[Senate Hearing 110-9]
[From the U.S. Government Publishing Office]
S. Hrg. 110-9
EIA ANALYSIS OF DRAFT CLIMATE CHANGE LEGISLATION
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HEARING
before the
COMMITTEE ON
ENERGY AND NATURAL RESOURCES
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
on
ANALYSIS RECENTLY COMPLETED BY THE ENERGY INFORMATION ADMINISTRATION,
``ENERGY MARKET AND ECONOMIC IMPACTS OF A PROPOSAL TO REDUCE GREENHOUSE
GAS INTENSITY WITH A CAP AND TRADE SYSTEM''
__________
JANUARY 24, 2007
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
DANIEL K. AKAKA, Hawaii PETE V. DOMENICI, New Mexico
BYRON L. DORGAN, North Dakota LARRY E. CRAIG, Idaho
RON WYDEN, Oregon CRAIG THOMAS, Wyoming
TIM JOHNSON, South Dakota LISA MURKOWSKI, Alaska
MARY L. LANDRIEU, Louisiana RICHARD BURR, North Carolina
MARIA CANTWELL, Washington JIM DeMINT, South Carolina
KEN SALAZAR, Colorado BOB CORKER, Tennessee
ROBERT MENENDEZ, New Jersey JEFF SESSIONS, Alabama
BLANCHE L. LINCOLN, Arkansas GORDON H. SMITH, Oregon
BERNARD SANDERS, Vermont JIM BUNNING, Kentucky
JON TESTER, Montana MEL MARTINEZ, Florida
Robert M. Simon, Staff Director
Sam E. Fowler, Chief Counsel
Frank J. Macchiarola, Republican Staff Director
Judith K. Pensabene, Republican Chief Counsel
Jonathan Black, Professional Staff Member
Kathryn Clay, Republican Professional Staff Member
C O N T E N T S
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STATEMENTS
Page
Bingaman, Hon. Jeff, U.S. Senator from New Mexico................ 1
Domenici, Hon. Pete V., U.S. Senator from New Mexico............. 2
Gruenspecht, Howard, Deputy Administrator, Energy Information
Administration, Department of Energy........................... 3
Grumet, Jason S., Executive Director, National Commission on
Energy Policy.................................................. 28
Lashof, Daniel A., Ph.D., Climate Center Science Director,
Natural Resources Defense Council.............................. 14
Smith, Anne E., Ph.D., Vice President, CRA International......... 21
Sterba, Jeffry E., Chairman, President and CEO, PNM Resources.... 10
APPENDIX
Responses to additional questions................................ 53
EIA ANALYSIS OF DRAFT CLIMATE CHANGE LEGISLATION
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WEDNESDAY, JANUARY 24, 2007
U.S. Senate,
Committee on Energy and Natural Resources,
Washington, DC.
The committee met, pursuant to notice, at 9:45 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. Alright, why don't we go ahead and get the
committee hearing started. Let me indicate that today we are
going to have testimony on the Energy Information
Administration's report on Draft Climate Change Legislation.
Also, we are going to take action on three routine business
matters.
In the interest of time, rather than waiting to get a
reporting quorum, I think we need to just start with our
hearing and advise everybody that if we get 12 Senators in the
room we are going to interrupt everyone at that point and do
these three business items which need to be done with the 12
Senators, but that may be a while. So, let me just welcome all
the witnesses and make a short statement here and then ask
Senator Domenici for the statement that he has and then
introduce the witnesses.
Thank you all for being here. This hearing will focus on
this Energy Information Administration Analysis of the Draft
Global Warming Legislation and the economic impact that that
would have on our country. Last year several of us, Senators
Specter and Lugar as well as Senators Landrieu, Salazar, and
Murkowski here on this committee, submitted draft legislation
to the EIA asking them to look at it and I appreciate those
members joining in that request. The draft was the culmination
of over a years worth of work. It began with an EIA analysis of
the Climate Proposal by the National Commission on Energy
Policy which was 18 months or more ago.
Over the past Congress we visited the issue on the floor;
we had, under Senator Domenici's leadership, a day-long
workshop here in this committee with 29 participants to explore
the design features of a cap and trade proposal. We received
this EIA analysis as a next step. We asked for it as a next
step in trying to craft legislation that would be appropriate
to deal with this issue. We circulated this draft. Senator
Specter and I have initiated the process of trying to improve
on the draft and having this hearing, which I think gets us
started in that process. We also hope to have more hearings on
the issue of climate change. Sir Nicholas Stern is scheduled to
testify before our committee next month. I hope that will give
the committee another chance to review the impacts of global
warming and the impacts of delaying action on global warming.
There are obviously a lot of different parts to this issue.
It is a complex issue. I hope that as many members as are
willing to, will engage themselves and take the time to try to
understand and settle on their views on the various issues that
are raised, so I appreciate very much the time and the effort
that Senator Domenici and his staff have committed to this very
difficult set of issues, as well as other members of the
committee. I call on Senator Domenici for his statement before
we hear from the witnesses.
STATEMENT OF HON. PETE V. DOMENICI, U.S. SENATOR
FROM NEW MEXICO
Senator Domenici. Thank you very much, Senator Bingaman. I
note that we might let it be known to the staff that if we get
a couple of more Senators, we have 12, and that whenever
there's 12, we will stop and turn it back over to you so you
can have the business meeting and pass the three business items
that are sitting around and I think that would be good.
I want to add my thanks to yours regarding the witnesses
for taking time out of their busy schedules for participation
in this hearing today. I thank each one of you. I did not get a
chance here this morning yet, but I do now.
In his State of the Union address last night, the President
laid out an ambitious, but worthy, goal to reduce the
consumption of gasoline by 20 percent in 10 years. I applaud
the President's leadership in emphasizing the importance of
alternative fuels and vehicle fuel efficiency. The efforts will
enhance our National Energy Security, as well as decrease
emissions from greenhouse gases. However, I was disappointed
that the President gave little attention to the tremendous
promise that nuclear energy holds for this Nation. Expanding
our use of nuclear power is the single most significant thing
we can do to confront climate change. In the last Congress,
Senator Bingaman and I started a bipartisan discussion in this
committee to consider the climate change issues. I am pleased
that we are continuing the discussion into the 110th Congress.
Another Senator has arrived. Senator Bingaman and I released a
white paper on climate change which laid out the key questions
and the design challenges for a mandatory program for limiting
greenhouse gas emissions. At our Climate Conference last April,
we received more than 150 submissions at our Climate
Conference, excuse me, that contained more than 500 individual
documents. Imagine that, people truly are interested and go a
long way and give a lot of their time and energy to help us
understand what is happening. We have had a very productive
discussion on climate, and we have learned a lot so far.
I am aware that many in the scientific community are
warning us that something needs to be done. We still have a lot
of questions before us, though. With this hearing we are
continuing a search for answers that are meaningful,
economically feasible and that will produce real reductions in
greenhouse gas emissions. It is clear to me that developing a
system of mandatory controls on carbon emissions could be a
daunting task. Controls must be effective. They must produce
significant emission reductions to be meaningful. The cost of
such controls should have the least possible overall negative
effect on our economy and any burdens must be quite as
equitable as they have been, as they can possibly be. And we
must be sure that we do not impose costs on our industry that
will drive them to impose costs that will drive them to
relocate in countries such as India and China that do not have
similar controls on carbons. I believe an essential part of any
response to climate change is to double, maybe triple, our
commitment to developing new technologies. Research and
development funding, both public and private, is vital to
addressing any of our Nation's energy challenges, and the
climate change issue is no exception. I look forward to
learning more from today's hearings.
Thank you Mr. Chairman and thank the Senators who are here
and the others who will be coming that are interested in this
issue.
The Chairman. Thank you very much. Why don't we just start?
Let me introduce the panel of witnesses here and then we will
start from the left and just go across and hear the testimony
of each. Our first witness is Howard Gruenspecht, who is the
Deputy Administrator with the Energy Information Administration
in the Department of Energy and he is the person who has been
the lead on this analysis that we have asked for. In addition,
of course, Jeff Sterba is chairman and president and CEO of the
PNM Resources in New Mexico, a company we are very proud of in
our State. We appreciate Jeff's leadership and willingness to
testify today. Daniel Lashof who is the climate center deputy
director for the Natural Resources Defense Council, we very
much appreciate you being here. Anne Smith who is the vice
president for CRA International here in Washington, thank you
for being here and Jason Grumet who is the executive director
for this National Commission on Energy Policy that the Hewlett
Foundation established a couple of years ago and has been the
moving force behind getting the draft legislation that is being
analyzed by the Energy Information Administration prepared.
Why don't we do this, Howard, would you go ahead and take
whatever time you need to give us the analysis you went through
and then your conclusions and then I will ask each of the other
witnesses to take 5 minutes or so and summarize their comments,
either about the analysis or any other point they want to make
and then we will take questions. Howard, go ahead.
STATEMENT OF HOWARD GRUENSPECHT, DEPUTY ADMINISTRATOR, ENERGY
INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY
Dr. Gruenspecht. Thank you Mr. Chairman, Senator Domenici
and members of the committee. I appreciate the opportunity to
appear before you today.
The Energy Information Administration is the independent
statistical and analytical agency in the Department of Energy.
We do not promote, formulate or take positions on policy issues
and our views should not be construed as representing those of
the Department or the administration. As requested, my
testimony focuses on EIA's recent analysis of the energy and
economic impacts of a cap-and-trade program for greenhouse gas
emissions. Our report compares energy and economic outcomes
incorporating the proposal provided to us by the chairman and
five colleagues to those of the reference case of the Annual
Energy Outlook 2006. As noted in my written testimony there are
many uncertainties inherent in any long term projection,
particularly over a 25-year period, but the examination of
differences across cases can provide some robust insights.
Also, while EIA has recently updated its reference case in the
Annual Energy Outlook 2007, an analysis starting from the new
outlook would likely produce results that are very similar to
those in our report, given the relatively modest changes
between the 2006 and 2007 outlooks. My discussion of key
findings will focus on the Phased Auction case, which was one
of the cases we were asked to look at, which provides for the
direct allocation of some emissions allowances and the
auctioning of others with the share that would be auctioned
rising over time as specified in the proposal.
Starting with energy price impacts, the cap-and-trade
proposal requires fossil fuel suppliers to submit emissions
allowances that reflect the carbon dioxide emitted when the
fuel is burned. The cost of the allowances raises the energy
prices paid by the end users. Figures 1 and 2 of my written
testimony summarize the price impacts, which are all expressed
in real 2004 dollars and include the value of allowances. The
average retail gasoline price under the program is 3 percent
higher in 2020 and 5 percent or 0.11 cents higher in 2030
compared to the reference case. The price impact in 2030
reflects the operation of the safety valve feature of the
program. In terms of natural gas, the program is projected to
increase the average delivered natural gas price by about 6
percent in 2020 and by 11 percent in 2030.
The projected percentage increase in delivered coal prices
to electric generators, 48 percent in 2020 and 81 percent in
2030, is significantly larger than those expected for oil
products and natural gas. This result reflects coal's higher
carbon content per unit of energy and its lower price in the
reference case compared to both oil and natural gas.
In the Phased Auction case, where significant quantities of
allowances are given free of charge to electricity generators,
electricity prices are estimated to be 4 percent higher than in
the reference case in 2020 and 11 percent higher in 2030.
Projected electricity price impacts--another sensitivity we
were asked to look at--in the Full Auction case, where all
allowances are auctioned, are somewhat greater. The difference
in impacts reflects the assumed pass-through to ratepayers of
the value of allowances given to electric generators who are
subject to State-level, cost-of-service regulation in the
Phased Auction case. So this is an example where State and
Federal policies interact. It is also the case that electricity
price impacts vary across States and regions, so I am giving a
national number, but there is definitely a different impact
across different parts of the country that we can talk about.
Projected effects on oil and natural gas use are limited by
the modest changes in their delivered prices and the limited
availability of economical substitute fuels in the transport
sector and other applications where these fuels are used.
However, projected coal consumption is reduced relative to the
reference case by 4 percent in 2020 and by 20 percent in 2030,
due mainly to the shift in the generation fuel mix that is
driven by higher delivered coal prices. The displaced coal
generation is largely replaced by generation from nuclear and
renewable energy. So, Senator Domenici would be happy to hear
that given his remarks.
Figure 4 of my written testimony shows the projected
impacts on electric generation capacity additions of this
program and if you look at the Figure you can see that the
amount of projected coal capacity additions falls rather
dramatically, but the projected nuclear capacity additions and
renewable capacity additions increase rather dramatically. The
proposal also significantly reduces the economic attractiveness
of coal-to-liquids conversions, so again it is the coal prices
that are mostly affected and it is the new builds of coal
plants and coal-to-liquids that are affected. However, despite
the reduction in coal power generation and CTL conversion
relative to baseline growth estimates, coal use is still
projected to remain above its 2004 level through 2030.
Figure 5 of the written testimony shows projected emissions
reductions and they consist of a mix of non-energy related
reductions which play an important, but declining role over
time. They account for 57 percent of the reductions that are
projected to occur in 2020 and 35 percent of the reductions
that are expected to occur in 2030. So over time, the share
that energy-related reductions contributes increases. Because
the Safety Valve in the proposal is projected to be triggered
in 2026 the specified greenhouse gas intensity targets are not
fully attained beyond that date. Emissions rise slowly during
the first phase of the program, but decline thereafter.
Turning finally to economic impacts, Figure 6 shows
projected effects on the level of real Gross Domestic Product
and personal consumption. By 2030, real GDP in the Phased
Auction case is projected to be 0.26 percent lower than the
reference case level; 0.26 percent is $59 billion in year-2000
dollars. The economy is very big so even small percentage
changes are a lot of money. The total reduction in discounted
real GDP over the 2009-2030 period is 0.10 percent, which is
$232 billion, relative to the reference case. Should I stop?
The Chairman. Howard, could I just ask you to interrupt
your testimony for a minute. We have our 12 Senators to do this
business meeting. Let me just get that out of the way.
[RECESS]
The Chairman. Howard, why don't you continue with your
excellent testimony? Now the exit of a few of these members
should not be seen as any lack of confidence in your testimony.
Dr. Gruenspecht. I have a thick skin, but in any event, I
was saying that real total reduction in discounted real GDP
over the 2009 to 2030 period is 0.10 percent, relative to the
reference case. Impacts on projected real consumption--I know
there is a lot of focus on GDP but consumption is probably a
different way to look at well-being--shown in figure 6 are
somewhat larger. GDP and consumption impacts for the Full
Auction case are larger than those for the Phased Auction case,
due to the assumption that the much higher auction revenues in
the Full Auction case--when all of the permits, all the
allowances, are auctioned, rather than some of them being given
away--are not re-circulated into the economy beyond the $50
billion in expenditures from the proposed Climate Change Trust
Fund that is part of the proposal. This result could change
under a different revenue recycling assumption and does not
imply a general conclusion that a Full Auction will necessarily
have larger impacts than a Phased Auction. Mr. Chairman, that
concludes my testimony and I would be happy to answer any
questions you might have.
[The prepared statement of Dr. Gruenspecht follows:]
Prepared Statement of Howard Gruenspecht, Deputy Administrator, Energy
Information Administration, Department of Energy
Mr. Chairman, and members of the Committee, I appreciate the
opportunity to appear before you today. As requested in your
invitation, my testimony focuses on the Energy Information
Administration's (EIA's) recent analysis of the energy and economic
impacts of a cap-and-trade program for greenhouse gas (GHG) emissions.
The proposal we evaluated, sent to us by Chairman Bingaman and Senators
Landrieu, Lugar, Murkowski, Salazar, and Specter in September 2006,
would set specific targets for the reduction of GHG emissions intensity
of the U.S. economy and incorporate a safety valve to assure that
allowance prices remain at or below a ceiling that rises over time.
EIA is the independent statistical and analytical agency within the
Department of Energy. We are charged with providing objective, timely,
and relevant data, analyses, and projections for the use of the
Congress, the Administration, and the public. Although we do not take
positions on policy issues, we do produce data and analyses to help
inform energy policy deliberations. Because we have an element of
statutory independence with respect to this work, our views are
strictly those of EIA and should not be construed as representing those
of the Department of Energy, the Administration, or any other
organization.
EIA's analysis (Energy Market and Economic Impacts of a Proposal to
Reduce Greenhouse Gas Intensity with a Cap and Trade System (SR/OIAF/
2007-1)), released earlier this month, compares cases incorporating the
cap-and-trade proposal to those in the reference case of the Annual
Energy Outlook 2006 (AEO2006). AEO2006 is based on Federal and State
laws and regulations in effect as of October 2005. It has recently been
superseded by AEO2007, which updates the projections to current laws
and regulations and our current analysis of market conditions. However,
given the relatively modest changes between AEO2006 and AEO2007, an
analysis starting from the new Outlook would likely produce results
that are very similar to those I will review today.
The projections included in EIA's reference and policy cases, which
extend through 2030, are not meant to be exact predictions of the
future but represent likely energy futures, given technological and
demographic trends, fixed laws and regulations, and consumer behavior
as derived from available data. EIA recognizes that projections of
energy markets over a 25-year period are highly uncertain and subject
to many events that cannot be foreseen such as supply disruptions,
policy changes, and technological breakthroughs. In addition to these
phenomena, long-term trends in technology development, demographics,
economic growth, and energy resources may evolve along a different path
than expected in the projections. For this reason, the AEO includes
many alternative cases intended to examine these uncertainties.
Generally, projected differences between cases, which are the focus of
our report, are likely to be more robust than the specific projections
for any one case.
EIA's complete report, which includes a description of the proposal
(and its full text as an Appendix), our modeling approach and our
results, as well as a discussion of uncertainties and caveats, has been
provided to the Committee and is publicly available on our web site. My
testimony summarizes key findings, focusing on the Phased Auction case,
which provides for the direct allocation of some emissions allowances
and the auctioning of others, with the share to be auctioned rising
over time as specified in the proposal. It outlines projected impacts
on energy prices, energy use, GHG emissions, and economic activity, as
well as the sensitivity of the results to technology and other
uncertainties. It also provides some comparisons to results from other
EIA analyses of policies to limit GHG emissions.
energy prices
The cap-and-trade proposal requires that fossil fuel suppliers
submit emission allowances that reflect the carbon dioxide emitted when
the fuel is burned. Fuel suppliers would presumably pass on the cost of
the allowances to consumers, leading to increases in fuel prices. As a
secondary effect, however, reduced demand for fossil fuels could lower
their supply cost at the wellhead or the minemouth, offsetting some of
the price increase due to allowances. When these effects are taken
together, however, the cost of allowances tends to dominate, so the
energy prices paid by end users generally rise.
Figures 1 and 2 * summarize the program's impacts on energy prices,
which are all expressed in real 2004 dollars and include the value of
allowances. The average retail gasoline price is 6 cents per gallon (3
percent) higher in 2020 and 11 cents per gallon (5 percent) higher in
2030 than in the reference case. Because the safety valve caps the
price of GHG allowances at $5.89 per metric ton of carbon dioxide
(CO2) in 2012, rising to $14.18 per metric ton in 2030, the
maximum direct effect of the cap-and-trade policy on the delivered
price of gasoline in 2030 is roughly 11 cents per gallon (2004
dollars).
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* Figures 1-6 have been retained in committee files.
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The average delivered natural gas price is $0.41 per thousand cubic
feet (6 percent) higher in 2020 and $0.88 per thousand cubic feet (11
percent) higher in 2030, largely because of the allowance price which
is added to the delivered fuel costs.
The average delivered coal price to electric generators, including
the cost of emissions allowances, is $0.67 per million British thermal
units (Btu) (48 percent) higher in 2020 and $1.22 per million Btu (81
percent) higher in 2030 than in the reference case. The much higher
percentage change in delivered coal prices compared to the other fossil
fuels reflects both coal's high carbon content per unit of energy and
its relatively low price in the reference case.
Because electricity consumers capture the economic benefits of the
allocation of GHG allowances to regulated utilities in areas of the
country where electricity rates are set under cost-of-service
regulation at the state level, projected impacts on the average
delivered price of electricity are sensitive to decisions made
regarding the allocation or auctioning of allowances. In the Phased
Auction case, where significant quantities of allowances are given free
of charge to electricity generators, electricity prices are estimated
to be 4 percent higher than in the reference case in 2020 and 11
percent higher in 2030. In the Full Auction case, where all allowances
are auctioned, electricity prices are estimated to be 6 percent higher
than in the reference case in 2020 and 13 percent higher in 2030. The
difference between the Phased and Full Auction cases reflects the
assumed passthrough to ratepayers of the value of allowances given to
electric generators who are subject to state-level cost-of-service
regulation in the Phased Auction case. Electricity price impacts also
vary across states and regions.
energy use
Impacts on energy use generally reflect both the size of the change
in energy prices and the availability of substitutes and alternatives
for each type of affected energy. Figure 3 summarizes projected impacts
on energy use. Projected primary energy use is 1.7 quadrillion Btu (1
percent) lower in 2020 and 2.4 quadrillion Btu (2 percent) lower in
2030 as the cost of GHG allowances is passed through to consumers,
providing an incentive to lower energy use and shift away from fossil
fuels, particularly in the electric power sector. Relative to the
reference case, fossil fuel energy consumption is 1.9 quadrillion Btu
(2 percent) lower in 2020 and 8.1 quadrillion Btu (7 percent) lower in
2030, with almost all of the change accounted for by a reduction in the
otherwise expected growth in coal use.
The reduction in petroleum use relative to the reference case
projection is less than 1 percent in 2020 and about 3 percent in 2030.
Over 70 percent of oil is used in the transportation sector, where
alternatives are limited. With impacts on retail gasoline prices
starting at 6 cents per gallon in 2012 and growing to only 11 cents per
gallon by 2030, only modest changes in vehicle purchase and travel
decisions are expected, and there is no significant impetus to fuel
switching.
Impacts on projected natural gas use are also small. Natural gas
consumption is 0.3 quadrillion Btu (1 percent) lower in 2020 and 0.3
quadrillion Btu (1 percent) higher in 2030. The electric power sector
reduces its use of natural gas in 2020, but increases its gas use in
2030, reflecting the impact of the proposal in substantially reducing
the switch away from gas generation over the 2020 to 2030 period, when
the reference case, by comparison, projects a substantial increase in
new coal-fired capacity and coal generation.
Projected coal consumption is significantly affected by the
program. Relative to reference case projections, coal use is reduced by
1.2 quadrillion Btu, or 4 percent, in 2020 and more significantly
reduced by 6.8 quadrillion Btu (20 percent) in 2030, due mainly to the
shift in the generation fuel mix that is driven by higher delivered
coal prices. In contrast to the situation in the transportation sector,
a program that places even a modest value on GHG emissions encourages a
significant shift towards alternative technologies such as nuclear and
renewables in the electric generation sector. The proposal also
significantly impacts the economic attractiveness of coal-to-liquids
(CTL) conversion. Almost all of the CTL capacity that is projected to
be built and operated in the reference case is not expected to be built
if the cap-and-trade proposal is implemented.
Figure 4 shows how the cap-and-trade proposal affects projected
electric generation capacity additions over the 2004 to 2030 period.
The projected capacity additions of conventional coal-fired technology
decline to less than a third of the reference case level.
Notwithstanding the decline in coal generation relative to the
reference case, overall use of coal is expected to increase from its
2004 level, mainly due to increased utilization of existing coal
plants. Thus, although allowance prices under the proposal are high
enough to dissuade much of the construction of new coal plants that
would otherwise occur in the 2015 to 2030 period, they are low enough
that it is still attractive to use available coal capacity through
2030. As the program continues beyond 2030, allowance prices would
likely continue to rise as the GHG emissions cap tightens and the price
trigger for the safety valve increases, eventually resulting in the
retirement of significant amounts of existing coal plants for economic
reasons. Under such a scenario, the level of coal use beyond 2030 would
likely be sensitive to the future competitiveness of coal with carbon
capture and sequestration relative to other very-low-carbon or carbon-
free generating technologies.
emissions
As shown in Figure 5, reductions in emissions of non-CO2
GHG emissions in the proposed program, which are not represented in a
detailed fashion in the EIA National Energy Modeling System, are
projected to account for 57 percent of the covered GHG emissions
reductions in 2020 and 35 percent of the covered GHG emissions
reductions in 2030. Estimates for non-CO2 GHG emissions were
developed using emissions baselines and abatement cost curves based on
engineering cost estimates that were supplied by the U.S. Environmental
Protection Agency. Real-world factors affecting the behavior of
decisionmakers and the use of incomplete cost information may result in
an overstatement of the actual level of non-CO2 abatement
achieved at each level of the allowance price. However, due to the
safety-valve feature of the proposed cap-and-trade program, the
projected energy sector and economic impacts would not change
significantly even if the assumptions used regarding the supply of GHG
abatement opportunities were too optimistic. Rather, such a situation
would tend to drive the allowance price up to the safety-valve level
earlier than projected in our analysis.
Because the safety-valve in the cap-and-trade program is projected
to be triggered in 2026, the specified GHG intensity targets in the
proposal are not fully attained beyond that date. Total emission
reductions in 2030 are estimated to be 654 million metric tons
CO2 equivalent short of the level that would satisfy the GHG
intensity reduction goal.
economic impacts
Figure 6 shows the projected effect of the cap-and-trade policy on
the projected level of real gross domestic product (GDP) and personal
consumption for both the Phased Auction and Full Auction cases. By
2030, real GDP in the Phased Auction case is projected to be 0.26
percent ($59 billion in year-2000 dollars) below the reference case
levels. The total reduction in discounted real GDP over the 2009 to
2030 period is 0.10 percent ($232 billion) relative to the reference
case. Impacts on projected real consumption, also shown in Figure 6,
are somewhat larger, reaching 0.36 percent ($55 billion) in 2030. The
reduction in discounted real consumption over the 2009 to 2030 period
is 0.14 percent ($236 billion).
As requested, EIA's analysis also included a Full Auction case in
which 100 percent of emissions allowances are auctioned beginning from
the start of the cap-and-trade program in 2012. GDP and consumption
impacts for this case are larger than those for the Phased Auction
case, due to the assumption that the much higher auction revenues are
not re-circulated into the economy beyond the $50 billion in
expenditures from the proposed Climate Change Trust Fund. This result
could change under a different revenue recycling assumption, and does
not imply a general conclusion that a Full Auction will necessarily
have larger GDP impacts than a Phased Auction.
technology sensitivities
While the AEO2006 reference case used as the baseline in our
analysis incorporates significant improvements in technology cost and
performance over time, it may either overstate or understate the actual
future pace of improvement, since the rate at which the characteristics
of energy-using and producing technologies will change is highly
uncertain.
Although the cap-and-trade program includes provisions that
allocate a portion of the allowance auction revenues for increased
federal funding for research, development and deployment, EIA,
consistent with its established practice in other recent studies, did
not attempt to estimate how increased government spending might
specifically impact technology development. In previous analyses, EIA
has illustrated how the use of more optimistic assumptions about the
timing and cost of advanced energy technologies tends to reduce
projected energy use in both baseline and policy cases. Under more
optimistic technology assumptions, specified emissions reduction
targets can generally be reached at lower cost, and the safety-valve is
less likely to be triggered.
relationship to previous eia greenhouse gas analyses
In recent years, EIA has completed several other reports on policy
proposals to limit or reduce GHG emissions. Our new report builds on
these prior analyses (all of which are available on our web site),
which taken together suggest that the economic impacts are largely
determined by the size of the energy market change required to satisfy
the policy and the speed with which the change must occur. From an
energy and economic perspective, one key factor is the extent to which
a proposed policy causes the economic obsolescence of existing energy
system capital.
In April 2005, EIA analyzed of the original policy proposal made by
the National Commission on Energy Policy (NCEP), a nongovernmental,
privately-funded entity. That proposal included a cap-and-trade program
along with other recommendations. The emission reduction targets for
the cap-and-trade program in the original NCEP proposal were less
stringent than those evaluated in our new report, but the proposed
program began in 2010 rather than 2012. In February 2006, EIA reported
on the energy and economic impacts of several alternative cap-and-trade
options, ranging from less stringent to more stringent than the one
considered in our new report.
Two EIA studies issued in 2003 and 2004 considered the original
version of the Climate Stewardship Act (S. 139), which would cap GHG
emissions at the 2000 level in 2010 and the 1990 level from 2016 on,
and an amended version of that bill (S.A. 2028) that removed a
provision for a tightening of the emissions cap beginning in 2016.
These proposals have the same 2010 start date as the original NCEP
proposal but they do not have a safety valve, and emissions are capped
at a lower level than in the proposal analyzed in our new study. The
reference cases for all studies completed before 2006, including EIA's
analyses of the Kyoto Protocol, differ significantly from the reference
case for the present study, which incorporates significantly higher
long-term real prices for oil and natural gas.
Finally, while all reference and policy case projections are
inherently uncertain, policy design differences can significantly
affect the nature of uncertainty surrounding the projected energy and
economic impacts of alternative policies to limit GHG emissions.
Inclusion of a safety-valve feature in a cap-and-trade program would
allow GHG emissions to rise above the level projected in our report in
the event that emissions reduction inside or outside the energy sector
proves to be more costly than we expect, while protecting against the
prospect of larger energy system and economic impacts in these
circumstances. In contrast, policies that impose a ``hard'' cap on
emissions without a safety-valve price for GHG credits would force the
fixed GHG emissions target to be met regardless of cost, reducing
uncertainty surrounding the GHG emissions outcome but increasing
uncertainty regarding energy and economic impacts. Policy design
differences can also influence the behavior of stakeholders after a
policy is implemented. For example, interests primarily focused on the
achievement of GHG emissions reduction targets are more likely to
support the broad availability of low-cost options to reduce emissions,
rather than insist on the use of particular technologies and the
avoidance of others if a safety-valve provision is included in a
policy.
This concludes my testimony, Mr. Chairman and members of the
Committee. I would be pleased to answer any questions you may have.
The Chairman. Thank you very much. Before we present any
questions to you why don't we hear from each of the other
witnesses on any points they think we need to understand either
about this study or otherwise on the subject. Jeff Sterba, why
don't we start with you?
STATEMENT OF JEFFRY E. STERBA, CHAIRMAN, PRESIDENT AND CEO, PNM
RESOURCES
Mr. Sterba. Good morning Chairman Bingaman, Senator
Domenici and members of the committee. Thank you for inviting
me here today. I am Jeff Sterba, chairman of the board,
president and CEO of PNM Resources an energy holding company
headquartered in New Mexico with subsidiaries in New Mexico and
Texas. We operate in both competitive and regulated markets in
both the wholesale and the retail arenas. I appreciate this
opportunity to discuss what I believe is the single greatest
long term environmental and economic challenge facing my
industry, climate change. I would like to thank Chairman
Bingaman and Senator Domenici for the bipartisan leadership
that you have demonstrated on this issue. Previously, I have
testified before this committee on key architectural details
necessary for a comprehensive climate bill and I provided
additional details in my testimony.
This morning I would like to use my comment time to focus
particularly on technology and certain economic elements
associated with this issue. I believe the most significant risk
facing my industry when it comes to addressing climate change
is the duel challenge of meeting the growing electricity demand
in an increasing cost environment and the state of low and zero
emitting technologies and their costs. We need to address
climate change in a three phase cost effective approach,
partially to allow technology to catch up that is to slow it,
stop it and then reduce the rate of growth, or reduce the
actual level. The technologies needed to achieve the maximum
goals in each of these phases have serious impediments to full
deployment. We need to remove the barriers and provide gap
funding to allow full deployment of technology that is
available today such as nuclear and in the near future, such as
carbon capture and sequestration that can slow greenhouse gas
emissions and this must include renewables, nuclear energy
efficiency, advanced coal and also cross over technologies,
like plug-in hybrids. We must more rapidly advance the capacity
to and the policy for capturing and storing CO at a much larger
scale than is currently planned. This is integral to enabling
coal to remain a viable fuel source for both economic and
energy security reasons.
Senator Domenici. Can we go back again in your testimony
and talk again about the concept of slow it, stop it and then
what else
Mr. Sterba. And reduce. This is a concept that we have
spoken of before in the last hearing and one that I strongly
support. We must first work on slowing the rate of growth of
carbon dioxide emissions and the key to that is increases in
efficiency. For example, there are technologies where we can
take existing coal fired powerplants and make them more
efficient by for example, re-blading the turbines which will
effectively allow us to produce more energy for the same amount
of fuel input. So the amount of carbon dioxide being emitted
related to the amount of energy we are producing goes down.
Alternatively, energy efficiency, the use of renewables, so we
can slow the rate of growth then bring the rate of growth to
zero and then decline so we reduce the emissions, that, the
actual declination, must occur. But the question is, when must
it occur and what are the technologies and their cost that we
can use to get it to reduce and this slow, stop and reverse
strategy which has been put forward by this piece of
legislation that has been evaluated by EIA is a critical
component to it Senator.
Senator Domenici. Alright, thank you. Thank you for your
time.
Mr. Sterba. We also need a long term price signal to
promote investment in cutting edge major capital projects such
as clean coal and advanced nuclear so we can stop emissions
growth while fueling our nation's economic growth. I believe
this is consistent with the application of a safety valve to
mitigate economic impacts while low and zero carbon
alternatives are limited and expensive. We need sufficient
financial support for basic research but more importantly
development, demonstration and deployment. The biggest gap we
must address is from promising technology in the lab to the
ability to purchase commercialized technology. Funding for near
and mid-term technology initiatives, needs to begin occurring
well in advance of mandated reductions so that cost effective
means to achieve reductions are available when they are
required.
Let me recommend four specific actions that Congress and
this committee can begin to take action on. First is the
authorization and full funding of research, but particularly
development, demonstration and deployment of more climate
friendly technologies and applications; second, the development
of large scale carbon capture and storage demonstration
projects and addressing the licensing and liability issues of
such facilities so we can maintain the viability of coal for
the future. The current projects that we have are at best
25,000 metric tons. The deployment of the regional partnerships
that are underway are in the range of 100,000 tons. A 500 mega
watt single coal unit will produce about 4 million metric tons
a year. There is a huge gap between what we are exploring and
what we have got to be ready to implement. Third, promote and
facilitate aggressive deployment of renewable energy and energy
efficiency programs of which the simplest and most important
steps can be authorizing the production tax credit for a 7 to
10 year period instead of the 2 year extensions that we have
had to live with. And second, to encourage the decoupling and
other incentive mechanisms to fully use and develop energy
efficiency alternatives at the State level. Last, moving toward
a rational climate legislation that is capable of gaining
essential bipartisan support for most the development of
climate friendly technologies that could be achieved with
existing and affordable technology in the short term and
emerging and new technologies as they become available and
economically viable and it also mitigates adverse economic
impacts that may occur in the interim. I do believe that there
is adequate information to move forward on all three, on all
four of these points. I believe that we must have a long term
market price signal but that does not impair the ability or is
not impede the ability in effectiveness of short term
mitigation that can come in the form of a safety valve or
something of that nature.
I believe the committee draft to address climate change is
a very good start to this process. It provides many of the
elements that I think are integral to being able to address
this issue and that it can be the focal point for climate
debate in the Senate. Thank you for your time and
consideration.
[The prepared statement of Mr. Sterba follows:]
Prepared Statement of Jeffry E. Sterba, Chairman, President and CEO,
PNM Resources
introduction
Good morning Chairman Bingaman, Senator Domenici, and distinguished
Members of the Committee on Energy and Natural Resources. Thank you for
inviting me here today. I am Jeffry Sterba, Chairman of the Board,
President, and Chief Executive Officer of the PNM Resources.
I appreciate this opportunity to discuss what I believe is the
single greatest long-term environmental and economic challenge facing
the utility industry: climate change. Rather than critiquing what I
expect is a thorough economic analysis by EIA, I will share with you my
views on what legislative design elements are required to forge a
political consensus on climate change legislation during the 110th
Congress.
pnm resources
But first, let me be clear that I am here today representing PNM
Resources. PNM Resources is an energy holding company based in
Albuquerque, N.M., with consolidated operating revenues of $2.3
billion. Our electric generation is primarily a mix of coal, nuclear,
wind and natural gas. Through its utility and energy service
subsidiaries, PNM Resources supplies electricity to 738,000 homes and
businesses in New Mexico and Texas, natural gas to 470,000 customers in
New Mexico, and electricity to numerous wholesale customers throughout
the southwest. Its utility subsidiaries are PNM, Texas-New Mexico Power
and First Choice Power, a deregulated competitive retail electric
provider in Texas. In November 2006, we announced a Joint Venture with
Cascade Investments for the purpose of long-term investment in both in
wholesale and retail electricity sales, electricity generation and
energy trading.
As the CEO of an electric and gas utility holding company, I
believe that prudent risk management dictates that deliberate steps be
taken to position PNM Resources and its subsidiaries to operate in a
carbon-constrained world. For example, in 2003 our Board of Directors
adopted the goal of reducing the intensity of greenhouse gas emissions
from our utility operations in New Mexico by 7 percent by 2009. Other
actions we have voluntarily undertaken to manage and reduce emissions
of greenhouse gases at PNM and our other utility subsidiaries include:
Greenhouse Gas Emissions Inventory: We have completed an
inventory of GHG emissions for our New Mexico operations and in
2007 will complete a similar company-wide inventory for all of
our operations.
Pricing Carbon in Resource Planning: We are internalizing
the costs of carbon dioxide emissions into our electric supply
planning processes to account for potential future greenhouse
gas regulations. This will enable us to make more informed
resource decisions and allocate capital based on expected
future costs of compliance with greenhouse gas regulation.
Diversifying Our Generation: We have created a diverse
portfolio of generation assets that include pulverized coal,
pressurized fluidized-bed technology, natural gas combined-
cycle, nuclear, wind, distributed solar, and demand-side
resources to provide our customers with a cleaner, less carbon-
intensive portfolio of resources.
Renewable Energy: We have a 25-year power purchase agreement
for all of the output from the New Mexico Wind Energy Center.
The 204 MW of capacity from this facility represents over 8% of
our generation capacity. In 2005, we issued an RFP for non-wind
renewable energy and a deal for independent developers to
supply power to PNM Resources from a 32 MW biomass project,
which has been signed. We have also launched a program that
pays customers $.21 per kWh in incentives payments and credits
for power produced from customer-owned solar PV systems.
Biodiesel: We have switched to using biodiesel fuel in 57
percent of our diesel-powered vehicle fleet in New Mexico.
Carbon Sequestration: We have participated in a number of
programs aimed at reducing or sequestering greenhouse gasses,
and
Energy Efficiency: We have made significant investments in
energy efficiency to offset 10% of annual energy demand growth
in our Texas service territory. In 2006, we introduced natural
gas efficiency programs to our New Mexico customers and will be
filing a suite of electric energy efficiency programs in
January 2007.
senate energy and natural resources committee workshop on
climate change
Nine months ago, I appeared before this Committee and testified on
the Committee's thought-provoking white paper, Design Elements of a
mandatory Market-Based Greenhouse Gas Regulatory System. Today, I want
to thank both Chairman Bingaman and Senator Domenici for that hearing
and for your bipartisan leadership on this vital national issue. You
demonstrate the kind of political leadership needed to steer our
country during this important debate towards an environmentally sound,
economically viable and equitable legislative solution to climate
change.
In addition to your leadership, the workshop was also timely as it
created a public dialogue around what politicians, utilities,
environmental organizations, energy producers and manufacturers and
industry believed were very polarizing issues. But it also became clear
there were potential areas of agreement among these diverse
stakeholders.
the electric utility industry
As I am sure you are aware, there are varying opinions within the
electric utility industry on mandating reductions and genuine concerns
about cost impacts on consumers and the availability of low and non-
greenhouse gas emitting technologies that can deliver electricity at
affordable prices and provide reliable service. Yet, I think there is
agreement that significant greenhouse gas emission reductions are
attainable only with a full suite of technology options, including
continued development of renewable resources, advanced clean-coal
technologies including but not limited to IGCC, carbon capture and
storage, advanced nuclear and increased energy efficiency and the
potential of plug-in hybrid vehicles. While a few of these options
currently are commercially available--though at a higher cost--many are
not. Making all of these technologies commercially available at a
reasonable cost is critical to addressing climate change in both the
short and long term.
next steps
Our legislative process is famously characterized as
``deliberative'' and there are many excellent reasons for that, but
deliberative can also mean terribly slow. I urge this Committee and
Congress to begin taking immediate action, including:
1. We need authorization and full funding of research,
development, demonstration, and deployment of more climate
friendly technologies and applications;
2. We must develop large-scale carbon capture and storage
demonstration projects and address the licensing and liability
issues of such facilities, as it is essential we maintain the
viability of coal to meet our country's energy needs;
3. We need to promote aggressive deployment of renewable
energy and energy efficiency programs, including smart metering
and plug-in hybrids; and
4. We need to move toward rational climate legislation that
is capable of gaining essential bipartisan support and promotes
the development of climate friendly technologies that can be
achieved with existing and affordable technology in the short
term, and emerging and new technologies as they become
available and economically viable.
In the past, we have seen numerous climate bills that--based on the
state of current technologies--are unrealistic approaches to addressing
climate change on a national level. We will not make real progress in
addressing this critical issue if we continue to spend valuable time on
legislation that only works in one region or state, only addresses one
sector or only promotes one or a few technologies.
Chairman Bingaman, the Committee has devoted significant time and
careful thought in the development of a comprehensive proposal to
address climate change. More than any other proposal, the Committee
draft recognizes the limits of today's commercial technology and the
economic risks currently associated with addressing climate change for
my industry and our ratepayers. It begins with modest reductions but
through the five-year review has the flexibility to implement more
aggressive emission reductions made possible by technology advancement.
The draft creates and allocates funds for critical technology
advancement, though we need to find means to advance the availability
of such funding. And, it utilizes a cost control mechanism that avoids
adverse economic impact while enabling a long-term price signal for
major capital projects. For all of these reasons, I believe the
Committee draft to address climate change should be the focal point of
the climate debate in the Senate.
conclusion
Thank you for your time and consideration. I would be pleased to
answer any questions you might have and I look forward to being of
service in any way I can to this Committee.
The Chairman. Thank you very much.
Mr. Lashof, thank you for being here.
STATEMENT OF DANIEL A. LASHOF, Ph.D., CLIMATE CENTER SCIENCE
DIRECTOR, NATURAL RESOURCES DEFENSE COUNCIL
Dr. Lashof. Thank you. Thank you, Mr. Chairman. I
appreciate the opportunity to be here, Senator Domenici and
members of the committee. I am Daniel Lashof. I am the science
director and deputy director of the Climate Center at NRDC and
I want to start by just underlining what has been said before
appreciating your leadership and working on the critical
details of global warming legislation that are going to be
needed to move the legislative process forward.
I believe that with Monday's call to action from the U.S.
Climate Action Partnership that Mr. Sterba is part of along
with NRDC and many other leading organizations and companies
that that really changes the political landscape on global
warming and I think we have a real opportunity to enact
effective climate legislation this year so I look forward to
working with you and members of this committee to seize that
opportunity.
In summarizing my testimony I would like to make three
points about the EIA analysis and then three more general
points about emission allowance allocation. First, EIA's
analysis clearly shows that the discussion draft proposal would
have minimal macro-economic impacts on the U.S. economy. EIA
projects that GDP would grow from $10.8 trillion in 2004 to
$17.5 trillion in 2020 and over $23 trillion in 2030 with or
without the emission caps and the discussion draft and
regardless of how the emission allowance is allocated so robust
economic growth, very small deltas which get magnified in some
of the charts, but we need to keep it in mind. This is a
growing economy under all of these cases. The analysis also
indicates however, that the proposal would not reduce
greenhouse gas emissions below current levels even through
2030, and there are two reasons for this, one is the intensity
targets themselves don't decline fast enough to get emissions
down below current levels over that time frame and second, the
safety valve part of the proposal means the actual emissions
that are projected by EIA would be higher than the nominal caps
in the proposal. While in my view the discussion draft contains
many valuable proposals regarding emission allowance
allocation, faster and deeper emission reductions, such as
those proposed in the U.S. Climate Action Partnership, are
essential to prevent dangerous global warming.
My second point is that the small differences in GDP that
EIA projects under the Phased Auction verses the Full Auction
approach as I think, Mr. Gruenspecht indicated are primarily
related to the assumptions the EIA made about deficit reduction
verses tax cuts. They assume that under the Full Auction the
extra revenues would be dedicated to deficit reduction. In
their model that tends to dampen current consumption over this
time frame. If they had made a different assumption holding say
the deficit constant, and using the extra revenue for tax cuts,
I think they would have found the opposite, that the Full
Auction would actually have a slightly higher GDP than under
the Phased Auction approach.
My third point and this is probably the most important one
on the EIA analysis is that it does not reflect important
provisions of the discussion draft designed to promote energy
efficiency and deployment of advanced technology. Appropriate
analysis of these provisions would show that I think much
deeper emission reductions could be achieved with minimal
macro-economic impacts or possibly with an economic benefit.
The two primary ways in which the proposal would achieve this,
first, their provisions promote increases in energy efficiency
by overcoming barriers in the marketplace to energy efficiency
and provisions to advance the deployment of low and zero
emission carbon technologies. For example, the proposal
includes a Climate Change Trust Fund, funded through the
allowance allocation system as well as proposing dedicating
allocating allowances to States or the President to use the
revenues for similar purposes. I particularly favor the idea of
allocating a substantial portion of the allowances to States.
We are in a very good position to particularly promote energy
efficiency. EIA's analysis does not incorporate the benefits of
those critical parts of this proposal and I think it is
important that as this committee looks at this and other
proposals that include deeper emission reductions those
benefits need to really be fully taken into account.
Now let me turn to a couple more general points. First, the
emission allowances created under any Greenhouse Gas Cap and
Trade program are a valuable public asset. Deciding how to use
that asset and how to allocate it is a critical public policy
decision that Congress has to wrestle with. The stakes are very
high. If you look at EIA's projection for this proposal in 2020
the value of emission allowances allocated just in that year
would be over $50 billion. That is a lot of money by anybody's
calculation. That is not the cost of the program. That is the
value of the allowances. So it is a distributional question how
those are used. I think the allocation of these resources
should start from the principle that no one has an entitlement
to put carbon dioxide emissions into the atmosphere. Economists
widely recognize that most efficient and fair way to allocate
emission allowances is through a public auction and I believe
the revenues from that auction should be dedicated to the
purposes of the program in protecting climate change and to
other public purposes and this is precisely the approach that
New York and Massachusetts have announced that they are
planning to take in implementing the Regional Greenhouse Gas
Initiative in their States.
Second, I think that most allowances should be allocated in
a way that lowers the cost of implementing the program both to
consumers and to businesses by strategically promoting
increases in energy efficiency and widespread use of the new
technology as this discussion draft indeed does, I think that
it can go further in that direction, more of the allowances
could be allocated to those programs. As you know Mr. Chairman,
these benefits are not just theoretical, we have realized in
practice where energy efficiency is effectively promoted major
benefits. For example, in California where there have been
robust programs for many years, the per capita electricity
consumption has been stabilized over the last 30 years while in
the rest of the Nation it is increased by 50 percent. So these
types of programs make a real difference and it would make it
much less expensive to achieve emission caps at any level.
Third, I would suggest a slightly different approach to
allocating allowances in the electricity industry. Allocating
allowances to generating companies is likely to provide some
inequitable outcomes that depend on whether a particular
jurisdiction is under cost of service regulation or in a
competitive market and we know about 40 percent of the country
has competitive wholesale markets, the rest under more
traditional cost of service regulation and this problem has
already surfaced in European markets where the United Kingdom
authorities have concluded that their allocation system which
was to generators on a grandfathered basis has produced a
significant windfall profits and they are looking to change
that. Electricity distribution companies on the other hand, are
under continuous cost of service regulation in all
jurisdictions. This would give regulators a way to ensure that
the value of the allowances is used to benefit customers
through both energy efficiency and adjustments in rates. Now
for some companies like Mr. Sterba's at least in New Mexico
there is no difference between the two, it is the same thing
but in other jurisdictions where there is wholesale competitive
markets it would make a difference and so I urge you to
consider that. Exelon proposed something similar in the
workshop that you held earlier last year.
So in conclusion, let me just finish by saying I think
EIA's analysis provides an upper bound on the cost of
implementing the discussion draft but it fails to account for
important provisions designed to promote increases in
efficiency and deployment of low carbon technologies. Congress
should allocate emission allowances strategically to reduce
compliance costs and account for the benefits of this approach
in the analysis that it considers of proposals. This will be
particularly important for proposals that would require
emissions to be reduced substantially below current levels
which I believe is necessary to prevent dangerous global
warming. Thank you, Mr. Chairman.
[The prepared statement of Dr. Lashof follows:]
Prepared Statement of Daniel A. Lashof, Ph.D., Climate Center Science
Director, Natural Resources Defense Council
introduction
Thank you for the opportunity to share my views regarding the
Energy Information Administration's analysis of Chairman Bingaman's
greenhouse gas cap-and-trade discussion draft proposal.\1\ My name is
Daniel A. Lashof, and I am the science director of the Climate Center
at the Natural Resources Defense Council (NRDC). NRDC is a national,
nonprofit organization of scientists, lawyers and environmental
specialists dedicated to protecting public health and the environment.
Founded in 1970, NRDC has more than 1.2 million members and online
activists nationwide, served from offices in New York, Washington, Los
Angeles and San Francisco.
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\1\ Energy Information Administration, 2007. Energy Market and
Economic Impacts of a Proposal to Reduce Greenhouse Gas Intensity with
a Cap and Trade System. U.S. Department of Energy, Washington, DC. SR/
OIAF/2007-01 (January).
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My testimony will discuss EIA's key findings and shortcomings of
EIA's analysis, particularly with respect to the treatment of energy
efficiency and technology deployment programs. I will then turn to more
general comments on the emission allowance allocation system proposed
in the discussion draft.
emissions rise instead of fall
The Energy Information Administration (EIA) analysis of Chairman
Bingaman's greenhouse gas cap and trade discussion draft demonstrates
that the proposal would have minimal macroeconomic impacts on the U.S.
economy regardless of how emission allowances are allocated. The
analysis also indicates, however, that the proposal would not reduce
greenhouse gas emissions below current levels through at least 2030,
although it would slow the rate of emission growth. Emissions grow
under the proposal for two reasons: First, the specified reductions in
emissions intensity are not rapid enough to reduce emissions below
current levels by 2030, and second the ``safety valve'' provision of
the proposal allows emissions to substantially exceed the nominal cap.
While the discussion draft contains many valuable proposals
regarding the allocation of emission allowances, faster and deeper
emission reductions, such as those proposed by the U.S. Climate Action
Partnership in its January 22nd Call for Action,\2\ are essential to
prevent dangerous global warming.
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\2\ www.us-cap.org.
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macroeconomic impacts are minimal
EIA's conclusion that there would be minimal macroeconomic impacts
from a greenhouse gas emissions cap and trade program such as the
Bingaman discussion draft is robust. Regardless of how emission
allowances are allocated EIA finds that the impact on the present value
of Gross Domestic Product (GDP) would be less than 0.2 percent, not
accounting for the health and environmental benefits the program would
produce.
EIA's analysis suggests that macroeconomic costs would be somewhat
higher if all the emission allowances issued under the program are
auctioned than under the ``Phased Auction'' approach outlined in the
discussion draft. This conclusion appears to be primarily related to
the way EIA analyzed the ``Full Auction'' case, rather than the
inherent merits of this approach relative to the Phased Auction
alternative. In particular, EIA assumes that all of the additional
revenue generated under the Full Auction would be devoted to deficit
reduction, which has a dampening effect on consumption in EIA's model
over the analysis time horizon. This result is not primarily related to
the cap-and-trade program, however. Any deficit reduction policy
considered in this model would likely yield similar results.
Conversely, had EIA assumed that the additional revenue from the Full
Auction was used to cut taxes, holding the deficit constant, the model
would likely project slightly more economic output under the Full
Auction compared with the Phased Auction.
This does not imply that allowance allocation is unimportant. To
the contrary, emission allowances created under any greenhouse gas cap
and trade program will be a valuable public asset and deciding how to
use this asset fairly and effectively is a critical part of
Congressional deliberation on global warming legislation.
allowances are a valuable public asset
Policy decisions about how allowances will be allocated should
start from the principle that no one has an entitlement to pollute the
atmosphere with heat-trapping gases. An emission allowance represents a
limited permission to release one ton of carbon dioxide into the
atmosphere. This is not a property right and there is no inherent
policy rationale for allocating allowances based on historic emissions.
Rather, the atmosphere's limited capacity to accommodate emissions is a
public asset, much like the radio frequency spectrum. Economists widely
recognize that the most efficient and fair way to allocate this asset
is through a public auction. Revenues from such an auction should be
used to further the goal of solving global warming and for other public
purposes. This is precisely the approach that New York and
Massachusetts are adopting to allocate emission allowances under the
Regional Greenhouse Gas Initiative. While there may be a number of
policy and practical reasons to deviate from this principle by
allocating some emission allowances without charge, any free
allocations to the private sector should be limited and phased out over
time, and the burden should be on those proposing free allocations to
justify this approach.
The stakes are considerable. EIA projects that covered greenhouse
gas emissions under the discussion draft proposal would be 7.1 billion
tons in 2020. For each ton emitted covered entities will have to retire
one emission allowance, which EIA projects will have a market value of
$7.15 in that year. Thus the total value of emission allowances used in
2020 would be over $50 billion. Analysis by Dallas Burtraw and others
at Resources For the Future,\3\ as well as experience with the pilot
phase of the European Union Emissions Trading Scheme, shows that the
value of emission allowances greatly exceeds the impact of the
emissions cap on the profitability of firms covered by the program.
Hence, there would be substantial windfall profits were all of the
emission allowances to be distributed for free to the private sector,
particularly for firms operating in competitive markets in which
increased marginal costs will be passed through to consumers.
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\3\ http://www.rff.org/Documents/RFF-DP-05-55.pdf.
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allowances should be allocated strategically
In addition to being fair, the allowance allocation approach should
strategically promote increases in energy efficiency and widespread use
of available low carbon technologies. NRDC recommends devoting most of
the value of emission allowances to these purposes in order to reduce
costs for both. consumers and businesses. While the discussion draft
proposal stops short of this, it does appropriately devote a
substantial portion of the value of allowances to promoting increased
energy efficiency and deployment of advanced zero- and low-carbon
technologies. This includes not only the $50 billion Climate Change
Trust Fund, but also the value of the portion of allowances allocated
to States or the President. Unfortunately, EIA did not analyze the
impact of these important provisions of the proposal. While analyzing
these provisions is challenging, ignoring them is misleading.
Appropriate analysis of the energy efficiency and technology
deployment provisions of the proposal would show that much deeper
emission reductions could be achieved with minimal macroeconomic
impacts or even with net economic benefits. There are two primary ways
in which these provisions would promote low cost emission reductions:
First, by overcoming market failures that prevent cost-effective
increases in energy productivity, and second by accelerating technology
innovations that reduce costs and improve performance as a function of
learning-by-doing. Neither of these effects is appropriately reflected
in the EIA analysis.
eia neglects energy productivity gains from allowance allocation
The proposed incentives for energy efficiency would overcome
barriers to cost-effective energy productivity improvements. Satisfying
energy service demands with less primary energy is the fastest,
cheapest, and cleanest way to reduce global warming pollution, and will
make it much less expensive to achieve any greenhouse gas emission cap.
This opportunity is large and consequential, as documented recently at
the global level in the Stem Review of the Economics of Climate Change
\4\ and the McKinsey Global Institute report on energy productivity.\5\
Numerous reports have reached similar conclusions for the United States
at both the state and federal level. For example, last week NRDC
released a report prepared by Optimal Energy which shows that cost-
effective energy efficiency, demand response, and combined heat and
power investments in Texas could eliminate projected electricity demand
growth and obviate the claimed need for more than a dozen new high-
emitting coal fired power plants in the state, avoiding 400 million
tons of CO2 emissions over the life of the efficiency
measures.\6\ I have attached a copy of this report to my testimony and
ask that it be included in the record of this hearing.
---------------------------------------------------------------------------
\4\ www.hmtreasury.gov.uk/independent_reviews/
stern_review_economics_climate_change/stern_review_report.cfm.
\5\ http://www.mckinsey.com/mgi/publications/Global_Energy_Demand/
index.asp.
\6\ http://docs.nrdc.org/globalwarming/glo_07011701A.pdf.
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The benefits of robust energy efficiency policies are not just
theoretical. They have been demonstrated in practice. In California per
capita electricity consumption has been held constant over the last 30
years while the rest of the nation's per capita consumption increased
by more than 50 percent.\7\ This is no accident: over the period
California has had the nation's strongest building and appliance
efficiency standards and most aggressive utility efficiency programs.
Nonetheless, EIA only considered energy demand changes related to their
projections of small changes in retail prices associated with the
discussion draft proposal, and made no attempt to analyze the effects
of federal or state incentives provided through the Climate Change
Trust Fund or through the allowances allocated to States. As a result
EIA projects that residential energy consumption in 2020 under the
discussion draft proposal (Phased Auction case) would be only 0.4
percent lower than in the Reference case. Similarly, EIA projects just
1 percent less transportation sector energy consumption in 2020 due to
the proposal.
---------------------------------------------------------------------------
\7\ http://www.nrdc.org/air/energy/fcagoals.asp.
---------------------------------------------------------------------------
eia neglects technology deployment driven by allowance allocation
EIA's analysis also fails to account for the deployment of zero-
and low-emission energy technologies induced by the Climate Change
Trust Fund and State efforts. There are two important mechanisms that
should be considered. First, the low-emission facilities that would be
built as a direct result of the proposed deployment incentives. Second,
early deployment will result in technological learning that would
improve the performance and reduce the cost of next generation
facilities, making these technologies more competitive with higher-
emitting competitors regardless of the availability of additional
incentives. Because EIA did not consider these effects, and because
allowance prices are relatively low under the discussion draft
proposal, EIA does not project any use of carbon capture and geologic
disposal technology for power plants during the timeframe of their
analysis. (It also appears that EIA did not consider the opportunity to
use industrial CO2 for enhanced oil recovery in conjunction
with geologic disposal, or they likely would have found that at least
some carbon capture and disposal would be cost effective at the
allowance prices they forecast).
allocate a portion of allowances to states
NRDC supports the idea of allocating at least 30 percent of the
available allowances to States as proposed in the discussion draft.
States are in the best position to address specific equity concerns and
promote energy efficiency and infrastructure investments that will help
achieve the cap at the lowest possible cost. For example, States are
primarily responsible for enforcing building codes and planning
transportation infrastructure, both of which can have a substantial
impact on carbon dioxide emissions.
effectively addresses competitiveness concerns
Special consideration is needed to ensure that energy-intensive
industries facing international competition are not put at a
significant disadvantage by the program. A grandfathered allocation to
these firms will not necessarily achieve this goal, however, because
their most profitable course may still be to shut down domestic
production and sell their allowances. To prevent this without creating
a perverse incentive to keep operating the least efficient, highest
polluting plants, the allocation to energy intensive firms could be
reduced in proportion to any reductions in their regional employment.
(From a broader perspective, the most efficient policy for addressing
this concern is border tax adjustments for energy intensive products
traded with countries that don't have equivalent emission reduction
programs).
allocate to electricity distribution companies rather than generators
The discussion draft proposes to initially allocate 30 percent of
the total allowance pool to electricity generators based on their share
of emissions during 2004-2006. Although this free allocation begins to
decline in 2017, nearly 15 percent of allowances would still be
allocated on this basis in 2030. This appears to be substantially in
excess of the amount that can be justified on the basis of mitigating
economic transition costs to relatively more adversely affected firms.
As a result, allocating allowances in this manner would likely result
in substantial inequities. This is because about 40 percent of ITS
generation sells its output at market prices into various largely
unregulated wholesale markets, while the rest remains subject to
diverse forms of cost-of-service price regulation.\8\ Impacts of
allocations on consumers and shareholders will vary widely and state
regulators will not be able to respond to real or perceived inequities.
In many cases, generators can be expected to pass through the increased
price of carbon regulation in their wholesale prices, and also to keep
the proceeds from the sale of allowances allocated to them initially.
Consumers obviously will see the price signal, but not the benefits
from the allowance allocation. The problem has already surfaced in
European markets, leading United Kingdom authorities to conclude that
initial allocation to electric generators serving competitive markets
resulted in large windfall profits.\9\
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\8\ This is the estimate of the Electric Power Supply Association,
which represents competitive power suppliers.
\9\ House of Commons, Environmental-Audit Committee, ``The
International Problem of Climate Change: UK Leadership in the G8 and
EU,'' p. 17 (Mar. 16, 2005).
---------------------------------------------------------------------------
Electricity distribution companies, by contrast, provide service
under continuous price regulation from either state commissions (for
investor-owned utilities, accounting for about three-fourths of retail
sales) or local boards (for publicly owned utilities and cooperatives,
which serve the rest of the nation). Regulators can therefore ensure
that consumers benefit from any allowances allocated to distribution
companies by directing funds to energy efficiency investments and long-
term emissions reductions, and by adjusting rates. Many in the utility
industry and its regulators are likely to prefer distribution company
allocation to a generator-based system (e.g., see Exelon's comments on
the Energy Committee White Paper).
Congress would have a wide range of options in making allocations
to distribution utilities, ranging from the carbon content of
electricity delivered by distribution companies to the volumes of
electricity delivered (with numerous intermediate compromise
possibilities). Utilities that distribute mostly coal-fired electricity
are likely to advocate an emissions-based formula on the grounds that
they will see the largest increase in electricity costs as a result of
the CO2 emissions cap. Utilities that distribute mostly low-
emission resources are likely to advocate a formula based on
electricity sales on the grounds that their customers are already
paying higher prices for a cleaner generation portfolio.
Whether or not the allocations should be updated over time is an
independent question. The proposed phase-out of free allocations to the
private sector diminishes the case for updating in general (the more
rapid the phase-out the less need to update the free allocation). Any
allocation based on carbon content should definitely not be updated
because that would create a perverse incentive to increase emissions in
order to obtain a larger allocation, raising the overall cost of
achieving the emission cap (or increasing actual emissions if the
safety valve is open). There is a stronger argument for updating a
sales-based formula as a matter of equity between high-growth and low-
growth areas.
Such an approach would need to include an adjustment for
independently verified energy efficiency to ensure that updating does
not create a disincentive for additional energy efficiency
improvements.
The simplest approach would be to allocate based on electricity
sales during the same historical period used for allocating to other
sectors. If Congress decides to allocate (in part or in whole) based on
historical emissions, however, calculating the carbon content of those
electricity sales is certainly feasible and should not be seen as an
obstacle to allocating to distribution companies. As long as the
allocation is to distribution companies (to avoid windfall profits) and
is not updated in a way that creates perverse incentives (to avoid
raising costs or emissions), then the specific allocation formula is a
matter of regional equity and an appropriate subject for negotiations
during the legislative process.
To prevent state regulators from masking price signals to consumers
through their regulation of distribution companies, it would be
appropriate for Congress to condition the grant of free allowances on a
requirement that a portion be used to promote energy efficiency and
that they not be used to mask the cost of carbon emissions in the form
of directly offsetting subsidies for retail electricity costs.
Of course state regulators cannot change or hide a very potent
price signal, which is the added cost of carbon-intensive generation to
its utility purchasers (and to other entities that buy power in
wholesale markets to serve retail customers). This is the most
important economic element of any cap-and-trade system for the
generation sector, because it shapes the long-term investment and
operational decisions that drive the sector's total emissions. Carbon-
intensive generation will increase in price to these decision-makers as
the cap takes effect and tightens, regardless of how retail-price
regulators decide to deal with proceeds from the sales of allowances
allocated initially to their distribution companies.
conclusion
EIA's analysis provides an upper bound on the costs of implementing
Chairman Bingaman's discussion draft proposal, but it fails to account
for important provisions designed to promote increases in energy
efficiency and deployment of zero- and low-carbon technologies.
Congress should allocate emission allowances strategically to reduce
compliance costs and account for the benefits of this approach as it
considers a range of legislative proposals. This will be particularly
important for proposals that would require emissions to be reduced
substantially below current levels, which is essential to prevent
dangerous global warming.
The Chairman. Thank you very much.
Anne Smith, we are very glad to have you today. Go right
ahead.
STATEMENT OF ANNE E. SMITH, Ph.D., VICE PRESIDENT,
CRA INTERNATIONAL
Dr. Smith. Thank you Mr. Chairman and members of the
committee. Thank you for inviting me to participate in today's
hearing. My name is Anne Smith. I am an economist and vice
president at CRA International. The opinions I present are my
own and not those of CRA.
EIA's analysis of the draft bill finds a small but not cost
lest impact on the U.S. economy. The 0.1 percent reduction in
GDP that we have heard about implies a present value cost per
person to every person in the United States of $800. The bill
also finds, the analysis also finds, significant shifts in
certain parts in the economy. EIA reports that coal demand
remains stable under the bill but this also says that the bill
would almost entirely eradicate this sectors prospects for
growth. For a business plan, that is a devastating outcome.
Nevertheless, the draft bill probably would not have
devastating impacts to the economy as a whole. This is directly
attributable to its safety valve feature and to the specific
price level associated in this bill with the safety valve. In
earlier EIA analysis showed that carbon prices would be two to
four times higher if the safety valve were to be removed and we
have every reason to expect that the current draft bill's costs
would balloon upwards in the same way if the safety valve were
to be removed from it. So if Congress wants to keep the costs
of this policy low it must keep the safety valve price low.
EIA's analysis also tells us that the emission reductions
achieved on the proposed safety valve are small. In fact,
emissions continue to rise even through 2030 in the
projections. If this is all that the draft bill would
accomplish does it make sense to pay even the small amount for
it. The emissions reductions needed to stabilize climate change
are huge. Many, many times more than this draft bill is
projected to accomplish and they have to accomplished on a
global scale. EIA's analyses shows that this simply cannot be
done at a low cost with all of our current technological
options. An affordable reduction in climate change risks will
require revolutionary transformation of energy technology
through intensive and reformed R&D policy. The current draft
bill misses this need all together and for that reason I do not
feel it is a good first step in developing a reasonable climate
policy. Some people will argue back that the draft bill's
Climate Change Trust Fund is an R&D provision including someone
sitting directly to my right who has just made that point. It
is not an R&D provision. It only provides deployment incentives
which are subsidies to technologies that are already, almost
ready, to enter the market. These trust fund subsidies also are
redundant. The carbon price serves as the deployment incentive
in this bill and by offering a second subsidy for technologies
that are going to enter the market anyway, the draft bill
creates free rider-ship at its worse. It makes the subsidies a
waste of the valuable allowance auction revenues.
The Trust Fund also reflects bad R&D policy practice as
evidenced in the past. It attempts to pick winners by rigidly
allocating funding across types of technologies rather than
letting all these types of technologies to compete for those
resources based on their successes. Also, the subsidy rules
determining which companies will win the subsidies do not pick
the projects that would provide the lowest dollar per ton
removed reductions and that should be the goal. But most
importantly of all, the subsidies fail to address the kind of
R&D that is needed to start the world down the path towards
huge, a huge emissions reduction goal without going bankrupt
along the way. The kind of R&D that I believe is needed is
basic research and basic research that seeks breakthroughs in
science and applications of science's technologies. The
challenges for us is to design effective incentives to guide
basic science researchers towards those successful outcomes in
new energy systems solutions and the draft bill never considers
these needs. What we need is a bill with provisions for
dramatically reforming basic R&D institutions, incentives and
funding. Carbon pricing provisions should support this core
role not supplant it. The low safety valve price needs to be
paired with a vision and a plan for how we will create the
astounding degree of technological change necessary to reduce
emissions at such low prices and without this businesses facing
this cap will continue to face planning uncertainty,
uncertainty that costly caps might be imposed at some point
within their investment planning horizon. So this kind of R&D
policy must be initiated immediately. The hope for any new
solutions by a time frame such as 2030 yet the policy community
is transfixed by overly complex cap and trade schemes. They
cannot have meaningful impact on emissions until decades after
such an R&D policy has been established. The draft bill has the
cart but not the horse.
Thank you for this opportunity to share my views on this
important topic. My written statement makes additional comments
that I hope will be inserted into the record.
[The prepared statement of Dr. Smith follows:]
Prepared Statement of Anne E. Smith, Ph.D., Vice President,
CRA International
Mr. Chairman and members of the committee, thank you for your
invitation to participate in today's hearing. I am Anne Smith, and I am
a Vice President of CRA International. Starting with my Ph.D. thesis in
economics at Stanford University, I have spent the past twenty-five
years assessing the most cost-effective ways to design policies for
managing environmental risks. For the past fifteen years I have focused
my attention on the design of policies to address climate change risks,
with a particular interest in the implications of different ways of
implementing greenhouse (GHG) gas emissions trading programs. I thank
you for the opportunity to share my findings and climate policy design
insights with you. My written and oral testimony reflect my own
research and opinions, and do not represent any positions of my
company, CRA International.
The topic of today's hearing is a proposal to reduce greenhouse gas
intensity with a cap and trade system that Senator Bingaman's office
has prepared. (I will call this the ``Proposed Policy'' in my
testimony). At Senator Bingaman's request, the Energy Information
Administration (EIA) has prepared estimates of the energy market
impacts and economic impacts of this proposal using its NEMS model
combined with a macroeconomic model from Global Insight, Inc.\1\ (I
will refer to this as the ``EIA report'' in my testimony.) EIA's
results are widely reported to find only small economic impacts, with
one of the most frequently cited results being that GDP would be
reduced by only 0.1% through 2030.
---------------------------------------------------------------------------
\1\ EIA, Energy Market and Economic Impacts of a Proposal to Reduce
Greenhouse Gas Intensity with a Cap and Trade System, SR/OIAF/2007-01,
January 2007.
---------------------------------------------------------------------------
While a 0.1% reduction is small relative to total GDP, it is
important to keep in mind that GDP is a very large number. A small
fraction of GDP can still be a quite significant cost in absolute
terms. For example, this small loss of GDP is equal to a present value
cost of $800 per person in the U.S. Also, it is possible to affect the
apparent size of an impact estimate by changing the benchmark that it
is compared to. For example, one could choose to compare the estimated
reduction in GDP to the total growth in GDP that would be expected in
the absence of the proposed policy. The same absolute GDP loss would
eliminate about 0.7% of the future anticipated growth in GDP.
None of these alternative ways of stating the estimated costs
indicate that the Proposed Policy's impacts are severe, or that one
should characterize the Proposed Policy as ``unaffordable.'' Clearly,
the Proposed Policy is far less costly than some of the other climate
policy proposals that are currently in play. However, the primary
reason its costs are lower is because the emissions reductions that it
offers are so much smaller. This unavoidable trade-off between
emissions reduction and policy cost was made quite clear in the earlier
analysis that EIA performed at the request of Senator Salazar for a
range of different safety valve prices.\2\ It is also apparent in the
two safety valve sensitivity cases in the current EIA report. As the
cost of the policy rises or falls, so too do the emissions reductions
achieved. In short, ``you get what you pay for.''
---------------------------------------------------------------------------
\2\ EIA, Energy Market Impacts of Alternative Greenhouse Intensity
Reduction Goals, SR/OIAF/2006-01, March 2006.
---------------------------------------------------------------------------
Thus, the EIA report offers no epiphany that we have finally found
a greenhouse gas policy approach that achieves meaningful emissions
reductions at an affordable cost. The EIA report only shows that the
degree of emissions reduction required can be reduced to the point
where the expected costs of the policy are small. The key question,
then, is whether this is a good climate policy proposal that is worth
the cost that it does impose on us. In my judgment, the Proposed Policy
can be viewed as one of the more efficient ways of imposing a cap on
emissions, but this does not make it an effective first step to a
national policy to manage and mitigate risks of climate change.
is the proposed policy an efficient way to cap emissions?
I will first address why the Proposed Policy is one of the more
efficient ways of imposing a cap on U.S. greenhouse gas emissions:
The Proposed Policy uses an ``upstream'' approach, which
offers the most comprehensive coverage of national greenhouse
gas emissions subject to the policy mechanism known as cap-and-
trade. Greater coverage of emissions translates into greater
economic efficiency for each incremental degree of emissions
reduction. The policy merits of the upstream approach for
greenhouse gas emissions have been known for a long
time,3,4 but unfortunately have rarely been included
in proposed policies.
---------------------------------------------------------------------------
\3\ Anne E. Smith, Anders Gjerde, et al., CO2 Trading
Issues, Volume 2: Choosing the Market Level for Trading, Final report
of Decision Focus Incorporated to Office of Policy, Planning and
Evaluation, U.S. Environmental Protection Agency, EPA Contract No. 68-
CO-0021, May 1992.
\4\ E.J. Balistreri, P.M. Bernstein et al., ``Analysis of the
Reduction of Carbon Emissions Through Tradable Permits or Technology
Standards in a CGE Framework,'' AERE/Harvard Workshop on Market-Based
Instruments for Environmental Protection, Cambridge, MA, July 18-20,
1999.
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An additional advantage of the Proposed Policy is that it
relies solely on the market-based measures, eschewing costly
technology standards such as automobile fuel economy standards
(e.g., CAFE). An earlier EIA report found that the CAFE
standard that was in the 2005-era ``Bingaman Amendment'' was a
very costly way of increasing emissions reductions that could
be achieved.\5\ Fortunately, it has been omitted in Senator
Bingaman's current proposal.
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\5\ EIA, Impacts of Modeled Recommendations of the National
Commission on Energy Policy, SR/OIAF/2005-02, April 2005.
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The Proposed Policy uses a ``safety valve'' to establish a
firm limit on the costs of the policy. Hard caps on emissions
(whether for greenhouse gases or any other emission) inevitably
produce high price volatility as well as risks of imposing an
unintentionally and unnecessarily costly emissions reduction
target. The experience with the EU ETS is a prime example. In
the case of a stock pollutant such as greenhouse gases, there
is no need to absorb high costs in return for great specificity
in achieving each year's emissions cap.\6\ Economists widely
agree that the cost to businesses of managing the price
uncertainty of a hard cap is not worth the greater certainty on
what greenhouse gas emissions will be from year to year.
---------------------------------------------------------------------------
\6\ Richard G. Newell and William A. Pizer 2003, ``Regulating Stock
Externalities Under Uncertainty,'' Journal of Environmental Economics
and Management, Vol. 45, pp. 416-432.
---------------------------------------------------------------------------
It is important that people understand that the analysis
method used by EIA does not capture the important benefit of
price certainty that is associated with the safety valve. If it
could do so then EIA reports on costs of various greenhouse gas
caps proposals would find much greater cost-effectiveness for
policies with a safety-valve than for policies of a comparable
cap stringency but with hard caps. It is unfortunate that the
analysis method being used by the U.S. Government to assess the
merits of greenhouse gas cap proposals is unable to demonstrate
the important efficiency improvements that a safety valve
provision provides.
Thus, the Proposed Policy has three important attributes for
ensuring that the emissions caps are imposed in an efficient manner. It
would be more efficient than any cap policies that do not embody these
attributes.
is the proposed policy a good first step for reducing climate risks?
Although the Proposed Policy would achieve domestic emissions
reductions in a manner that is generally cost-effective, I do not feel
that this makes it an effective first step towards a national policy to
reduce the risks of climate change. Three key features that are
critical elements of a cost-effective policy to mitigate global climate
risks are:
Provisions to address a pressing need for research and
development (R&D) to transform global energy systems
Consideration of developing country emissions
Long-run business planning certainty
Although the Proposed Policy has provisions that some might argue
address each of these, I feel that it fails at all three, for the
reasons I explain below.
r&d needs
The Proposed Policy would create a ``Climate Change Trust Fund''
that is supposed to provide for R&D. However, this Trust Fund only
provides subsidies to technologies that are far enough along in the
development process to have clear constituencies, yet not far enough
along to be cost-effective in the market without a subsidy. This is a
``deployment subsidy'' and should not be confused with the need for
fundamental R&D that is the central challenge for climate policy.
Further, the carbon price imposed by the cap in the Proposed Policy
provides exactly the type of subsidy that these technologies need;
additional subsidies for deployment do not need to be handed out by
Congress in the form of the Trust Fund provisions. The Trust Fund thus
creates a ``double-subsidy'' that is unneeded and wasteful.
The specific provisions for disbursement of funds under the Trust
Fund also reflect some of the worst features of bad R&D policy. A good
R&D policy for climate policy would establish incentives that align the
motivations of researchers with finding the most cost-effective carbon
emissions reductions. Once well-aligned incentives are established, the
incentives would determine the direction of R&D. In contrast, the
subsidy provisions of the Proposed Policy's Trust Fund pre-ordain the
distribution of funding among technologies. It attempts to ``pick
winners,'' an approach to publicly-funded R&D has a long history of
waste and failure. The specific allocation of subsidies among
technology categories appears to have no rationale or basis in
analysis, and even worse, the award of subsidies is not even nominally
aligned with achieving the lowest dollar per ton of carbon
reduction.\7\
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\7\ For example, Section 1627(C)(3) calls for awards based on bids
into a reverse auction for subsidies stated in terms of dollars per
megawatt-hour of electricity generated, rather than based on dollars
per ton of emissions reduced.
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More importantly, however, the Proposed Policy's subsidy
provisions--whether well or poorly constructed--fail to address the
kind of R&D needs that are requisite to begin to actually reduce
greenhouse gas emissions in meaningful amounts.
It is known, but not widely appreciated, that stabilization of
atmospheric concentrations of greenhouse gases will require the world
(not just the U.S.) to reduce greenhouse gas emissions intensity to
near-zero levels. While small greenhouse gas reductions may be cost-
beneficial, they cannot halt or even dramatically slow climate change.
Halting climate change is possible only if the large-scale greenhouse
gas emission reductions can be implemented at costs that are both
politically and economically acceptable. Incremental cost improvements
in currently developed technologies, and more rapid deployment of
technologies just now becoming affordable will not meet this need. The
magnitude of possible reductions in the next decade or two achievable
with today's technology is dwarfed by the magnitude of reductions that
successful innovation would supply through these routes.\8\
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\8\ For example, if all of the existing U.S. natural gas-fired
combined cycle generating capacity were to suddenly be fully utilized,
we estimate based on our models of the U.S. power sector that current
annual U.S. CO2 emissions would be reduced by about 80
MMTC--about a 4% reduction in total US GHG emissions--and it would come
at a cost of about $80/tonne C, even if gas prices would not be
inflated by the sudden surge in natural gas demand.
---------------------------------------------------------------------------
Hoffert et al. report that ``the most effective way to reduce
CO2 emissions with economic growth and equity is to develop
revolutionary changes in the technology of energy production,
distribution, storage and conversion.'' \9\ They identify an entire
portfolio of technologies requiring intensive R&D, suggesting that the
solution will lie in achieving advances in many categories of research.
They conclude that developing a sufficient supply of technologies to
enable near-zero carbon intensity on a global scale will require basic
science and fundamental breakthroughs in multiple disciplines.
---------------------------------------------------------------------------
\9\ M.I. Hoffert et al., ``Advanced Technology Paths to Global
Climate Stability: Energy for a Greenhouse Planet'' Science, Vol. 298,
Nov. 1, 2002, p. 981.
---------------------------------------------------------------------------
Therefore, Herculean technological improvements beyond those that
are already projected and accounted for in cost models appear to be the
only way to hope to achieve meaningful reduction of climate change
risks. As a result, no cap and trade scheme should be placed into law
that does not simultaneously incorporate specific provisions that
directly support a substantially enhanced focus on energy technology
R&D. I use the term R&D as a distinctly different concept from
providing subsidies for the initial uptake of existing but yet-to-be
deployed technologies. By R&D, I mean investment to create technologies
that do not exist today, and which would require major new scientific
breakthroughs before they could become an option that any private
entity might consider proposing in a competition for actual
implementation under a subsidy program. The R&D may entail basic
science as well as work that is identifiably on an energy technology
with low or zero carbon emissions. Subsidies aimed at bringing existing
technologies into the market, and achieving incremental improvements in
their costs, do not fit my definition of the term R&D.
Placing a price on carbon emissions, as a cap and trade program
would do, would affect the pattern of private sector R&D. However, this
so-called ``induced-innovation effect'' would be small. Economic
analysis shows that market forces produce a less than socially optimal
quantity of R&D. Once a private sector innovator demonstrates the
feasibility and profitability of a new technology, competitors are
likely to imitate it. Copycats can escape the high fixed costs required
to make the original discovery. Therefore, they may gain market share
by undercutting the innovator's prices. In that case, the initial
developer may fail to realize much financial gain. Foreseeing this
competitive outcome, firms avoid investment in many R&D projects that,
at the level of society as a whole, would yield net benefits.\10\
---------------------------------------------------------------------------
\10\ These points are developed in a more rigorous fashion in W.D.
Montgomery and Anne E. Smith ``Price, Quantity and Technology
Strategies for Climate Change Policy,'' in M. Schlesinger et al (eds.)
Human-Induced Climate Change: An Interdisciplinary Assessment,
Cambridge University Press, forthcoming 2007.
---------------------------------------------------------------------------
The task of developing new carbon-free energy sources is likely to
be especially incompatible with the private sector's incentives. With
no large emissions-free energy sources lying just over the
technological horizon, successful innovation in this area will require
unusually high risks and long lead times. As Hoffert et al. pointed
out, developing the needed technologies will entail breakthroughs in
basic science, placing much of the most essential R&D results beyond
the boundaries of patent protection. These are precisely the conditions
under which for-profit firms are least likely to rely on R&D as an
approach to problem-solving. Thus, greenhouse gas caps on their own
would insufficiently increase private sector R&D directed toward
technological solutions to abatement.\11\
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\11\ Further, the ``safety valve'' in the Proposed Policy is
designed to provide assurance that the price of emission allowances
will not reach economically unsustainable levels. But that causes the
carbon prices to be set at a level far too low to provide an adequate
incentive for private investors to develop radically new technologies.
Removal of the safety valve provision also is not an option, as a hard
cap would impose a degree of market risk that would be unsustainable
politically.
---------------------------------------------------------------------------
Realistically, then, government must play an important role in
creating the correct private sector incentives for climate-related R&D,
as well as in providing funding to support such incentives. This role
must be built into any cap and trade policy, in order to avoid
establishing an emissions policy that cannot fulfill expectations, and
to avoid wasteful diversion of key resources for the requisite forms of
R&D. The Proposed Policy does not appear to recognize the need for
enhanced emphasis on basic research rather than additional subsidies
for specific technologies that are already far along in the development
process. It also does not clearly define government's role or an
appropriate division of labor or risk between the public and private
sectors in the development of new technologies, whether as
commercialization and incremental improvement of existing low-carbon
technologies, or R&D for new, breakthrough technologies. Creating an
effective R&D program will not be easy, but it ultimately has to happen
if climate risks are to be reduced. The difficult decisions are how
much to spend now, and how to design programs to stimulate R&D that
avoid mistakes of the past.
developing country emissions
As discussed above, the most important feature of any policy
initiative is the impact it will have on investment in effective forms
of R&D and the successful development of radically new technologies to
provide large quantities of carbon-free energy at an affordable cost.
However, that critical attribute of a sound climate policy only
addresses emissions in the long-term. Near-term emissions reductions
are also an interest (although they should not be the primary interest,
as in most current policy proposals).
For near-term emission reductions, developing countries offer far
larger and more cost-effective opportunity for emission reduction that
mandatory emission limits on U.S. businesses and consumers. Thus, a
sound national policy for managing climate risk would place a high
priority of its near-term control policies to bring about changes in
how energy is used in developing countries. The Proposed Policy fails
to make clear linkage of its near-term reduction requirements with the
critical need to reduce emissions growth in developing country
emissions.
There are a number of ways in which the U.S. Congress could act to
increase technology transfer and encourage foreign investment in
developing countries, and these actions could lead to near-term
reductions in emissions larger than any of the mandatory limits on U.S.
emissions under considerations. A great deal of the difference in
greenhouse gas intensity between developing countries and industrial
countries can be explained by fundamental failures of markets and
institutions in developing countries. Although the most cost-effective
near-term emission reductions can be found in developing countries,
fundamental institutional and market reforms are prerequisites to
create the property rights and investment climate required for private
foreign direct investment and technology transfer.\12\ These important
needs are already a focus of the Climate Change Title (Title XVI) of
the Energy Policy Act of 2005; the Proposed Policy would be improved if
it were contain provisions to further the goals of Title XVI.
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\12\ Such policies are discussed at greater length in W. David
Montgomery & Sugandha D. Tuladhar, ``Impact of Economic Liberalization
on GHG Emission Trends In India,'' Climate Policy Center, May, 2005.
---------------------------------------------------------------------------
long-run planning certainty
The Proposed Policy attempts to address the need for business
planning certainty. However, the certainty it offers covers only what
Federally-imposed carbon prices will be. The Proposed Policy contains
no provision to preempt state greenhouse gas caps that are starting to
proliferate. This omission undermines any ability for its stable
Federal carbon price expectations to offer U.S. businesses any true
planning certainty.
Even if preemption of state cap policies were included, another
attribute of the Proposed Policy undermines the effectiveness of the
long-run planning certainty that its safety valve provides. The
proposal itself does not expect--even by 2030--emissions reductions
that begin to match the large reductions that are viewed as necessary
by mid-century for greenhouse gas stabilization by the end of the
century. As noted at the outset, the Proposed Policy does not promise
large reductions in emissions so that it can keep its costs ``low.''
Unfortunately, as noted in my section on R&D, the Proposed Policy also
fails to include any measures to address the central challenge of
reducing the cost of large reductions, which would at least provide a
vision of eventual long-run emissions reductions. Thus, supporters of
the Proposed Policy will be hard pressed to characterize this specific
policy as a first step towards a meaningful policy to manage climate
change risks. Because of this, if enacted, there would probably be
little relief in pressures to impose yet more stringent emissions
limits within the U.S. These continued pressures would leave businesses
with much less long-run planning certainty than the Proposed Policy
wishes to provide.
summary
In summary, the Proposed Policy does not offer any of the critical
attributes of an effective policy to reduce climate change risks. It
does not impose much cost on the economy, but that does not make it
worth that small cost. To nudge the Proposal towards being a low cost
policy that is worth its cost, I would recommend at least the following
steps:
1. Replace the current provisions for subsidies for nearly-
commercialized technologies with provisions to initiate of a
research program focused on expanded basic scientific inquiry
with relevance to energy system applications. Such provisions
should also call for a careful evaluation of the best ways to
establish effective R&D incentives for both public and private
sector spending.
2. Provide support for further efforts to promote technology
transfer to developing countries.
3. Add a provision that would cause the Federal policy to
preempt all present and future greenhouse gas caps in the U.S.
4. Maintain the provision for a carbon price ceiling, and an
upstream imposition of that carbon price to offer the widest
possible regulatory coverage within reasonable administrative
bounds.
Even if the proposal were to be substantially revised to focus on
true R&D needs, one might still reasonably question the need for
imposing a cap and trade form of policy. A modest carbon tax could
provide the same stable carbon price expectations and a source of
funding for enhanced R&D. A carbon tax would provide identical
emissions reduction incentives at identical costs to those of the
safety valve proposal without the political, institutional, and
analytical complications apparent in today's safety valve proposals.
The inherent complexity of a safety valve approach does not appear to
me to be justified compared to a simpler carbon tax.
does the proposed policy distribute allowances ``fairly''?
The complexity of setting up a cap and trade scheme is evident in
the detailed provisions of the Proposed Policy for how carbon permits
would be allocated. The language of the Proposed Policy does not
suggest that these allocation rules are ``fair'' or that they offer any
particular degree of compensation to those bearing the cost of the
policy. However, Appendix C of the EIA report contains a ``Discussion
Draft'' by Senator Bingaman's staff that explains the rationale for the
various provisions in the Proposed Policy. It describes the
distribution of allowances as ``an approach that fairly compensates
sectors for past investments in carbon-intensive technologies.'' \13\
The following pages then discuss the specific numerical allocations
proposed for each sector as if they were a computed estimate of the
relative needs for compensatory values of each sector.
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\13\ EIA Report, p. 85.
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Although the staff Discussion Draft makes several allusions to
estimates ``provided by EIA'' as a basis for the allocation shares
selected, there appears not to have been any true analysis of
compensation needs by sector. In fact, EIA states in the EIA report
itself: ``NEMS is not designed to evaluate the distributional impacts
of whether industries are better or worse off under a given allocation
scheme.'' \14\
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\14\ EIA Report, p. 17.
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As someone who has performed quantitative analyses of compensation
needs under different greenhouse gas policies,15,16 I do not
think that the allocation formulas in the Proposed Policy appear to
even roughly approximate the relative needs for compensation of the
various sectors. As an example, the EIA report establishes that
railroads will suffer the most concentrated impacts to demand of all
the transportation activities because of the linkage of its business
outcomes to the delivery of coal, yet the Proposed Policy does not
appear to offer any allocation at all to the transportation sector. At
the same time, the Proposed Policy would give 2/55 of the allowance
pool to natural gas processors (a value of about $1.5 billion per year
in 2012 alone), even though there is no clear reason why natural gas
processors would suffer any financial impact under a greenhouse gas
cap.
---------------------------------------------------------------------------
\15\ Smith, Anne E., Martin T. Ross, and W. David Montgomery,
Implications of Trading Implementation Design for Equity-Efficiency
Trade-Offs in Carbon Permit Allocations (Charles River Associates,
December 2002).
\16\ Smith, Anne E. and Martin T. Ross, Allowance Allocation: Who
Wins and Loses Under a Carbon Dioxide Control Program? Prepared for the
Center for Clean Air Policy (Charles River Associates), February 2002.
---------------------------------------------------------------------------
I could continue the list of inconsistencies between the allocation
formulas in the Proposed Policy with likely requirements for ``fair
compensation,'' but the more important point is that people should not
be misled into thinking that the allocation formulas in the Proposed
Policy are ``fair'' in light of any specific objective. Their
specificity does not reflect precision in, or indeed any formal
estimation of, the relative compensation claims of various sectors, or
of businesses within sectors.
The Chairman. Thank you very much.
Jason Grumet, we are glad to have you here and thank you
for all your good work in getting this proposal to where it is
at this point.
STATEMENT OF JASON S. GRUMET, EXECUTIVE DIRECTOR, NATIONAL
COMMISSION ON ENERGY POLICY
Mr. Grumet. Thank you Chairman Bingaman. This new
technology, I guess I am just not quite up to it. Chairman
Bingaman, I thank you and also Senator Domenici for the
opportunity to be here on behalf of the Energy Commission.
Chairman Bingaman, I think what I would like to do is just
speak for a moment upon the world in which we find ourselves in
which means the opportunities to advance this discussion and
then focus on the EIA analysis and on some of the comments that
we have just heard to inform the discussion on how to move
ahead.
This committee, Chairman Bingaman, has done a great service
by advancing the discussion on the specific aspects of what it
will take to move legislation forward in a bipartisan fashion
that could generate the kind of support necessary to act. The
sense of the Senate resolution passed in the summer of 2005 did
two very important things. First of all, it asserted that we
have an imperative to act that as long as the price of venting
a ton of carbon into the atmosphere is zero there will not be
incentives for the very kind of logical things that Mr. Sterba
was suggesting should take effect. At the same time that
resolution identified some obvious parameters that would be
necessary in order for this country, I think, to move forward
in a mandatory way and those are that we have to have a
mandatory economy wide market based program that does not harm
the economy and that is linked to actions in developing
countries. Most significant, I believe what we hear today is
that the EIA analysis confirms that while certainly imperfect,
I think Dr. Smith and Dr. Lashof have both made very good
points about opportunities to improve the legislation that the
basic structure of the bill fulfills that mandate in the sense
of the Senate resolution and I think just pausing for a moment,
that is a very important realization. We are now at the point
of trying to figure out very important details, but the basic
framework has been established.
Also important to recognize is there are very different
approaches being put forward in the U.S. Congress for dealing
with climate change and they all are supported by good science.
There are those supported by good atmospheric science which
indicate as the Commission believes, that we must achieve a 60
to 80 percent reduction in global emissions and then we must do
so with urgency and those bills therefore assert that we have
to have absolute hard caps that achieve those reductions. Those
are consistent with good atmospheric science. There are bills
that have good economic science behind them. Those are bills
that understand the uncertainties inherent in technological
progress and the inability to know exactly what those costs
will be and they also recognize the uncertainty and actions of
other nations and recognize the competitive issues that Senator
Domenici mentioned early on. So when, when our Commission sat
back and kind of reflected on good political science we came to
the conclusion that what was necessary was a first step that
was designed to address those very real and serious economic
uncertainties while providing an architecture on a robust basis
for moving a country forward and I think that is really what
the EIA results suggest is possible. Now sadly, this approach
wins enthusiasm from very few. It is neither absolutely
protective enough to satisfy those who rightly recognize the
urgency of the environmental challenge nor is it absolutely
clear that it will have no costs or will have no negative
impacts on industries that many of us care deeply about. But,
we believe it is ultimately the only way to move the Nation
forward, not only to reduce our own emissions but to bring us
back into a posture where we can act effectively to get China
and India and the rest of the world to join us in an effective
approach.
So let me comment for a moment on the specifics of the EIA
analysis. There was a certain intent to make sure that this
proposal would not harm the economy and some of our mutual
friends, Senator, I think that we outdid ourselves. It is clear
that these costs are extremely low. Dr. Lashof indicates that
EIA also has not incorporated certain aspects of the
technological benefits that could bring prices lower and for
that reason I think we share the sense that there are
opportunities to strengthen aspects of the legislation while
still abiding by the requisite requirement, not to harm the
economy.
Our Commission is meeting on Friday actually. We are going
to be evaluating options and looking at questions whether we
could suggest strengthening the reduction targets,
strengthening the cost cap or I think most significantly trying
to speed the transition from the slow to the stop phase. We
very much believe there has to be a slow phase. We have a lot
of momentum in the system and if we try to throw it in reverse
right away there could be some disruption. We initially had
proposed a 10 year slowing of emissions but I think now we are
believing that something shorter than that, possibly a 5 year
transition from slow to stop may be more appropriate. We hope
to come back to you with suggestions, but Mr. Chairman, no
matter how we move forward we think there are three
fundamentals that have to be sustained if we are going to have
real progress.
The first is that this has to be a gradual approach
initially and it has to be supported by real technological
support, both to bring commercialization forward more quickly
and I think as Dr. Smith suggests for that longer term goal. It
is that combination of a modest reduction target and real
support for technology that brought unusual organizations like
the United Mine Workers, the United Steel Workers, the United
Auto Workers to support our proposal and the legislation you
were considering because they recognize that there was an
opportunity if things were done thoughtfully to provide new
technology that would allow those industries to move forward
and succeed before the costs of the emission reductions became
really damaging to their future.
Second Mr. Chairman, we believe that this has to be an
iterative approach. The collective action nature of the problem
is this me, Mr. Chairman or is this the vote? I have this
effect on people. Well, maybe that did it. We believe that this
has to be an iterative approach. The collective action nature
of the problem, the fact that we can not solve the problem
unless we have action by all developed and developing countries
leads us to believe that no matter how much we desire a 50 year
certainty, it is just not realistic. I think it is more
political cosmetics than reality whether you are articulating a
10 or 15 year path saying that you are going to iterate or
whether you are asserting a 50 year path and asserting that it
is locked in. The truth is that this is an issue that Congress
is going to have to revisit on a regular basis and we believe
that that should be understood and explicit from the outset.
And finally, we believe that the program has to be cost
certain. This is still a rather polarized debate going from one
camp to the other and saying trust me, it is going to be cheap,
does not tend to have a lot of beneficial impact.
I think we heard from all of the folks speaking today that
there are differences of opinion about how quickly technology
will advance. Those are the differences that lead you to
believe that the program will either be expensive or cheap. I
personally tend to be more of a technology optimist. I do not
think that a safety valve is going to in fact reduce the
ultimate impact of the programs significantly but I also
recognize that the person I am trying to convince is not myself
and we have found that when we have tried to move this
discussion forward and broaden the coalition, the ability to
say that absolutely under no circumstances can the cost of the
program be higher than a set, you know, predetermined price has
been incredibly important to bring this discussion, I think,
closer to a central point from which you can actually now try
to come up with some details.
So let me close by simply saying that we continue to
greatly appreciate the opportunity for this discussion. We
think this committee is having the kind of discussion that is
necessary to really advance the debate and in particular, the
decision to submit the draft proposal for the rigorous analysis
EIA has done allows us to have a public discussion where you
have equal attentions of the costs and benefits on the table at
the same time and we think that is the kind of discussion that
is going to, that will ultimately allow us to build the
coalition necessary for action. Thank you.
[The prepared statement of Mr. Jason Grumet follows:]
Prepared Statement of Jason S. Grumet, Executive Director, National
Commission on Energy Policy
Good morning Chairman Bingaman and Members of the Committee. I
speak to you today on behalf of the bipartisan National Commission on
Energy Policy. The Commission is gratified that our recommendations on
climate change continue to inform this Committee's deliberations and I
appreciate the opportunity to speak with you today regarding the Energy
Information Administration's analysis of Chairman Bingaman's draft
legislation. In the summer of 2005, this Committee played a critical
role in moving the Congressional debate on climate change forward by
winning Senate adoption of a landmark resolution recognizing the
importance of the climate problem and, for the first time, putting this
body on record in support of the need for mandatory efforts to reduce
greenhouse gas emissions. I continue to believe that in years to come,
passage of this resolution will come to be seen as a pivotal moment in
the evolution of our collective response to the risks posed by climate
change. I commend Chairman Bingaman, Senator Domenici and many others
on this Committee for their leadership on this issue.
The Sense of the Senate resolution represents a critical milestone
because it recognizes the urgency of taking mandatory action on climate
while also establishing conditions that must be met to craft an
effective, responsible, and politically viable path forward. The
resolution calls for an approach that will slow, stop, and reverse the
growth of greenhouse gas emissions. But it also emphasizes the need to
adopt an approach that is market-based, will not significantly harm the
U.S. economy, and encourages comparable action by other nations that
are major trading partners and key contributors to global emissions.
We are now moving to the next phase of the legislative process, in
which the laudable goals of the Senate resolution must be translated
into specific language that can win the support of Congress. The
Commission is very supportive of the process this Committee is pursuing
to reduce the polarization that has dominated past climate-change
debates and build the bipartisan consensus necessary to enact
legislation. It is clear that the draft bill analyzed by EIA benefited
greatly from detailed input received as a result of the program design
workshop this Committee conducted last year. New provisions that
address key issues such as permit allocation and emissions offsets with
greater specificity than ever before will add much to the continuing
discussion. It should also be noted that the bill under discussion
proposes somewhat stronger emission reduction targets than the similar
legislation EIA analyzed in 2005. The Commission believes that further
opportunities exist to strengthen this legislation while still abiding
by the requirements of the Sense of the Senate Resolution and we hope
to share more specific suggestions--as well as our current thinking on
other key design issues such as allocation, point-of-regulation, and
emission offsets--with the Committee in the coming weeks.
Chairman Bingaman, the Commission is very encouraged by your and
Senator Specter's decision to circulate a discussion draft and initiate
an ongoing series of staff working sessions to hammer out the tough
questions that remain. Submitting your legislation for detailed
economic analysis prior to entertaining a larger public discussion
reflects a continued commitment to serious engagement with the concerns
that must be overcome to advance this debate. We hope that advocates of
other climate proposals will also see the value of subjecting their
ideas to a similar degree of scrutiny.
For the remainder of my testimony, I would like to focus first on
the substance of EIA's findings and then on the implications of these
findings as Congress goes forward to design an effective legislative
approach, on climate change.
summary of impacts
The EIA analysis of Senator Bingaman's proposal allows us to
directly address one of the questions at the heart of the debate over
climate legislation: Is it possible to take a meaningful first step to
limit greenhouse gas emissions without harming the economy? EIA's most
recent analysis again demonstrates that the answer is yes. This
conclusion is in line with EIA's assessment of a similar proposal from
NCEP that was analyzed at the request of Senator Bingaman in 2005. EIA
said of that proposal that the overall growth rate of the economy
during the period of analysis was ``not materially altered.'' For
Senator Bingaman's current proposal, EIA found similarly minor impacts:
according to its analysis, U.S. GDP in 2030 is reduced by only one
quarter of 1 percent compared to the baseline case. This is equal to
slowing the rate of economic growth by roughly one month over the next
20+ years.
It is also important to emphasize that EIA's analysis does not
include positive benefits from the $50 billion the current proposal
would generate over the next 20 years for technology incentive
programs. These funds would accelerate the development and deployment
of the breakthrough technologies--such as advanced coal gasification
with carbon sequestration, cellulosic ethanol, and renewable energy--
that will be necessary to achieve significantly deeper emissions
reductions in the future. In other words, if EIA had used more
optimistic technology assumptions to reflect the bill's significant
technology incentives, the analysis would likely have shown larger
emission reductions at even lower cost.
EIA's analysis also shows modest impacts on energy use and prices.
While growth in coal use is projected to slow by more than 50 percent
compared to the business-as-usual (BAU) baseline case, EIA predicts
that overall coal use will continue increase under the proposed policy
even without accounting for the new markets that will be created by
IGCC and sequestration. When crafting its recommendations, the
Commission worked closely with the United Mine Workers to develop a
strategy that would initiate the transition toward a low-carbon future
while providing an opportunity for carbon sequestration and other
carbon management approaches to mature before rising carbon prices
would render coal-based energy uneconomic. By pairing initially modest
emission reduction targets with a robust package of technology
incentives, this legislative draft aims to effectively address the
legitimate concerns of the coal sector.
Another important concern addressed in the EIA analysis is the
impact of carbon constraints on already tight U.S. natural gas markets.
Here again, the new results are reassuring: natural gas consumption
remains essentially unchanged despite somewhat more stringent program
targets. Throughout the forecast period, natural gas use ranges from 2
percent below the BAU level to 1 percent above the BAU level.
Of course, a very small fraction of a very large economy can still
look like a lot of money if taken out of context. You will undoubtedly
hear from critics that the proposal will cost $232 billion in lost GDP
between 2009 and 2030. What the critics are less likely to mention is
that this is just a tiny fraction (one-tenth of 1 percent) of the more
than $240 trillion of cumulative growth in GDP the economy is expected
to generate over the same time period.
To say that greenhouse gas limits can be imposed without harming
the economy is not to claim that the program is costless. Any honest
debate will need to acknowledge that there are costs and that--as with
any public policy intervention--there will be winners and losers. We do
not doubt that innovative and efficient companies can prosper under a
carbon mitigation regime. Moreover we believe that the technological
innovation sparked by a carbon price signal could well produce net
benefits for our entire economy in the long run. In the near term,
however, the same price signal will impose new costs on fossil fuel
consumption and reduce the value of carbon-intensive capital stock. So
yes, there will be costs. But as always, the real choice is not between
some cost and no cost. Rather the relevant question is whether the
costs of action are reasonable and justified when compared to the
liabilities of inaction. Two years after the Senate adopted its
landmark resolution we think the answer to that question is clearer
than ever. We also remain convinced that the quite modest economic
impacts of the approach we have proposed can be effectively mitigated
by thoughtful program design and through the equitable allocation of
emission permits.
implications of the eia analysis
The trade-off for the modest costs found by EIA is that the program
being analyzed also achieves relatively modest emission reduction
benefits, at least in its early stages. In light of recent scientific
developments and the time that has passed since NCEP's 2004
recommendations, the Commission has begun evaluating opportunities to
strengthen its original proposal and still meet the criteria of the
Sense of the Senate resolution. In particular, we are analyzing
modifications that would strengthen program targets as well as possibly
increase the starting price of the safety valve and/or the rate at
which that price rises over time. We are also evaluating options for
speeding the transition between the slow and stop phases of the
program's target emissions trajectory. Our original report recommended
a ten-year period aimed at slowing emissions growth, followed by a ten-
year period designed to stop further growth. We are presently examining
approaches that would stop emissions growth within five years and
reduce overall emissions no later than ten years after program
implementation. It is important to stress that any changes in our
recommendations will be predicated on the conclusion that a moderate
strengthening of the program can be achieved while still meeting the
test of no significant harm to the economy.
Even as we examine opportunities to strengthen our original
recommendations, the Commission remains firmly convinced that certain
elements are essential to the economic and political viability of any
climate proposal. We start with an acknowledgment that trade-offs
between the timeliness and stringency of action are unavoidable. It's
clear that significant reductions in absolute emissions will eventually
be necessary to stabilize atmospheric greenhouse gas concentrations.
But faced with a disconnect between what is required and what is
politically feasible in the near-term, we conclude that timely adoption
of a policy that sets initially modest targets while establishing a
robust basis for long-term progress is more ecologically protective
than continued delay in pursuit of more aggressive targets. Simply put,
there is no time to lose, especially when one considers that mandatory
action by the United States remains the necessary predicate for action
by other major emitting nations such as China and India.
The Commission's emphasis on the necessity of a major technology
program to spur the development and deployment of lower-carbon
technologies follows directly from our judgment that near-term progress
demands a policy with modest initial costs. The $50 billion package of
technology incentives created and funded by the draft legislation
provides a critical complement to the long-term market signal created
by the emissions trading program. We strongly believe that a combined
strategy of market signals and robust technology incentives is the most
effective and least costly way to achieve a meaningful shift from
business-as-usual trends, while equitably sharing the burden of
emissions mitigation among shareholders and taxpayers.
We also continue to believe that cost certainty is critical to
forging the political consensus needed to move forward without further
delay. The Commission recognizes that the decision to include a
``safety-valve'' to cap costs under an emissions trading program is
highly controversial. Nevertheless, we remain convinced that this
approach provides a uniquely effective response to the economic and
competitiveness concerns that continue to motivate opposition to
mandatory action. At some point in the future, we anticipate that the
need for environmental certainty is likely to outweigh the need for
cost certainty. Indeed, once there is greater international consensus
about the ultimate goal of emission reduction efforts and about the
means necessary to achieve that goal it will likely be appropriate to
transition away from the safety valve toward firm emission caps. Again,
our hope is that near-term action by the United States will hasten
progress toward a truly effective and equitable global response to the
climate problem. Meanwhile, we recognize that other legislative
proposals propose alternative approaches to containing program costs
and welcome further analysis and debate on which mechanisms best
address the cost and competitiveness concerns that have been raised by
labor unions, energy-intensive industries, consumer groups, and others.
Finally, although it is not specifically the subject of this
hearing, we continue to believe that any successful national policy
must place considerable emphasis on promoting wider international
cooperation. By some accounts, China is now adding new coal capacity at
the rate of one large power plant every week to ten days and is set to
surpass the United States in total carbon emissions as early as
2009.\1\ Though some will argue that this sobering development weakens
the case for unilateral action by the United States, the Commission
draws the opposite conclusion. In our view, the current trajectory of
global emissions instead underscores the liabilities of continued
paralysis. If one accepts that rapidly industrializing countries like
China and India are likely to accept emissions limits only after the
United States and other wealthy nations have demonstrated a willingness
to take the lead, it follows that postponing action will come at a high
price--not just in terms of U.S. emissions but in terms of prolonging
business-as-usual trends in other countries. At the same time, we
continue to believe that once the United States takes action, it is
imperative that our major trade partners and other large emitters
follow suit. We therefore support the five-year review provision in the
Bingaman proposal, which would link continued tightening of the
emissions target and further increases in the safety valve price to
significant action by these countries.
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\1\ See http://select.nytimes.com/search/restricted/
article?res=F50B 12F83A5B0C748CDDA 80994DE404482.
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In closing, the Commission believes that the discussion draft you
have circulated presents a sound framework for legislative action. The
results of the EIA analysis are very helpful and give grounds for
optimism that a viable policy consensus is in reach. Indeed, as we have
indicated in this testimony, the EIA results suggest to us that there
is room to further improve the bill consistent with the requirements of
the Sense of the Senate Resolution. We look forward to exploring those
opportunities and addressing other key details of program design with
the Committee and other stakeholders as this process moves forward.
The Chairman. Thank you very much.
Let me ask a few questions, then we will have 5 minute
rounds and Senator Domenici will follow me.
Howard, let me ask you first. One issue that I believe Ms.
Smith raised is whether or not it is really worth doing this
considering the modest benefit that would be achieved. You, EIA
did an analysis this last year I believe of the impact of
EPAct, the 2005 energy bill on carbon dioxide emissions and I
have that in front of me. It says in sum, EIA's analyses
suggest that roughly 30 EPAct 2005 provisions that were
explicitly modeled are projected to reduce energy related CO
emissions by approximately 90 million metric tons in both 2020
and 2030. That is your conclusion?
Dr. Gruenspecht. Yes, that is correct.
The Chairman. Now, as I understand this analysis you
testified on today, you say that this draft proposal instead of
reducing the 90 million metric tons, would reduce greenhouse
gases during that same period well in 2020. I think the figure
you got is that it would reduce it to 562 million metric tons
and in 2030 it would be 1,259 metric tons. Am I right about
that?
Dr. Gruenspecht. That is correct, 1,259 million metric
tons.
The Chairman. Yes, 1,259 million. So that by 2030 if this
provision were adopted your best guess is that we would be
reducing greenhouse gas emissions by somewhere in the range of
12 to----
Dr. Gruenspecht. 15.
The Chairman. 12 to 15 times as much reduction as would be
the case in absence of some kind of cap and trade system. Is
that a fair statement or not?
Dr. Gruenspecht. That is a very fair statement, sir.
The Chairman. Okay. Maybe you would want to respond and
give your thoughts on Dr. Lashof's comments about how you did
not take into account some of the energy efficiency benefits as
I understood what he said that there are energy efficiency
benefits to be realized from the investment of research dollars
in this fund. I think that was the point that he was making and
maybe other benefits as well. Maybe you could respond to that.
Dr. Gruenspecht. I could do that, sir, thank you. I guess
the easiest and cheapest response would be a Goldilocks answer.
I know there was a press release I saw yesterday that some
other group criticized us for low-balling the cost and I guess
with Dan saying we are high-balling the cost I could say gee,
we must be just right if we are being criticized from both
sides, but that is not a substantive answer. I do not want to
say that. I actually think Dan's comments raised some
interesting issues, but I really do disagree with their
implication that EIA's study is biased. Our analysis is very
clear about what is included and what we do not include and
why. Without doubt, there are many cross-cutting forces and
additional complexities we do not address, and we state that
clearly in the study, but these do not all cut in one direction
as I think Dan's testimony suggests. Starting first with
technology, our report prominently
The Chairman. Give us the short version here because I
wanted to ask another question.
Dr. Gruenspecht. I will give you the pretty short version.
The Chairman. Good.
Dr. Gruenspecht. Basically we have done a lot of work on
technology in our previous reports--both the one done in
response to your original request and Senator Salazar had a
request last year.
Clearly, more advanced technology lowers the cost of
achieving emissions reductions but we really cannot see any
correct way to link increased Federal expenditures to the state
of energy technology. So we have looked at the effect of better
technology and it is to reduce the cost of reductions. We also
agree on energy efficiency, but I would say that some of the
policies that NRDC suggests have a decidedly mixed historical
experience. For example, some demand-side management programs
and some, I guess what is called, strategic promotion of
technology programs, I am sure many of you in this committee
are familiar with something called PURPA, which I think you
repealed last year. There was a lot of strategic technology
promotion in that statute. Some of that strategic technology
promotion ended up being quite expensive, and I recall that
some of the States that took the strongest efforts under PURPA
actually were some of the States that had the highest, that
ended up with the highest electricity prices and because of
that got led into restructuring in the late 1990's. That had
problems of its own, frankly, but the notion that all this
strategic promotion and targeting is going to make things work
better is not necessarily the case. Again, their testimony
talks about allocating allowances based on moving off the
historical allocation to some kind of incentive or strategic
allocation, to the extent that allocations are used to buy down
consumer costs. You are going to attenuate the consumption
response to the extent that you tie allowances to specific
technologies; you may not get the lowest-cost responses. So
there are a lot of issues here. The bottom line--in my world,
when you want to make an omelet you break some eggs, although
you try to do as careful a job as you can to hold down the
number. Dan's sort of suggesting that when he makes an omelet
he finds more eggs in his refrigerator than he started with.
Again it is a nice thought, but there is a lot going on here.
It is difficult to see how reducing use of technologies and
processes that the market finds economically attractive, like
burning coal, and replacing them with more expensive options is
likely to raise overall economic performance. That does not say
we should not do it.
Even if limiting emissions engenders some cost, it can
still be very desirable public policy if the environmental
benefits are such that the limitations serve to increase
overall social welfare. You guys all have a hard task in front
of you. EIA does not look at benefits. We have a very limited
role in this. We try to do that role well. We think we have
done it well. It is not easy.
The Chairman. Thank you very much. Let me stop with that
and call on Senator Domenici for his questions.
Senator Domenici. Well, with all of that I don't know
whether I have any but, let me go with you, Doctor, a little
bit more if you can stand it. The EIA analysis projects a small
decrease in the Gross Domestic Product under the proposal and
the EIA model tell us more about the impacts, specific
industries, for example which U.S. industries would see job
loses. Can the EIA model tell us anything about regional
impacts? I don't want you to give us the whole, the result
today; I want you to just tell us, can you?
Dr. Gruenspecht. Yes, we can do some of that.
[The following was received for the record:]
The National Energy Modeling System (NEMS) used in this analysis
does produce energy market results at various regional levels \1\ and
industrial sector economic results at the national level. With respect
to the energy sector, significant variations in regional results are
seen in the electricity and coal markets. In the industrial sector, the
most significant impacts occur in the energy-intensive industries.
---------------------------------------------------------------------------
\1\ For example, electricity markets are represented for 13 regions
based on the regions and subregions of the North American Reliability
Council (NERC).
---------------------------------------------------------------------------
electricity and coal markets
All regions of the country are projected to face higher electricity
prices in the Phased Auction case of the September 2006 proposal that
EIA was asked to analyze (Figures 1 and 2).* The largest price
increases are projected in regions where electricity prices are set
competitively and where coal generation accounts for a large share of
total generation. In these regions, the costs of holding all the needed
emission allowances will be fully reflected in consumer prices. For
example, electricity prices in the MAAC and ECAR regions are projected
to be 17 percent and 14 percent higher, respectively, in the Phased
Auction case in 2030. Conversely, the electricity price impacts are
projected to be smaller in regions that still have an average cost
pricing regime and do not depend as heavily on coal. For example, 2030
electricity prices in the California and NWP regions are projected to
only be 4 percent and 5 percent higher, respectively, in the Phased
Auction case.
---------------------------------------------------------------------------
* Figures 1-4 have been retained in committee files.
---------------------------------------------------------------------------
The reduced use of coal in the power and liquid fuels (i.e., coal-
to-liquids diesel production) sectors affects coal production in all
areas of the country (Figure 3). In absolute terms, western coal
production is projected to be most impacted, falling 253 million tons
(24 percent) below the reference case in the Phased Auction case in
2030. This occurs because, in the reference case, western coal regions,
particularly the Powder River Basin in Wyoming and Montana, were
expected to be the dominate growth areas for coal production. In the
Phased Auction case, power companies turn to new nuclear, natural gas,
and renewable plants to meet growth in the demand for electricity,
reducing the need for greater coal production. Even with this change,
western coal production in 2030 in the Phased Auction case is 30
percent higher than 2004 production. Eastern coal production in 2030 is
projected to be 142 million tons (22 percent) below the reference case
level in the Phased Auction case, about the same level that was
produced in 2004.
impacts on industry output
In the Phased Auction case, the price of allowances directly
increases the costs in emitting sectors and leads to increases in
energy prices that raise the factor input costs for all industries.
This leads to changes in the demand for goods and services, as
reflected in the final demand categories of consumer spending,
investment, government spending and trade, and causes industries to
adjust their production accordingly. Figure 4 shows the average annual
loss in gross output relative to the reference case for the period 2009
to 2030 for the Phased Auction case. The energy-intensive manufacturing
industries \2\ are impacted the most, with output projected to be
reduced by an average of 0.82 percent. Non-energy-intensive
manufacturing is reduced by an average of 0.57 percent, non-
manufacturing industries by 0.32 percent and services by 0.10 percent.
---------------------------------------------------------------------------
\2\ Energy-intensive manufacturing industries in NEMS include food,
paper, inorganic and organic chemicals, resins, agricultural chemicals,
petroleum refining, glass, cement, iron and steel, and aluminum.
---------------------------------------------------------------------------
Among the detailed energy-intensive industries, aluminum
production, which is a heavy user of electricity, is expected to fall
by 5.0 percent on average. Production of glass, iron and steel, cement,
agricultural chemicals and basic inorganic chemicals are also expected
to fall by more than 1 percent. Among the non-manufacturing industries,
coal mining is projected to fall by 8.9 percent, with oil and natural
gas extraction falling by 0.4 percent.
Senator Domenici. Okay, has it been done, or would it have
to get done, or going on?
Dr. Gruenspecht. Some of the work on electricity has been
done, the different regional price impacts.
Senator Domenici. We would like you to do that and submit
it to the record through the chairman.
Dr. Gruenspecht. Be glad to do that, sir.
Senator Domenici. Higher energy prices under the proposal
drive energy intensive industries to relocate to countries like
China and India where there are no restrictions on greenhouse
gases. Is that a true statement?
Dr. Gruenspecht. What we looked at was a U.S. model, not a
global one, so there is logic in what you say, but we have not
evaluated it in the context of this study.
Senator Domenici. Alright, you mean you didn't study it.
You just kept an American one.
Dr. Gruenspecht. The focus is on United States, yes.
Senator Domenici. Right, thank you. Why do you believe that
nations like China and India will act to limit greenhouse gas
emissions if the United States does it first? Would these large
developing countries have an advantage if they kept their
energy price as low as possible? This is a question for Jason
Grumet. Jason?
Mr. Grumet. Thanks, Senator Domenici. I guess I would have
to flip the question around and say that I think that action by
the United States is certainly necessary to imagine that we can
have action from other countries, but it is not sufficient.
There are absolutely no guarantees that the United States once
we re-enter the discussion in the postural leadership are
capable of moving the world, but if you look to history when it
comes to our foreign policy we are not great followers. We are
pretty good at getting other people to follow us and we have
had a lot of success with the CFC treaty. We have a tremendous
opportunity to, I think, to encourage other countries to join
us in that approach and the last thing that I would say is that
they see the risks of climate change too. I think that they are
suffering the same kinds of anxieties about, you know, they
have a billion people to feed and a billion people who need
clean drinking water. They are already having a lot of stresses
there. So my hope and this goes back to I think where the first
President Bush entered the discussions that we would seek to
have differentiated commitments. We would not sit back and say
we are going to wait for China to lead us, nor would we go off
willy-nilly and say we are going to commit to an 80 percent
reduction absent assurance that they are coming with us, but as
this bill does, we would basically trust and verify. We would
take a step; we would do everything we can to make that then
bring about an effective global program. If that happens we
would take second and third steps. If that does not happen, I
think that we would stand down.
Senator Domenici. Okay. This last question is of Dr. Anne
Smith. Dr. Smith, you made an important point that the United
States industry needs certainty if we are going to put a price
on carbon. Would a carbon tax give industry more certainty than
a cap and trade system?
Dr. Smith. The safety valve feature, if it goes in as said,
is almost the same amount of certainty however it is far more
complex as you have probably started to realize in setting up a
cap and trade system with all of the allocations and the issues
of the rules for the trading and it imposes a lot of costs on
businesses to manage that trading and the management, the
accounting for the emissions etcetera that could be much more
simple under a simple carbon tax. Essentially with a safety
valve, if it is stable, you get almost the same outcome but at
much greater administrative cost and complexity and it might
even, I think, hold up the passage of the bill, that
complexity.
I would also like to point out, Jason mentioned that we
need to not deal, not even think that we can get certainty with
any bill that obviously we will have to revisit what the caps
are over time and I agree with that. There is no way either a
tax that would be imposed or a cap and trade program with the
safety valve would really provide true certainty over all time,
but what we do need is a policy that will eliminate the cause
for dramatic new shifts towards a different philosophical
approach to dealing with the climate policy into the future,
into the next 20 years and that is why I am saying pairing the
safety valve feature or carbon tax with a true R&D plan
envisioned for getting technology down is how you can get a
stable expectations within that general philosophical approach
and that is the essential piece that is missing right now, I
think.
Senator Domenici. I wanted to thank Jeff Sterba in
particular for coming up here today and testifying and being a
leader among some industry people who would seek to move us to
get started. I am not, we normally agree, Sterba, you and I,
that isn't necessary, but we normally do for some strange
reason. At this point we are not in agreement on this bill, but
we are moving so I guess as long as that is there you can be
somewhat satisfied that the number of trips you will make to
Washington can be minimized in some way pretty soon. Thank you.
Mr. Sterba. Thank you, Senator.
Senator Domenici. Thank you, Senator Bingaman.
The Chairman. Thank you very much.
Senator Akaka.
Senator Akaka. Thank you very much, Mr. Chairman. Mr.
Gruenspecht, thank you for your analysis and hard work on this
report. In general, I support a cap and trade system to reduce
carbon emissions in the United States. However, as you know,
Hawaii has the highest gasoline and electricity costs in the
Nation. Your analysis shows increases in gasoline costs over
time up 0.11 cents by 2030 and also in electricity costs. Can
you expand a little bit more on the economic effects on the
State of Hawaii due to its unique circumstances?
Dr. Gruenspecht. Well, thank you, sir. First I should give,
it is not my hard work it is the work of all the people at EIA
because it took a lot of people to do this and I want to say
that first. We do not have really detail into the individual
State-level impacts in this type of framework. I do not know
what to say. What I would do if I was thinking about this is
draw some analogies to some of the recent events. Gasoline
prices have changed a lot for other reasons, as we all know.
More recently, in a direction that I think a lot of us like but
over the past couple of years in a direction that a lot of us
do not like and those changes were a lot bigger than 0.11
cents. Maybe by comparing how those changes have effected
things would be a context for thinking about the question that
you pose. That is not a real formal answer, but I think that is
probably the best I can do.
Senator Akaka. Well, with the new proposals of this
committee with Jeff Bingaman there may be some other changes
that may come sooner than we think. Mr. Lashof, I fully agree
with your point that allowances are a public asset and I am
encouraged by your suggestion that a significant portion that
is 30 percent be allocated to States. As you know my State of
Hawaii could probably use some of the allowances to address
concerns in particular sectors that hopefully could benefit
families and consumers in Hawaii. Is this something that, the
State use, can use to help with the impact on gas and
electricity prices?
Dr. Lashof. Ah, thank you, Senator and first of all I want
to say that this idea of allocating some, 30 percent of the
allowances, is not my idea, it is Senator Bingaman's idea and I
think it is a good one so I want to endorse it and I think that
it is there precisely because each State has some different
circumstances and the way Hawaii would use those resources will
be different then the way New Mexico will use those resources
so I think it makes a lot of sense to go down that road and
Hawaii could, for example, has enormous renewable energy
potential that could actually allow your State to produce all
the electricity it needs without burning fossil fuels. I think
in the long run that would lower costs to consumers and those
resources could be used for that as an example. It could be
used to help in the transportation. I think you do want to be
careful not to have States use the resources in a way that
would subsidize activities that would cause emissions to go up
because that would defeat the purpose of the program, and I
think the provisions here are intended to ensure that States
use the resources in ways that further the program. In general
I think this is a good approach to include in any cap and trade
program.
Senator Akaka. I look forward to working with Senator
Bingaman to explore the possibility. Mr. Grumet, thank you for
your work with the National Commission on Energy Policy. It has
launched us in the right direction. I want to follow on Senator
Domenici's question. I agree with your point that we must place
a renewed emphasis on promoting wider international cooperation
in reducing carbon emissions. Are there signs that China and
India will take action if the United States self regulates
carbon emissions and if there are what are the next steps for
the United States?
Mr. Grumet. Well, Senator I have to admit that domestic
policies are more my expertise than foreign policy but I can
suggest a couple of things happening and maybe you can reflect
on what you think the possibilities are. China, in particular,
is actually reducing the carbon intensity of its economy at a
much faster pace then the United States or any developing, of
any developed country. What they aspire to, of course, is
advanced technology and at a very simple level and I think Mr.
Sterba has spoken to this in the past and moving from very
inefficient, largely uncontrolled, small utility coal
combustion to a modern facility in and of itself has a
tremendously beneficial impact on reducing the carbon per
kilowatt.
It is also the case that the Chinese government has a very
serious appreciation of the perils that can befall China if in
fact we have the kind of drought and the strong cyclical
changes in which we have snow melt much faster and all the
different varieties of anxiety that I think that everyone who
looks at these should seriously just starts to feel. So again I
think I have to flip the question back around and recognize
that the United States is responsible for about 80 percent in
the developed world of the emissions in the atmosphere. We now
have China struggling to move from a developing Nation to a
country that has some of the amenities that we have come to
take for granted and we have to find a way to meet them in some
kind of iterative approach. I think they look at us in kind of
aghast to think that we would come to them and say please, you,
China have to take the exact same steps as we do when you
compare our GDP's and relative quality of life, so it is going
to be an iterative relationship.
Senator Akaka. Briefly, what about India?
Mr. Grumet. I think that the dynamics are somewhat similar
in India. India is in fact has the greater ability of making
existing kind of technological base. They are moving forward
with a number of rather significant low carbon activities both
India and China are of course moving as strongly as they can
towards nuclear power, which they both hold some significant
hope and but again, this is a question about the United States
and our, you know, great international might rejoining this
discussion and trying to develop global process that in fact
would be equitable and ultimately effective.
Senator Akaka. Thank you. Thank you, Mr. Chairman.
The Chairman. Senator Craig.
Senator Craig. Well, Mr. Chairman, thank you very much. Let
me first thank you for the hearing and the effort put forth and
I must also say your thoughtful approach toward the cap and
trade concept. I think that is reflected in the testimony we
have heard today. I must also tell you that I continue to
oppose what I think is an obsolete approach that is a post
Kyoto holdover of a command and control type that creates
imbalances or disincentives and certain other kinds of abnormal
incentives to a market that all of us are and should be
concerned about.
As you know I helped co-author the Hagel-Pryor Climate
Title, title 17 in EPAct that you and Senator Domenici are
certainly receiving accolades for as you should and frankly
that opposed the cap and trade amendment approach. Having said
that I think your latest draft demonstrates a lot of work on
your part and I am encouraged by it. You have included
greenhouse gas intensity as a measurement of emissions in the
terms of the GDP. I guess my frustration beyond that because I
see a phenomenal opportunity for our country to do a good
number of things. First and foremost for us to lead and help
the world, I do not dispute that. I think that is in part what
Jason is referencing and we can do that not through existing
technology, but new technologies. We gain very little to focus
on ourselves and ourselves alone and let China and India wander
off into the future continuing to be the large emitters they
are. It is just simply counterproductive. We are investing
more, we should invest more, I think Anne has it right. This
may be the cart but there is no horse and I must tell you I am
extremely frustrated with an administration that is talking the
talk right now but they are not administratively, by rule and
regulation, walking it and by that I mean we are still lagging
dramatically with the implementation of all of the new
technology ideas and the guaranteed loans and all of that that
in part, many of you have included in your discussion today on
this piece of legislation. That does not mean it is all
inclusive for the work we have done and there should not be
more work done and I am certainly willing to be part of that,
but I am going to jab this administration a little bit for the
very counterproductive discussion between DOE and OMB about who
is on first and who is on second.
Now I will take another step forward. The unwillingness of
the current Senate and House to move forward on an
Appropriations bill approach to fund these new efforts that we
are now going to deny ourselves, steps us back another year, in
many of the new technologies in the advancement of something
that we all now generally agree with, nuclear. Here we are
attempting to look into the future and we are not handling the
present very well as it relates to the work we have already
done and it is not untypical of a Congress to always look at
what may be publicly pleasing tomorrow but failing to carry
through on the very work we have done that is phenomenally
substantive today. Am I frustrated, yes, I am. Am I going to
change an attitude that I have grown to be comfortable with
because I spend a lot of time on this issue with scientists and
others? I am not surprised with Daniel's testimony. It is okay,
but it is not enough we need to do a lot more. We probably do,
but I am not going to shut down this economy to accomplish it
and I am not going to create an artificial market in which
there are winners and losers in a way that distorts it. We
ought to be all about incentivizing. We ought to be all about
new technologies and as I have traveled the world to the
Climate Change Conferences. I am very proud of the fact that
what we do is open, transferable as it relates to the rest of
the world and that is what we ought to be about. It is a
technology we develop for the coal industry of this country
that is immediately applied to the coal industry and the
generating capacity of China. That is a quantum leap for, by
all measurable amounts. So, I get it.
I thank you for the work done. I am not sure that I am
willing to accept a nose under the tent approach to cap and
trade when in fact it gets us so short a distance, that I think
as Anne said, we are picking winners and we are picking losers
and somebody's going to pay for it and I am not sure it is
productive at that point. Whereas, coal gasification a whole
combination of new things clearly to get this administration
off its back and moving on nuclear and other areas of new
technologies make, to me, a whole lot of sense. I guess that is
more of a statement than a question. I have used up my time,
but I think it also demonstrates at least for me, that this
committee is moving generally in the right direction and I
thank you very much for that, Mr. Chairman.
The Chairman. Thank you very much.
Senator Sanders.
Senator Sanders. Well, thank you very much, Mr. Chairman
and I want to thank all of our distinguished guests for being
with us. Let me start off with Dr. Gruenspecht and I know you
are not here representing the administration per say, but be
very brief. Does the administration today in the year 2007
recognize global warming as a man-made phenomenon? Do they
still consider it a hoax? Where is the administration, I mean,
are they on board in saying it is a man-made phenomenon or not?
Dr. Gruenspecht. As you said I am really not here
representing the administration.
Senator Sanders. Give me your best guess on it.
Dr. Gruenspecht. You probably know better than I do. I do
not get the impression that they think it is a hoax.
Senator Sanders. OK, OK. Do they see it as a man-made
phenomenon?
Dr. Gruenspecht. I think they see both man-made and other
causes.
Senator Sanders. Let me ask Dr. Lashof a question.
Obviously all of us, I do not think there is any debate up here
that we all want a strong economy, nobody wants to do anything
that is going to create more unemployment or lower wages. That
goes without saying, but on the other hand, I am sure I speak
for everybody up here that they do not want to see a planetary
catastrophe. Nobody here wants to see that as well. How much
time do we have, I mean, there are some people who are saying
that if we do not act in a very dramatic fashion in terms of
reducing greenhouse gas emissions that we are going to reach
irreversible situations which will permanently damage the
entire planet and will result in increased drought, flooding,
the severity of hurricanes, the loss of agricultural land, the
rising of the seas, which obviously nobody here wants to see.
How severe, very briefly, is the problem? How quickly do we
have to act if we are going to reverse it?
Dr. Lashof. Well, very briefly, it is a very severe problem
and we need to act very quickly. I mean, I am persuaded by Dr.
Hanson's analysis which says that unless emissions are headed
sharply downwards within the decade, we start to lose our
window of opportunity to prevent the most dangerous
consequences.
Senator Sanders. Now maybe I was a little opportunistic
asking you that question because along with Senator Boxer and
nine other of my Senate colleagues, I have introduced S. 309
which is the strongest global warming bill introduced in the
Senate and this bill would reduce U.S. emissions to 1990 levels
by the year 2020 and by 2050 the level of emissions would be
reduced to a level below 1990 levels. Is that the kind of
program that we need, do you think?
Dr. Lashof. Well, Senator, I think it is. I think that the
level of reductions that you have in your bill are exactly the
kind of leadership that the United States needs to take. That,
that is, as Jason Grumet said, that the good atmospheric
science in this process and that is the direction. What I am
encouraged by is the fact that we now have a growing
recognition including in major businesses.
Senator Sanders. Right.
Dr. Lashof. In the U.S. Climate Action Partnership calling
for reductions that are consistent with your proposal.
Senator Sanders. OK, and I agree with that. Let me ask Mr.
Grumet a question which, I think ordinary citizens would have a
hard time understanding, given the severity of the crisis that
we face, in your judgment, why as a Nation do we still have a
situation where today we are driving vehicles that get worse
mileage per gallon than 20 years ago? How is this
comprehensible? How do we have a mass rail system, which is far
inferior to what exists in Japan, exists throughout Europe and
in fact, China is in some ways moving ahead of us in terms of
mass transportation? How is it that we continue to provide
substantially more funding for fossil fuels and nuclear energy
than for all of the potential breakthroughs that are sitting
there with solar, with wind, with geothermal and so forth and
so on?
Mr. Grumet. Senator, let me say, I appreciate being able to
talk about something other than cap and trade for a moment.
Senator Sanders. Me, too.
Mr. Grumet. Our Commission in another significant
recommendation argue that we have to significantly reform and
significantly strengthen vehicle fuel economy standards. There
is no question that the most significant single thing we can do
to improve our energy security and address greenhouse gas
emissions is to increase fuel economy.
Senator Sanders. Do you support raising the CAFE standards?
Mr. Grumet. Very much, sir and I think that you are
absolutely right that we have had stagnant standards since 1985
that the Nation of China now actually, Senator Akaka, has fuel
economy standards stricter than those here in the United States
and while the fuel economy standards have stagnated, technology
sir, has not. Vehicles are now 50 percent more powerful, 25
percent larger than they were 20 years ago.
So, the last thing I will note though, and I think this is
what Senator Domenici referred to early on, despite the fact
that the President did not make a major announcement on climate
change or nuclear power. He did make, I think, a very
significant statement on fuel economy. Last night the President
of the United States called upon Congress to both reform and
significantly strengthen fuel economy standards, asking for
direction that the fuel economy standards be strengthened by 4
percent a year which is a mile per gallon a year. That is a
very aggressive increase in fuel economy standards. That is
equal to the increase that Senator Inouye and others are asking
for on the Commerce Committee, so this is gone a little bit
beneath the radar, but I would hope that this Congress, in a
bipartisan way would send him a bill in the next 3 weeks that
provide that very authority and that obligation.
Senator Sanders. OK, let me ask both Dr. Lashof and you,
Mr. Grumet. There has been talk obviously about nuclear power
and we all know the positive and negatives of that but I think
there is no debate that nuclear, investing in new nuclear
powerplants is a very, very expensive proposition, not to
mention the issue of what we do with the radioactive waste. In
your judgment, let us start off with Dr. Lashof, if we invested
similar amounts of money in sustainable energy and in an energy
efficiency, would that be in fact a better investment and a
safer investment?
Dr. Lashof. In my----
The Chairman. Why do not you give us short versions of
answers to those so we can get the other members to ask some
questions?
Dr. Lashof. Very briefly our analysis shows that
investments in energy efficiency is the cheapest, fastest and
cleanest way to make progress on global warming so I put the
most emphasis on that.
Mr. Grumet. I would agree that energy efficiencies are more
cost effective than almost any new generation, but our views,
we have no option. We have to go after every possible
opportunity for low carbon energy and so if nuclear can be made
cost effective and we can deal with the proliferation of waste
issues, our group believes we have to advance those as well.
Senator Sanders. OK, thank you. Mr. Chairman, thank you
very much.
The Chairman. Thank you very much.
Senator Sessions.
Senator Sessions. Thank you, Mr. Chairman. This is a very
interesting hearing and I appreciate your thoughtful approach
to the issue and it is something that we needed to discuss in
these kind of open forum. With regard to nuclear power,
Tennessee Valley Authority is, has assured me that their
nuclear production of electricity comes in, considering
lifetime capital costs, well below coal and far, far below
natural gas and that it is economical and it is got to be a
major part of the mix to me. It just cannot be otherwise or it
is breathtaking that it is not the number one matter that we
discuss, but we do have and will have carbon emission problems,
I guess we say carbon, carbon dioxide, which is not a
pollutant, but it is a global warming gas. This is what I am
thinking and I would like to ask each of you if you would
comment on it and I will leave my questioning at this subject.
I have come to be a believer, and a bipartisan Congress
believes that we have unhealthy dependence on foreign energy,
particularly oil and therefore we have a national security
interest in reducing that dependency which includes, then we
are able to use all sorts of things, like, ethanol and bio-
fuels and cellulosic ethanol. I think we have a national
consensus that pollutants are bad, the NO and SO and
particulates and all of those issues are unhealthy for our
economy and we want to maintain that, maintain our progress in
improving the quality of our air and water. We also have a
strong interest in keeping the cost of energy low. I do not
think we need to have a national policy to see how high we can
make energy be. One of the things that makes life healthy in
America is low cost energy and as I am informed, the life span
of countries that have readily available power is twice that of
the life span of countries that do not, so that is important.
So, why would not we want to develop policies that focus on
those goals and if we do so, can't we at the same time
positively impact and reduce CO2 emissions and get
more birds with one stone, so to speak, and not create a system
that focuses solely on carbon dioxide emissions?
Dr. Gruenspecht, can you start?
Dr. Gruenspecht. Sure; a very thought provoking question
and I think there are ways to go about it. Put it this way,
energy security, I think, is primarily about oil. Reducing
greenhouse gases at the lowest cost within the United States,
our study suggests, is primarily about coal. Greenhouse gas
reduction and energy security goals--there are some synergies
and I think that is what your question is pointing to, but
probably if we are honest about it, there are also some
conflicts and I think that is where you guys have a much
tougher job that I have. Improved vehicle efficiency is one of
the things that was mentioned; that one seems to have some
synergies. It lowers greenhouse gas emissions and it lowers oil
demand and imports of oil, whether that increases energy
security is itself a real complex question.
Coal-to-liquids conflict--clearly coal to liquids reduces
oil imports. You can produce some very high quality diesel by
converting coal to liquids like they do in South Africa right
now. Not very helpful on greenhouse gases, so that is a
scenario where there is conflict. There are some where it is
even trickier, there are sort of synergies and conflicts, such
as biomass. Using biomass to back out oil in transport fuels:
reduces oil imports and it reduces greenhouse gases; however
you could take the same biomass and get a larger greenhouse gas
reduction by using biomass to back out coal in electricity
generation. I do not want to go on, but, you know, life is
complicated and it is good to look for a way of killing all the
birds with one stone and ending up with more eggs in your
refrigerator at the same time, but it is hard. That is why you
guys, you Senators, are here.
Senator Sessions. Any others like to comment on that?
Mr. Sterba. Senator, if I may, a couple of comments. I
generally agree with what Howard said, but I would add two
other pieces. One of the areas where there is a cross-over
between the electricity generation sector and then
transportation is the potential development of plug-in hybrids
and we are seeing a significant move in the technology front
from the regular hybrid to the potential for a plug-in hybrid.
If we looked at the same kind of penetration of plug-in hybrids
as we have seen in regular hybrids and we assume that plug-in
hybrids are available in 2010, we could have a million of those
on the roads in 2020. That is an enormous amount of two things,
No. 1, vehicles that have reduced their use of petroleum
product and No. 2, they also are creating the potential for a
distributed energy storage device and the electric grid. So
that is one cross-over technology where I think the two can go
together.
The second one is just, I agree with Howard that coal is
one of the main issues, not the only issue, but one of the main
issues associated with greenhouse gas emissions, but natural
gas is also a fundamental fuel that today we do not import that
much from other countries other than Canada, but that is
increasing as we move more to having LNG be the natural gas on
the margin we can be, we can get in a similar position with
natural gas on importation and the issues on where is that fuel
coming from, so and natural gas is a fuel used in generation of
electricity and in fact got to the point that over 90 percent
of all of the generators billed through the 1990's were natural
gas fire generation. We have to be very careful that we do not
do something as we address climate change that triggers
significant increases in natural gas usage because that will
drive us even more to having to import natural gas and drive
prices up for natural gas which in addition to heating is a
fundamental input for a lot of feed stock opportunities,
whether it is fertilizers and plastics and all of that. So,
there are points where these things come together and when we
think about the natural gas application across and the plug-in
hybrid application across that is where, I believe you see
strong justification for renewables and energy efficiency and
those kinds of things that while they focus on the electricity
sector they have the indirect benefit of addressing petroleum
use because of the transportation sector and then also on the
natural gas sector.
Senator Sessions. My time is up but if nuclear would fit
that role of a multiple benefit energy source, would it not?
Mr. Sterba. It, absolutely.
Senator Sessions. And it would work; help with the plug-in
hybrids and things of that nature?
Mr. Sterba. Absolutely and one of the things that makes me
very concerned about the ability to achieve these goals, I
personally do not see how we get there without nuclear. It is a
low cost source. The challenge even in this EIA analysis, we
have five times the amount of nuclear, and that is one of the
things that helps hold costs down, five times the amount of
nuclear then we currently have, by 2030. That is a significant,
well maybe not quite that much.
Dr. Gruenspecht. The increase in nuclear is five times as
much as----
Mr. Sterba. As the base case----
Dr. Gruenspecht [continuing]. We have a small increase in
the base case of----
Mr. Sterba. Right.
Dr. Gruenspecht [continuing]. About nine gigawatts and
capacity----
Mr. Sterba. Right.
Dr. Gruenspecht [continued]. Compared to a hundred
gigawatts that we have now that increases by nine in the base
case and by a little bit under 50. So going from a hundred to a
hundred and ten in the base case, going from a hundred to a
hundred and fifty in this analysis.
Mr. Sterba. So, we are having about a 50 percent increase,
I apologize, but a 50 percent increase in the amount of nuclear
and frankly we are not moving very far on that.
Senator Sessions. I would agree, thank you.
The Chairman. Thank you.
Senator Lincoln.
Senator Lincoln. Thank you, Mr. Chairman and thank you so
much for your leadership on this issue. I think we have all,
certainly, I have, in the last several years, have felt a
heightened awareness as well as a heightened sense of
responsibility that we need to do something and to do it sooner
than later, so we appreciate your leadership and I am delighted
to be back on the committee.
The Chairman. Welcome back.
Senator Lincoln. Absolutely, thank you. On that last point
that Senator Sessions, you all were just discussing, if the
assumption then in this study or in analysis is that there is a
50 percent increase and we have not had a new nuclear facility
in 30 years, is that about, 30 or more, 30 more years and then
we are also seeing that the re-licensing of nuclear facilities
is becoming more difficult. That is over a 10 year period, I
believe, isn't it, the re-licensing? Is that a safe assumption?
Dr. Gruenspecht. As I tried to say in the testimony, there
is a lot of uncertainty about all projections over a 25-year
period, but I think it is important to note that the proposal
we were asked to evaluate has a safety valve so, as discussed
in my written testimony, the economic effects would not really
be much different even if that nuclear could not be built.
Senator Lincoln. But does not, would with what you have
just said that with the safety valve and the economic effects
not, does that mean that, quite frankly, that it is going to be
a lot easier to just, for companies to trade credit as opposed
to invest in technologies and in less expensive or more
reasonable forms of energy production. I mean, I know Ms. Smith
has somewhat eluded to a little bit of that in your testimony
and I, you, at least have stated that you feel the emissions
reductions that are achieved in the bill are short of other
proposals being really not an effective first step I guess is
kind of the words that you used in your testimony. Maybe you
want to elaborate on that a little bit, I mean, what are the
long term costs, I guess, kind, my question to you is, the long
term cost of doing nothing or doing too little verses what we
have really talked about here today, which are the short term
cost.
Dr. Smith. The long term costs of doing too little could
become large if there are significant impacts associated with
climate change, so there is a risk to be managed. What I was
trying to explain in my testimony is that it will be very
costly if we try to push beyond that safety valve price with
the technologies we have today. So the first step towards a
long run solution is to create new technologies that are simply
not in the tool kit, they are not in the list, they are not in
the models, they are not in anything that has been talked about
in this room today.
Senator Lincoln. Right.
Dr. Smith. Those need to be created and those take 20, 30
year lead times to get created so we could create a plan to
have significant emissions reductions by mid-century at low
cost but only if we start with a true basic R&D policy
reformation of our R&D policy for energy.
Senator Lincoln. So is it your opinion that the cap is at a
level that is going to encourage that investment or incentivize
the need for newer technology sooner?
Dr. Smith. A low safety valve price will not provide the
appropriate incentives for that kind of R&D and that is the
kind of R&D that we need. That low safety valve price is very
useful for bringing new technologies that do exist into the
marketplace to reduce carbon emissions where they are cost
effective to do so, now, as well as on into the future and for
establishing some expectations for long term investments.
Senator Lincoln. So existing technologies as opposed to
newer technologies.
Dr. Smith. It is useful for picking up the low cost
reductions that are existing today which are meaningful to
undertake if they are in that cost range.
Senator Lincoln. Mr. Grumet, did you have a comment?
Mr. Grumet. Yes, thank you, Senator Lincoln. You know we
tend to have this discussion a lot about whether the answer is
technology or a price signal. People tend to feel more
comfortable in one of those two places and our----
Senator Lincoln. Kind of got to be both though.
Mr. Grumet. Well, exactly, Senator.
Senator Lincoln. Yes.
Mr. Grumet. And I think that to Senator Craig's discussion
about the liabilities of government and the frustration we are
having about the inability of government to move forward on
these specific technology programs. Most people look at that as
one of the liabilities of a program that just depends upon
government competence to pick the right technologies. So the
technology only approach assumes the taxpayer comes up with the
money and government is smart enough to give it to the right
people and those are incentives that we do not talk about the
taxes, we talk about the incentives and those feel great. On
the other hand, people who just talk about strict, strict caps,
you know, we are having economic impacts far higher than
anything that we would be willing to tolerate and if you have
just a low cap, you do not get the kind of technologies. So the
messy mill, which I think you either love or you hate, is that
you have a modest carbon price, as Dr. Smith says, this brings
forward the low hanging good stuff. You get reductions, you get
energy efficiency, you get people to pay more attention to
their operations, you get coal mine methane, you get reductions
and you generate a bunch of cash because one of the real
problems with our R&D program is we do not have any kind of
dedicated revenues from it so you have a market signal, you get
into the game, you start learning your way through the system,
you cap the costs so that you have some confidence and
hopefully you get a bill to become law and you generate a bunch
of cash.
Senator Lincoln. But you know with what you have said there
and then that superimposed on top the idea that we do not have
a whole lot of time. I mean, I think there is an anxiousness
that becoming more prevalent among many people in terms of this
issue and with all of that considered maybe you could help by
telling me a little bit more or going a little more in depth
and maybe you have and I have missed it and I apologize for
running late this morning. The methods that you used to come up
with that safety valve price mean, maybe, I think there were
probably political considerations, cost considerations, but
were the time considerations in terms of the time that we have
or that we are coming to know that we have of where there is a
break even point of what we do as doctors will tell you that if
you smoked all your life and you do not quit before you are 45
or 50, then, you know, you have pretty much lost your shot at
it or supposedly, I don't know, I do not smoke, but it is the
same thing here that we are beginning to hear that there is a
judgment day.
Mr. Grumet. It is the right question and I am glad that
Senator Bingaman, I think in the discussion draft that you have
circulated has indicated the desire to re-engage this question.
I tell you that it was some art and some science in our
Commission. There was a real question about what people think
the market could bear, look at the price increases that would
result, about a 10 percent electricity price. When we worked
very closely with the mine workers we came to believe and I
believe that their support at some point will be critical, that
they were willing to have the growth in coal decrease
significantly by the price as long as there was a view that
there would be resources for things like IGCC and sequestration
that could come in and save the industry before the cost got so
high that they would actually start to really lose in absolute
terms. A $7 a ton safety valve would basically reduce the
growth in coal by about half. That is what I think, EIA says,
that coal growth would be about 20 percent instead of about 50
percent, now when you look 2 years later at the urgency of the
science, I believe our Commission's going to come back and
think well, maybe we should try and do something better than
that, but if you go too much farther, I think, and I should not
be here telling you about politics, but you know, I think we,
everyone goes back to their Kyoto corners and we keep yelling
at each other for another decade and that clearly is not going
to solve.
Senator Lincoln. Yes, that is unacceptable.
Mr. Grumet. I think a messy middle that is heroically
inadequate is the kind of action that is going to bring,
hopefully, the Congress together, but that is not the kind of
political science you like to hear. Go take on every industry
in the country and have them and the environmental community
angry at you, and we will clap, but we are very small, little
people.
Senator Lincoln. Thank you, Mr. Chairman.
The Chairman. Thank you very much. Let me just ask a couple
more questions. First, let me just say that when you are in
public office, it is hard to run for office on a platform that
I have championed and messy middle that is heroically
inadequate, that is not exactly a winning platform.
Let me ask, Jeff Sterba, you were a part of this U.S.
Climate Action Partnership and I believe I heard Dr. Lashof
characterize your position, the Partnership's position, as
essentially endorsing the cuts that were in the Jeffords bill,
and now the Boxer and Sanders bill, that level of reduction in
it, or that intensity targets or level of reduction of
emissions. I guess I would ask you first of all if you think
that is an accurate characterization of what the Partnership
did and second, how much more can we do to get these targets to
decline, these intensity targets to decline more quickly
without doing significant damage to the economy?
Mr. Sterba. Thank you, Senator. First, the U.S. cap is not
formed to take a position or advocate on any bill, that is not
its purpose and it is, as far as I am concerned, that group
will never do that. So I do not believe it is appropriate to
apply the U.S. cap principles at this stage to any specific
bill. I think the principles stand on their own and they stand
as a collective package. In my judgment, there are many pieces
of legislation and approaches to legislation that can be
encompassed within the principles of that bill and so I would
not agree that that legislation is anyway representative of the
U.S. cap.
Second thing relative to the second piece of your question,
Senator, I think there are a number of things that can be done
to bring, to more rapidly accelerate the action and that, you
have hit the nail on the head. The first one goes to what
Senator Lincoln raised. There is a challenge about the raising
of money to invest in both R&D and only tied to when caps get
put in place and we start to generate revenues off the
auctioning of allowances. That money needs to be made available
now. We need to find a way to fund the technology in advance of
the imposition of significant reductions in the emissions, in
the allowance of emissions. So that would be the first thing is
there is more rapid funding associated with the technology both
on basic research for the next breakthroughs.
I would take a slightly different view than Dr. Smith did
about the deployment demonstration and development funding, the
need for that. I agree basic research is a significant piece,
but frankly there are funding mechanisms within the DOE for
that. We need to advance those, but it is really getting from
the concept out of the lab to its commercially available. That
is the gap that we do not do very well. Part of it is because
we have utilities that are regulated who are not incentivized
to take an action to take a nascent technology and deploy it.
It is because by nature, already the notion of having a
technology that may have a 60 or 70 percent hit rate is not
something that regulators want to pay for. So, there is a
challenge institutionally to making that happen.
Dr. Lashof. Senator, may I?
The Chairman. Ah yes, Dr. Lashof, why do not you give us
the final answer here and then if there is still time we will
have Senator Craig ask any questions he has, but we do have a
vote that has started, a cloture vote.
Dr. Lashof. So, just quickly, I just wanted to clarify what
I was trying to say about U.S. cap and Senator Sanders bill
because I do not want to leave the wrong impression. Jeff's
absolutely right; U.S. cap did not review any specific pieces
of legislation. We laid out some principles and
recommendations. What I was trying to do and what I think I
said is that in my views Senator Sanders targets are consistent
with the recommendations of U.S. cap, not that the group has
endorsed it because we did in this U.S. cap group recommend
some specific emission reductions that go along with this slow,
stop and reverse, first phase within 5 years of enactment, low
emissions limit them to within 100 percent to 105 percent of
current levels, 10 years after enactment, 10 percent below to
current levels and then 15 years after enactment at 10 to 30
percent reduction and then looking to a 60 to 80 percent
reduction by mid-century. So there is an envelope there and we
can look at any bill that is introduced and see if it falls
within that envelope. The Sanders bill is one bill that falls
within that envelope. That is what I was trying to say. Thank
you.
The Chairman. Very good.
Senator Craig, did you have a final question?
Senator Craig. I will be very brief because I am always a
little frustrated by a sense of urgency that causes us to react
in a way that maybe is not consistent where we ought to be. I
would suggest to Senator Lincoln that the sense of urgency is
the 2008 election for a good many people as it relates to how
they express their public policy intent and then once we are
past that, then it will be another 2 years and another sense of
urgency. I think what has to come out of this committee is a
pattern of consistency and predictability for industries to
make the kind of investment we are expecting they should make
and we should make with them to incentivize this process. For
example I am very pleased to see Howard, who in 2005,
incrementally hardly recognized nuclear as a growth industry.
Today has jumped substantially into the forefront with his
figures and that is positive.
The Chairman. That is only if we pass my bill.
[Laughter]
Senator Craig. I think that is in part consistent with you
know, not only your bill.
Dr. Gruenspecht. You also get something out of the 2005
Energy Policy Act.
Senator Craig. Thank you, I thought we would and we did,
but now
The Chairman. Bottom line; let us be clear, we go 99,000
mega watts----
Dr. Gruenspecht. Yes.
The Chairman [continuing]. Under the 2005 bill. If this
draft legislation we just analyzed----
Dr. Gruenspecht. You get a lot for----
The Chairman [continuing]. 48,000 mega watts.
Dr. Gruenspecht. Right, the coal and the nuclear are
alternative technologies for base load.
The Chairman. Right.
Senator Craig. Right and having said that, Mr. Chairman,
you have now found yourself in Jason's murky middle, whether
you like it or not.
[Laughter]
The Chairman. Heroically inadequate.
Mr. Grumet. Yes.
The Chairman. Alright, thank you all very much. It is a
very useful hearing.
[Whereupon, at 11:38 a.m., the hearing was adjourned.]
APPENDIX
Responses to Additional Questions
----------
Department of Energy,
Congressional and Intergovernmental Affairs,
Washington, DC, February 21, 2007.
Hon. Jeff Bingaman,
Chairman, Committee on Energy and Natural Resources, U.S. Senate,
Washington, DC.
Dear Mr. Chairman: On January 24, 2007, Howard Gruenspecht, Deputy
Administrator, Energy Information Administration, testified regarding
the Energy Market and Economic Impacts of a Proposal to Reduce
Greenhouse Gas Intensity with a Cap and Trade System.
Enclosed are the answers to nine questions that were submitted by
Senators Menendez, Thomas, and you for the hearing record.
If we can be of further assistance, please have your staff contact
our Congressional Hearing Coordinator, Lillian Owen, at (202) 586-2031.
Sincerely,
Jill L. Sigal,
Assistant Secretary.
[Enclosures.]
Responses of Howard Gruenspecht to Questions From Senator Bingaman
Question 1. Two years ago we passed an energy bill, EPAct 2005. I
understand that my staff has asked you to model the impacts of the
Energy Bill on greenhouse gas emissions. I have a document here that I
would like to enter to the Record. Can you very quickly tell us how the
proposed draft's impacts on GHG emissions compares to the Energy Bill?
Answer. In April 2006, EIA prepared a brief summary of the impacts
of the provisions of the Energy Policy Act of 2005 (EPAct 2005) that we
were able to model (see below). The key finding was that the modeled
provisions of EPAct 2005 reduced CO2 emissions by about 90
million metric tons, roughly 1 percent of total emissions, in 2020 and
2030. In comparison, the impacts of the September 2006 draft proposal
that you and 5 other senators asked EIA to analyze are found to be
larger, reducing CO2 emissions by 193 million tons in 2020
and 727 million tons in 2030. Furthermore, the proposed draft also
reduces the emissions of other greenhouse gases by 369 million tons and
532 million tons in 2020 and 2030, respectively, and establishes a
pilot program to stimulate biological carbon sequestration.
The text of the April 2006 paper outlining EIA's views on the
projected impact of EPAct 2005 on energy-related carbon dioxide
emissions follows:
projected impact of epact 2005 on energy-related carbon dioxide
emissions april 2006
The Energy Information Administration (EIA) has some capability to
assess the effects of the Energy Policy Act of 2005 (EPAct 2005) on
energy-related carbon dioxide (CO2) emissions. However, the
extent to which studies or programs authorized by EPAct 2005, but not
directly implemented by that legislation, might advance the timing and/
or lower the cost of advanced energy technology represent a key
uncertainty in such an assessment.
The Annual Energy Outlook 2006 (AE02006) Reference case \1\
includes roughly 30 specific provisions implemented by EPAct 2005. Many
of these provisions, which are outlined in the Legislation and
Regulations section of the AEO2006, are intended to increase energy
efficiency and encourage use of nuclear power and renewable fuels,
which have the ancillary benefit of reducing CO2 emissions.
Removal of these provisions in a No-EPAct 2005 case resulted in
projected CO2 emissions that are 90 million metric tons (1.3
percent) higher than in the Reference case in 2020, and 92 million
metric tons (1.1 percent) higher in 2030. About 90 percent of the
CO2 emission reductions directly attributed to EPAct 2005 in
2030 are associated with electricity, some of which result from reduced
electricity demand due to efficiency standards and some from incentives
for new nuclear power and renewable generation.
---------------------------------------------------------------------------
\1\ Energy Information Administration, Annual Energy Outlook 2006,
DOE/EIA-0383(2006) (Washington, DC, February 2006), web site
www.eia.doe.gov/oiaf/aeo/index.html.
---------------------------------------------------------------------------
It is important to recognize that many other EPAct 2005 provisions
were not explicitly considered in the AEO2006 Reference case. EIA did
not try to anticipate policy responses to the many studies required by
EPAct 2005, nor did it try to predict the impact of research,
development, and deployment (RD&D) authorizations and loan guarantee
programs in the bill that require future appropriations. However,
recent EIA technology sensitivity analyses not directly tied to EPAct
2005 show that assumptions about the availability and cost of advanced
technologies can significantly impact future energy use and
emissions.\2\ For example, the Integrated High Technology Case in
AEO2006, which assumes reduced costs and accelerated timing of advanced
technologies, projects CO2 emissions that are 385 million
metric tons (5.4 percent) lower than in the Reference case in 2020, and
694 million metric tons lower (8.5 percent) in 2030. What part, if any,
of the accelerated timing and lower costs assumed in this case might be
realized specifically due to the enactment of the research, development
and deployment provisions of EPAct 2005 is highly uncertain.
---------------------------------------------------------------------------
\2\ A further discussion of this issue in another context is
provided in EIA's April 2005 analysis of the recommendations of the
National Commission on Energy Policy, web site www.eia.doe.gov/oiaf/
servicerpy/bingaman/pdf/sroiaf(2005)02.pdf.
---------------------------------------------------------------------------
In sum, EIA's analyses suggest that the roughly 30 EPAct 2005
provisions that were explicitly modeled are projected to reduce energy-
related CO2 emissions by approximately 90 million metric
tons in both 2020 and 2030. Any impact resulting from the non-modeled
authorizations, loan guarantees, studies and other miscellaneous
provisions that served to advance the availability and cost of advanced
energy technologies would add to projected reductions in energy-related
CO2 emissions.
Table 1 compares results of the AEO2006 Reference case, the No-
EPAct 2005 case, and the AEO2006 Integrated High Technology Case.
Table 1.--COMPARISON OF ENERGY CONSUMPTION AND ENERGY-RELATED CARBON DIOXIDE EMISSIONS IN THE AEO2006 REFERENCE,
NO-EPACT 2005, AND HIGH TECHNOLOGY CASES (2004, 2020, and 2030)
----------------------------------------------------------------------------------------------------------------
2020 2030
-----------------------------------------------------------------
Indicator 2004 No No
Reference EPAct High Reference EPAct High
2005 technology 2005 technology
----------------------------------------------------------------------------------------------------------------
Consumption (quadrillion Btu)
Petroleum Products.................. 40.08 48.14 48.16 45.49 53.58 53.59 49.70
Natural Gas......................... 23.07 27.70 27.88 26.43 27.66 27.95 28.72
Coal................................ 22.53 27.65 28.49 25.95 34.49 35.28 30.17
Nuclear Power....................... 8.23 9.09 8.59 8.93 9.09 8.59 9.47
Renewable Energy.................... 5.74 8.00 8.00 8.34 9.02 9.14 9.59
Other............................... 0.04 0.05 0.05 0.04 0.05 0.05 0.05
-------------------------------------------------------------------------
Total............................. 99.68 120.63 121.16 115.19 133.88 134.61 125.70
Carbon Dioxide Emissions by Fuel
(million metric tons)
Petroleum Products.................. 2,595 3,061 3,063 2,899 3,421 3,424 3,178
Natural Gas......................... 1,203 1,455 1,464 1,388 1,452 1,468 1,403
Coal................................ 2,090 2,589 2,668 2,432 3,226 3,300 2,825
Other............................... 11 14 14 14 15 15 15
-------------------------------------------------------------------------
Total............................. 5,900 7,119 7,209 6,734 8,114 8,207 7,421
Carbon Dioxide Emissions by Sector
(million metric tons)
Electric Power...................... 2,299 2,835 2,914 2,677 3,318 3,402 2,957
Residential......................... 1,208 1,434 1,477 1,366 1,576 1,631 1,432
Direct Fuel....................... 375 398 398 384 398 397 372
Electricity....................... 833 1,036 1,079 982 1,178 1,234 1,060
Commercial.......................... 1,020 1,339 1,367 1,293 1,620 1,645 1,502
Direct Fuel....................... 229 260 263 260 284 287 283
Electricity....................... 792 1,079 1,104 1,033 1,336 1,357 1,220
Industrial.......................... 1,727 1,924 1,941 1,778 2,184 2,195 1,946
Direct Fuel....................... 1,069 1,222 1,229 1,132 1,400 1,405 1,284
Electricity....................... 658 703 712 646 784 790 662
Transportation...................... 1,945 2,422 2,424 2,297 2,734 2,736 2,541
Direct Fuel....................... 1,929 2,404 2,406 2,281 2,715 2,716 2,525
Electricity....................... 16 18 18 16 20 20 16
-------------------------------------------------------------------------
Total........................... 6,900 7,119 7,209 6,734 8,114 8,207 7,421
----------------------------------------------------------------------------------------------------------------
Source: National Energy Modeling System runs AEO2006.D111905A, NRGBILL0.D041006A, and HTRKITEN.D121905A
Question 2. Also, I understand that my staff asked you to create
this chart on the impacts of this proposal on GDP. I have that chart
here. Did you make this chart? Can you quickly explain it?
Answer. The figure below * was prepared by EIA at the request of
your staff to put the projected impact of the September 2006 proposal
(represented by the Phased Auction case on U.S. gross domestic product
(GDP) in the context of the overall level of real U.S. GDP. U.S. real
GDP (measured in 2000 dollars) currently exceeds $11 trillion, and is
expected to grow over time, reaching over $22.5 trillion in 2030. Under
the proposal, real GDP is estimated to be reduced by $59 billion, or
0.26 percent of its projected level, in 2030.
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* The graph has been retained in committee files.
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Question 3. Dr. Gruenspecht, I recently read a statement from a
trade association that criticized EIA's analysis of the Bingaman
proposal for underestimating the costs of the climate proposal.
Specifically, the analysis claimed that natural gas prices would rise
dramatically due to fuel switching from coal to natural gas caused by
the mandatory climate constraint. Could you react to that claim? I'm
attaching the statement and will put it in the Record. Could you please
respond to claims made about the EIA modeling?
Answer. EIA stands behind the results of its analysis, and
disagrees with the position of the Industrial Energy Consumers of
America (IECA) stated in their January 22, 2007, press release that
EIA's analysis ``misinforms the Congress.''
We do not take issue with IECA's view that projections of natural
gas production, increased LNG imports, and increased nuclear capacity
over a 25-year period are inherently uncertain--in fact, EIA's report
and its January 24th testimony explicitly and repeatedly note this.
The IECA review of EIA's analysis, however, fails to take account
of a key provision of the proposal EIA was asked to evaluate--the
safety valve. As discussed in the EIA testimony and analysis, inclusion
of a safety-valve feature in a cap-and-trade program would implicitly
relax the emissions cap in the event that emissions reduction inside or
outside the energy sector proves to be more costly than expected, while
protecting against the prospect of larger energy system and economic
impacts in these circumstances.
The delivered price for coal under the proposal EIA reviewed is the
``no policy'' delivered price plus the cost of allowances. Under the
proposal, the price of allowances will never exceed the safety valve
level, regardless of future developments in nuclear, renewable energy,
or energy efficiency technologies; natural gas production; or the rate
of economic growth. Therefore, a calculation made using the assumption
that the cost of allowances is always at the safety valve level sets an
upper bound on the delivered coal price under the proposal. To the
extent that expanded use of existing or new coal plants at such a
delivered coal price is cheaper than using natural gas, IECA's concern
about ``diversion'' of natural gas away from their constituents towards
the electric power sector, would appear to be unfounded.
Other considerations also mitigate strongly against the position
outlined in the IECA press release. For example, IECA legitimately
notes the significant uncertainty surrounding EIA's reference case
projections of future domestic natural gas production, future LNG
imports, and future industrial natural gas demand. EIA certainly
recognizes these uncertainties and routinely seeks to address their
impact in numerous sensitivity cases in our yearly Annual Energy
Outlook (AEO) and in the service reports we prepare at the request of
the Congress, even though the energy price, energy availability, and
economic impact results for the proposal we analyzed are not sensitive
to them given the availability of the safety value. EIA, however, does
not routinely consider uncertainty regarding future policy actions in
its AEO projections. Ironically, uncertainty regarding future actions
to limit greenhouse gas emissions, which IECA does not address in its
review of the EIA analysis, could have exactly the effects on natural
gas use for electric power generation that IECA states that it is
concerned about. For example, to the extent that potential investors in
long-lived power generation capital are sensitive to uncertainty over
future policies that could significantly affect the market value of
their projects, they may be reluctant to make such investments, which
would tend to promote the use of existing capacity and the cheapest
possible capacity expansions where new investment is unavoidable, until
such time as the direction of policy becomes more clear.
In sum, while EIA takes no position on the desirability of the
specific policy proposal we were asked to analyze or on any other
policy matter, we strongly believe that our analysis of the proposal is
both reasonable and informative.
Question 4. Dr. Gruenspecht, does the EIA modeling account for
advances in technology that would result from additional government R&D
funded through auctions of allowances?
a. If not, would you expect the impact on electricity prices and
GDP to be lower if those advances were factored into the model?
Answer. EIA's analysis of the proposal does not explicitly
represent the potential impacts of government expenditures associated
with revenue collected in the Climate Change Trust Fund. As stated in
this analysis, ``All of the analysis cases incorporate the economic and
technology assumptions used in the AEO2006 reference case. While
increased expenditures for research and development (R&D) resulting
from the creation of the Climate Change Trust Fund are expected to lead
to some technology improvements, a statistically reliable relationship
between the level of R&D spending for specific technologies and the
impacts of those expenditures has not been developed. Furthermore, the
impact of Federal R&D is also difficult to assess, because the levels
of private sector R&D expenditures usually are unknown and often far
exceed R&D spending by the Federal Government.'' (page vi) It is
certainly possible that the Climate Change Trust Fund expenditures
could lead to technological advances that lower the costs of complying
with the proposal.
Question 5. Dr. Gruenspecht, Some of my colleagues have introduced
legislation that calls for percentage reductions by specific dates in
the future, but leaves the implementation details to be determined
through regulation. Can you discuss how draft legislation that has no
specific mechanisms for constraining greenhouse gas emissions
complicates efforts to model economic impacts?
Answer. Due to the ubiquitous nature of greenhouse gas (GHG)
emissions in the US energy-economy, assessing the potential impacts of
any proposal to reduce them is extremely complex. Details about the
emissions target level, the policy instrument(s) to be used, what GHGs
are covered, what sectors or entities are covered, whether domestic or
international offsets are allowed, whether carbon capture and
sequestration is allowed or limited, whether biological sequestration
is allowed or limited, and whether the potential costs are limited by a
safety-valve mechanism are all important in the assessment of any
policy proposal. Assessing the potential economic impacts of a proposal
without these details would be very challenging.
Question 6. Dr. Gruenspecht, please discuss the limitations, both
at EIA and in the academic community, of economic modeling scenarios
more than 30 years in the future.
Answer. There is enormous uncertainty in any projections that look
25 years or more into the future. As stated in EIA's analysis of the
September 2006 proposal, ``NEMS, like all models, is a simplified
representation of reality. Projections are dependent on the data,
methodologies, model structure, and assumptions used to develop them.
Since many of the events that shape energy markets are random and
cannot be anticipated (including severe weather, technological
breakthroughs, and geopolitical developments), energy markets are
subject to uncertainty. Moreover, future developments in technologies,
demographics, and resources cannot be foreseen with certainty.
Nevertheless, well-formulated models are useful in analyzing complex
policies, because they ensure consistency in accounting and represent
key interrelationships, albeit imperfectly, to provide insights.''
Furthermore, all long-term projections engender considerable
uncertainty. It is particularly difficult to foresee how existing
technologies might evolve or what new technologies might emerge as
market conditions change, particularly when those changes are fairly
dramatic. As a result, to comply with the GHG emissions growth limits
necessary to meet the intensity reduction targets, all energy
providers, particularly electricity producers, likely will increasingly
rely on technologies that play a relatively small role today or have
not been built in the United States in many years. Sensitivity analyses
included in previous EIA studies of cap-and-trade systems for GHG show
that estimates of both energy and economic impacts of such programs can
change significantly under alternative assumptions regarding the cost
and availability of new technologies.
Finally, as noted in my testimony, policy design differences can
significantly affect the nature of uncertainty surrounding the
projected energy and economic impacts of alternative policies to limit
GHG emissions. Inclusion of a safety-valve feature in a cap-and-trade
program would allow GHG emissions to rise above the level projected in
our analysis in the event that emissions reduction inside or outside
the energy sector proves to be more costly than we expect, while
protecting against the prospect of larger energy system and economic
impacts in these circumstances. In contrast, policies that impose a
``hard'' cap on emissions without a safety-valve price for GHG credits,
would force the fixed GHG emissions target to be met regardless of
cost, reducing uncertainty surrounding the GHG emissions outcome but
increasing uncertainty regarding energy and economic impacts.
Responses of Howard Gruenspecht to Questions From Senator Menendez
Question 1. Mr. Gruenspecht, the Intergovernmental Panel on Climate
Change has warned us of the potentially devastating effect that global
warming may have on our and the world's economy if we do not act
quickly and decisively. In fact, Sir Nicolas Stern, head of the British
Government's Economics Service, found that globally the costs of
dealing with these effects may amount to 5 percent of global GDP. What
assumptions, if any, does the EIA report make of these potential costs?
Answer. The EIA analysis only assesses the impacts on the U.S.
energy-economy of the specific proposal that EIA was asked to examine.
EIA has not examined the analysis prepared by Sir Nicolas Stern, nor
made an assessment of the global costs of dealing with global warming.
Furthermore, as stated in the report, ``This report, like other EIA
analyses of energy and environmental policy proposals, 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 ETA'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.''
Question 2. Mr. Gruenspecht, I realize that these costs are
difficult to predict with certainty. Some have and continue to argue
that these costs are exaggerated. Others, as mentioned in the previous
question, have a less optimistic outlook. Regardless, could you provide
us with a middle ground for what the mitigation costs are likely to be?
Answer. The EIA analysis only assesses the impacts on the US
energy-economy of the specific proposal that EIA was asked to examine.
This focus is consistent with ETA's statutory mission and expertise. As
mentioned in the previous answer, EIA has not examined the analysis
prepared by Sir Nicolas Stern, nor made an assessment of the global
costs of dealing with global warming.
Responses of Howard Gruenspecht to Questions From Senator Thomas
Question 1. Please provide an economic analysis, comparable in
detail to that which was prepared from a national perspective, of the
impact that the proposed legislation would have, for each of the 50
states.
Answer. EIA is not able to provide an analysis at the level of each
of the 50 States as requested. However, the National Energy Modeling
System (NEMS) used in this analysis does produce energy market results
at various regional levels \3\ and industrial sector economic results
at the national level. With respect to the energy sector, significant
variations in regional results are seen in the electricity and coal
markets. In the industrial sector, the most significant impacts occur
in the energy intensive industries.
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\3\ For example, electricity markets are represented for 13 regions
based on the regions and subregions of the North American Reliability
Council (NERC).
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electricity and coal markets
All regions of the country are projected to face higher electricity
prices in the Phased Auction case of the September 2006 proposal that
EIA was asked to analyze (Figures 1 and 2).* The largest price
increases are projected in regions where electricity prices are set
competitively and where coal generation accounts for a large share of
total generation. In these regions, the costs of holding all the needed
emission allowances will be fully reflected in consumer prices. For
example, electricity prices in the MAAC and ECAR regions are projected
to be 17 percent and 14 percent higher, respectively, in the Phased
Auction case in 2030. Conversely, the electricity price impacts are
projected to be smaller in regions that still have an average cost
pricing regime and do not depend as heavily on coal. For example, 2030
electricity prices in the California and NWP regions are projected to
only be 4 percent and 5 percent higher, respectively, in the Phased
Auction case.
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* Figures 1-4 have been retained in committee files.
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The reduced use of coal in the power and liquid fuels (i.e., coal-
to-liquids diesel production) sectors affects coal production in all
areas of the country (Figure 3). In absolute terms, western coal
production is projected to be most impacted, falling 253 million tons
(24 percent) below the reference case in the Phased Auction case in
2030. This occurs because, in the reference case, western coal regions,
particularly the Powder River Basin in Wyoming and Montana, were
expected to be the dominate growth areas for coal production. In the
Phased Auction case, power companies turn to new nuclear, natural gas,
and renewable plants to meet growth in the demand for electricity,
reducing the need for greater coal production. Even with this change,
western coal production in 2030 in the Phased Auction case is 30
percent higher than 2004 production. Eastern coal production in 2030 is
projected to be 142 million tons (22 percent) below the reference case
level in the Phased Auction case, about the same level that was
produced in 2004.
impacts on industry output
In the Phased Auction case, the price of allowances directly
increases the costs in emitting sectors and leads to increases in
energy prices that raise the factor input costs for all industries.
This leads to changes in the demand for goods and services, as
reflected in the final demand categories of consumer spending,
investment, government spending and trade, and causes industries to
adjust their production accordingly. Figure 4 shows the average annual
loss in gross output relative to the reference ease for the period 2009
to 2030 for the Phased Auction case. The energy-intensive manufacturing
industries \4\ are impacted the most, with output projected to be
reduced by an average of 0.82 percent. Non-energy-intensive
manufacturing is reduced by an average of 0.57 percent, non-
manufacturing industries by 0.32 percent and services by 0.10 percent.
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\4\ Energy-intensive manufacturing industries in NEMS include food,
paper, inorganic and organic chemicals, resins, agricultural chemicals,
petroleum refining, glass, cement, iron and steel, and aluminum.
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Among the detailed energy-intensive industries, aluminum
production, which is a heavy user of electricity, is expected to fall
by 5.0 percent on average. Production of glass, iron and steel, cement,
agricultural chemicals and basic inorganic chemicals are also expected
to fall by more than 1 percent. Among the non-manufacturing industries,
coal mining is projected to fall by 8.9 percent, with oil and natural
gas extraction falling by 0.4 percent.
______
[Responses to the following questions were not received at
the time this hearing went to press:]
Questions for Jason Grumet From Senator Bingaman
Question 1. Mr. Grumet, in your testimony, you noted that cost
control measures other than the safety valve have been proposed. Could
you elaborate on that? How should we evaluate the pluses and minuses of
these different measures?
Question 2. Mr.Grumet, in your testimony you note that the
Commission believes that the Safety Valve is instrumental at the outset
of a program but may not be appropriate in the longer term. Can you
please explain?
Question 3. Mr. Grumet, competitiveness concerns--in particular
with regard to China--are often raised by those opposing mandatory
action to address climate change. What are the best ways to address
these concerns?
Question 4. Mr. Grumet, do you have any views on how the
President's announcement last night to promote alternative fuels and
CAFE increases bears upon economy-wide approaches to GHG reductions.
______
Questions for Jason Grumet From Senator Menendez
Question 1. Mr. Grumet, you stated that if the EIA had used a more
optimistic technology assumption to reflect the hill's significant
technology incentives, the analysis would likely have shown larger
emission reductions at even lower costs. What is your best guess as to
the difference in emission reductions and costs that would result from
a more optimistic view?
Question 2. Mr. Grumet, you indicated that the Commission has begun
evaluating opportunities to strengthen its original proposal while
still meeting the test of no significant harm to the economy. Could you
elaborate on any preliminary findings?
Question 3. Mr. Grumet, the European Union's Emissions Trading
Scheme (ETS) is set to enter into its second phase next year. As I'm
sure you know, the ETS reduction targets are much more stringent than
those found in the proposal that the FIA recently analyzed.
Additionally, there is no safety-valve price mechanism in the EU
system. Are you familiar with any statistical analysis that may have
been conducted of the ETS that have measured or predicted the costs to
the EU economy? If so are there any valuable lessons that we can take
from the EU's experience thus far?
______
Questions for Dan Lashof From Senator Bingaman
Question 1. Dr. Lashof you have mentioned target levels that you
believe would be necessary to reach ecologically necessary levels of
greenhouse gas concentrations. Have you or your colleagues looked at
the costs of those targets and could you compare them to the proposal
that we are discussing today?
Question 2. Dr. Lashof, what would be the impacts on coal use under
the low-end and high-end reduction ranges. you are supporting?
Question 3. Dr. Lashof, how do you believe the U.S. can most
effectively encourage developing countries to join in reducing GHG
emissions?
______
Questions for Anne Smith From Senator Bingaman
Question 1. Dr. Smith, your testimony implies that some level of
mandatory price signal, either through a safety valve or a carbon tax
could be justified as part of climate change policy. Could you
elaborate?
Question 2. Dr. Smith, the safety valve is often talked about in
largely political terms. You make the point that you believe it
increases the economic efficiency of the program. Can you please
explain?
Question 3. Dr. Smith, in your testimony, you say that the
allocation scheme in the proposal does not reach the goal of ``fair
compensation'' for the impacts of the program. I would like to hear
more about that, but could you first tell us whether you think this
type of compensation approach is a valid way to allocate allowances? In
your view, is it better or worse that an approach based on historic
emissions or fuel use?
______
Questions for Jeff Sterba From Senator Bingaman
Question 1. Mr. Sterba, you lead a company that gets a significant
percentage of its generation from coal, Clearly, new coal technologies
will be important to your company. In your view, how will this proposal
help speed the deployment of these technologies? Are there ways to
improve the bill in this area?
Question 2. Mr. Sterba, in addition to heading up one of the
nation's leading energy companies, you have a prominent role in the
Edison Electric institute which represents the majority of investor
owned utilities. Do you believe that it is possible to design
legislation that could win the support of a majority of the utility
industry this Congress?
Question 3. Mr. Sterba, your company was one of the signatories to
the US Climate Action Partnership announced yesterday. I congratulate
you on your leadership role in this important initiative. The report
appears to endorse a safety provision similar to the one in the
Bingaman proposal. Also, if I've understood you correctly, I believe
you have just endorsed such a provision in your testimony. On the other
hand, I have heard statements by some of the organizations involved in
US CAP that the principles do not allow such a provision. Could you
clear this up for us?