EIA Releases Analysis of Waxman-Markey Bill

A new analysis of the Waxman-Markey bill from the Energy Information Administration (EIA) finds that the most carbon dioxide reductions will occur in the electric power sector, mainly through the reduction in use of coal power. But it also finds that compliance with emissions caps that is generated through offsets could exceed actual reductions in covered emissions, and that the average electric customer could face a 20% price hike by 2030.

The report, titled “The Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009,” responds to a request from Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.) for an analysis of H.R. 2454, the American Clean Energy and Security Act of 2009. The 1,428-page bill, which seeks to regulate emissions of greenhouse gases (GHGs) through the implementation of a cap-and-trade program, was narrowly passed in the U.S. House on June 26. It is now being considered by the U.S. Senate.

The bill’s Title III cap-and-trade program covers roughly 84% of total U.S. GHG emissions by 2016, and it requires a 17% reduction in carbon dioxide emissions by 2020 and an 83% reduction by 2050, both relative to a 2005 baseline. It seeks to achieve this with an emissions cap that declines steadily between 2012 and 2050.

Compliance is enforced through a requirement for entities subject to the cap to submit allowances, which are bankable, sufficient to cover their emissions. Allowance obligations may also be offset by reductions in domestic emissions of exempted sources, by international offsets, or by emission allowances from other countries with comparable laws limiting emissions.

Maximum offsets from domestic and international sources are each capped separately at 1 billion metric tons (BMT) in each year of the program. The bill includes a provision that up to 500 million metric tons (MMT) of the domestic offset cap may be shifted to the international offset cap if the administrator of the Environmental Protection Agency (EPA) determines that a sufficient supply of domestic offsets is not available.

Among its key findings, the EIA report asserts that because offsets could be a low-cost compliance option, compliance generated through offsets could exceed actual reductions in covered emissions. “Cumulative compliance between 2012 and 2030, including reductions both in domestic emissions of covered gases and in domestic and international offsets, ranges from 24.4 BMT to 37.6 BMT CO2-equivalent emissions in the main analysis cases, representing a 21% to 33% reduction from the level of cumulative covered emissions projected in the Reference Case,” the report says.

It also finds that the vast majority of reductions in energy-related emissions are expected to occur in the electric power sector. The sector could account for between 80% and 88% of the total reduction in energy-related CO2 emissions in 2030. The EIA adds that the reductions will be mainly achieved by reducing the role of conventional coal-fired generation, which in 2007 provided 50% of total U.S. generation. “In addition, a portion of the electricity-related CO2 emissions reductions results from reduced electricity demand stimulated both by consumer responses to higher electricity prices and incentives in [the bill] to stimulate greater efficiency in energy use.”
Additionally, the report finds that if new nuclear, renewable, and fossil plants with carbon capture and storage (CCS) are not developed and deployed “in a timeframe consistent with emissions reduction requirements” under the bill, covered entities are expected to respond by increasing their use of offsets, and by turning to increased natural gas use to offset reductions in coal generation.
At the same time, however, the report projects that the bill will accelerate clean energy technologies. It forecasts that CCS technology would come online before 2020 and lead to 69 GW of new CCS coal-fired generation by 2030. Renewable generation would also be “dramatically higher” under the legislation, increasing 28% by 2030. The report also asserts that under the bill, nuclear power would expand dramatically without added financial assistance.

Other findings include these:

• GHG allowance prices are sensitive to the cost and availability of emissions offsets and low- and no-carbon-generating technologies: Across all main analysis cases conducted by the EIA, allowance prices range from $20 to $93 per metric ton in 2020 and from $41 to $191 (2007 dollars) per metric ton in 2030. 
• The Waxman-Markey bill increases energy prices, but effects on consumers’ electricity and natural gas bills are substantially mitigated through 2025 by the allocation of free allowances to regulated electricity and natural gas distribution companies. The report says that in almost all analysis cases, electricity prices ranged from 9.5 to 9.6 cents/kWh in 2020. Average impacts on electricity prices in 2030 are estimated to range between 11.1 cents/kWh and 17.8 cents/kWh, reflecting both higher allowance prices and the phase-out of the free allocation of allowances to distributors between 2025 and 2030.

Responding to the report, the Department of Energy published a statement in which it said the “non-partisan” EIA had confirmed findings by earlier reports from the Congressional Budget Office and the EPA. The Waxman-Markey energy and climate legislation will cost Americans $83 (adjusted for inflation) annually by 2030. This is roughly 23 cents a day— “the same as a postage stamp a day,” it said.
The Congressional Budget Office earlier this year projected a cost of 48 cents per day ($175 per year), while the EPA projected a cost of 22 to 30 cents per day ($80 to $111 per year).

“The bottom line is this: This legislation will create a new set of clean energy incentives that will be good for America—for jobs, for our economy, and for the environment,” said Energy Secretary Steven Chu. “We need to seize this opportunity and pass this bill.”
 
Sources: EIA, DOE