energy policy recommendations to the president and the 110th

Energy PolicyRecommendationsTo the President and 110th Congress

National Commission on Energy Policy

April 2007

Energy Policy Recommendations to the President and 110th Congress

These recommendations are the product of a bipartisan Commission of 21 members ofdiverse expertise and affiliations, addressing many complex and contentious topics. It is in-evitable that arriving at a consensus document in these circumstances entailed innumerablecompromises. Accordingly, it should not be assumed that every member is entirely satisfiedwith every formulation in this document, or even that all of us would agree with any givenrecommendation if it were taken in isolation. Rather, we have reached consensus on theserecommendations as a package,which taken as a whole offers a balanced and comprehensiveapproach to the economic, national security, and environmental challenges that the energyissue presents our nation.

2

Disclaimer

The National Commission on Energy Policy would like to express its thanks for the strongsupport of its funders.The Commission was founded in 2002 by theWilliam and Flora HewlettFoundation and its partners.

Acknowledgements


NCEP Commissioners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Letter from NCEP Co-Chairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Summary of Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Oil Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Climate Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

ProgramTargets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Price Cap or Safety Valve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Linkage to International Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Other Key Program Design Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14

Energy Efficiency and Supply Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Natural Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Advanced Coal Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

Nuclear Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Renewable Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Biofuels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Energy Technology Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22

Economic Analysis of Updated Commission Recommendations . . . . . . . . . . . . . . . . . . .24

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24

Updated Commission Recommendations and Key Modeling Assumptions . . . . . . . . . .25

Summary of Main Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26

Economic (GDP) and Energy-Price Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Emission Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Sector-Level Impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

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Table of Contents


Ralph CavanaghSenior Attorney and Co-Director, EnergyProgram,Natural Resources Defense Council

Erroll B. Davis*Chancellor of the University System of Georgia

Rodney EllisState Senator, Texas

LeoW. GerardInternational President, United Steelworkersof America

Robert E. Grady*Managing Partner, Carlyle Venture Partners,The Carlyle Group; Former ExecutiveAssociate Director of the OMB

F. Henry HabichtManaging Partner of SAILVenture Partners, LLC;Former Deputy Administrator of the U.S.Environmental Protection Agency

Frank Keating*CEO of the American Council of Life Insurers;Former Governor of Oklahoma

Richard A.Meserve*President of The Carnegie Institution;Former Chairman of the U.S. NuclearRegulatory Commission (NRC)

John P. HoldrenCo-ChairTeresa and John Heinz Professor ofEnvironmental Policy, Harvard University;Director of theWoods Hole Research Center

William K. ReillyCo-ChairSenior Advisor,TPG, Inc.;Former Administrator, U.S. EnvironmentalProtection Agency

JohnW. RoweCo-ChairChairman and CEO, Exelon Corporation

Philip R. SharpCongressional ChairPresident, Resources for the Future;Former U.S. Representative, IN

Marilyn BrownVisiting Distinguished Scientist,Oak Ridge National Laboratory;Professor, School of Public Policy,Georgia Institute of Technology

John E. Bryson*Chairman, President and Chief ExecutiveOfficer, Edison International;Chairman, Southern California Edison

Mario MolinaProfessor, University of California, San Diego

Sharon L. NelsonChair, Board of Directors, Consumers Union;Former Chief, Consumer Protection Division,Washington Attorney General’s Office

Richard L. Schmalensee*Professor of Economics,MIT;John C. Head III Dean,MIT Sloan Schoolof Management

Norm Szydlowski*President and CEO,Colonial Pipeline Company

Susan TierneyManaging Principal, The Analysis Group;Former Assistant Secretary of Energy

R. JamesWoolseyVice President, Booz Allen Hamilton;Former Director of Central Intelligence

Martin B. ZimmermanClinical Professor of Business, Ross Schoolof Business, University of Michigan;Former Group Vice President, CorporateAffairs, Ford Motor Company

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NCEP Commissioners

* Joined the Commission since the release of the December 2004 report, Ending the Energy Stalemate: A Bipartisan Strategy to Meet America’s Energy Challenges.


August 2007

Dear Colleagues,

Since the National Commission on Energy Policy (NCEP) released its December 2004 report, Ending the Energy Stalemate: A Bipartisan Strategyto Meet America’s Energy Challenges, we have watched our nation’s discourse on energy issues with a combination of optimism and concern. Onthe one hand,we have seen growing support — not only in Congress, but among business leaders and the general public — for decisive actionto address serious, energy-related threats to the environment and to our national and economic security. As a result, prospects for progress onproblems like global warming and U.S. oil dependence now seemmore promising than they have in over a decade.

On the other hand, the experience of the last few years also underscores how difficult it is to reach political consensus on these issues.TheEnergy Policy Act of 2005 contained many useful provisions to expand the domestic biofuels industry, address urgent infrastructure needs,promote efficiency, and develop new energy supplies. And yet, it seemed clear to many that these measures did not go nearly far enough. Asthe Commission prepared to issue updated recommendations in April 2007, it appeared our nation was fast approaching the end of the decadewithout an adequate response to the central energy challenges we confront.

At the time of this writing, new opportunities to bridge that gap are again within reach.Detailed climate legislation, introduced in June 2007 bySenators Bingaman and Specter with bipartisan backing, is winning support from constituencies that had hitherto been opposed to mandatoryaction on greenhouse gas emissions— including prominent leaders from the labor and business communities.More recently, Senators LiebermanandWarner have introduced bipartisan legislation to limit greenhouse gas emissions, and Speaker Pelosi has established a select committeein the House of Representatives to address global warming and energy security. At the same time, energy bills recently passed by the Houseand Senate contain, between them, important provisions to boost renewable energy resources, appliance efficiency standards, automobile fueleconomy, and the development of alternative fuels.

Which of these elements survives in final legislation is, of course, the key question. Likewise,whether-and in what form and timeframe—Congress will finally act to adopt a mandatory climate policy remains uncertain. In all of these areas, the politics of polarization and paralysiscontinue to exert a potent influence. They must not prevail. Over the last two-plus years, the Commission has continued working to identifycritical policy gaps and explore options for bridging them.This document summarizes the results of these efforts, focusing on specific areas whereadditional interventions, or in some cases an expansion or extension of current commitments, are called for.We do not attempt here to review thefull suite of topics and proposals included in our 2004 report, though all the needs identified in that document remain extremely important.

In closing, it is worth re-stating two core messages from our original report. The first is the ongoing need for comprehensive rather thanpiecemeal approaches. As before, our updated recommendations are designed to bemutually reinforcing and to function as a package.Thus, forexample, the policy we propose for limiting U.S. greenhouse gas emissions generates the funds needed to support major new investments inclimate-friendly technologies. Similarly,we believe a significant push to improve vehicle fuel economy is an essential complement to the nation’songoing efforts to promote clean, domestic biofuels.

Second,we remain convinced that the path to solving our most difficult energy problems can only be found through bipartisan cooperationand principled compromise.Without cooperation and compromise, opportunities for progress on issues like climate change and oil dependencewill continue to go unrealized for lack of public resources, political will, or both— even as mounting evidence of a warming planet and stubbornlyhigh oil prices underscore the liabilities of further inaction and delay. Here and elsewhere, the Commission’s central message remains the same:it is time— indeed it is past time— for the stalemate to end.

Sincerely,

John. P. Holdren William K. Reilly JohnW. Rowe

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Letter from NCEP Co-Chairs


• Strengthen key parameters of the originalNCEP climate proposal, including:

o defining program targets to aim for stabi-lizing emissions at current (2006) levelsby 2020 and reducing emissions 15 percentbelow current levels by 2030;

o raising the starting price of the safety valveto $10 per ton of carbon-dioxide equivalentemissions; and

o increasing the rate of escalation in thesafety-valve price to 5 percent per year inreal (rather than nominal) terms.

• Address other program design issues by (1)allocating emission allowances in a mannerthat effectively directs substantial resourcesto aid in the transition to a low-carboneconomy and that fairly compensates majoraffected industries for short-term economicdislocations incurred as a result of the pol-icy, while also avoiding the potential forsignificant windfall gains; (2) placing thecompliance obligation (point of regulation)at or near primary energy suppliers; and (3)including a well-designed offsets provision.

• Create stronger incentives for comparableaction on the part of key trading partners byproviding technical and financial resourcesfor the transfer of low-carbon technology,by signaling that the United States will workwith other countries to forcefully addresstrade and competitiveness concerns in theevent other major emitting nations fail to

1. Oil Security• Establish a national average new-vehiclefuel-economy improvement target of fourpercent per year, while retaining the fulldiscretionary authority of the NationalHighway Traffic Safety Administration(NHTSA) to modify the presumptive targetup or down if safety, technology, or economicconsiderations warrant.

• Encourage and empower NHTSA to imple-ment reforms aimed at making the existingcorporate average fuel economy (CAFE) pro-grammore cost-effective,market-oriented,and responsive to the jobs and competitive-ness concerns of the automobile industry.

• Provide targeted consumer and manufac-turer incentives to promote the domesticdevelopment, production, and deploymentof advanced automotive technologies suchas hybrids, plug-in hybrids, and advanceddiesel vehicles.

• Pursue cost-effective opportunities to fur-ther reduce transportation energy use byimproving heavy-truck fuel economy and byadopting efficiency standards for light-dutyvehicle replacement tires.

2. Climate Change• Adopt legislation this Congress to imple-ment a mandatory,market-based programto limit economy-wide U.S. greenhousegas emissions.

take action within a reasonable timeframe,and by linking future U.S. emission-reductioncommitments to progress in the interna-tional arena.

3. Energy Efficiency• Enhance and extend tax incentives for effi-ciency investments introduced under theEnergy Policy Act of 2005 (EPAct05).

• Ensure that the Department of Energy (DOE)follows through on its recent commitmentto issue efficiency standards for 22 categoriesof appliances and equipment that captureall cost-effective and technically feasibleenergy savings.

4. Natural Gas• Continue to focus on assuring future supplyadequacy by following through on EPAct05commitments with respect to the Alaskapipeline, LNG infrastructure,market trans-parency, and permitting and leasing. TheCommission reiterates its call for a compre-hensive inventory of on- and off-shoreresources to inform future policy decisionsand urges Congress to address concernsabout the adequacy of related provisionsin EPAct05 (both in terms of the relativelyshort timeframe specified for completingthe inventory and in terms of constraintson the use of federal resources to conductinventory-related activities in certain areas).

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Summary ofRecommendations


5. Advanced Coal• Direct greater resources toward acceleratingthe commercialization of carbon captureand storage (CCS) by providing substantialdeployment incentives. Specifically, theCommission believes CCS projects should beeligible for bonus allowances under a green-house gas trading program that are at leastequal in value to incentives provided underthe renewable energy production tax credit.

• Condition eligibility for public funding orsubsidies on the actual inclusion of CCSwithany new integrated gasification combinedcycle (IGCC) and other advanced coal projectsgoing forward. CCS must be included fromthe outset in any taxpayer supported effortsto develop coal-to-liquids technology.

• Explore carbon capture options for non-IGCC plants.

• Ensure that the U.S. Environmental Protec-tion Agency (EPA) completes a rigorous,formal public process to formulate effectiveregulatory protocols governing long-termcarbon storage as soon as possible (recog-nizing that midcourse corrections will likelybe needed as experience is gained).

• Ensure that new coal plants built withoutCCS are not “grandfathered” (i.e., awardedfree allowances) in any future regulatoryprogram to limit greenhouse gas emissions.

6. Nuclear Energy• Take action to address the current impasseon nuclear waste disposal,while reaffirmingthe ultimate objective of siting and devel-oping one or more secure geologic disposalfacilities, by amending the NuclearWastePolicy Act (NWPA) to:

o Align its requirements with human engi-neering and scientific capabilities, while

adequately protecting public health andsafety and the environment.

o Require DOE to site and operate consoli-dated national or regional interim storageoptions.

o Undertake R&D to explore technologicalalternatives to the direct geologic disposalof waste from a once-through cycle thatmeet commercial requirements and non-proliferation objectives, reduce the challengeof waste disposal, ensure adequate pro-tection of public health and safety, andextend fuel supply.

o Codify that interim storage and federalresponsibility for disposal of nuclearwaste is sufficient to satisfy the NuclearRegulatory Commission’s waste confi-dence requirement.

o Require the Secretary of Energy to takepossession of and/or remove fuel fromreactor sites that have been, or are in theprocess of being fully decommissioned.

7. Renewable Energy• Continue to provide investment certaintyby extending the eligibility period forfederal production tax credits in five-year,rather than two- or one-year, increments.

• Adopt a federal renewable portfolio standard(RPS) that increases the share of electricitygenerated by renewable resources nation-wide to at least 15 percent by 2020.

8. Biofuels• Re-evaluate ethanol subsidies and tariffs inlight of current fuel mandates and rational-ize existing policies to direct a greater shareof public resources to more promising op-tions, such as cellulosic ethanol; biobutanol;

and clean, high-quality diesel fuel fromorganic wastes.

• Address other hurdles to biofuels deploy-ment, including hurdles related to thedeployment of critical supporting infra-structures (including gathering systems,distribution systems, and refueling facili-ties) and compatible vehicle technologies.

• Take steps to ensure that policies aimed atreducing U.S. oil dependence do not pro-mote environmentally unsustainable fuelalternatives. The Commission believes thatCalifornia’s recently introduced low-carbonfuel standard suggests a useful directionfor future policy and deserves considerationat the national level.

9. Energy TechnologyInnovation

• Double annual direct federal expenditures onenergy-technology research, development,and demonstration, corrected for inflation,with increases emphasizing public-privatepartnerships, international cooperation, andenergy-technologies that offer high poten-tial leverage against multiple challenges.Substantially increasing public investmentin energy technology innovation is critical tothe achievement of oil security and climatechange objectives and can be funded usingrevenues generated by the proposed green-house-gas trading program.

• Triple federal funding specifically forcooperative international efforts in energyresearch, development, and deployment(where this proposed increase is within theoverall expansion of federal expendituresrecommended above).

7

In its 2004 report, the Commission emphasized the impor-tance of a balanced approach to enhancing oil security. Thus,the Commission’s recommendations included a number ofsupply-side measures— aimed at nurturing a greater diver-sity of foreign and domestic suppliers, promoting a morerobust global network of strategic reserves, and developinglong-term alternatives to petroleum, such as biofuels —while also stressing the importance of concerted efforts onthe demand side. In particular, the Commission called onCongress to “significantly strengthen”and “simultaneouslyreform” the existing Corporate Average Fuel Economy (CAFE)program,while providing targeted manufacturer and con-sumer incentives to accelerate the deployment of advancedvehicle technologies and to address the competitivenessconcerns of the U.S. auto industry.

yet-untapped area of policy opportunity forreducing oil dependence and making thenation more energy secure. The Commissiontherefore applauds President Bush’s recentcall for a significant improvement in averagenew-vehicle fuel economy and urges Con-gress to move quickly to adopt legislationthat would:

Two years later, despite promising ad-vances on the technology front — includingsubstantial progress in developing vehicles,such as hybrid electric and “plug-in”hybrids,that could radically reduce gasoline con-sumption per mile traveled— improving theefficiency of the nation’s light-duty vehiclefleet remains the most important and as-

Oil Security


• Establish a four percent per year fuel-economyimprovement target;

• Retain the full discretionary authority ofthe National Highway Traffic Safety Admin-istration (NHTSA) to implement the CAFEprogram, including discretion to modify thepresumptive annual average fuel-economyimprovement target up or down upondemonstrating that safety, technology,or economic considerations warrant suchmodification;

• Encourage and empower NHTSA to imple-ment reforms aimed at making the CAFEprogram more cost-effective,market-oriented, and responsive to the jobs andcompetitiveness concerns of the automobileindustry (e.g., by adopting attribute- orsize-based standards, allowing trading oraveraging across manufacturers, establish-ing multi-year compliance periods, andrationalizing incentives within the CAFEprogram for alternative fuel vehicles);

• Promote the domestic production of ad-vanced automotive technologies and boostconsumer demand for more efficient vehi-cles by providing targeted consumer andmanufacturer incentives, as recommendedin the Commission’s 2004 report. TheCommission notes that a market-basedprogram to limit greenhouse gas emissions(as discussed in the next section) could pro-vide a secure revenue stream to supportsuch incentives.

The Commission believes that the approachoutlined above will produce substantial fuel-economy improvement over time and greatly

accelerate the adoption of transformativevehicle technologies. At the same time, theCommission recognizes that efforts towardthis objective must be responsive to jobs andcompetitiveness concerns given the vulnerablestate of the domestic auto industry. In our view,a well-designed package of CAFE programreforms and manufacturer and consumerincentives can mitigate these concerns. Forexample, an attribute- or size-based systemcould significantly address the disadvantagessome automakers would otherwise face as aresult of the mix of vehicles in their productline.With a thoughtful combination of policies,the Commission is confident that progresstoward more efficient cars and a more robustand globally competitive U.S. auto industryare achievable at the same time.1

Here, as in other major policy areas, theimportance of a comprehensive approach isworth emphasizing. Incentives for the pro-duction and sale of more efficient vehiclesalone will not do the job: absent a changein standards, average fuel economy will con-tinue to stagnate so long as gains frommoreefficient models can be offset by a largermarket share for less efficient vehicles. Andeven though consumers’ vehicle choices areaffected by substantial changes in gasolineprices, the magnitude of the price signalgenerated by any politically viable, near-termprogram to regulate greenhouse gas emis-sions is unlikely — by itself — to be sufficientto effect a significant shift in driving patternsor consumer preferences for more efficientautomobiles. Thus, as the Commission hasargued in the climate context, a combinationof regulation and incentives that generates a

simultaneousmarket pull andmarket push fornew technologies is likely to bemore effectivethan either approach in isolation. By essen-tially “flipping” the regulatory presumptionin favor of steady progress absent a findingto the contrary, we seek to alter the dynamicthat has enabled fuel economy to stagnatefor over twenty years,while retaining NHTSA’sfull authority to adjust the rate of improvementbased on its expert judgment.Moreover, theCommission sees great merit in establishinga system that achieves constant, incremen-tal, and relatively predictable improvementcompared against the current system,whichhas produced long periods of inaction inter-rupted by erratic and potentially disruptivechanges in fuel-economy requirements thatoccur only once every ten to twenty years.

1 For example, in its 2004 report, the Commission encouraged policy makers to consider establishing cost certainty for the vehicle industry by incorporating acost-containment mechanism in the CAFE program (the idea was first proposed in a 2002 National Academy of Sciences study of fuel-economy regulation).The Commission has not undertaken further analysis of specific cost-containment options, but continues to believe that this and other approaches to managingtechnology and cost uncertainty merit further exploration.

9

“Improving the efficiency of thenation’s light-duty vehicle fleetremains the most importantand as-yet-untapped area ofpolicy opportunity for reducingoil dependence and making thenation more energy secure.”

Among the most prominent and controversial recommen-dations put forward by the Commission in 2004 wasa proposal that the United States adopt a mandatory,economy-wide program to limit future greenhouse gasemissions. Two years later, as the scientific case for actionhas grown steadily more compelling andmore urgent, theCommission remains convinced that a combination ofmarket signals and technology policies (including substan-tially increased R&D investments, enhanced deploymentincentives, and well-designed mandates) provides the mostpromising and ultimately most effective path forward.

ClimateChange

We therefore reiterate our call for a com-prehensive approach that will generate themarket signals and investment certaintyneeded to spur the development and deploy-ment of lower-carbon technologies, recogniz-ing that the market signal generated by anypolitically viable, near-term proposal is unlikelybe adequate— on its own— to overcomeexisting deployment barriers for certain keytechnologies (such as carbon capture andstorage), at least in the early years of programimplementation. Thus, a critical element of

the Commission’s original approach was andremains the inclusion of a complementarypackage of technology policies and incen-tives (where the latter are funded by newrevenues generated under a greenhouse gastrading program).

In sum, the Commission urges Congressto act without further delay to implementa comprehensive,mandatory,market-basedprogram to limit emissions of greenhousegases in a manner that does not significantlyharm the U.S. economy and that encourages


comparable action by other major emittingnations. Core elements of the program archi-tecture described in the Commission’s 2004report remain, in our view, central to craftingsound, politically viable legislation consistentwith this objective.Asmomentum for a changein national policy has grown and as Congresshas begun to consider a number of compet-ing proposals, three program design issues—stringency of program targets, inclusion of aprice cap or safety valve mechanism, and link-age to developing country participation—have provoked intense debate among stake-holders and extensive further deliberationwithin the Commission itself. Our currentthinking in each of these areas is summarizedbelow. In each case, the Commission has cometo the view that its original recommendationsshould be strengthened while preserving thebasic approach we proposed in 2004.

Program TargetsThe Commission has long been convinced

that the best hope for timely action on climatechange lies in formulating a “first step”policythat establishes moderate near-term targetswhile also providing a robust basis for long-term progress. Our original ecommendationsenvisioned an initial ten-year implementationperiod during which program targets wouldfirst aim to slow the rate of growth in U.S.emissions before proceeding to “stop”and

“reverse”phases in which emissions wouldstabilize and then begin to decline.

The Commission has always recognized,of course, that responsibly managing climaterisks will eventually require substantial re-ductions in absolute emissions. The recent(Fourth) Assessment Report of the Intergov-ernmental Panel on Climate Change (IPCC)

indicates that limiting the projected increasein Earth’s average surface temperature to 2–3degrees Celsius could require absolute reduc-tions in global carbon-dioxide emissions ofas much as 30–85 percent below 2000 levelsby mid-century (2050).2 In contrast, the latestreference-scenario projection issued by theInternational Energy Agency shows the con-tinuation of a business-as-usual trajectoryleading to a 55 percent increase in globalcarbon dioxide emissions over just the nextquarter century (that is, by 2030).3 Given therapid industrialization that is now occurring

in many parts of the world and given thelong-lived and capital-intensive nature ofmuch of the world’s energy infrastructure,the challenge of reversing global emissionstrends to the extent needed to addressclimate concerns is clearly enormous.4

At the same time, and notwithstandingthe fact that many stakeholders now acceptand expect that greenhouse gas emissionswill eventually be regulated, the Commissionis under no illusions about the continuing

2 See Table SPM.5 (p. 23) of IPCC, 2007. Climate change 2007:Mitigation. Contribution ofWorking group III to the Fourth Assessment Report of the IntergovernmentalPanel on Climate Change [B.Metz, O. R. Davidson, P. R. Bosch, R. Dave, L. A.Meyer (eds)], Cambridge University Press, Cambridge, United Kingdom and New York,NY, USA. The IPCC’s Fourth Assessment Report also locates the onset of many of the most serious potential consequences of climate change in the range of aglobal average temperature increase of 2–3ºC (for a fuller discussion of impacts, see IPCC, 2007. Climate change 2007: Impacts, Adaptation and Vulnerability.Contribution ofWorking group II to the Fourth Assessment Report). All IPCC reports are available at http://www.ipcc.ch/.

3 See <http://www.energybulletin.net/22042.html>. The reference-scenario projection is from the IEA’s 2006World Energy Outlook; it is intended to providea baseline vision of how energy markets are likely to evolve absent new government measures to alter underlying trends. The U.S. Energy InformationAdministration’s 2006 reference case projection is even more pessimistic, indicating a nearly 75 percent increase in global emissions between 2003 and 2030(http://www.eia.doe.gov/oiaf/ieo/ieorefcase.html).

4 By one estimate, global energy-related carbon emissions grew by approximately 18 percent between 1990 and 2003 (Marland, et al., 2006.<http://cdiac.ornl.gov/ftp/ndp030/global.1751_2003.ems>).Moreover, the annual rate of increase in global emissions seems to have accelerated in recent years,as has the rate at which carbon-dioxide levels in the atmosphere are rising.

11

“The Commission urges Congressto act without further delayto implement a comprehensive,mandatory,market-basedprogram to limit emissionsof greenhouse gases.”

Energy Policy Recommendations to the President and 110th Congress12

Price Cap orSafety Valve

The price cap or safety valve has emerged asperhaps the single most contentious elementof the Commission’s 2004 proposal. Morethan two years later, we continue to believethat the cost certainty provided by thismechanism is critical to forging the politicalconsensus needed to move forward withoutfurther delay. Cost debates inevitably turn on

difficulty of reaching political consensus on theclimate issue. It remains the case that effortsto advance policy must be responsive topolitical realities and to the inevitable trade-offs that exist between the timeliness andstringency of action. In view of the continuingdisconnect between what is required interms of emission reductions and what ispolitically feasible in the near-term,we con-clude— as we did in 2004— that movingforward with initially moderate targets ismore ecologically protective than continueddelay in pursuit of more aggressive goals.

That said, the Commission believes it isappropriate and feasible to strengthen itsoriginal program targets in light of the addi-tional time that has elapsed since 2004 andthe scientific and technological developmentsthat have occurred in the interim. Specifically,the Commission’s current recommendationis to:

• Strengthen program targets to aim forstabilizing economy-wide greenhouse gasemissions at current (2006) levels by 2020and achieving a 15 percent reduction belowcurrent emissions levels by 2030.

We recognize that even this revised reduc-tion target remains considerably less aggres-sive than several proposals now beforeCongress. Therefore it is important to stressthat the Commission continues to support asignificant acceleration in the rate of domesticreductions once Congress determines thatall major emitting nations are joined in anequitable and effective global response toclimate change.The five-year review provisionincluded in our original proposal provides amechanism for adjusting program targetsover time and remains critical to charting anecologically and economically responsiblecourse for U.S. policy well beyond the initialyears of program implementation.

technology assumptions: greater optimismabout the development of low-carbon tech-nologies will result in lower cost projectionswhile greater pessimism produces the oppo-site result. Since there is no objective way toadjudicate different views of the future tothe satisfaction of all parties, cost debatesare inherently intractable. Even within theCommission, a wide range of opinions existsabout the likely cost and pace of technologyimprovements. By including the safety

GREENHOUSE GAS EMISSION TARGETS

The Commission’s original proposal envisioned an initial ten-year implementation pe-riod during which program targets would first aim to slow the rate of growth in U.S.emissions before proceeding to “stop”and “reverse”phases in which emissions would sta-bilize and then begin to decline.

The Commission’s new proposal strengthens the program targets to begin emissionsreductions immediately upon implementation and achieve a 15 percent reduction belowcurrent emissions levels by 2030.

Business-as-usual projections for greenhouse gas emissions are taken from the Energy InformationAdministration’s Annual Energy Outlook 2006.

12,000

10,000

8,000

6,000

4,000

2,000

01990 1995 2000 2005 2010 2015 2020 2025 2030

MillionM

etric

Tons

CO2e

OriginalNCEP ProposalNew NCEP

Proposal

Business-as-UsualProjections

Historic Emissions


valve— and thereby insuring society againstthe possibility that current assumptions aretoo optimistic — our diverse group has beenable to reach consensus on a common emis-sions reduction target while maintainingdiffering expectations about the rate of tech-nological progress. Other proposals currentlybefore Congress use other mechanisms toaddress economic uncertainty, but in ourview the safety-valve still provides a uniquelyeffective and decisive response to the costand competitiveness concerns that continueto motivate opposition to mandatory action.

Recognizing that the emissions target andsafety valve together determine the overallstringency of the program, the Commissionhas, in recent months, undertaken furtheranalysis of options for strengthening bothparameters.We have concluded that the

combination of a somewhat higher safetyvalve price and more aggressive emissionstargets, coupledwithmajor incentive programsfor new technology and complementarypolicies that have recently begun to attractwidespread political support — specifically,an increase in vehicle fuel-economy (CAFE)

standards and a federal renewable portfoliostandard (RPS) —will produce significantlylarger environmental benefits over the nexttwo decades while still meeting the economictest of “no significant harm.”

Accordingly, the Commission’s current rec-ommendation is to:

• Raise the starting price of the safety valveto $10 per ton of carbon-dioxide equivalentemissions (compared to $7/ton in the Com-mission’s original proposal) and increasethe rate of escalation in the safety-valveprice to 5 percent per year in real (ratherthan nominal) terms.

The results of recent Commissionmodelingto analyze the impacts of a higher safety valveprice and more aggressive program targetsare described in the appendix of this report.On the whole, the analysis confirms thatpredictions about program impacts are highlysensitive to input assumptions concerningboth technology development and the im-plementation of additional policies.Withoutsupplemental policies and without acceler-ated deployment of new technologies likecarbon capture and storage, the Commission’smodeling results suggest that imposing a 15percent emissions reduction target over thenext two decades could— absent a safetyvalvemechanism— result in allowance pricesas high as $50 per ton of carbon dioxideequivalent in 2030. On the other hand,withthe supplemental policies, significant energy-efficiency improvements, and a moreoptimistic view of the effect of increasedR&D investment in terms of driving downfuture technology costs, the same target can

be achieved— according to the modelinganalysis — without ever triggering theCommission’s proposed safety valve price.

Given inherent uncertainty about futuretechnology and policy developments, theCommission believes these results highlightthe usefulness of a predictable and well-defined cost-containment mechanism.ManyCommission members are optimistic aboutthe level of innovation likely to occur in re-sponse to a concrete carbon price signal andabout the prospects for implementing im-portant supplemental policies like CAFE, RPS,and incentives for carbon capture and storage.Moreover, our analysis indicates that includingthese policies is central to achieving moreambitious emission reduction targets withouttriggering the safety valve.5 At the same time,the Commission believes it is appropriate andinstructive to assess the economic impacts ofcombining stronger program targets with ahigher safety valve price absent acceleratedtechnology assumptions and supplementalpolicies. In that case,modeling analysis indi-cates that the safety valve price will betriggered relatively early in the program butthe overall impact on the economy is verysmall; indeed the estimated reduction in U.S.GDP relative to the base case totals just 0.12percent in 2020 and 0.25 percent in 2030.This cost estimate is only very slightly greaterthan the 0.2 percent reduction in 2030 GDPestimated for the Commission’s originalproposal and deemed at that time by EIAto constitute “no material impact” on thenation’s economy.

Two additional points about the Commis-sion’s approach are worth emphasizing. First,

5 Because supplemental policies like CAFE and RPS have the effect of limiting emissions from specific sectors — in this case transportation and electric powerproduction— their inclusion as part of a comprehensive package of policies reduces demand for allowances within a greenhouse gas trading program, therebydriving down allowance prices. Of course, the supplemental policies also impose costs — costs that, along with the policies, themselves,may be justified byadditional public-interest rationales. Vehicle fuel-economy standards, for example,may be justified largely on the basis of energy security considerations,whilethe chief purpose of an RPS may be to provide sufficient investment certainty for the successful commercialization of technologies that will continue to facesubstantial deployment hurdles, even in the context of initial carbon constraints.

13

6 See http://select.nytimes.com/search/restricted/article?res=F50B12F83A5B0C748CDDA80994DE404482


every five years — for the express purpose ofassessing progress both internationally anddomestically and for adjusting U.S. policyaccordingly. In addition, the Commissionspecifically called for a tripling of federalexpenditures to promote and participate incooperative international efforts to advanceenergy research, development, demonstra-tion, and deployment.

Over the last two years it has becomeclearer than ever that any successful nationalpolicy must place considerable emphasis onpromoting wider international cooperation.By some accounts, China is now adding newcoal capacity at the rate of one large powerplant every week to ten days and is set tosurpass the United States in total carbonemissions as early as 2009.6 Though somewill argue that this sobering developmentweakens the case for action by the UnitedStates, the Commission draws the oppositeconclusion. Our view remains that rapidly in-dustrializing but still far poorer nations arelikely to accept emissions limits only afterthe United States and other wealthy coun-tries have demonstrated a willingness totake the lead. The current trajectory of globalemissions not only underscores the liabilitiesof continued paralysis (in terms of prolong-ing business-as-usual trends in places likeChina and India), it argues for concertedmeasures to bring other countries along asquickly as possible.

Thus, in addition to strengthening keyparameters of its proposed domestic policy,the Commission believes it is appropriate toplace greater emphasis on accelerating thediffusion of low-carbon technologies tocountries like China and India. Specifically,the Commission’s current recommendationis to:

our current proposal — by combining astronger price signal with additional deploy-ment incentives — is designed to overcomeestimated price differentials for advanced coalsystems with carbon capture and storage.Given the urgent necessity of speeding thetransition to more climate-friendly coal tech-nologies, the Commission believes this is a keytest for any near-term climate policy package.

Secondwewish to stress that while a cost-containment mechanism such as the safetyvalve remains, in our view, essential to buildingthe bipartisan support needed to advancea timely and meaningful domestic climatepolicy, we also anticipate that ecologicalconsiderations will argue for an eventualphase-out of this mechanism in favor ofgreater emissions certainty once a truly in-ternational response to global warming isunderway. Our hope, consistent with ouremphasis on encouraging comparable actionby other nations, is that near-term leadershipby the United States will hasten progresstoward that objective.

Linkage toInternational Action

The Commission has always recognized thenecessity of engaging other countries in anysustained and ultimately successful effort tomanage climate risks — indeed it is preciselyfor this reason that we assign great urgencyto re-asserting a leadership role for theUnited States. Our original recommendationstherefore sought to create a direct linkagebetween future U.S. emission-reduction com-mitments and comparable action by othermajor emitting nations. The primary mecha-nism included in our 2004 recommendationsfor this purpose was a periodic review by thePresident and Congress — to be conducted

• Create stronger incentives for comparableaction on the part of key trading partnersby using a share of the public revenuesgenerated by a greenhouse-gas tradingprogram to provide technical and financialresources for the transfer of low-carbontechnology. In addition, the United Statesshould signal its intention to work withother countries to develop forceful and co-ordinated responses to international tradeand competitiveness concerns if majoremitting nations fail to adopt comparableclimate policies in a reasonable timeframe.

In sum,while the Commission remainsfirmly convinced that the United States shouldand must lead by example,we are equallyclear that ecological and economic imperativesdemand the participation of China, India andall major trading partners in implementingmeaningful long-term emission reductioncommitments. If other major emitting nationsdo not participate in future efforts to limitglobal climate risks, the United States mustbe prepared to respond effectively to tradeand competitiveness concerns and to considera variety of options for doing so.

Other Key ProgramDesign Issues

The Commission has also developed moredetailed positions on other specific aspectsof designing a trading program to limitgreenhouse gas emissions:

ALLOWANCE ALLOCATION• On allowance allocation, the Commis-

sion has come to the view, based on furthereconomic analysis, that the number of al-lowances available on an economy-widebasis under a greenhouse gas trading program

14


will be more than adequate to both compen-sate major energy-related industries for anyshort-term economic dislocations incurred asa result of the program,while also providingsubstantial resources to address other policyconcerns arising from the transition to alower-carbon economy. Accordingly, we haveproposed an initial allocation where roughlyhalf of overall allowances are auctioned orotherwise directed to investment in advancedenergy technologies and tomitigating impactson low-income consumers.The remaining halfof the allowance pool should be distributedin a manner that fairly addresses the costconcerns of affected industries (includingsuppliers of primary fuels, the electric powersector, and energy-intensive manufacturers).7

We believe this basic approach provides anappropriate balance of public and privateinterests in the early years of program imple-mentation and avoids the potential forsignificant windfall gains. Over time, theshare of allowances distributed at no costshould diminish in favor of a more completeauction. The Commission recently publisheda staff paper that discusses the issue of allo-cation in some detail; this document, entitled“Allocating Allowances in a Greenhouse GasTrading System,” can be found at www.ener-gycommission.org.

POINT-OF-REGULATION• On point-of-regulation, the Commission

recommends that the compliance obligationbe placed at or near primary fuel producersor suppliers. Besides reducing administrativecomplexity and the potential for emissions“leakage,”we believe this approach will facil-itate efficient pass-through of the carbonprice-signal and reduce the potential for dis-

tortions introduced by, among other factors,different models of electric utility regulationaround the nation.

EMISSIONS OFFSETS•On emissions offsets, the Commission

has concluded that a carefully designed off-sets provision can provide a critical catalystfor cost-effectivemeasures not otherwise cov-ered by the trading program. The Commis-sion is concerned, however, by proposals thatrely on offsets as a principal means of near-term cost containment.While there is enor-mous potential for cost-effective carbonsequestration in the agriculture and forestrysectors, relatively little long-term experienceexists for measuring,monitoring, and verify-ing the permanence of emission reductionsachieved through terrestrial sequestration.Proposals that expect to achieve significant(>10 percent) compliance through offsets inthe near term will be obligated to create asubstantial enforcement bureaucracy or riskan influx of illegitimate credits. Either ofthese outcomes would badly undermine the

viability of a meaningful domestic offsetprogram. The Commission believes that theability to implement a well-functioning off-sets programmust not be jeopardized byoverstating its near-term potential. Rather, acredible programmust reflect the differinglevels of certainty and verifiability associ-ated with different types of projects andshould initially provide allowances from aset-aside within the overall pool of availableallowances to encourage harder-to-verifyoffsets without undermining program objec-tives. Using a dedicated set-aside fromwithin the program’s overall allocation willguarantee the agriculture and forestry sec-tors the incentives necessary to acceleratelearning for this important set of green-house-gas mitigation options. By reducingthe need for long administrative reviewprocesses and expensive reporting require-ments, the proposed approach would alsoprovide investors with greater certainty andlower transaction costs. A recent NCEP-com-missioned paper on emissions offsets isavailable at www.energycommission.org.

7 Importantly, this recommendation should not bemisinterpreted to imply that each sector is limited to a direct allocation equivalent to 50 percent of its emissionsobligation. On the contrary,we propose that the distribution of allowances should roughly follow the actual distribution of net cost burdens imposed on differentsectors and industries as a result of the policy. As explained at some length in the Commission’s detailed staff paper, this approach would lead to an initial alloca-tion in which some sectors receive substantially more than 50 percent of their emissions obligation and some sectors receive considerably less than 50 percent.

15

One of the Commission’s founding premises has beenthat America’s energy challenges call for a comprehensiveresponse— that efforts to address oil security or climatechange will fail if they do not also include complementarymeasures to promote improved efficiency and assure ample,reliable, and affordable energy supplies. As noted in theintroduction to this update, progress has been achievedin a number of areas over the last two years, in many casesas a result of provisions introduced under the Energy PolicyAct of 2005 (EPAct05) and in some instances through otherregulatory or legislative initiatives. This section identifiesremaining areas where the Commission believes additionalor expanded efforts are called for.

EnergyEfficiencyand SupplyDiversity


Energy EfficiencyOn energy efficiency, EPAct05 established

a number of tax incentives for energy effi-ciency and solar energy technologies. Theseincentives expire, however, at the end of2008— too soon to realize their full benefits.The Commission urges Congress to:

• Enhance and extend tax incentives forefficiency investments introduced underEPAct05.

• Ensure that the U.S. Department of Energy(DOE) fully meets its recent commitmentto issue 22 new efficiency standards formajor appliance and equipment categories,following an extended period of sluggishprogress. DOE must dedicate the necessaryadministrative resources to establish rigorousstandards that capture all cost-effectiveand technically feasible savings.

Recognizing thatmany of themost urgentlyneeded advances in energy-efficiency policywill occur at the state level, the Commissionalso wishes to note the July 2006 release ofa National Action Plan for Energy Efficiency.8

Developed by a broad-based group of stateregulators, utilities, consumer advocates,business interests, and environmental groups,the Action Plan includes a number of usefulpolicy recommendations and deserves closeattention from policy-makers and regulatorsat the state and federal level.

Natural GasOn natural gas, the Commission’s 2004 rec-

ommendations stressed the importance—

for economic and environmental reasons—of assuring the adequacy of future supplies.At that time we proposed concerted effortsto move forward with the Alaska natural gaspipeline, expand LNG infrastructure, provideadditional resources to expedite environ-mentally responsible leasing and permittingdecisions, and conduct a comprehensive in-ventory of on- and off-shore resources. TheCommission therefore welcomes a numberof provisions in EPAct05 that should facilitateprogress in many of these areas, along withaction taken by Congress and the Adminis-tration in 2006 to expand access to knownreserves in the eastern Gulf of Mexico.

Notwithstanding these important devel-opments, however, the Commission remainsconcerned about the potential for a growinggap between U.S. demand for natural gasand access to domestic and imported suppliesin the years ahead. Given the importanceof natural gas as a bridge to an era of lower-carbon electricity production,we believepolicy makers must continue to give priorityto assuring supply adequacy for this criticalfuel. For example, concerns have recentlybeen raised about the adequacy of inventoryprovisions included in EPAct05: specifically,whether the short timeframe specified forcompleting the inventory and constraintson the use of federal resources to conductinventory-related activities in certain areaswill hamper efforts to fill in important datagaps. Since rational resource decisions can-not be made absent good information, theCommission urges Congress and the relevantagencies to focus on addressing these con-

cerns and on moving forward to complete atruly comprehensive inventory.

Advanced CoalTechnologies

On advanced coal technologies, significantincentives were provided under EPAct05 forintegrated gasification combined-cycle(IGCC) coal technology. Recognizing that thefuture of coal depends on pairing future coalsystems with actual carbon capture and stor-age (CCS), the Commission urges Congressand DOE to ensure that adequate attentionand funding is being focused on the CCS sideof the equation.The Commission further notes

that several states and utilities have adoptedor are considering specific constraints onlong-term investment in baseload coal gen-eration that lacks provision for responsibledisposal of its global warming emissions;given potential costs associated with futureregulation of these emissions, such precau-tions deserve consideration by all generationinvestors and regulators as a simple matterof fiscal prudence.

In sum, the Commission reiterates in thestrongest possible terms its 2004 recommen-

8 The Action Plan is available at: http://www.epa.gov/cleanenergy/actionplan/report.htm.

17

“…The future of coal dependson pairing future coal systemswith actual carbon captureand storage…”

Nuclear EnergyOn nuclear energy, EPAct05 included sub-

stantial incentives for a new generation ofnuclear power plants but did not address theunresolved problem of nuclear waste disposal.The Commission recognizes, of course, thatsignificant additional hurdles with respect tocost, safety, and proliferation risk must alsobe addressed to allow for an expanded rolefor nuclear power in the future-all of theseissues are addressed in some detail in our2004 recommendations.Meanwhile, the factthat the licensing of the proposed nuclearwaste repository at Nevada’s Yucca Mountainremains highly uncertain argues for refocusedattention on effective management of spentfuel as an interim step towards permanentdisposal. This would increase the probabilitythat nuclear energy could make a significantcontribution to the mitigation of climatechange in this century. The expansion ofnuclear power would enhance fuel and tech-nology diversity in the electricity sector andcould reduce vulnerabilities associated withreliance on petroleum and natural gas fromunstable regions of the world.10 Spent fuelcan be safely managedwith currently licensedand regulated technology for the period likelyto be necessary to find disposal solutions.To that end, the Commission recommendsthat Congress consider several additionalsteps aimed at ending the current impasseon nuclear waste disposal, including:

9 A recent MIT study, The Future of Coal: Options for a Carbon-ConstrainedWorld, notes that “there is the possibility of a perverse incentive for increased earlyinvestment in coal-fired power plants without capture . . . in the expectation that the emissions from these plants would potentially be “grandfathered”by thegrant of free CO2 allowances as part of future carbon regulations.” (p. xiv)

10 Although only about 3 percent of U.S. electricity supply comes from oil, the emergence of plug-in hybrids and all-electric vehicles illustrates a potentially significantoil displacement opportunity for nuclear power and other low-carbon electricity sources.


2004 report recommended that advancedcoal with CCS be eligible for the same pro-duction tax credit currently available torenewable energy projects. The Commission’supdated recommendations include:

dation for a $3 billion program to support thecommercial-scale demonstration of seques-tration projects in several different geologicsettings.We also reiterate our call for imme-diate deployment incentives; for example, our

• Providing CCS systems with deployment incentives that are at least equal to those currentlyavailable under EPAct05 for new nuclear power plants and (via the federal production taxcredit) for renewable energy resources. In particular, the Commission strongly supports theconcept of awarding bonus allowances under a greenhouse-gas trading program for projectswith CCS. The financial incentives generated by such provisions could substantially exceedany direct increase in public R&D spending on CCS.

• Conditioning eligibility for taxpayer subsidies or public funds for any new coal projects goingforward on the actual inclusion of CCS.

• Placing greater emphasis on exploring carbon capture options for non-IGCC plants.

• Ensuring that CCS is included from the outset in any publicly funded efforts to explore coal-to-liquids technology. Even with CCS, this fuel pathway generates — at best — roughly thesame carbon emissions as conventional petroleum fuels; without CCS total fuel-cycle carbonemissions nearly double.

• Ensuring that the U.S. Environmental Protection Agency (EPA) completes a rigorous, formalpublic process to formulate effective regulatory protocols governing long-term carbonstorage as soon as possible (recognizing that midcourse corrections will likely be neededas experience is gained).

• Ensuring that new coal plants built without CCS are not “grandfathered” (i.e., awarded freeallowances) in any future regulatory program to limit greenhouse gas emissions.9

18

“The expansion of nuclear power would enhance fuel and technologydiversity in the electricity sector and could reduce vulnerabilitiesassociated with reliance on petroleum and natural gas from unstableregions of the world.”


• Reforming the NuclearWaste Policy Act(NWPA) to align its requirements withhuman engineering and scientific capabili-ties, while simultaneously ensuringadequate protection of public health andsafety and of the environment.

• Amending the NWPA to require DOE tosite and operate consolidated national orregional interim storage options.

• Undertaking R&D investments to exploretechnological alternatives to the directgeologic disposal of waste from a once-through cycle that meet commercialrequirements and non-proliferation objec-tives, reduce the challenge of waste disposal(by reducing heat load and/or transmutinglong-lived radionuclides), ensure adequateprotection of public health and safety, andextend fuel supply.11

• Amending the NWPA to codify that interimstorage and federal responsibility for disposalof nuclear waste is sufficient to satisfy theNuclear Regulatory Commission’s wasteconfidence requirement.12

• Amending the NWPA to require the Secre-tary of Energy to take possession of and/orremove fuel from reactor sites that havebeen, or are in the process of being fullydecommissioned.

Renewable EnergyOn renewable energy, the primary national-

level policy currently in place to promoteelectricity production using wind and otherrenewable resources remains the federalproduction tax credit (PTC).The eligibility periodfor projects to qualify for the PTCwas renewedunder EPAct05 and recently extended for an

11 The recommended pursuit of R&D should not be interpreted as a change in NCEP policy with regard to the “long-standing U.S.moratoria on commercialreprocessing of spent nuclear fuel and construction of commercial breeder reactors.”

12 Pursuant to 10 CFR 51.23. Generic NRC determination of 6 December 1999: 64 Fed.Reg. 68005.

19

Source: U.S. Nuclear Regulatory Commission,Washington, DC.


detailed recommendations in this importantpolicy area. In our view, a number of issueswarrant further exploration and analysis,along with further examination of the utility-and economic-policy dimensions of differenttechnology and program options. Specificquestions include: (1) whether amore ambitioustarget for non-carbon resources could beachieved by expanding eligibility to includenew nuclear power and advanced fossilsystemswith CCS; (2) whether and how invest-ments in energy efficiency and distributedpower systems might be integrated in abroader portfolio requirement; (3) whetherand at what level a safety valve or price capmechanism should be incorporated in theprogram; and (4) how a portfolio requirementwould interact with other policies, includingstate RPS requirements and other deploymentincentives such as the PTC.

Meanwhile, the Commission has identifieda number of important principles as startingpoints for consideration as Congress beginsdebating various RPS proposals in the weeksahead.Webelieve a sound federal policy should:

• Apply to all retail electricity providers, notjust electric utilities;

• Complement but not pre-empt state pro-grams and recognize credits that are usedfor compliance with state RPS requirements(in other words, a federal RPS should not beconstrued as creating an additive require-ment on top of whatever state RPS may bein place — where a state RPS also exists,retail providers should be able to use thesame renewable energy commitments tomeet both requirements);

additional year— it now ends in 2008. Amorerecent and extremely important developmenthas been the proliferation of state programsthat require utilities — typically using amechanism known as a renewable portfoliostandard (RPS) — to provide a minimum

percentage of electricity from renewable re-sources. Policies to promote renewable energyhave now been adopted by 23 states and theDistrict of Columbia, generating growingmomentum for a national-level program.In this rapidly evolving policy context, theCommission recommends that Congress:

• Continue to provide investment certaintyby extending the eligibility period forfederal production tax credits in five-year,rather than two- or one-year, increments.Given that the current window ends in2008, this would imply extending the PTCeligibility period to at least 2013.

• Adopt a federal renewable portfolio standardaimed at increasing the share of electricitygenerated by renewable resources nation-wide to at least 15 percent by 2020.

In coming months, the Commission in-tends to examine a number of critical issuespertinent to the design of a federal portfoliorequirement with the aim of offering more

• Be technology neutral— the program shouldbe designed to treat all covered renewablesources equally;

• Provide credit for early action—utilities thathave invested in renewable energy prior tothe enactment of a federal RPS should notbe penalized; and

• Allow for national trading, including effortsto standardize the monitoring, verification,and distribution of credits in a fair and effi-cient manner taking into consideration thesignificant variation that currently existsacross state programs; and

• Include express provisions assuring retailelectricity providers of cost recovery and afair rate of return for approved renewableenergy investments undertaken to complywith a federal RPS.

BiofuelsOn biofuels, EPAct05 included a number of

provisions to promote domestic alternativesto today’s almost exclusively petroleum-basedfuel supply for the transportation sector,mostnotably by establishing a first-ever, national-level renewable fuels standard (RFS). Thecurrent RFS is expected to translate to 7.5billion gallons of renewable fuel production— enough to displace roughly 4.3 percentof U.S. gasoline consumption on an energy-equivalent basis — by 2012. More recently,President Bush has called for boosting theuse of domestic alternative fuels to 35 billiongallons by 2017.

The Commission strongly supports moreambitious goals for renewable fuels use,

20

“The primary national-levelpolicy currently in place topromote electricity productionusing wind and other renewableresources remains the federalproduction tax credit.”


recognizing that such goals will require asignificant push to commercialize cellulosicethanol and other promising corn-ethanolalternatives such as biobutanol.13 Feedstockconstraints alone will likely limit the produc-tion of corn-based ethanol, which currentlydominates the U.S. biofuels market, to lessthan 10 percent of the fuel requirements ofthe nation’s light-duty vehicle fleet. Recentadvances in molecular and systems biologyand genetic engineering show great promisefor developing improved feedstocks andmuchless energy-intensive means of producingbiomass-based liquid fuels; in addition,promising technologies are emerging thatcan convert a wide variety of organic wastematerials to clean, high-quality diesel fuel.As emphasized in our 2004 report, federalpolicies and R&D commitments must pro-mote continued progress in these areas. At

plentiful and environmentally beneficialbiomass fuels and to ensure rational policyoutcomes from both an energy-security andclimate-mitigation perspective, the Commis-sion recommends that Congress:

• Re-evaluate ethanol subsidies and tariffs inlight of current fuel mandates and rational-ize existing policies to direct a greater shareof scarce public resources tomore promisingbiofuels options, such as cellulosic ethanol;biobutanol; and clean, high-quality dieselfuel from organic wastes.

• Address other hurdles to biofuels deploy-ment, including hurdles related to thedeployment of critical supporting infra-structures (including gathering systems,distribution systems, and refueling facilities)and compatible vehicle technologies. Forexample, Congress should consider a com-bination of incentives and requirements toincrease the number of gas stations thatdispense fuels containing ethanol at levelsup to 85 percent and should support aggres-sive R&D and engine certification testingto explore whether and how ethanolblends higher than 10 percent can be usedin existing vehicle engines and distributedthrough existing fuel infrastructure.

• Take steps to ensure that policies aimedat reducing U.S. oil dependence do not pro-mote environmentally unsustainable fuelalternatives. The Commission believes thatCalifornia’s recently introduced low-carbonfuel standard suggests a useful directionfor future policy and deserves considerationat the national level.

13 Biobutanol can be produced via fermentation from the same feedstocks as ethanol. It has the advantage of being more like gasoline; it is less corrosive thanethanol, better tolerates water contamination, and is more suitable for distribution through gasoline pipelines.

21

the same time, the Commission is concernedabout the potential climate impacts of ex-panding fuel production from coal and otherunconventional fossil sources, such as oilshale, tar sands, and heavy oil.While not ofthe view that all efforts to improve energysecurity must also contribute to climategoals, we believe it would be deeply irre-sponsible and ultimately counterproductiveto pursue policies that are at direct cross-purposes, in the sense that they address oneproblemwhile exacerbating another. As notedabove, current coal-to-liquids technologiesgenerate nearly twice asmuch carbon dioxideas conventional petroleum on a full fuel-cycle basis; the climate impacts of existingmethods for unconventional oil productionare similar or even worse.

To promote needed advances towardcommercializing a new generation of more

In fact, the President’s FY2007 request forDepartment of Energy RD&D on energy tech-nologies (where about 95 percent of thegovernment’s expenditures in this domainoriginate) was slightly less than the FY2005appropriation in real terms. The correspon-ding FY2008 request is up 15 percent fromthe FY2005 appropriation in real terms, but

essentially all of the increase is concentratedin the rapid ramp-up of a nuclear-fuel-cycleinitiative aimed at early demonstration oflarge-scale reprocessing of spent nuclear fuel— a project considered by many, includingthis Commission, to be ill-advised. At thesame time, the FY2008 request for RD&D onadvanced fossil-fuel technologies is 29 per-

In its December 2004 report, the Commission recommended“doubling annual direct federal expenditures on energy-technology research, development, and demonstrationcorrected for inflation, over the period 2005–2010—withincreases emphasizing public-private partnerships, interna-tional cooperation, and energy-technologies offering highpotential leverage against multiple challenges.”Althoughthe relatively low cost and relatively non-controversial char-acter of government investments in RD&D compared toother elements of needed national strategy might lead oneto suppose that recommendations in the vein might findready acceptance, nothing like the recommended trajectoryhas materialized.

EnergyTechnologyInnovation


FY2005 to FY2008 will end up being a thirdof what we recommended.

Taking all due account of enhanced incen-tives for private-sector energy-technologyRD&D that were embodied in EPAct05 (manyalong lines recommended by this Commis-sion), as well as the prospect of further such

incentives that will materialize when aneconomy-wide price is established on carbonemissions, the current trajectory of federalexpenditures on energy-technology RD&Dremains wholly inadequate in relation to theenergy challenges facing the United Statesand in relation to the identifiable relevantopportunities that are badly underfunded.The Commission is undertaking a more de-tailed analysis of this mismatch for releaselater this year.

23

“The increase in the FY2008 requestcompared to the FY2005 appropri-ation falls far short of the rate ofincrease recommended by theCommission in its 2004 report.”

U.S. DOE ENERGY RD&D(Real Spending FY 1978–FY2008)

8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0

Million20

00$

19781980

198219841986

19881990

19921994199619982000

2002

2004

2006

2008Request

Source: Gallagher, K.S., A. Sagar, D. Segal, P. de Sa, and J.P. Holdren. 2007. DOE Budget Authority forEnergy Research, Development and Demonstration Database. Energy Technology Innovation Project.John F. Kennedy School of Government, Harvard University.

Hydrogen (non-fossil)

Electricity T&D

Fossil including CCT demo

Renewables

Efficiency

Fusion

Fission

the rate of increase recommended by theCommission in its 2004 report. A doublingof real expenditures over five years requiresan average rate of increase of 14 percent peryear in real terms, or 16–17 percent per year incurrent dollars for a 2–3 percent rate of infla-tion. If the President’s request is funded byCongress, the average rate of increase from

cent below the FY2005 appropriation in realterms, and for RD&D on energy-efficiencytechnologies the decline is 21 percent.

Even if the question of appropriate alloca-tion of energy RD&Dmonies is put aside, theincrease in the FY2008 request compared tothe FY2005 appropriation falls far short of

1 A detailed description of the NEMSmodel can be found at http://www.eia.doe.gov/oiaf/aeo/overview/index.html. The model was used to forecast impacts to2030, consistent with the forecasting period used in EIA’s Annual Energy Outlook.


forecasts and assess policy options.1 TheCommission was interested in using this toolto estimate benefits, costs,and sectoral impactsunder different program parameters and inexploring how technology- and sector-orientedpolicies might interact with a broad-basedgreenhouse-gas price signal. Thus, in additionto assessing effects on emissions, energyprices, and GDP, the modeling analysis wasundertaken to answer questions such as:

• Is it possible to strengthen the Commission’soriginal (2004) proposal for a mandatory,greenhouse-gas trading program withoutcausing harm to the broad economy?

• Under what circumstances is the safetyvalve in the NCEP recommendations likelyto be triggered?

•What assumptions or policies play aparticularly important role in enablingemission-reduction targets to bemet at anacceptable cost in terms of energy-priceand GDP impacts?

• Is the combination of a carbon dioxide(CO2) price and direct technology incentivesadequate to speed the development anddeployment of carbon capture and storagetechnology in the power sector?

IntroductionThis appendix describes the results of a

modeling analysis undertaken to assess theeconomic and emissions impacts of updatedrecommendations issued by the NationalCommission on Energy Policy in April 2007.Those recommendations sought to acceler-ate progress in areas where the Commissionbelieves current energy-policy initiatives re-main inadequate to the challenges at hand,particularly with respect to oil security andclimate change. Specifically, the Commissionhas recently proposed to strengthen keyparameters of the mandatory, economy-widegreenhouse-gas trading program first pro-posed in its 2004 report, Ending the EnergyStalemate, and has recommended a packageof supplementary policies to improve vehiclefuel economy,promote energy efficiency, boostincentives for carbon capture and storage, andincrease the renewable-energy contributionto the nation’s electricity supply.

To analyze the combined impact of theserecommendations, the Commission used theNational Energy Modeling System (NEMS),a detailed model of energy production andconsumption used by the U.S. Energy Infor-mation Administration (EIA) to develop

• What is the interaction between a CO2

price and a national renewable portfoliostandard in expanding the future contribu-tion of renewable energy sources?

In general, the results of the analysis under-score the importance of underlying technol-ogy assumptions in driving projections ofeconomic cost and environmental benefitunder different policy scenarios.With rela-tively optimistic technology assumptions—concerning, for example, the potential forenergy-efficiency improvements in the trans-portation and buildings sectors, and thedeployment of new technologies like carboncapture and storage—the emission reductionsstimulated by a given greenhouse-gas pricesignal as much as double. Conversely, withless favorable technology assumptions, theprice signal required to achieve a given environ-mental target becomes substantially higher.

The overall results of themodeling analysisprovide, in our view, considerable groundsfor optimism concerning the feasibility andaffordability of undertaking a major shift inthe nation’s energy trajectory over the nexttwo decades, provided the political will existsto implement awell-designed and compre-hensive package of policieswithin the next few

24

Economic Analysis ofUpdated CommissionRecommendations


years. Specifically, the Commission’s findingssuggest that the combination of a meaning-ful price signal for reducing greenhouse-gasemissions and effective technology policies canachieve substantial reductions in greenhouse-gas emissions across all sectors of the economywithout triggering the proposed safety-valvemechanism and without incurring significantenergy price shocks or GDP losses— and doso while simultaneously preserving a majorrole for coal, reducing oil dependence, andsubstantially boosting the contribution of clean,domestic renewable resources. Substantialimprovements in vehicle fuel economy andend-use efficiency throughout the industrial,residential, and commercial sectors also playa critical role in achieving this result.

The remainder of this appendix describesthe results of the Commission’s recent mod-eling efforts in detail — including providinganswers to the above-identified questions.Before proceeding to results, however, it isuseful to begin by reviewing the parametersand limitations of the analysis.

Updated CommissionRecommendationsand Key ModelingAssumptions

Table 1 summarizes the key assumptionsused in the modeling analysis to reflect theCommission’s updated recommendationsconcerning the design of a mandatory,greenhouse gas trading program and otherpolicies to improve oil security, assure ampleand reliable energy supplies, and overcomemarket hurdles to the deployment of new,low-carbon energy technologies. It is worth

noting that some elements of the Commis-sion’s larger package of updated recommen-dations could not be readily modeled withinthe NEMS framework and thus are not in-cluded in the analysis. For example, the Com-mission did not model its recommendationsto address hurdles to further biofuels deploy-

ment. Results of the analysis are presented,throughout the discussion that follows, aschanges relative to the EIA’s Annual EnergyOutlook 2006 business-as-usual reference-case forecast, which includes policy changesintroduced under the Energy Policy Act of2005 (EPAct05).

25

TABLE 1: KEY MODELING ASSUMPTIONS USED TOANALYZE UPDATED NCEP RECOMMENDATIONS

Average combined new car and light-truck fuel economy increasesgradually to reach 41 miles per gallon by 2030.This is just slightlybelow the Commission’s current recommendation for a presumptive4 percent per year (approx. 1 mpg per year) rate of improvement inaverage light-duty vehicle fuel economy.

Mandatory economy-wide greenhouse gas trading program imple-mented in 2012 with the following features:

• Annual program targets defined to achieve stabilization of emissionsat 2006 levels by 2020 and 15% reduction below 2006 levels by 2030.

• “Safety valve”price starts at $10 per ton CO2-equivalent in 2012 andescalates 5% per year in real terms thereafter.

Uses assumptions in EIA’s “High Technology” side case from the An-nual Energy Outlook 2006 for the residential, commercial, industrial,and transportation sectors. This case is used to reflect the effects oftechnology improvements resulting from the Commission’s updatedenergy efficiency and RD&D recommendations (see further discussionin main text).

Carbon capture and storage projects receive production incentivessimilar to the renewable production tax credit.

A federal renewable portfolio standard is adopted to increase thenation’s share of renewable electricity sales to at least 15% by 2020.Consistent with past legislative proposals, the standard includes a 1.5cent price cap on the cost of renewable energy credits. (Note that theCommission has not made any recommendations concerning the in-clusion of a price cap in a national RPS.)

Uses EIA’s “High Technology” side case from the Annual EnergyOutlook 2006 for the electric sector (which includes high technologyassumptions for fossil-fuel, nuclear, and renewable energy systems).This case is used to reflect the effects of technology improvementsresulting from the Commission’s updated RD&D recommendations.

Vehicle Fuel Economy

Climate Change

Energy Efficiency

Advanced Coal

Renewable Electricity

Technology RD&D

2 The safety valve price is assumed to escalate at 5 percent per year above the rate of inflation.


one of these scenarios we model the effectsof the proposed greenhouse gas tradingprogramwith no safety valve and no supple-mentary policies. In a second scenario, weassume the $10 safety valve is immediatelytriggered to simulate the maximum eco-nomic impact that would be expected ifdemand for emission allowances— in theabsence of supplementary policies and/orwith slower technology progress — causesallowance prices to rise to the Commission’sproposed price cap.2 Results from thesescenarios are presented, along with resultsfrom the main analysis, in the discussionthat follows.

Summary ofMain Findings

Themain findings of themodeling analysisare perhaps best summarized by returningto the questions posed at the outset of thisdiscussion.

• Is it possible to strengthen the Commission’soriginal (2004) proposal for a mandatory,greenhouse-gas trading program withoutcausing harm to the broad economy?

The answer to this question is yes. Themodeling analysis shows that the morestringent emissions-reduction targets in theCommission’s 2007 proposal (i.e., stabilizationat 2006 levels by 2020 and a 15 percent re-duction below 2006 levels by 2030) can beachieved with impacts on GDP that rangefrom the slightly positive to slightly negativebut that are in all cases very small comparedto expected growth in the nation’s economy.Specifically, in the policy case—which includesthe supplemental policy assumptions sum-marized in Table 1 — improved technologies

As indicated in Table 1, the Commission’srecommendations with regard to energy effi-ciency, expanded technology RD&D, andbonus allowances for carbon capture andstorage were not modeled directly, but wereinstead represented using proxy assumptions.Whether these assumptions are more likelyto understate or overstate the impact ofCommission recommendations is difficultto assess. EIA’s “High Technology” case, forexample, assumes better than business-as-usual improvement in end-use efficiency inthe residential and commercial sectors butis less aggressive than EIA’s “Best AvailableTechnology” case,which assumes that themost efficient equipment available in a givenyear is adopted regardless of cost (see textbox on page 33). As such it represents anapproximation rather than an effort to pre-cisely estimate the savings likely to occur asa result of related Commission recommenda-tions, which include extending and expandingfederal tax incentives for efficiency improve-ments, issuing rigorous new appliance andequipment standards, and greatly increasingpublic expenditures on technology RD&D.In other respects, the modeling assumptionsare clearly conservative: for example, theydo not include additional policies — beyondthose introduced in EPAct05— to boost theuse of biofuels.

The Commission also analyzed twoadditional scenarios to elucidate the effectsof the greenhouse gas trading program byitself (that is, without the additional orsupplemental policies recommended bythe Commission and summarized in Table 1)and to explore the impact of the safety valvein limiting economic costs under less favor-able policy and technology assumptions. In

and reduced energy demand limit energyprice impacts and produce a small increase inU.S. GDP. In other words, gains from efficiencyimprovements and better technologies arelarge enough to offset GDP losses resultingfrom the emission trading program (althoughit should be noted that economists aresometimes skeptical of analyses predictingeconomic gains from efficiency programs asthere could be adjustment costs that are notadequately reflected in the modeling). As aresult, overall GDP in 2030 is slightly (0.15percent) higher in the policy case than inthe reference case. Under less favorable tech-nology and policy assumptions, the overallimpact of the trading program on the nation’seconomic output turns slightly negative butremains below one half of 1 percent of pro-jected GDP in 2030.While impacts on thebroad economy are small, certain sectors,particularly coal mining and coal-consumingsectors, will face higher costs, as coal pricesare expected to roughly double by 2030 as aresult of the trading program.

• Under what circumstances is the safetyvalve in the NCEP recommendations likelyto be triggered?

In the policy case,which includes substantialgains in vehicle fuel economy and end-useefficiency and the accelerated deploymentof climate-friendly technologies, allowanceprices are projected to remain below thesafety valve throughout the forecast. Absentthese favorable technology assumptions andsupplemental policies, the safety valve in theNCEP recommendations is likely to be trig-gered in the early years of program implemen-tation. This result suggests that adoption ofthe supplemental policies included in theCommission’s updated package of recom-

26


mendations is critical to achieving targetedgreenhouse-gas reductions.

• What assumptions or policies play aparticularly important role in enablingemission-reduction targets to be met by2030 at an acceptable cost in terms ofenergy-price and GDP impacts?

As noted previously, improvements invehicle fuel economy, enhanced end-useefficiency in the buildings and industrialsectors play an especially important role,although expanded deployment of advancedsupply-side technologies — notably, carboncapture and storage and renewable energy— also make a significant contribution toachieving overall program goals. Strongerfuel-economy standards, in particular, arecritical because the CO2 price signal gener-ated by the trading program alone wouldnot be expected to produce substantialemission reductions from the transportationsector.With the level of vehicle efficiencyimprovement assumed in the policy case, thetransport sector delivers roughly 16 percentof projected energy-related CO2 reductionsby 20303 and 1.2 billion barrels of oil savingsper year by 2030.

Without significant transport-sector emis-sions reductions, on the other hand, a muchlarger share of the abatement burden fallsto the electric power sector, which would becompelled to make commensurately largerinvestments in potentially more expensiveoptions such as carbon capture and storage,new nuclear generation, and renewableenergy. Technology improvements and asso-ciated end-use efficiency gains also play acrucial rolewithin the electric sector where— as in the transportation sector — the

modeling results suggest that the CO2 pricesignal from the trading programwould notbe sufficient, by itself, to produce substantialdemand reductions.

• Is the combination of a CO2 price and directtechnology incentives adequate to speedthe development and deployment of carboncapture and storage technology in thepower sector?

Yes,modeling results for the policy caseshow significant capacity additions of ad-vanced coal systems with carbon captureand storage (CCS) compared to the referencecase. Specifically, 81,000megawatts (MW)of coal capacity with CCS are added by 2030in the policy case; as a result, coal consump-tion in 2030 is actually slightly higher (by 2percent) than current consumption. By con-trast, the reference case shows comparablecapacity additions for advanced coal systems,but none of these additions include actualCCS. The modeling results further indicatethat the CO2 price signal alone accounts fora relatively small share of expected new CCScapacity by 2030.This finding underscoresthe importance of near-term policies aimedat directly supporting CCS technology, in-cluding production incentives and supportfor demonstration projects.

• What is the interaction between a CO2

price and a national renewable portfoliostandard in expanding the future contribu-tion of renewable energy sources?

In the case of new renewable electricity tech-nologies (primarily wind and biomass), theCO2 price signal and a national renewableportfolio standard work together to producea substantial increase in installed renewablegenerating capacity and electricity produc-

tion. Specifically, the CO2 price signal aloneincreases RPS-eligible renewable generationto approximately 12 percent of total electricitysales by 2030 compared to 2 percent in thereference case. Implementing a national re-newable portfolio standard, as recommendedin the Commission’s updated proposal, re-sults in further gains such that RPS-eligiblerenewable generation grows to 18 percentof overall sales by 2030. Importantly, the re-newable contribution is limited in the NEMSmodeling runs by a 1.5-cent price cap on thecost of renewable energy credits (where creditsare assumed to be issued in per kilowatt-hour units). This constraint was included toreflect previous legislative proposals; it is notbased on a Commission recommendation.With a higher price cap, the renewable con-tribution would be even higher under thepolicy case.

Economic (GDP) andEnergy-Price Impacts

Table 2 shows the impact of the Commis-sion’s proposed package of policies on energyprices in 2020 and 2030, relative to EIA’sreference-case forecast. In general, priceimpacts are relatively modest, ranging froma 3–7 percent increase in 2030 compared tothe reference case, except in the case of coalwhere prices roughly double by 2030. Signifi-cant improvements in end-use efficiency andreduced electricity and natural gas demand,however,mitigate the impact of higher coalprices in the electric sector. As a result, elec-tricity prices remain at roughly the samelevel as in the reference case through 2025and rise only 5 percent above the referencecase level by 2030.

27

3 See Figure 2 on page 32. Energy-related carbon emissions for purposes of this comparison do not include modeled reductions in non-CO2 gases and reductionsattributed to offsets.


TABLE 2: SUMMARY OF ENERGY MARKET IMPACTS 4

2020 2030AEO 2006 Policy AEO 2006 Policy

2005 Reference Case Reference Case

Emissions of Greenhouse Gases (million metric tons CO2-e)Energy-Related Carbon Dioxide 5,967 7,119 6,020 8,114 5,909Other Covered Emissions 269 452 193 627 219

Total Greenhouse Gases 6,236 7,571 6,213 8,741 6,127

Emissions Reduction from Reference Case (million metric tons CO2-e)Energy-Related Carbon Dioxide — — 1,099 — 2,206Other Covered Emissions — — 259 — 409Non-Energy Offset Credits — — 119 — 157Carbon Sequestration — — 319 — 345

Total Emissions Reduction — — 1,478 — 2,771

Total (including sequestration) — — 1,797 — 3,116

Allowance Price (2004$ per metric ton CO2-e) — — $ 8.67 — $19.60

Delivered Energy Prices (2004$ dollars per unit indicated)(includes allowance costs)

Motor Gasoline (per gallon) $ 2.31 $ 2.08 $ 2.04 $ 2.19 $ 2.26Jet Fuel (per gallon) $ 1.71 $ 1.42 $ 1.43 $ 1.56 $ 1.70Distillate (per gallon) $ 2.34 $ 2.03 $ 2.07 $ 2.14 $ 2.43Natural Gas (per mcf) $ 9.89 $ 7.14 $ 7.34 $ 8.22 $ 8.78

Residential $12.68 $10.48 $10.56 $11.67 $12.20Electric Power $ 8.29 $ 5.53 $ 5.39 $ 6.41 $ 6.69

Coal, Electric Power (per million Btu) $ 1.50 $ 1.39 $ 2.16 $ 1.51 $ 3.21Electricity (cents per kilowatthour) 8.3 ¢ 7.2 ¢ 7.2 ¢ 7.5 ¢ 7.9 ¢

Fossil Energy Consumption (quadrillion Btu)Petroleum 40.2 48.1 42.8 53.6 44.6Natural Gas 22.9 27.7 23.8 27.7 24.0Coal 23.4 27.6 23.3 34.5 23.8

Electricity Generation (billion kilowatthours)Petroleum 115 107 40 115 38Natural Gas 752 1,102 825 990 819Coal 2,041 2,505 2,111 3,381 2,276Nuclear 774 871 865 871 1,002Conventional Hydropower 267 303 307 303 307All Other Renewable 109 212 707 256 1,040

Total 4,058 5,099 4,855 5,915 5,482

4 All 2005 data were sourced from the AEO 2006.

Energy Policy Recommendations to the President and 110th Congress 29

The existence of the safety valve would, ofcourse, serve to limit price impacts under lessfavorable technology and policy conditions.To model the effects of this cost-containmentmechanism,we assume that allowanceprices — in the absence of supplementalpolicies and accelerated technology progress— reach the safety valve level in the earlyyears of program implementation. In thatcase, energy-price and GDP impacts areslightly greater than those seen in the fullpolicy case, but fall far short of the impactsseen under the hard-cap case. Specifically, ata safety-valve starting price of $10 per ton ofCO2-equivalent emissions, energy price in-creases for gasoline, delivered natural gas,and electricity range from 5 percent to 10percent in 2020, and 8 percent to 15 percentin 2030. Coal prices rise by 83 percent in 2020and 116 percent in 2030. Because energy ex-penditures account for only a small share ofthe overall economy, however, impacts oneconomic growth are considerably moremodest. In 2030, GDP under the $10-per-tonsafety-valve-only scenario is just 0.26 percentbelow projected GDP in the reference case.Cumulative GDP losses as a result of theemission trading program amount to 0.52percent of cumulative GDP gains over theentire modeling period (2006-2030). In other

Additional analysis of the alternative scenar-ios noted above highlights the importanceof supplemental policies and technology as-sumptions in driving model results. The fullpackage of modeled policies achieves tar-geted emission reductions without trigger-ing the Commission’s recommended “safetyvalve” cap on allowance prices.Absent theimprovements in vehicle fuel-economy, re-newable energy production, and energy effi-ciency noted in Table 1, however, emissions inthe electricity and transport sectors — andassociated demand for allowances— aresubstantially higher. Achieving the sameemission-reduction targets in this instancewould entail significantly higher allowancecosts and energy-price impacts. Specifically,the modeling analysis suggests that theCommission’s recommended emissions tar-gets alone— if imposed as a “hard” cap (thatis, without a safety valve) and without addi-tional policies —would result in allowanceprices of roughly $23 per ton of CO2 equiva-lent emissions in 2020 and nearly $50 perton in 2030. Associated energy-price impactswould also be significantly larger: forecastprices for delivered natural gas, gasoline, andelectricity would rise 29 percent, 19 percent,and 22 percent respectively above the refer-ence case forecast by 2030,while coal priceswould nearly quadruple.5

words, GDP growth is reduced only slightly,from 100.8 percent to 100.2 percent between2006 and 2030.6

Before concluding this section, it is impor-tant to stress again that the above-discussedresults for safety-valve-only scenarios reflectrelatively pessimistic technology and policyassumptions. That is, they assume the cli-mate policy works entirely through the pricesignal generated by the greenhouse gastrading program without any additionalbenefits generated by supplemental policiesor accelerated technology development inkey areas like energy efficiency and carboncapture and storage.

Emission ImpactsThe Commission’s combined proposals

result in significant greenhouse gas reduc-tions compared to both current and forecastlevels. Cumulative greenhouse gas emissionsfrom covered sources7 over the 2012–2030period analyzed are 22 percent below refer-ence-case emissions.8 Allowance bankingallows these emission reductions to bespread out over the forecast period, withregulated entities over-complying in theearly years of program implementationwhen allowance prices are lower. Over 2,950million metric tons of carbon-dioxide equiva-

5Overall GDP impacts would also be higher than in the full policy case (a 0.46 percent reduction in forecast 2030 GDP compared to a 0.15 percent gain in the fullpolicy case), though to a lesser degree in percentage terms than a simple comparison of energy-price impacts might suggest.This is because energy expenditures,though large in aggregate and certainly significant for many households and for certain industries, account for only a relatively small share of the nation’smulti-trillion-dollar overall economy.

6 This result includes economic benefits from the NEMSmodel’s revenue-recycling assumptions. In addition to the economic impacts that result from changesin energy prices and resulting impacts on the production and consumption of energy-intensive goods and services, the model accounts for positive benefitsassociated with the auction and distribution of greenhouse-gas allowances. The distribution of allowances generates revenue streams to the government andprivate interests that are represented in the NEMSMacroeconomic Activity Module,which calculates aggregate impacts on prices, output, and employmentwithin the economy. For this modeling exercise, assumptions concerning allowance allocation were taken from draft legislation sponsored by Senator Bingamanthat is largely consistent with the NCEP proposal. The assumptions include $50 billion in cumulative RD&D expenditures by 2030 funded from auction revenues.Additional auction revenues that flow to the government are assumed to be used for deficit reduction.

7 Covered sources include sources of energy-related CO2 emissions, coal mine methane, nitrous oxide emissions from adipic acid and nitric acid production, andindustrial gases (HFCs, PFCs, and SF6). Global warming potential (GWP) conversion factors for non-CO2 greenhouse gases are taken from the IntergovernmentalPanel on Climate Change,Climate Change 2001:The Scientific Basis (Cambridge, UK: Cambridge University Press, 2001).

8 Cumulative emission reductions include certified emission reductions or “offset credits” from non-covered sources. Unless otherwise stated, the term“greenhousegas emissions” refers to emissions from all covered sources less offset credits. Additional reductions from agricultural sequestration activities are not included inthe totals reported here.


lent (MMTCO2e) allowances are banked by2022. Emissions then begin to rise above thetarget as banked allowances are used forcompliance. Even with the use of bankedallowances, however, emissions in 2030 are 4percent below current (2006) levels (Figure 1).Allowance prices start at approximately$4.50 per metric ton CO2e in 2012 and riseto nearly $20 per metric ton CO2e by 2030(in real 2004$), but remain below the safetyvalve price throughout the forecast period.9

Overall, program targets are met and no ad-ditional allowances are purchased throughthe safety valve mechanism.

Reductions fromenergy-related carbon diox-ide emissions account for roughly 80 percentof projected reductions in the 2020–2030timeframe.The largest emissions reductionsare forecast in the electric power and trans-portation sectors as a result of the greenhousegas trading program andmore stringentCorporate Average Fuel Economy (CAFE) re-

quirements (see Figure 2). These two sectorsaccount for 53 percent and 15 percent, respec-tively, of total cumulative emissions reductionsover the forecast period In contrast, primaryenergy consumption in the residential, com-mercial, and industrial sectors combinedaccounts for a much smaller percentage(6–12 percent) of annual emissions reductionsover the forecast period, although emissionswithin the industrial sector are nearly 20percent below the reference case by 2030.Remaining reductions come from other cov-ered greenhouse gases, the bulk of whichinvolve industrial emissions of hydrofluoro-carbons (HFCs), perfluorocarbons (PFCs), andsulfur-hexafluoride (SF6).

Themodeling analysis also accounts for theinclusion of a well-defined offsets program topromote cost-effective emission reductionsfrom non-covered sources. The Commissionhas recommended that emissions offsets belimited to non-covered sources where there

is a strong likelihood that emissions benefitscan be reliably verified and monitored overtime.10 In the modeling analysis, offsetsaccount for 6–7 percent of the overall emis-sions reductions implemented between 2020and 2030 to meet program targets. Themodeling analysis also includes a “set-aside”program in which a small percentage of thetotal annual allowances are used to provideincentives for agricultural storage activities.Because the allowances for the set-asideprogram are taken from the total pool ofavailable allowances, emission reductionsfrom agricultural storage activities should beviewed as additional reductions beyond thoseneeded to meet the program targets. Theset-aside program results in an additional240–345 MMTCO2e of reductions annually.

Sector-Level ImpactsThe Commission’s modeling analysis

provides further insights on specific impacts

TABLE 3: GDP IMPACTS

Reference Policy No Safety $10 SafetyCase Case Valve Valve

Annual GDP (Billions 2000$)2020 $ 17,541 $ 17,571 $17,499 $ 17,514

Percent change from Reference Case — 0.17% -0.24% -0.15%

2030 $23,112 $23,148 $23,005 $23,052Percent change from Reference Case — 0.15% -0.46% -0.26%

Cumulative GDP Growth (Billions 2000$)2006–2030 $11,599 $ 11,633 $ 11,493 $ 11,540

Percent change from Reference Case — 0.30% -0.92% -0.52%

9 As a result of banking, allowance prices rise at the real discount rate— in this case, 8.5 percent — so that the cost of early versus later reductions is equivalentwhen adjusted for differences in timing.

10 Eligible offset projects in this analysis include landfill methane projects, animal waste methane projects,municipal wastewater methane projects, andmeasuresto reduce SF6 emissions from electrical transformers. Credits for CCS projects at power plants are included in electric-sector emission reductions.


at the sector level. Subsequent sectionsreview results for the electric power sector,the transportation sector, and primaryfuel markets.

ELECTRIC POWER SECTOR:The combi-nation of a CO2 price signal and supplementalpolicies — notably a national-level RPS anddeployment incentives for CCS 11—producessignificant shifts in the resources and technol-ogies used for electricity generation. Over the

next two decades, both generation and newcapacity shift away from carbon-intensivesources, particularly conventional pulverizedcoal plants, to nuclear, renewables, and ad-vanced coal systems with CCS. In addition,the modeling results for 2030 show substan-tially lower levels of electricity generationand capacity in the policy case compared tothe reference case. Improvements in end-useefficiency significantly reduce electricity use,

principally in the residential and commercialsectors. Electricity demand in the referencecase is projected to grow 45 percent by 2030,while demand in the policy case grows only35 percent.

Not surprisingly, electricity generationfrom renewable resources (excluding existinghydropower) — particularly fromwind andbiomass— increases substantially under thepackage of policies analyzed. Electricity fromthese sources accounts for 13 percent of totalsales by 2020 (compared to 1 percent in thereference case), and 18 percent by 2030 (com-pared to 2 percent in the reference case).Lower electricity demand substantially re-duces the need for new generating capacityin the policy case-as a result, there are feweropportunities for new renewable plants toenter the market. In absolute terms,windcapacity reaches 94,000MW by 2030 inthe policy case, compared to 20,000MW by2030 in the reference case; similarly biomasscapacity in the policy case reaches 66,000MW by 2030, compared to 5,000MW in thereference case. (Current installed wind andbiomass capacity totals approximately 10,000and 2,000MW, respectively.) Combined, over157,000megawatts of new renewable capacityare added by 2030 in the policy case.

While nuclear capacity also grows,modeledincreases are much less dramatic than inrecent NEMS analyses.12 This is due in largepart to the incentives provided for CCS in thepolicy case analyzed. These incentives drivedown the cost of advanced coal systems,making themmore economically attractivethan nuclear plants. In the reference case,

31

FIGURE 1: COVERED EMISSIONS LESS OFFSETS

9,000

8,500

8,000

7,500

7,000

6,500

6,000

5,500

5,000

2005 2010 2015 2020 2025 2030

MillionM

etric

Tons

CO2e

BankingAllowances

Using BankingAllowances

Reference Policy Case Target

11 To simulate the bonus allowance program for CCS recommended by the Commission, all advanced coal generation with CCS built by 2030 receives a 1.7 cent perkilowatt-hour production tax credit. This is slightly below the current 1.9 cent per kilowatt-hour tax credit for renewables to reflect the fact that CCS systemswould likely capture 90 percent (rather than 100 percent) of carbon emissions. As with the renewable production tax credit, plants receive the credit for the first10 years of operation.

12 See, for example, the January 2007 EIA report: Energy Market and Economic Impacts of Reducing Greenhouse Gas Intensity with a Cap and Trade System athttp://www.eia.doe.gov/oiaf/servicerpt/bllmss/pdf/sroiaf(2007)01.pdf.


2030,more than 81,000MW of advancedcoal with CCS are added. Overall, coal-firedgeneration accounts for 44 percent of totalelectricity generation in 2030— 15 percentless than in the reference case. Natural gascapacity increases by just 9,000MW incomparison to the reference case forecast.Although natural gas-fired combined-cyclecapacity increases slightly by 2030 comparedto the reference case, older, less efficientoil/gas steam units are retired, holding natu-ral gas capacity relatively steady.

Several factors combine to mitigate anyincrease in electricity prices that would other-

9,000MW of nuclear capacity are addedby 2030— 3,000MW through upgrades atexisting plants and 6,000megawatts throughnew plant construction. In the policy case, bycontrast, the total increase in nuclear capac-ity over the same timeframe is 26,000MWand nuclear power’s share of overall genera-tion remains roughly constant at 20 percent.

Fossil-fired generation,meanwhile, declinesfrom forecast levels under the policy case,but remains roughly equivalent in absoluteterms by 2030 compared to current levels.The analysis indicates that while some 47,000MW of existing coal capacity are retired by

wise result from higher fossil fuel prices. Asnoted above, the substantial reduction inprojected electricity demand reduces theneed for new capacity and allows less efficientplants to be retired. Fewer new power plantsand incentives for renewables and CCS leadto lower natural gas demand in the electricsector. These factors, combined with end-useefficiency improvements in other sectors,lead to a decline in delivered natural gasprices for the electric sector. Because naturalgas-fired generation often sets the price incompetitive electricity markets, lower naturalgas prices offset much of the impact ofhigher fossil-fuel prices from the greenhousegas trading program. As a result, the averageprice of electricity nationwide in the policycase is slightly below the reference casethrough 2025.

TRANSPORTATION SECTOR:Morestringent fuel-economy regulations play amore significant role in driving modeling re-sults for the transportation sector than doesthe CO2 price signal introduced by the green-house gas trading program. In the referencecase, the average fuel economy of new cars andlight trucks increases just 4 miles per gallon(mpg), from a current combined average of25 mpg to 29 mpg in 2030 (this improvementoccurs in part as a result of recently adoptedchanges in the CAFE standard for light trucks).As noted previously, the policy case assumesthat the average combined car and light-truck fuel economy of new vehicles increasesby 16 mpg to a new average of 41 mpg in2030 (this scenario is modeled as a proxy forthe Commission’s recommendation for a 4percent per year presumptive increase inCAFE standards subject to modification byNHTSA if safety, cost, or economic considera-tions warrant).

Due to a lag in fleet turnover, the averagefuel economy of the in-use light duty fleet

32

FIGURE 2: EMISSION REDUCTIONS BY SECTOR

3,000

2,500

2,000

1,500

1,000

500

02020 2025 2030

MillionM

etric

Tons

CO2e

Residential and Commercial

Qualifying Offsets

Industrial

Non-CO2 GHG

Transportation

Electric Power Sector

Energy Policy Recommendations to the President and 110th Congress 33

EFFICIENCY AND TECHNOLOGY ASSUMPTIONS

ELECTRICITY DEMAND NATURAL GAS DEMAND

As noted in the main text, EIA’s “High Technology” side case fromthe Annual Energy Outlook 2006 was used as a proxy for the Com-mission’s recommendations whenmodeling energy efficiency in theresidential and commercial sectors. This case assumes earlier avail-ability, lower costs, and/or higher efficiencies for end-use equipmentthan EIA’s reference case, as well as greater improvements in building-shell efficiency. Equipment assumptions were developed by engi-neering experts, assuming increased research and development inadvanced end-use technologies.* In the High Technology case, allnew construction is assumed to meet Energy Star specificationsafter 2010.

The Commission also modeled its policy scenario using EIA’smore aggressive “Best Available Technology” case as an alternativeproxy for its efficiency and technology R&D recommendations. Thiscase assumes that all equipment purchases and construction prac-tices from 2007 forward reflect the most efficient choice availablein the High Technology case, regardless of cost.

When either of these efficiency side cases is modeled along withthe Commission’s other policy recommendations concerning vehiclefuel economy, carbon capture and storage, and renewable energy,proposed greenhouse-gas reduction targets are achieved withouttriggering the trading-program safety valve and the model projectsa slight increase in future economic growth compared to the referencecase. A comparison of modeling results under the High Technologyand Best Available Technology side cases underscores a furtherimportant point: the additional efficiency investment reflected inthe Best Available Technology case achieves substantial additionalbenefits compared to the High Technology case. Importantly, itleads to significant further reductions in projected demand forelectricity and natural gas and substantially less need for newelectric-generating capacity. As a result, delivered prices for electric-ity actually decline in the Best Available Technology case comparedto a slight increase predicted after 2025 in the High Technologycase, and there is a slightly larger gain in projected GDP for 2030(a 0.3 percent increase instead of a 0.15 percent increase).

* The high technology assumptions are based on EIA,Technology Forecast Updates-Residential and Commercial Building technologies-Advanced Adoption Case(Navigant Consulting, September 2004).

5,000

4,000

3,000

2,000

1,000

02005 2010 2015 2020 2025 2030

Billion

Kilowat

thou

rs

12

10

8

6

4

2

0

2005 2010 2015 2020 2025 2030

TrillionCu

bicF

eet

Reference High Tech Best Available TechnologyReference High Tech Best Available Technology


new car market in the policy case, togethercomprising asmuch as 19 percent of new light-duty vehicles sales by 2020 and 64 percentof new light-duty vehicle sales by 2030.Theprice of the average new vehicle in 2030 rises$3,500 (or 12 percent) higher in the policycase compared to the reference case.

F.3 PRIMARY FUELS: Fossil-fuel con-sumption falls considerably in response to theCommission’s recommended policies. Overallfossil-fuel use in the policy case is 92 quads in2030— 20 percent below the reference caseforecast, although still slightly above the cur-rent (2006) level of consumption. The largestreduction is in coal consumption,which fallsfrom 35 quads in the reference case in 2030

improves more slowly than the fuel economyof new vehicles. Specifically, in-use fleet fueleconomy improves by just 2 mpg in the refer-ence case (from 20mpg in 2005 to 22 mpg in2030). By comparison, in-use light duty fleetfuel economy in the policy case increases to25 mpg by 2020 and 30 mpg by 2030.

Themodeling analysis suggests that hybrid-electric, advanced diesel, and flex-fuel vehicleswill play an important role in achieving sig-nificantly higher fuel-economy standards. Inthe reference case, sales of gasoline-electrichybrids are projected to reach 6 percent ofnew vehicle sales by 2020. By comparison,gasoline-electric hybrids and advanced dieselsachieve much higher penetration of the

34

to 24 quads in the policy case.While lowerdemand for coal in the electric sector accountsfor the bulk of this decline, industrial sectordemand for coals falls 51 percent comparedto the reference case by 2030 and accountsfor 17 percent of reduced coal demand. Inabsolute terms, however, projected coalconsumption in the policy case in 2030 isequivalent to current (2006) consumption.

Oil consumption in 2030 is roughly 17percent lower in the policy case than in thereference case in 2030, largely as a result ofimproved light-duty-vehicle fuel economy.Gasoline consumption is 21 percent below thereference case in 2030 and accounts for justover half of the total projected reduction in oildemand.The remaining reductions in oil usecome primarily from other transportationfuels and the industrial sector,where demandfalls 17 percent compared to the referencecase in 2030. Imports of both crude oil andrefined products decline substantially dueto lower U.S. consumption, falling 14 percentand 33 percent respectively compared to thereference case in 2030.

Demand for natural gas declines in allsectors, and by 2030 is 13 percent below thereference case. The largest demand reductionfor this fuel occurs in the electric sector,wherenatural gas demand falls by 35 percent. Thisdecline accounts for roughly two-thirds of thetotal reduction in natural gas demand. Asnoted previously, significant improvementsin end-use efficiency in the residential andcommercial sectors, combinedwith incentivesfor renewables and CCS, drive down electricitydemand. For 2030, residential sector naturalgas demand is 8 percent lower in the policycase than in the reference case; the corre-sponding demand reduction in the commer-cial and industrial sectors is 6 percent.

FIGURE 4: LIGHT-DUTY VEHICLE SALES BY FUEL TYPE

10,000

8,000

6,000

4,000

2,000

0Reference Policy Case Reference Policy Case

2020 2030

MillionM

etric

Tons

CO2e

Other Alternative Vehicles

Ethanol-Flex Fuel ICE

Electric-Diesel Hybrid

Electric-Gasoline Hybrid

TDI Diesel ICE

Gasoline ICE Vehicles

Jason S. Grumet, Executive Director

Julie Anderson, Senior AdvisorPaulW. Bledsoe, Director of Communications and StrategyDavid Conover, CounselNate Gorence, Policy AnalystEmily Hawkes, Administrative AssistantJoe Kruger, Policy DirectorSasha Mackler, Research DirectorKarrie S. Pitzer, Deputy Chief of StaffBilly Pizer, Senior EconomistDavid Rosner, Policy AnalystVito Stagliano, Research AdvisorMarika Tatsutani, Senior Analyst and TechnicalWriterTracy Terry, Technical Director

NCEP Staff

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energy policy recommendations to the president and the 110th

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