The Economics of Climate Change PolicyThe Economics of Climate Change Policy

Prepared for:CEO Climate Change Task Force Meeting

American Public Power AssociationWashington, D.C.December 3, 2007

By: Dr. Margo Thorning, Ph.D. By: Dr. Margo Thorning, Ph.D. Senior Vice President andSenior Vice President and

Chief EconomistChief EconomistAmerican Council for Capital FormationAmerican Council for Capital Formation

Washington, D.C. www.accf.orgTel: 202-293-5811 Mthorning@accf.org

Trends in Global Energy Use and Carbon Emissions: Trends in Global Energy Use and Carbon Emissions: 2007-20302007-2030

Primary energy demand projected to increase by 1.8 % annually.

Fossil fuels projected to be dominant energy source

Renewable energy share projected to increase from 7% to 8% percent

Carbon emissions projected to increase by 1.8% annually

Developing countries account for over three quarters of the CO2 increase

China’s CO2 emissions exceeded the U.S. in 2006

U.S. Economic and Energy TrendsU.S. Economic and Energy Trends

Producing a dollar of Gross Domestic Product requires 33¢ of energy use

GHG emissions fell by 1.5% in 2006 and energy intensity declined by 4.2%

Population will rise by 22% over the next 25 years

Substantial increases in investment will be needed to meet rising demand: electricity alone will require $412 billion over next 25 years

Proposals to reduce GHGs will impact U.S. economic growth and employment.

Greenhouse Gas Emissions: Under EIA Baseline Forecast Greenhouse Gas Emissions: Under EIA Baseline Forecast and S. 2191 Targets and S. 2191 Targets

(Million Metric Tons CO2 Equivalent)(Million Metric Tons CO2 Equivalent)

0

1000

2000

3000

4000

5000

6000

7000

8000

1990 2000 2010 2020 2030 2040 2050

Million Metric

Ton

s CO2 Eq

uiva

lent

Covered GHG Emissions

S. 2191 Emissions Target2012

Gap in 2030:4,311 MMtCO2e

Per Capita Greenhouse Gas Emissions: Under EIA Baseline Per Capita Greenhouse Gas Emissions: Under EIA Baseline Forecast and S. 2191 Targets Forecast and S. 2191 Targets

(Metric Tons CO2 Equivalent per Person)(Metric Tons CO2 Equivalent per Person)

0

5

10

15

20

25

1990 2000 2012 2020 2030

Mill

ion

Met

ric T

ons

CO

2 Equ

ival

ent p

er P

erso

n

Baseline Forecast

S.2191

Historical Data

Gap = 33%

U.S. Per Capita Emissions: Effort Required U.S. Per Capita Emissions: Effort Required to Meet Lieberman / Warner Targetsto Meet Lieberman / Warner Targets

Emissions Population Per Cap GHG % S. 2191 Required Per Cap %Year (MMTCO2E) (Millions) Emissions Change Targets GHG Emissions Change1990 4,810 249 19.32000 5,414 282 19.2 -0.8% 5414 19.22012 5,995 314 19.1 -0.6% 5,200 16.5 -13.8%2020 6,614 336 19.7 3.2% 4,432 13.2 -20.2%2030 7,783 364 21.4 8.7% 3,472 9.5 -27.6%

Historical and Baseline Emission S. 2191 Targets

Economic Impacts of Lieberman/Warner Bill (S. 2191) Economic Impacts of Lieberman/Warner Bill (S. 2191) on the U.S. Economy on the U.S. Economy

(compared to the baseline forecast with no mandatory carbon caps)(compared to the baseline forecast with no mandatory carbon caps)

Price of Permit to Emit Carbon: $35 to $55 per ton of CO2 in 2015, rising to $60 to $120 by 2030

Gross Domestic Product decreases by: 1.0% to 1.6% by 2015 2.0% to 2.5% by 2050

U.S. Employment falls: 1.2 to 2.3 million net job loss by 2015 1.5 to 3.4 million net job loss by 2020

Natural Gas Prices Rise by 15% to 20% through 2030

Electricity Prices Rise by: 36% to 65% by 2015 80% to 125% by 2050

Source: Anne E. Smith, CRAI, testimony before U.S. Senate Committee on Environment and Public Works, Nov. 8, 2007.

Greenhouse Gas Emissions in the European Union: Greenhouse Gas Emissions in the European Union: Gap Between Projections* and Kyoto Targets in 2010Gap Between Projections* and Kyoto Targets in 2010

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

EU-15UK

SwedenGermany

FranceBelgium

NetherlandsIrelandGreece

DenmarkPortugalFinland

ItalySpain

AustriaLuxembourg

* Projections assume existing measures already in place.Source: European Environmental Agency, November 2007.

Target

Greenhouse Gas Emissions Associated with Existing and Greenhouse Gas Emissions Associated with Existing and New Investment in 2001New Investment in 2001

(Million tons of Carbon per $Billion of GDP)(Million tons of Carbon per $Billion of GDP)

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

China India U.S. Japan

Mill

ion

tons

of C

arbo

n pe

r $B

illio

n of

GD

P

Installed Base New Investment

Source: Promoting a Positive Climate for Investment, Economic Growth and Greenhouse Gas Reductions, W. David Montgomery and Sugandha Tuladhar (see www.iccfglobal.org)

U.S. Capital Cost Recovery for Smart Meters Compares Poorly with Our Trading Partners

(Percent of Nominal Capital Cost Recovered After 5 Years)

Source: “International Comparison of Depreciation Rules and Tax Rates for Selected Energy Investments,” prepared for the American Council for Capital Formation by Ernst & Young LLP, May 2007. For full report, please see www.accf.org.

100.0%

90.0%

63.1%

63.1%

57.7%

49.7%

49.7%

45.0%

39.8%

31.2%

29.5%

23.1%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0%

India

Malaysia

Germany

Canada

Rep of Korea

Taiwan

Japan

Indonesia

China

Brazil

United States

Mexico

Capital Cost Recovered After 5 Years

Use cost / benefit analysis before adopting policies

Reduce cost of U.S. energy investment through tax code improvement and incentives for non profits

Remove barriers to developing world’s access to more energy and cleaner technology by promoting economic freedom and market reforms

Increase R&D for new technologies to reduce energy intensity, capture and store carbon, and develop new energy sources

Promote nuclear power for electricity

Promote truly global solutions and consider expanding the Asia Pacific Partnership on Development with its focus on economic growth and technology transfer to other major emitters

Practical Strategies for Reducing Practical Strategies for Reducing Global Greenhouse Gas GrowthGlobal Greenhouse Gas Growth