title IV, and a few of the energy efficiency provisions in Titles I
& II. To the extent that the non-modeled provisions would impact the
cost of the bill, this increases the uncertainties in the modeling
results.
Question 4. To what extent does H.R. 2454's cost containment
measures, such as its heavy reliance on offsets to meet emission
reduction targets, increase the uncertainties and the sensitivities in
the modeling results?
Answer. As stated in EPA's October 23, 2009 analysis of S. 1733,
``the cost and availability of offsets, particularly international
offsets, is one of the greatest uncertainties in forecasting the cost
of climate legislation. . .All analyses that have looked at the issue
have shown that the availability of offsets is one of the most
important factors influencing allowance prices.'' To address this
issue, EPA has in the past conducted a number of sensitivity analyses
on offset use.
Question 5. To what extent does the development of a carbon market
in H.R. 2454, which will likely cause price changes independent of
supply and demand fundamentals, increase the uncertainties and the
sensitivities in the modeling results?
Answer. EPA's analysis did not attempt to model price volatility.
The economic models used by EPA estimate equilibrium conditions.
Specifically, they assume rational behavior and full information.
Question 6. Both the EIA and EPA analyses of the House bill show
significant expansion of nuclear power as the constraints on fossil
carbon get tighter in future decades. Could you talk about the
expansion of nuclear power and assumptions that facilitate it in your
models?
Is price the principal driver of nuclear power in the
models, or do government subsidies play a role in the
industry's expansion?
Answer. EPA's reference case projection of nuclear energy in the
ADAGE model is simply calibrated to the DOE's forecast in the March
release of the AEO 2009. The AEO forecast projects nuclear power to
grow 12% from 2010 levels to 907 billion kWh of nuclear generation in
2030. This reference case projection reflects existing industry
subsidies and existing institutional barriers. We have not modeled the
impact of changing existing nuclear subsidies.
In the policy case, price is the principal driver of nuclear power
in EPA's models; however assumed limits are placed on the growth of
nuclear power. EPA's analysis of H.R. 2454 projects a 150-percent
increase in nuclear generating capacity by 2050, in response to the
carbon price generated by H.R. 2454. In the longer term, we believe
that nuclear power will be a cost competitive source of emissions-free
electricity under a cap and trade system. The 150-percent increase in
nuclear generating capacity by 2050 is a restriction on the amount of
new nuclear capacity that the model is allowed to build. These
restrictions are designed to reflect the technical and political
feasibility of building new nuclear power plants. The assumed
limitations on new nuclear capacity reflect the U.S. Climate Change
Science Program Synthesis and Assessment Product 2.1a (MiniCAM Level 1
Scenario), and the EPRI analysis ``The Power to Reduce CO2
Emissions: The Full Portfolio'' (August 2007). When it comes to the
nuclear industry, EPA uses the assumptions about the costs of nuclear
power used by the Energy Information Administration. All of the
assumptions that EPA uses have been through repeated rounds of inter-
agency review. The peer review that EPA's methodologies and assumptions
have been through is described in slides 16-18 of the appendix to EPA's
analysis of H.R. 2454. EPA recognizes that the actual degree of future
expansion of any of the electricity-generating technologies in question
depends not just on the economic incentives created by a policy such as
H.R. 2454 or S. 1733, but also on the presence or absence of
constraints (administrative, political, etc.) that EPA's computer
models are not designed to detect. For that reason, EPA's computer-
modeling efforts include running the policy in question through the
models under assumptions that the technologies in question do not
deploy as much as hoped or expected, irrespective of the economic
incentives created by the policy under analysis.
What role do you believe a clear and consistent carbon price
signal play in the future development of nuclear power? How
would you rate the impact of a carbon price signal on future
nuclear energy development relative to expansion of existing
industry subsidies and removal of other institutional barriers?
Answer. See above answer.
How could we manage volatility in the carbon market to
ensure a consistent price signal for in energy technology
innovators and investors?
Answer. There is a large body of literature on how best to control
volatility through market design. This literature is too vast to be
completely covered here. But it highlights several measures that are
widely recognized as important to ensuring the clarity and consistency
of market signals, some of which are included in HR 2454:
Allowing a large number of buyers and sellers of allowances
Allowing banking and borrowing of allowances
Other cost containment mechanisms (e.g. strategic reserve;
price collar) Providing a floor for allowances prices through
an auction ``reserve price''
suggested references
Burtraw, Dallas. Addressing Price Volatility in Climate
Change Legislation. Written Testimony before the House of
Representatives Committee on Ways and Means. March 2009.
Ellerman, A. Denny and Paul Joskow. The European Union's
Environmental Trading System in Perspective. Pew Center on
Global Climate Change. May 2008.
Hearing of the U.S. House of Representatives Committee on
Ways and Means, ``Addressing Price Volatility in Climate Change
Legislation.'' March 26, 2009. http://waysandmeans.house.gov/
hearings.asp?formmode=detail&hearing=6
68
Monast, Jonas, Jon Anda, and Tim Profeta (2009. ``U.S. Carbon
Market Design: Regulation Emissions Allowances as Financial
Instruments.'' Working Paper. Duke University, Nicholas
Institute for Environmental Policy Solutions, February 2009.
Parsons, John, Denny Ellerman, and Stephan Feilhauer.
``Designing a U.S. Market for CO2.'' Report No. 171,
MIT Joint Program on the Science and Policy of Global Change,
February 2009.
Pirrong, Craig (2009). Market Oversight for Cap-and-Trade:
Efficiently Regulation the Carbon Derivatives Market. Brookings
Institution, September 2009.
Tatsutani, Marika and William Pizer (2008). ``Managing Costs
in a U.S. Greenhouse Gas Trading Program.'' Discussion Paper,
Resources for the Future, July 2008.
Question 7. EPA's analysis of H.R. 2454 suggests that the House-
passed bills unlimited allowance banking provisions and heavy reliance
on domestic and international offsets result in just a 20 percent
reduction in actual gross CO2 equivalent emissions (i.e. the
actual amount of greenhouse gas emitted into the atmosphere for a given
year referenced to global warming potential) in 2050 from 2005 levels.
Is this an accurate interpretation of EPA's analysis, and if
so would you agree that a 20% reduction in gross greenhouse gas
emissions means that H.R. 2454 fundamentally does not
decarbonize our economy? What alternative climate policies
might accelerate decarbonization of the economy?
Answer. The claim that H.R. 2454 results in, ``just a 20 percent
reduction in actual gross CO2 equivalent emissions . . . in
2050 from 2005 levels,'' is not an accurate interpretation of EPA's
analysis. Depending on which emissions abatement sources you include,
there are different ways of calculating emissions reductions in 2050
relative to 2005 (2005 GHG Emissions = 7,109 MtCO2e). The
following calculations are from in EPA's H.R. 2454 analysis, ADAGE
scenario 2.
Total U.S. GHG emissions in 2050, accounting for all sources
of reductions (e.g. including domestic covered and non-covered
GHG abatement, the HFC cap, international and domestic offsets,
forest set-asides, and discounted international offsets) would
be 2,468 MtCO2e, 65.3% below 2005 levels.
Total U.S. GHG emissions in 2050, accounting for all sources
of reductions except forest set-asides and discounted
international offsets would be 2,797 MtCO2e, 60.6%
below 2005 levels.
Total U.S. GHG emissions in 2050 accounting for all domestic
abatement (e.g. including domestic covered and non-covered GHG
abatement, the HFC cap, and domestic offsets, but excluding all
international abatement attributed to the bill) would be 4,018
MtCO2e, 43.5% below 2005 levels.
Total U.S. GHG emissions in 2050 accounting for all domestic
emissions abatement (e.g. including domestic covered and non-
covered GHG abatement, and the HFC cap, but excluding all
domestic sinks related offsets and all international abatement
attributed to the bill) would be 4,617 MtCO2e, 35.0%
below 2005 levels. This is the number that would be consistent
with the U.S. GHG inventory calculation.
Total U.S. GHG emissions in 2050 accounting for only
domestic covered emissions abatement (e.g. including domestic
covered, but excluding non-covered GHG abatement, the HFC cap,
all domestic sinks related offsets and all international
abatement attributed to the bill) would be 5,351
MtCO2e, 24.7% below 2005 levels.
EPA's analysis of H.R. 2454 shows that the bill would transform the
structure of energy production and consumption, moving the economy from
one that is relatively energy inefficient and dependent on highly-
polluting energy production to one that is highly energy efficient and
powered by advanced, cleaner, and more domestically-sourced energy.
Increased energy efficiency and reduced demand for energy resulting
from the policy mean that energy consumption levels that would be
reached in 2015 without the policy are not reached until 2040 with the
policy. The share of low-or zero-carbon primary energy (including
nuclear, renewables, and CCS) would rise substantially under the policy
to 18% of primary energy by 2020, 26% by 2030, and to 38% by 2050,
whereas without the policy the share would remain steady at 14%.
Increased energy efficiency and reduced energy demand would
simultaneously reduce primary energy needs by 7% in 2020, 10% in 2030,
and 12% in 2050. Petroleum primary energy use declines by 0.4 million
barrels per day in 2020, 0.7 million barrels per day in 2030, and 1.6
million barrels per day in 2050.
How long, on average, do these models assume that businesses
are saving allowances in order to accumulate 20 billion
allowances by 2030 and how much otherwise productive capital do
you estimate that might tie up?
Answer. In EPA's H.R. 2454 analysis, the bank of allowances is
built up over the period between 2012 and 2029, and then drawn down to
zero between 2030 and 2050. In the IGEM model, the size of the bank in
2030 is 20 GtCO2e with a total value of $524 billion. In
ADAGE, the size of the bank in 2030 is 14 GtCO2e, with a
total value of $373 billion.
Because of the option to bank allowances, the rate of return for
holding allowances is expected to equalize with the rate of return from
other available investments. If instead the allowance price were rising
faster than the interest rate, firms would have an incentive to
increase abatement in order to hold onto their allowances, which would
be earning a return better than the market interest rate. This would
have the effect of increasing allowance prices in the present, and
decreasing allowance prices in the future. Conversely, if the allowance
price were rising slower than the interest rate, firms would have an
incentive to draw down their bank of allowances, and use the money that
would have been spent on abatement for alternative investments that
earn the market rate of return. This behavior would decrease prices in
the present and increase prices in the future. Because of these
arbitrage opportunities, the allowance price is expected to rise at the
interest rate. Allowing banking increases the flexibility in respect to
when emissions abatement takes place, which reduces price volatility
and decreases the overall cost of the program.
Question 8. EPA's analysis of H.R. 2454 shows that there is no
reduction in U.S. petroleum consumption through 2040. Is this
assessment accurate? If so, how can this projection be reconciled with
the fact that the policy's goal is to reduce overall greenhouse gas
emissions from energy use?
Answer. In scenario 2 of EPA's analysis of H.R. 2454, the ADAGE
model showed that relative to the reference scenario, petroleum use
would fall by 0.4 million barrels per day in 2020, 0.7 million barrels
per day in 2030, and 1.0 million barrels per day in 2040. This
projection is consistent with the policies goal to reduce greenhouse
gas emissions. The cap-and-trade system is designed to achieve
greenhouse gas abatement where it is most cost-effective, instead of
mandating specific reductions from greenhouse gas emissions from
petroleum use and other specific sources.
Question 9. Under EPA's analysis of H.R. 2454, what is the total
volume, in gigatons, of international offsets purchased between 2012
and 2050? What is the total monetary value of these international
offsets?
Answer. In scenario 2 of EPA's analysis of H.R. 2454, the IGEM
model showed that cumulative international offset purchases (before
applying the 5 to 4 turn-in-ratio) from 2012 through 2050 are equal to
approximately 51 gigatons. The total value of these international
offsets over the entire 2012 through 2050 time period is $1.3 trillion
(2005 dollars).
Question 10. Under EPA's analysis of H.R. 2454, what is the total
volume, in gigatons, of domestic offsets purchased between 2012 and
2050? What is the total monetary value of these domestic offsets?
Answer. In scenario 2 of EPA's analysis of H.R. 2454, the IGEM
model showed that cumulative domestic offset purchases from 2012
through 2050 are equal to approximately 12 gigatons. The total value of
these international offsets over the entire 2012 through 2050 time
period is $0.5 trillion (2005 dollars).
Question 11. Assuming the United States adopts cap-and-trade
legislation such as those currently under consideration in Congress,
are there any alternative cost containment options if verifiable
international offsets are not available in sufficient quantity?
Answer. Various legislation and conceptual papers have proposed
different means of containing costs within the context of a cap-and-
trade scheme. A July 2008 RFF working paper provides a good
introduction to a number of alternatives:
Tatsutani, Marika and William Pizer (2008). ``Managing Costs
in a U.S. Greenhouse Gas Trading Program.'' Discussion Paper,
Resources for the Future, July 2008.
Question 12. Do you believe consumers need to feel a price signal
in order to undertake energy efficiency investments and make the
behavioral changes necessary to reduce national fossil fuel use? Do
measures meant to reduce the burden of higher electricity prices, such
as the significant share of emissions allowances allocated to local
electricity distribution companies (LDCs) under H.R. 2454, effectively
dampen the carbon price signal and thus consumers' incentives to make
choices and behavioral changes that will be needed to decarbonizes the
economy?
Answer. A carbon price signal will lead to increased investment in
energy efficiency by consumers as well as behavioral changes (e.g.,
adjusting the thermostat setting at home) that together will reduce
national energy demand. The degree to which the price signal is
dampened by allowance allocations to electric LDCs depends upon how
that value is used. If used exclusively to reduce fixed charges (not
tied to the level of energy consumption) to consumers then the
dampening effect should be minimal. If used exclusively to reduce
charges based upon the level of energy consumption (e.g., to reduce
costs per KWh of electricity demand) then it would have a dampening
effect on energy efficiency investments and behavioral changes that
would otherwise tend to reduce energy demand.