Background and Scope of the Analysis
This report responds to a request from Chairman Henry Waxman and Chairman Edward Markey for an analysis of H.R. 2454, the American Clean Energy and Security Act of 2009 (ACESA). 7 ACESA, as passed by the U.S. House of Representatives on June 26, 2009, is a complex bill that regulates emissions of greenhouse gases (GHGs) through a variety of market-based mechanisms, efficiency programs, and economic incentives. The bill includes four titles designed to spur clean energy development, increase investment in energy efficiency, reduce global warming pollution, and transition to a clean energy economy.
Title I of H.R. 2454 focuses primarily on the development of clean energy resources. It establishes a combined efficiency and renewable electricity standard (CERES) requiring that all retail electricity suppliers with annual sales above 4 million megawatthours meet 20 percent of their load with qualified renewable energy sources or electricity efficiency savings by 2020. One-fifth of the requirement can initially be met with efficiency savings, with the possibility of an additional 20 percent if approved by the Federal Energy Regulatory Commission.
Title I also includes provisions to spur the commercialization of carbon capture and storage (CCS) technology, encourage increased investment in energy efficiency through allowance distributions to States, stimulate reductions in peak electricity loads, and motivate investment in an electric vehicle infrastructure. In addition, it establishes a Clean Energy Deployment Administration to promote the domestic development and deployment of clean energy technologies, including advanced or enabling infrastructure technologies, energy efficiency technologies, and related manufacturing technologies, through partnership with and support of the private capital market.
Title II of H.R. 2454 focuses on improving energy efficiency. It requires revisions to building codes for both new construction and existing facilities. It provides financial assistance for efficiency retrofit projects in existing buildings and calls for the development of new efficiency standards for several lighting and appliance applications, such as street lights, parking lot lights, portable light fixtures, hot food holding cabinets, bottle-type drinking water dispensers, commercial grade natural gas furnaces, and portable spas (hot tubs).
In order to address transportation efficiency, Title II directs the Environmental Protection Agency (EPA) and the Department of Transportation (DOT) to set GHG emission standards for heavy highway vehicles, non-road vehicles, and aircraft. It requires States to develop transportation GHG reduction plans and calls for EPA to expand its fuel-saving technologies deployment program. The Department of Energy (DOE) is also directed to establish further standards for industrial energy efficiency, create an awards program for increasing efficiency in the thermal electricity generation process, and clarify the waste-to-heat energy incentives in the Energy Independence and Security Act of 2007 (EISA 2007).
Reducing Global Warming Pollution
Title III of H.R. 2454 focuses on reducing GHG emissions by establishing a cap on emissions beginning in 2012 that covers electricity generators, liquid fuel refiners and importers, and fluorinated gas manufacturers. In 2014, the cap is expanded to include industrial sources that emit greater than 25,000 tons of carbon dioxide-(CO2) equivalent emissions, and in 2016 it is further expanded to include retail natural gas distribution companies. Relative to their emissions in 2005, covered sources must reduce their emissions 3 percent by 2012, 17 percent by 2020, 58 percent by 2030, and 83 percent by 2050. It provides for unlimited banking of allowances, while borrowing future allowances to meet current compliance obligations is allowed with some restrictions.
Title III also allows covered entities to offset up to 2 billion metric tons (BMT) of CO2-equivalent emissions through the use of domestic and international offsets. The offset limits are applied on a pro-rata basis to individual covered entities. The annual percentage of offsets a covered entity can use to comply with its limit is determined by dividing 2 billion by the sum of 2 billion and the number of allowances issued for the previous year. The pro-rata limit can therefore restrict offset usage independently of the overall 2-BMT limit. Under the overall limit, the title allows 1 BMT of international offsets and 1 BMT of domestic offsets. Furthermore, beginning in 2018, five international offsets must be submitted to account for four allowances. As with the overall limit, domestic and international offsets under the pro-rata limit can each be no more than half the total. However, if the EPA Administrator expects the availability of domestic offset credits to be less than 900 million metric tons (MMT), given expected allowance prices, then the maximum percentage of international offsets is increased to reflect an amount equal to 1,000 MMT less the expected domestic offset availability, up to 500 MMT. International allowances can also be used for compliance, provided that they originate from a program with mandatory emissions reductions and have not been used already to comply with another program. The authority to designate a limit on the use of international allowances is granted to EPA. Title V addresses the role of domestic agricultural and forestry-related offsets in the Title III cap-and-trade program.
Transitioning to Clean Energy Economy
Title IV of H.R. 2454 includes provisions intended to mitigate adverse economic impacts caused by the provisions of Title III. It directs EPA to provide rebates for industrial facilities that it determines face significant additional costs as a result of Title III. It also authorizes tax credits and refunds for low income energy consumers, in order to compensate them for any losses in purchasing power due to higher energy costs and provides for financial assistance to workers who loose their job as a result of the Title III program. In addition, it authorizes an increase in grants for colleges and universities that are developing programs in clean energy technology and energy efficiency.
Representing H.R. 2454 in the National Energy Modeling System 8
The analysis of energy sector and energy-related economic impacts of the various GHG emission reduction proposals in this report is based on results from the Energy Information Administration’s (EIA) National Energy Modeling System (NEMS). NEMS projects emissions of energy-related CO2 emissions resulting from the combustion of fossil fuels, representing about 84 percent of total U.S. GHG emissions today. The emissions in NEMS account for the vast majority of total emissions covered by the main ACESA cap-and-trade program.
The Reference Case used in this report was published 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. 9 The Reference Case is designed to reflect only current laws and policies, so it explicitly avoids assumptions about “expected” policy changes such as future fuel economy standards, taxes, or new regulatory requirements for conventional pollutants or GHGs. For this reason, EIA Reference Case projections are not directly comparable with private energy forecasts that include estimates of policy change in their baseline scenarios.
NEMS endogenously calculates changes in energy-related CO2 emissions in the analysis cases. The cost of using each fossil fuel includes the costs associated with the GHG allowances needed to cover the emissions produced when they are used. These adjustments influence energy demand and energy-related CO2 emissions. The GHG allowance price also determines the reductions in projected baseline emissions of other GHGs based on assumed abatement cost relationships. With emission allowance banking, NEMS solves for the time path of permit prices such that cumulative emissions match the cumulative emissions target with price escalation consistent with the average cost of capital to the electric power sector.
The NEMS Macroeconomic Activity Module (MAM), which is based on the IHS Global Insight U.S. Model, interacts with the energy supply, demand, and conversion modules of NEMS to solve for an energy-economy equilibrium. In an iterative process within NEMS, MAM reacts to changes in energy prices, energy consumption, and allowance revenues, solving for the effect on macroeconomic and industry level variables such as real gross domestic product (GDP), the unemployment rate, inflation, and real industrial output.
Key provisions of ACESA that are represented in the policy cases developed in this analysis include:
While this analysis is as comprehensive as possible given its timing, it does not address all the provisions of ACESA. Provisions that are not represented include the Clean Energy Deployment Administration, the strategic allowance reserve, the separate cap-and-trade program for HFC emissions, the GHG performance standards for activities not subject to the cap-and-trade program, 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. Of these provisions, the Clean Energy Deployment Administration may have the most significant potential to alter the reported results.
Like other EIA analyses of energy and environmental policy proposals, this report focuses on the impacts of those proposals on energy choices made by consumers in all sectors and the implications of those decisions for the economy. This focus is consistent with EIA’s statutory mission and expertise. The study does not account for any possible health or environmental benefits that might be associated with curtailing GHG emissions.
Finally, while the emissions caps in the ACESA cap-and-trade program decline through the year 2050, the modeling horizon in this report runs only through 2030, the projection limit of NEMS. As in EIA analyses of earlier cap-and-trade proposals, the need to pursue higher-cost emissions reductions beyond 2030, driven by tighter caps and continued economic and population growth, can be reflected in the modeling by assuming that a positive bank of allowances is held at the end of 2030 in all but one case.
Because of the complex interactions of the various policy instruments called for in ACESA, a large number of cases were prepared. These cases, while not exhaustive, are meant to explore key areas of uncertainty that impact the analysis results.
The role of offsets is a large area of uncertainty in any analysis of ACESA. The 2-BMT annual limit on total offsets in ACESA is equivalent to one-third of total energy-related GHG emissions in 2008 and represents nearly six times the projected growth in energy-related emissions through 2030 in the Reference Case used in this analysis.
While the ceiling on offset use is clear, their actual use is an open question. Beyond the usual uncertainties related to the technical, economic, and market supply of offsets, the future use of offsets for ACESA compliance also depends both on regulatory decisions that are yet to be made by the EPA, on the timing and scope of negotiations on international agreements or arrangements between the United States and countries where offset opportunities may exist, and on emissions reduction commitments made by other countries. Also, limits on offset use in ACESA apply individually to each covered entity, so that offset “capacity” that goes unused by one or more covered entities cannot be used by other covered entities. For some major entities covered by the cap-and-trade program, decisions regarding the use of offsets could potentially be affected by regulation at the State level. Given the many technical factors and implementation decisions involved, it is hardly surprising that analysts’ estimates of international offset use span an extremely wide range. One recent analysis doubts that even 150 MMT of international offsets will be used by 2020, while another posits that 1 BMT of international offsets will be used almost immediately from the start of the program in 2012, followed by a quick rise towards an expanded 1.5-BMT ceiling shortly thereafter.
The other major area of uncertainty in assessing the energy system and economic impacts of ACESA involves the timing, cost, and public acceptance of low- and no-carbon technologies. For the period prior to 2030, the availability and cost of low- and no-carbon baseload electricity technologies, such as nuclear power and fossil (coal and natural gas) with CCS, which can potentially displace a large amount of conventional coal-fired generation, is a key issue. However, technology availability over an extended horizon is a two-sided issue. Research and development breakthroughs over the next two decades could expand the set of reasonably priced and scalable low- and no-carbon energy technologies across all energy uses, including transportation, with opportunities for widespread deployment beyond 2030. The achievement of significant near-term progress towards such an outcome, however, could significantly reduce the size of the bank of allowances that covered entities and other market participants would want to carry forward to meet compliance requirements beyond 2030.
Main Analysis Cases
Additional Analysis Cases
EIA cannot attach probabilities to the individual policy cases. However, both theory and common sense suggest that cases that reflect an unbroken chain of either failures or successes in a series of independent factors are inherently less likely than scenarios that do not assume that everything goes either wrong or right. In this respect, the No International/Limited and Zero Bank Cases might be viewed as more pessimistic and optimistic scenarios, respectively, which bracket a set of more likely cases. Similarly, if actual access to international offsets is dependent on a series of independent regulatory and negotiating outcomes, cases with intermediate access to international offsets might be viewed as more likely than those representing either complete and immediate success across the board (High Offsets), or a permanent lack of progress (No International) in such activities.
This section presents the results of the analysis, focusing on the effects of ACESA in the six main cases that vary technology and offset assumptions. The impacts on GHG emissions, energy markets, and the economy are presented in turn. A full set of report tables for all analysis cases is available on the EIA website.
Greenhouse Gas Emissions and Allowance Prices
Greenhouse Gas Emissions and Compliance Patterns
The cap-and-trade provisions in ACESA impose a gradually tightening cap on covered GHG emissions beginning in 2012, with some industrial sector and natural gas coverage phased in between 2012 and 2016. By 2016 about 84 percent of total U.S.GHG emissions are covered emissions under the cap, including most sources of energy-related CO2 and some industrial emissions of non-energy CO2, nitrous oxide, perfluorocarbons, sulfur hexafluoride, and HFCs.
Figure 1 compares the total and covered portions of GHG emissions in the reference case under the cap, with covered emissions prior to 2012 shown based on the bill’s 2012 coverage provisions. 10 Cumulative covered emissions from 2012 to 2030 in the Reference Case are about 113 BMT, compared to 89 BMT tons allowed under the cap, a 21-percent or 24.6-BMT reduction requirement. Given incentives to bank allowances and an increasingly stringent cap on emissions through 2050, in five of the main analysis cases, an additional 13 BMT of abatement is assumed to occur over the same period, leaving a 13-BMT allowance bank balance at the end of 2030. In the Zero Bank Case, a target of 0 for the 2030 bank balance is assumed.
Although all of the main analysis cases start from the same Reference Case, apply the same cap on covered emissions, and five carry the same 13-BMT balance of banked allowances in 2030, the mix of offset usage and reductions in covered emissions vary a great deal across these cases (Figure 2). In the ACESA Basic, ACESA High Cost, and ACESA High Offset Cases, the cumulative use of offsets is projected to substantially exceed the 13-BMT bank balance that is carried forward beyond 2030. Covered entities are therefore able to meet the their obligations under the cap-and-trade program between 2012 and 2030 in those cases even though the reduction in their covered emissions, shown as the bottom three segments of the bars in Figure 2, is significantly below the cumulative 24.6-BMT reduction target shown in Figure 1. This effect is particularly evident in the High Offsets Case, where the reduction in covered emissions over the 2012 to 2030 period is only 8.3 BMT. In the ACESA Zero Bank Case, cumulative abatement matches the minimum required, yet the compliance mix includes a similarly large share of offsets, with international offsets accounting for about half the total abatement. In the two cases where no international offsets are assumed to be available, reductions in covered emissions are much greater, actually exceeding the cumulative 24.6 BMT reduction shown in Figure 1 in the cases that assume the ready availability of low- and no-carbon electric generation technology.
The temporal pattern of compliance also varies significantly across cases, as shown in Figure 3, which shows the accumulation of allowance bank balances. The build-up of allowance bank balances is most rapid in the High Offsets Case, where the maximum allowable quantity of offsets is assumed to be available immediately. For the other main analysis cases, allowance banks are generally accumulated more rapidly in the cases that assume restricted access to international offsets and/or low- and-no carbon technologies for electricity generation. These assumptions, which lead to higher allowance prices, encourage covered entities to take advantage of near-term fuel-switching opportunities in the electric sector. In the Zero Bank Case, a relatively small negative allowance balance accumulates from 2019 to 2022, reflecting some allowance borrowing as permitted in the bill, subject to some limitations and repayment penalties. The borrowing period is followed by a similar length payoff period, leaving a near-zero balance over the last 5 years of the projection, consistent with the terminal bank assumption of the case.
Given the relatively generous limit on offsets and their potential as a low-cost compliance option, the reductions in covered emissions are projected to be smaller than the abatement from offsets in most cases. In the ACESA Basic Case, which includes an increasing availability of international offsets over time, abatement in covered gases represents only 39 percent of cumulative total emission abatement from 2012 to 2030. In the ACESA High Offsets Case, where the maximum quantity of international offsets are also used beginning in 2012, abatement in covered gases represents even less of the overall abatement, accounting for just 22 percent of the cumulative abatement through 2030. Reductions in the emissions of energy-related CO2 account for more than half of the cumulative abatement only in the cases where international offsets are not assumed to be available.
The abatement measures used change over time, depending on how quickly offsets and other abatement opportunities become economical (Figure 4). In the ACESA Basic and ACESA High Cost Cases the “kink” in the international offsets trend occurs due to the discounting rule change that goes into effect in 2018. After 2018, 1.25 international offsets are required for each allowance credit. This discounting is assumed to reduce the market price covered entities in the United States are willing to pay for international offsets to 80 percent (1/1.25) of the domestic allowance price and also reduce the quantity of offsets supplied by international sources. Both the discounting and the market supply reaction to the lower international offset price contribute to the reduced use of international offsets in 2018. A second change in the international offsets trend occurs in 2021 when the limit on international offsets is reached.
The temporal abatement pattern in the Zero Bank Case is distinct from the other cases. Relatively low levels of abatement occur in the first 10 years of the cap-and-trade policy in this case, as investors are assumed to forego possible opportunities to bank allowances, as might occur with expectations of stabilizing allowance prices after 2030 that would reduce profits from such investments.
Under the ACESA cap-and-trade provisions, the market price of allowances will establish an incremental cost to emitting GHGs. That cost provides an incentive to reduce emissions whether or not some allowances are received for free, since operating costs can be reduced by emitting less and any unused allowances can be sold.
Prices in allowance markets will be influenced by the banking provisions. Covered entities or traders may hold allowances if they expect higher allowance prices in the future. Allowance prices and levels of emissions are estimated such that covered emissions, less offsets, meet the emissions caps over a time period. The allowance price path is estimated assuming a constant rate of growth matching the cost of capital, or discount rate, assumed in financing the investment in allowance banking. The projected allowance prices represent idealized paths. In reality, allowance prices would tend to fluctuate as markets respond to new information and as unanticipated events unfold.
Allowance prices in the ACESA Basic Case are projected at $32 per metric ton in 2020 and $65 per metric ton in 2030. The projected allowances prices are highly uncertain and sensitive to modeling assumptions, including such factors as the cost and availability of low-emissions technology options and the potential supplies of domestic and international offset credits (Figure 5 and Table 1). Allowance prices in the main cases, where these assumptions are analyzed, vary widely, from $20 to $93 per metric ton of CO2-equivalent emissions in 2020 and from $41 to $191 per metric ton in 2030. The lower prices in that range occur in cases where technological options such as CCS and adoption of new nuclear power plants become available at relatively low costs, and the use of international offsets helps to hold down compliance costs, as in the ACESA Basic and ACESA High Offset Cases, and where aggregate banking of allowances is minimal, as in the ACESA Zero Bank Case. Significantly higher allowances prices occur if international offsets are unavailable or low-emitting electricity supply technologies are more costly, or the development of these technologies is limited, as in the ACESA No International Offsets, ACESA High Cost, and ACESA No International/Limited Cases.
Variation in allowances prices also occurs in some of the additional cases examined (Figure 6 and Table 2). Allowance prices in the ACESA Low Discount Case are initially higher than in the ACESA Basic Case, but they grow at the slower discount rate assumed and end up lower than in the ACESA Basic Case by 2024. Generally, the lower the return that investors in allowances are willing to accept, the greater the incentive to reduce emissions early, building a larger bank of allowances that can be used for compliance later. Relatively high allowance prices result in both the ACESA High Banking and ACESA Limited Alternatives Cases, while relatively lower prices are projected in the ACESA High Tech Case. Not shown are the prices in the ACESA 35CAFE2016 Case, which are not significantly different than in the Basic Case.
The lower emissions under the somewhat higher Corporate Average Fuel Economy (CAFE) standards in the early part of the projection occur gradually and do not significantly shift aggregate long-term abatement costs at the margin.
Domestic and international offset prices are closely tied to allowance prices and ACESA’s limits on offset usage. Estimated domestic offset usage, which may be constrained by the pro-rata percentage limit imposed on covered emissions, varies across the cases and over time, ranging from 75 to 290 MMT in 2012, from 177 to 580 MMT in 2020, and from 335 to 754 MMT in 2030. In all but one of the main cases examined, the ACESA No International/Limited Case, the estimated quantity of domestic offset credits falls below the pro-rata limits throughout the projection. When offset usage is below the limit, the offset credit price is assumed to match the allowance price. In the No International/Limited Case, the case with the highest allowance prices, the domestic offset limit is reached in 2024 through 2030. Beginning in 2024, competition to supply a limited quantity of offsets drives the offset price below the allowance price.
The limit on international offset credits is initially established to match the domestic limit but is adjusted higher (by up to 500 MMT, or 1,000 MMT less the anticipated domestic offset usage) if domestic offset usage is anticipated to be less than 900 MMT. In the cases where international offsets are assumed to be available, the adjusted international offset limit ranges from 1,196 to 1,479 MMT in 2030, with the estimated limit in the ACESA Basic Case of 1,320 MMT falling in the middle of that range. Given the assumed offset supplies available, international offsets limits are projected to be reached in all of these cases. In the ACESA High Offsets Case, the maximum allowable quantity of international offsets is assumed to be used beginning in 2012, resulting in much lower levels of abatement and allowance prices than in the ACESA Basic Case.
Energy-Related Carbon Dioxide Emissions
The allowance program and other incentives under ACESA are expected to reduce energy-related CO2 emissions. The vast majority of the energy-related emissions reductions are expected to occur in the electricity sector (Figures 7 and 8). In fact, across the ACESA main cases, the electricity sector accounts for between 80 percent and 88 percent of the total reduction in energy-related CO2 emissions relative to the Reference Case in 2030. The electricity sector reductions stem from the use of more efficient, less carbon-intensive sources of generation. This results from a variety of factors, particularly the industry’s current dependence on coal, the availability and economics of technologies to switch from coal to less carbon-intensive energy sources, and the comparative economics of fuel switching in other sectors. In addition, a portion of the electricity-related CO2 emissions reductions results from reduced electricity demand stimulated both by consumers’ responses to higher electricity prices and incentives in ACESA to stimulate greater efficiency in energy use.
Energy Market Impacts
Energy consumers are expected to face higher costs of using energy as a result of the ACESA cap-and-trade program. To the extent that they are not ameliorated by the free distribution of allowances to regulated distribution companies, the cost of the allowances required to be submitted by covered sources will tend to be passed on to consumers of primary fuels through higher delivered energy prices. Table 1, presented earlier, summarizes the projected impacts on the delivered cost of energy under ACESA. Detailed projection tables on energy production, consumption, and prices for each case accompany the presentation of this report on EIA’s web site. 11
Energy-related emissions will be influenced by both the higher energy costs from the allowance program, as well as the ACESA incentives that promote energy efficiency and low-carbon fuel sources. Overall, the use of fossil fuels generally decreases relative to the Reference Case, while the use of renewable energy sources and nuclear power increases (Figure 9). As discussed earlier, the greatest changes occur in the electricity sector, with reductions in the use of coal and increases in nuclear and renewable fuels in most cases, relative to the Reference Case. The impacts tend to grow over time as the caps become more stringent and the allowance price increases.
Electricity Sector Emissions, Generation, and Prices
The provisions of ACESA alter electric power projections by favoring low-carbon technologies such as new nuclear, renewable, and fossil plants that sequester CO2. The impact on CCS technology is also affected by the provisions that provide additional incentives for these plants. The shifts in the generation mix caused by ACESA lead to lower CO2 emissions from the electricity sector, higher electricity prices (particularly after 2025) and lower electricity demand than would otherwise occur. The higher electricity prices are due to the higher capital costs of cleaner, more efficient technologies and the costs of holding allowances.
In the Reference Case, which assumes no explicit policy to reduce GHG emissions, power sector CO2 emissions are projected to increase 8 percent between 2007 and 2030 as the industry increases its use of fossil fuels (Figure 10). In the main ACESA cases, power sector CO2 emissions are expected to be 11 percent to 44 percent below the Reference Case level in 2020 and 29 percent to 85 percent below the Reference Case level in 2030. The electricity sector, in fact, accounts for the vast majority of the energy-related CO2 emissions reductions expected to occur under ACESA, with its share ranging from 79 to 88 percent in 2030 across the main ACESA cases. The largest changes in electricity emissions occur in the cases where it is assumed that international offsets are not available. Without these offsets, covered U.S. entities must make larger reductions in their own emissions to comply with the emissions cap established in ACESA. In contrast, the smallest change occurs in the ACESA High Offsets Case where covered entities are assumed to be able to rely more on international offsets as compliance options.
Capacity and Generation
In the Reference Case, which does take account of growing concerns about GHG emissions, natural gas plants and renewable plants meet a large share of new capacity requirements through 2030 (Figure 11). Natural-gas-fired generation, with a CO2 emission rate roughly 40 percent that of conventional coal-fired generation, gains competitiveness relative to coal but loses competitiveness relative to carbon-free technologies under the ACESA cap-and-trade program. The efficiency and cap-and-trade programs in ACESA also have the effect of reducing projected growth in electricity demand, which reduces the need for all generation sources.
Under ACESA, new coal builds without CCS beyond those that are already under construction are almost eliminated. There is also a large increase in coal power plant retirements with between 6 and 85 percent of existing coal capacity projected to retire by 2030 in the ACESA main cases, well above the 1 percent of existing coal capacity projected to retire in the Reference Case. These retiring coal plants are replaced by a combination of new nuclear, renewable, and coal plants with CCS. The Reference Case projects 11 gigawatts of new nuclear capacity by 2030, but under ACESA, nuclear builds by 2030 range from 15 gigawatts to 135 gigawatts, when allowed to grow. Renewable capacity also grows significantly, representing between 33 percent and 63 percent of all new capacity added between 2008 and 2030 across the ACESA main cases.
When technologies with CCS, nuclear, and biomass are limited to Reference Case levels, as could occur if the technologies prove more costly, take longer to develop, and/or meet with strong market resistance, the addition of new renewable and natural gas capacity grows significantly. In the ACESA Basic Case, natural gas additions are below those in the Reference Case, since CCS is not as economic on combined-cycle plants as on coal plants, and other non-fossil technologies are built instead of natural-gas-fired plants without CCS.
Changes in electricity generation are consistent with capacity choices and are influenced by the GHG allowance price (Figures 12 and 13). In the Reference Case, coal generation grows to 2,311 billion kilowatthours in 2030, an increase of 14 percent over 2007 levels, providing 46 percent of total electricity needs. In the ACESA main cases, coal generation drops, with its generation share in 2030 dropping to between 7 percent and 40 percent. Although some new coal capacity with CCS is added in most cases, the increased generation from these new plants is more than offset by reductions from the retirement of existing coal capacity. In the ACESA High Cost, Zero Bank, and High Offsets Cases, coal generation is above that in the ACESA Basic Case, but still much lower than the Reference Case. In those cases, the higher costs of new coal plants with CCS, the availability of greater international offsets, and/or reduced banking result in fewer coal retirements than in the ACESA Basic Case.
Nuclear generation follows the capacity additions, growing most significantly in the ACESA No International and ACESA Basic Cases. In the Reference Case, nuclear generation grows by 10 percent between 2007 and 2030, reaching 890 billion kilowatthours and providing 18 percent of total generation. In the ACESA Basic Case, nuclear grows to 1,548 billion kilowatthours in 2030, nearly 74 percent more than the Reference Case level. If nuclear costs are higher than expected, then new nuclear capacity additions are still projected but at a level only slightly above that seen in the Reference Case in 2030.
In most of the ACESA cases, natural gas generation in 2030 is lower than in the Reference Case. In the Reference Case, natural gas generation increases 9 percent by 2030, relative to the 2007 level. However, in the ACESA Basic Case, natural gas generation falls 21 percent between 2007 and 2030. In the ACESA No International/Limited Case, natural gas generation is 68 percent above the Reference Case level by 2030, due to the assumed limited availability of new plants with CCS, as well as new nuclear and biomass capacity. This case demonstrates the role of the development and deployment of key low-carbon generating technologies like nuclear, renewables, and fossil with CCS in a timeframe consistent with the emission reduction requirements of ACESA. Without them, allowance prices would be higher and greater demands would be placed on natural gas markets.
Renewable generation is dramatically higher under the provisions of ACESA, growing to between 22 percent and 75 percent above the generation level in the Reference Case in 2030. The vast majority of the increase is from wind generation, followed by biomass generation. The increase in biomass generation in the ACESA cases comes from a combination of increased cofiring of biomass in existing coal plants and the addition of new dedicated biomass plants. In most cases, cofiring dominates, particularly in the early years of the projections. However, as new dedicated biomass plants are added, they play a larger role in the later years. Cofiring is generally an economic way to reduce CO2 emissions without investing in new capacity, but as the allowance price increases throughout the projections, the economics begin to shift towards less CO2-intensive generation.
The share of renewable generation far exceeds that required to comply with the combined efficiency and renewable electricity standard in all of the ACESA cases. As shown in Figure 14, the nominal share of renewables required to comply with the target, assuming no efficiency credits, grows to a final target of 20 percent. When the required share is adjusted for the exemption of small utilities and the removal of hydroelectric generation from the baseline, the national average required share falls to approximately 16.5 percent. Moreover, the national average required share falls to just over 10 percent when the generation contribution from new nuclear and fossil plants with CCS is removed from the baseline for renewable electricity standard calculations in the ACESA Basic Case. After these adjustments, the level of renewable generation in the Reference Case exceeds the requirement in 2025 and beyond, while the level in the ACESA Basic Case far exceeds it.
Price and Demand
H.R. 2454 is projected to lead to higher electricity prices and lower electricity demand, though most of the price impacts are expected after 2025, as the allowances allocated to retail electricity providers are phased out. Except for the ACESA No International/Limited Case, electricity prices in five of the six main ACESA cases range from 9.5 to 9.6 cents per kilowatthour in 2020, only 3 to 4 percent above the Reference Case level (Figure 15). 12 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 12.0 cents per kilowatthour, 19 percent above the Reference Case level, with a wider band of 11.1 cents to 17.8 cents (10 to 77 percent above the Reference Case level) across all six main policy cases.
The combination of higher electricity prices and provisions in H.R. 2454 designed to improve energy efficiency causes growth in the demand for electricity to slow relative to the Reference Case in the main ACESA cases. The long-term trend of slowing growth in the demand for electricity is reflected in the Reference Case. After averaging nearly 2.4 percent per year in the 1990s and 1.2 percent per year between 2000 and 2007, the demand for electricity is projected to increase just 0.9 percent per year between 2007 and 2030 in the Reference Case (Figure 16). This projection reflects ongoing improvements in appliance efficiency, new appliance standards, and consumer responses to higher electricity prices. Among the main ACESA cases the growth slows further, ranging from 0.2 percent per year to 0.7 percent per year between 2007 and 2030.
The impacts on regional electricity prices vary for many reasons including the demand characteristics, the mix of generating sources used, the availability and delivered prices of different resources and fuels, the regulatory regime, and the local costs of construction (Figure 17). Generally, the largest changes in prices caused by the provisions of H.R. 2454 would be expected in regions that are most reliant on coal, regions without large renewable resources that can be developed, and regions where electricity prices are set competitively. However, since retail distributers remain regulated in all regions it is assumed that the benefit of allowances allocated to them for free will be passed on to their consumers. This significantly dampens the prices impacts of ACESA through 2025 in all regions.
As shown in Figure 17, all regions are expected to see prices increases in most of the ACESA cases by 2030. Regions like the Northwest Power Pool (NWP) and California, which do not rely heavily on coal, continue to have regulated prices, and have significant renewable resources, are projected to see relatively modest prices increases in the ACESA main cases.
Because coal has the highest carbon content of any of the key fossil fuels, the cost of using coal when a GHG cap-and-trade program is imposed increases dramatically (Figures 18 and 19). For example, in 2020 the cost of using coal in a plant that does not have CCS equipment is between 92 percent and 435 greater in the main ACESA cases than in the Reference Case. By 2030 the increase in coal costs to a plant without CCS equipment is even larger, ranging from 179 percent to 848 percent greater than in the Reference Case in the main ACESA cases. The vast majority of this cost increase is due to the need to hold allowances to cover the CO2 emissions that will be generated when the coal is used to produce electricity. The underlying delivered price of coal without the allowance costs is actually lower in the ACESA cases because of the reduced consumption of coal.
As a result of the reduced use of coal for electricity generation, coal production volumes (in tons) are projected to be 19 to 83 percent lower in the ACESA main cases in 2030 compared to the Reference Case (Figure 20). Lower coal consumption in the ACESA main cases disproportionately affects western coal producers, because they are expected to meet most of the growth in coal demand in the Reference Case.
Residential and commercial buildings are affected by programs targeting energy efficiency and the energy price consequences of the GHG emissions cap. Figures 21 and 22 depict buildings sector delivered energy consumption by fuel across the main ACESA cases in 2020 and 2030, respectively. Electricity and natural gas, which account for nearly 90 percent of the delivered energy used in buildings, are also the fuels most impacted by ACESA.
Electricity use in buildings is projected to be 1.5 percent lower in the ACESA Basic Case relative to the Reference Case in 2020, with a range of 1.1 to 4.8 percent across the main ACESA cases. By 2030, electricity use is projected to be 4.9 percent lower in the ACESA Basic Case, with a range of 3.2 to 14.4 percent across the ACESA main cases. In the ACESA Basic Case, most of the electricity savings in buildings is due to price-induced conservation.
Natural gas use in buildings is more directly affected by the energy efficiency provisions in ACESA, given the importance of building codes and building retrofit programs which tend to affect heating fuels more than electricity. In 2020, natural gas use in buildings in the ACESA Basic Case is projected to be 2.5 percent lower than in the Reference Case, with a range of 2.0 to 7.1 percent across the ACESA main cases. By 2030, the ACESA Basic Case is projected to be 7.8 percent lower than the Reference Case with a range of 6.0 to 15.4 percent, across the ACESA main cases. Most of the reduction in natural gas use is due to the energy efficiency provisions in ACESA, particularly the building codes and building retrofit programs.
Even with lower energy consumption in the main ACESA cases, energy expenditures are projected to increase, relative to the Reference Case, due to increases in delivered energy prices to the buildings sector. Figure 23 depicts the average projected energy expenditures per square foot in residential and commercial buildings over the 2012 through 2030 period in the main ACESA cases. These estimates include only expenditures for energy used in buildings and not any additional costs associated with the purchase of energy-efficient equipment or any transportation costs. For all residential and commercial buildings, energy expenditures in the ACESA Basic Case are projected to increase 4 percent over the Reference Case average over the 2012–to-2030 period on a per–square-foot basis (in real 2007 dollars). Of all the main ACESA cases, only the most restrictive case shows an increase in the average expenditures per square foot relative to 2007, when energy expenditures were at near-record highs in real terms.
Increases in energy prices impact households not only for the energy used in the house, but also for transportation costs and products they buy on an everyday basis. Several provisions in ACESA direct that the funds generated from emissions allowance auctions or the sale of freely allocated allowances be used to ameliorate the adverse impact on households. In addition to the funds generated for low-income households through the auctioning of 15 percent of the allowances allocated each year, local electricity and natural gas distribution companies are also directed to use freely allocated allowances to minimize the impact on residential energy consumers. These provisions, along with the energy efficiency programs such as building codes, partially shield residential consumers from significant increases in energy expenditures for uses inside the house. Transportation costs, however, do increase significantly on a per-household basis since there are no provisions designed to dampen motor gasoline price impacts.
As a result of the provisions in ACESA, the average household can expect increases in the cost of the energy they use to heat and cool their homes as well as the cost to operate their vehicles. Figures 24 and 25 depict these cost increases as well as the increase in the cost to purchase more energy-efficient equipment as a result of more stringent building codes. Since the building codes affect only new construction on an annual basis and the annualized cost (over 15 years) is spread out over all households in Figures 24 and 25, the impact of the increase in this cost is relatively small. Based on the three cost measures represented in Figure 24, households can expect an increase of $165 in 2020 in the ACESA Basic Case, with a range of $103 to $767 across the ACESA main cases. Increases in light-duty vehicle energy expenditures account for about 81 percent of the increase in 2020 in the ACESA Basic Case. In 2030, the cost to the consumers increases to $501 per household in the ACESA Basic Case, with the non-transportation costs accounting for about 52 percent of the increase (Figure 25). In 2030, the increased costs to households range from $282 to $1,870 across the ACESA main cases. The higher cost impacts in 2030 are stimulated by the rising allowances costs and the phase-out of the freely allocated allowances to electricity and natural gas distribution companies that begins in 2025.
The adoption of more efficient technology can play a role in mitigating the cost to households due to ACESA. In the ACESA High Tech Case, energy expenditures for household uses (excluding transportation costs) decline by $63, relative to the Reference Case, in 2020. In 2030, energy expenditures for household uses increase by $26 relative to the Reference Case, but are much less than the $191-increase projected in the Basic Case. The increased adoption of more efficient technologies, including rooftop photovoltaics, contributes to the reduction in household energy expenditures. Total per-household expenditures are lower in this case, relative to any of the main cases, even with a modest increase in annualized capital expenditures caused by the adoption of more efficient equipment. Per-household expenditures are 54 percent lower in 2020 relative to the Basic Case and 40 percent lower than the Basic Case in 2030.
The impact of ACESA on projections of CO2 emissions from the transportation sector are relatively small compared to emissions reductions realized in the other demand sectors. In 2020, CO2 emissions from the transportation sector are reduced from1.0 percent to 3.5 percent (19 to 68 MMT) across the main ACESA cases relative to the Reference Case. By 2030, transportation-related CO2 emission reductions increase and range from 2.6 percent to 8.5 percent (53 to 174 MMT) across the main ACESA cases compared to the Reference Case. Because reductions in transportation-related emissions are not proportional to reductions in other sectors, by 2030 the transportation sector accounts for a larger percentage of total U.S. GHG emissions across all cases. The relatively small changes in the transportation sector are driven by the modest changes in gasoline prices, which are expected by 2020 to range from $0.12 to $0.66 per gallon higher than in the Reference Case (Figure 26).
However, ACESA does contain provisions aimed at stimulating further advances in vehicle fuel efficiency and a more rapid penetration of vehicles that rely at least partially on electricity. Uncertainty about the impacts of these provisions led to them not being explicitly analyzed in this report. If they are successful, larger reductions in transportation sector emissions would be expected.
These results may also be impacted by proposed revisions to CAFE standards. On May 19, 2009, President Obama unveiled new light vehicle fuel economy standards increasing the minimum passenger car requirement to 39 miles per gallon and the light truck requirement to 30 miles per gallon by model year 2016. The proposed rule making jointly developed by the EPA and the National Highway Traffic Safety Administration mandates a 5-percent annual increase in fuel economy for model years 2012 through 2016. The new standards will address both fuel economy and GHG emissions via a vehicle-attribute-based CAFE standard and a tailpipe GHG emission standard.
To evaluate their potential impact, the proposed CAFE standards were incorporated into the 35CAFE2016 Case. Except for the revised CAFE standards, this case uses the same assumptions as the ACESA Basic Case, to examine the impact on transportation-related GHG emissions and how that effects total GHG emission reductions from all sectors. Relative to the ACESA Basic Case, the proposed CAFE standards reduce GHG emissions from the transportation sector by 0.5 percent in 2020 (9 MMT carbon-equivalent) and 0.8 percent in 2030 (16 MMT carbon-equivalent) relative to the ACESA Basic Case. Total GHG emissions are unchanged between the two cases since reductions in the transportation sector are offset by smaller reductions in other sectors. This occurs because allowance prices decrease in proportion to emissions reductions achieved in the transportation sector.
The transportation sector could contribute more to emissions reductions if the provisions of ACESA were to spur more rapid improvement in transportation technology. Relative to the ACESA Basic Case, in the ACESA High Tech Case, transportation sector CO2 emissions are 32 million metric tons lower in 2030 (1.6 percent).
Implementing the ACESA GHG cap-and-trade program will affect the economy through two key mechanisms. First, the cost of using energy, particularly fossil fuels and electricity, will be increased by the requirement to submit allowances for ongoing emissions. Second, the auctioning of allowances and the free distribution of allowances to emitting and non-emitting sources will generate revenue, which, in turn, will be spent by various government entities on programs designed to help businesses and consumers reduce their emissions or ameliorate the impacts associated with higher energy prices. In the ACESA cases, roughly 99 percent of the value of allowances, allocated freely or auctioned, goes to producers and consumers of energy from 2012 to 2030, while 1 percent is devoted to deficit reduction. Through 2025, the allocation of allowances under ACESA tends to dampen the changes in energy prices, but energy prices begin to escalate and the economy shows greater losses in the last 5 years of the projection horizon, as many of the early programs are phased out..
Prices increase and real output declines as a result of meeting the carbon reductions stipulated in ACESA. If all of the revenue collected by the carbon allowances were returned, deficits would be significantly higher, especially during the period where the carbon allowance prices are at their highest levels. As a result, for all ACESA cases, the full employment deficit was not allowed to change from the reference case. Government expenditures were adjusted so that the deficit remained at reference case values. The uses of the carbon allowance revenues as stipulated by H.R. 2454 were modeled; however to the extent that the resulting change in government expenditures were lower than the actual amounts specified by the bill, other non-defense government expenditures would have to be reduced to insure unchanged Federal deficits over time.
Figure 27 shows the detailed shares of allowances going to different entities as called for in ACESA over the 2012 to 2030 time period. As shown, the share devoted to the energy industry, mainly to be used to reduce impacts on their consumers, drops off dramatically post-2025, with an increasing share rebated to consumers via the climate change consumer refund program. The amounts going to the energy industry and trade-vulnerable industries are not directly collected as revenue in the macroeconomic model. Those revenues are used by the industries themselves to lessen the impact of rising energy prices to consumers. The remaining uses of the allowances are distributed through Federal transfer payments abroad (International Adaptation and Clean Technology Deployment funds), imports of services (purchases of international offsets), increased transfer payments to individuals (low income allocations), or increased Federal non-defense expenditures (clean energy innovation centers and energy efficient programs). The cumulative amount of revenues (not discounted) collected for redistribution by the government ranges from $1.3 trillion in the ACESA Zero Bank Case to $6.4 trillion in the ACESA No International/Limited Case between 2012 and 2030. These sums essentially include the value of all the allowances that will fund increased local, State, and Federal government expenditures for various purposes but exclude the value of allowances going directly to businesses, including to local electricity and natural gas distribution companies, or those that will be used for deficit reduction. Figure 28 provides another view of the distribution of allowances dividing them into five broad categories, electricity, natural gas and oil distributors, trade- and energy-vulnerable industries, international adaptation, consumers and efficiency, and deficit reduction.
Impacts on Energy and Aggregate Prices
Rising energy costs influence the aggregate economy through their effect on prices and energy expenditures. Figure 29 shows the percentage changes in both the consumer and producer indices for energy in the ACESA cases. Figure 30 highlights the All-Urban Consumer Price Index (CPI), a measure of aggregate consumer prices in the economy. The CPI for energy, a summary measure of energy prices facing households at the retail level, increases by approximately 15 percent above the Reference Case level by 2030 in the ACESA Basic Case. Industrial energy prices increase by 22 percent above the Reference Case by 2030. However, between 2012 and 2025, when electricity, natural gas, and heating oil distributors are assumed to use the large amount of allowances they receive to mitigate the impacts that their customers would otherwise see, industrial energy prices rise by roughly twice as much in percentage terms as do consumer energy prices.
Both wholesale and consumer energy prices rise quickly in the first 4 years, level off for the next 10 years and then sharply rise for the last 5 years. All cases show the same pattern with the amount of increase depending on the allowance prices and compliance options chosen in each case. The relative stability of energy prices from 2014 to 2025 reduces projected economic impacts from levels experienced following the initial energy price shock. However, when energy prices start to escalate post-2025, economic impacts begin to grow.
Across the ACESA cases, consumer energy prices increase between 8 and 62 percent above the Reference Case level in 2030, with the ACESA High Offsets Case showing the smallest change in energy prices and the ACESA No International/Limited Case showing the largest change, more than twice that in the next highest case.
Ultimately, consumers will also see the impact of higher energy prices directly through final prices paid for energy-related goods and services and higher prices for other goods and services using energy as an input, and, if the cost increases cannot be passed on to consumers, labor and capital stock may be reallocated. Figure 30 shows that the increase in consumer prices ranges from 1.5 percent to 12.0 percent above Reference Case levels in the main ACESA cases, with the increase in the No International/Limited Case nearly twice that in the next highest case.
Real GDP and Consumption Impacts
The higher delivered energy prices lead to lower real output for the economy. They reduce energy consumption, but also indirectly reduce real consumer spending for other goods and services due to lower purchasing power. The lower aggregate demand for goods and services results in lower real GDP relative to the Reference Case (Figure 31 and Table 3). Over the entire projection period, the change in the cumulative present value of GDP from the Reference Case in the ACESA Basic Case is 0.3 percent ($566 billion in 2000 dollars), with a range from $432 billion (-0.2 percent) to $1,897 billion (-0.9 percent) across the main ACESA cases. Impacts in the No International/Limited Case are more than twice as high as those in any other case.
Over time, the pattern of GDP impacts mirrors the change in energy and allowance prices. GDP losses are fairly small for the first 10 years as energy prices increase initially and then stabilize. Real GDP impacts actually decline as prices stabilize, but then increase again as energy prices start to escalate after 2025 as allowance prices continue to rise and the allocation of allowances used to mitigate the impacts on electricity, natural gas, and heating oil consumers is phased out.
In 2030, the last year explicitly modeled in this analysis, GDP losses range from $104 billion to $453 billion (-0.5 to -2.3 percent), with the losses in the ACESA No International/Limited Case, at the top of these ranges, again more than twice as large as those in the case with the next highest level of impacts.
While real GDP is an overall measure of what the economy produces, the components of GDP, consumption, investment, government, and net exports, may change considerably. In the ACESA cases, consumer expenditures, one indicator of consumers’ welfare, show smaller relative losses than overall GDP. Figure 32 shows consumption impacts over time and the cumulative discounted percent change in consumption over the 2012 to 2030 time period relative to the Reference Case. The cumulative percent losses for real consumption range from 0.1 percent ($196 in billion 2000 dollars) in the ACESA Zero Bank Case to 0.7 percent ($988 in billion 2000 dollars) in the No International/Limited Case. As with GDP, consumption losses during the first 10 years of the projection period are relatively small because consumer energy prices increase by half of the change in industrial energy prices and remain relatively steady until 2026 and roughly 15 percent of total nominal allowance revenue is returned to low-income consumers. In fact, until 2026, the value of increased residential energy expenditures (including transportation costs) is roughly equal to the amount of allowance revenue transferred to low-income consumers. After 2026, the consumer climate change funds rebates in personal taxes, allowing for muted consumer impacts of the rising energy costs.
By 2030, real consumption losses reach 0.4 percent ($63 billion in 2000 dollars) in the ACESA Basic Case.
On a per-household basis, average non-discounted consumption losses ranges from $95 to $435 (in 2007 dollars) over the 2012 to 2030 period in the ACESA cases. When discounted, the yearly losses average from $59 to $292 (in 2007 dollars) per household. The consumption losses escalate starting in 2025 as the allowance prices increase to meet the more stringent emission cap. Therefore 2020 household consumption costs are smaller than the losses in 2030 (Figure 33). The household consumption losses grow over time as energy prices escalate. The 2030 consumption losses per household are larger than the losses in 2020 as both the carbon allowance price and electricity prices increase rapidly post-2025 (Figure 34). In 2020, household consumption losses range from $30 to $362; while in 2030, the range in consumption losses is from $157 to $850 per household.
Industrial energy prices increase more than consumer energy prices because of the allowance revenue used to ameliorate energy price impacts for consumers. On average, wholesale energy prices increase by double that of consumer energy prices. Figure 35 indicates that industry 13 shows larger percentage losses than consumption. By 2030, industrial shipment losses range from 1.2 percent in the High Offset Case to 6.8 percent in the No International/Limited Case. Manufacturing industries show slightly larger percentage losses than the total industrial sector.
As allowance prices increase, the energy-intensive sectors, including bulk chemicals, glass, cement, steel, and aluminum, receive permit allocations of roughly 15 percent of the total allocated in 2013. Their allocation share gradually declines over time, such that by 2030 trade- and energy-vulnerable industries obtain just under 7 percent of the allocated permits. Receiving these permits ameliorates the impact of increased energy prices and therefore industries face energy prices that are not impacted by the permit values. 14 As a result, when energy prices increase, the reductions in output of these trade- and energy-vulnerable industries are less than overall manufacturing impacts and mirror the impacts (in terms of percentage change from the Reference Case) of total industrial shipments. In past EIA analysis of industrial impacts of energy price increases, these energy-intensive industries typically experience larger losses compared to overall manufacturing (Figure 36).
Total non-farm employment percentage losses are smaller than manufacturing primarily because gains in employment in the service sectors (Figure 36). The pattern of manufacturing employment losses over time mirrors the pattern shown by real manufacturing shipments in all cases.
The main ACESA cases give a wide range of industrial impacts depending on which technology (and its costs) the electricity sector uses and the availability of international offsets. One additional source of uncertainty in the macroeconomic model is how exchange rates will react to the imposition of a carbon allowance price. Given no information on how other countries would implement carbon emission caps and that the macroeconomic model used in NEMS focuses on primarily domestic economic impacts, the exchange rates were not allowed to change from Reference Case levels. See Appendix B for a description of the assumptions used in the macroeconomic model for the ACESA cases.
Comparison to Earlier EIA Analysis
EIA has analyzed a number of cap-and-trade bills and policies in recent years. In 2008 EIA evaluated S. 2191, the Lieberman-Warner Climate Security Act of 2007, which was introduced in the 110th Congress. 15 S. 2191 included an economy-wide cap-and-trade provision covering about 87 percent of GHG emissions, with those emissions capped at 40 percent below the 2005 level in 2030 and 72 percent below the 2005 level in 2050. The caps in ACESA are more stringent than those under S. 2191, requiring reductions of 58 percent reduction from 2005 levels in 2030 and 83 percent in 2050 and beyond; however, ACESA allows greater use of offsets as a compliance measure compared to S. 2191.
For S. 2191, EIA estimated allowance prices in 2030 of between $62 to $160, including $62 in the Core Case and $80 in the High Cost Case (prices in 2007 dollars per metric ton CO2-equivalent). This compares to EIA’s range of $41 to $191 for ACESA, including $65 in the ACESA Basic Case which is most similar to the S. 2191 High Cost Case in terms of electricity cost assumptions. EIA’s S. 2191 analysis was based on the Annual Energy Outlook 2008 (AEO2008)that included different energy price paths and macroeconomic growth assumptions from AEO2009, among other differences. In the AEO2009, long-run economic growth is slightly lower at 2.4 percent between 2008 and 2030, compared to AEO2008’s projected growth at 2.5 percent. Short-run growth is substantially lower in the AEO2009 relative to AEO2008 as a result of the current recession. Compliance costs as reflected in the estimated allowance prices would tend to be lower under the AEO2009 Reference Case than under the AEO2008 Reference Case, 16 suggesting somewhat closer compliance costs between ACESA and S. 2191, at least as reflected in allowance prices.
The ACESA allowance allocations and rebates help compensate energy consumers and energy-intensive businesses for higher energy costs and play a key role in the estimated energy market and macroeconomic response, relative to the projected allowance prices. For energy-intensive industries, output and employment impacts are less than under S. 2191 since, under ACESA, energy-intensive industries are assumed to be compensated for higher energy costs due to allowance prices. Under S. 2191, energy-intensive industries were assumed to face the full cost of allowance in higher energy prices.
Similarly, consumer and wholesale energy price increases are mitigated under ACESA through 2025 as rebates from local distribution companies offset the effect of rising allowance prices on electricity and natural gas prices. After 2025, these energy prices grow more rapidly as rebates are phased out, a different pattern than under S. 2191. Under ACESA, energy prices increase immediately in 2012 and then stabilize until 2025, allowing the economy to recover from the initial price increase. After 2025, the rapid increase in energy prices causes the economy to contract.
This effect of rebates on energy prices under ACESA accounts for the different time paths of GDP and consumption losses in the two studies. Under S. 2191, the losses are immediate and increase gradually over time. Under ACESA, real GDP and consumption losses are relatively small until 2025, but escalate rapidly late in the projection period. As a result, the cumulative macroeconomic impacts estimated under S. 2191, relative to the estimated allowance prices, were greater than those observed under ACESA, even though the 2030 impacts are less. For example, in the S. 2191 Core Case, with a 2030 allowance price of $62, the average undiscounted loss in real consumption from 2012 to 2030 was estimated to be $47 billion (2000 dollars). In the ACESA Basic Case, with a 2030 allowance price of $65, the average undiscounted loss in real consumption from 2012 to 2030 was $22 billion. The pattern of carbon allowance recycling in S. 2191 and H.R. 2454 differed. Revenue recycling to consumers did not have a sudden increase post-2025 in S. 2191 as it does in H.R. 2454. In H.R. 2454, since the consumer climate change fund is rebated to the consumer in the form of lower personal taxes post-2025, consumption impacts in S. 2191 and H.R. 2454 are similar, $68 billion for S. 2191 and $63 billion for H.R. 2454 in 2030.