THE COSTS AND PROVISIONS OF THE SENATE CLIMATE BILL

EPA Economic Analysis Finds No Significant Increase in Cost to American Families, Compared to Waxman-Markey Legislation
October 23, 2009 (Senate Environment and Public Works Committee)
and
Reality Sets In; Senate Allocation Pie Smaller Than House Climate Bill's
Darren Samuelsohn, October 29, 2009 (NY Times)

SUMMARY
There is a new, more specific version of S. 1733, the Clean Energy Jobs and American Power Act, the Senate version of the energy and climate legislation the Obama administration hopes to get through Congress before the Copenhagen international climate change summit in December.

Written by Senator Barbara Boxer (D-CA), Chair of the Senate Committee on Environment and Public Works, and Senator John Kerry (D-MA), Chair of the Senate Foreign Relations Committee, the new specifics are aimed at (1) putting a price on U.S. greenhouse gas emissions (GhGs) in order to sharply cut them back, (2) controlling the rising costs of energy, (3) protecting the most vulnerable segments of the economy and (4) driving development of New Energy, Energy Efficiency, “clean” coal and low emissions transportation.

Economic Impacts of S. 1733: The Clean Energy Jobs and American Power Act of 2009 Conclusions, from the Environmental Protection Agency, found that the provisions in the bill make the costs it would impose for the GhG cuts it would obtain similar to but “slightly higher” than and with “minor differences” to the costs of H.R.2454, the Clean Energy and Security Act written by Representative Henry Waxman (D-CA), Chair of the House Energy and Commerce Committee, and Representative Ed Markey (D-MA), Chair of the House Energy Subcommittee, the House of Representatives version of climate and energy legislation passed by the lower body in June.

Because the Senate has strict rules limiting the impact of legislation on the federal budget, the Boxer-Kerry bill allocates emissions allowances over a longer period of time and, therefore, has different short-term impacts. Nevertheless, the EPA analysis showed that under the terms of both the House and Senate bills average household consumption would be cut less than 1% per year compared with the business-as-usual (BAU) scenario.

For either bill, the overall average household cost – for setting the U.S. on the road to eliminating GhGs, turning the tide in the nation's fight against global climate change, ridding the nation of dependency on imported oil and taking the lead in the international competition to master New Energy, Energy Efficiency and lead the New energy economy – is likely to be 22-to-30 cents per day ($80 to $111 per year).

Let's have 2.

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COMMENTARY
The new version of S.1733:
(1) Is more specific about the portion of the allowances to be auctioned and the schedule on which they are to be auctioned.
(2) Contains provisions designed to protect consumers from rising energy prices.
(3) Has a variety of provisions for the development of “clean” coal.
(4) Increases the money allotted to New Energy and Energy Efficiency, low emissions transportation and alternative fuels.
(5) Adds provisions to protect agriculture from costs for the transition to an emissions-constrained economy
(6) Includes measures to reverse deforestation.
(7) Provides protections from rising energy costs for rural communities, small and medium-sized refineries and Native American tribes.
(8) Increases the “market stability reserve” of emissions allowances to prevent the cost from rising too high or too fast.

Some details of S.1733 are the result of the CBO haircut. This is a re-allotment of emissions allowances to fit the Congressional Budget Office (CBO) monitoring of the Senate requirement that legislation cannot add more than $5 billion to the federal deficit in any of the five decades after it is passed.

S.1733 therefore auctions 10% more of the allowances immediately after its cap&trade system kicks off to add revenue to the federal budget in the 2012-to-2029 period. It also auctions more allowances than the House proposal (22%) for the federal budget in the 2030-to-2039 period but stops at an auction of 25% of the allowances between 2040 and 2050. The House bill auctions 13% of the allowances to add revenue to the federal budget in 2012 and 2013 but only 1% from 2014 to 2015 and none after 2023.

Although these differences do not sigbnificantly affect the overall impacts of the bills on the consumer, they affect how the bills appeal to important political constituencies. By controlling its impact on the federal budget more rigorously, the Senate bill appeals more to the big political donors. By protecting consumers more rigorously, the House bill appeals more to voters.

CBO’s analysis of the House bill showed it would add $845.6 billion in federal revenues during the first decade of its operation in return for federal spending of $821.2 billion, a $24.4 billion net gain. CBO has not yet analyzed the Senate bill.

The EPA analysis evaluates key elements of the 2 bills, using standard, validated modeling techniques.
(1) It considers: (a) Cap levels and coverage; (b) Offset limits and sources; (c) Banking and borrowing; (d) The Strategic Reserve and Market Stability Reserve of allowances; (e) Energy Efficiency provisions; (f) Incentives for CCS ("clean" coal); (g) Energy Intensive and Trade exposed output based on rebate provisions; and (h) Allocations.
(2) It explains the purpose of each and how they are different in the bills.
(3) It calculates how the differences would impact allowance prices and costs.
(4) It then summarizes the economic impacts of H.R. 2454 and S. 1733.
(5) It identifies the 2 key factors in the models that are most uncertain.
(6) It identifies the possible ways regional and climate variations may or may not affect the bills’ impacts.
(7) It concludes with a clear and transparent description of its methods.

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The EPA analysis of S. 1733, using a variety of scenarios and based largely on the cap&trade dimension of the legislation, shows 4 central conclusions that are very much the same as found in the analysis of H.R. 2454:
(1) Both bills’ cap&trade systems “would transform the way the United States produces and uses energy...”;
(2) Total per-household cost of each bill would be approximately $100 per year in the most likely projected scenario;
(3) Impacts will vary little across the highly varied regions of the U.S.; and
(4) Actions of other countries will much affect both bills, despite their differences.

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The differences of any significance between the 2 bills:
(1) The Senate bill’s 2020 GhG cut is to 20% below the 2005 level while the House bill aims for a 17% 2020 cut. This difference causes a slightly higher cost for the Senate bill.
(2) The Senate bill allows landfill and coal mine methane (CH4) to be used as offset sources while the House bill requires such offsets to meet performance standards. This lowers the Senate bill’s costs slightly and reduces GhGs.
(3) The Market Stability Reserve allowances held back in the Senate bill provide greater price certainty than the Strategic Reserve allowance market stabilizing provisions in the House bill. The Senate bill also allocates more allowances to the Market Stability Reserve than the House bill gives its Strategic Reserve. Assuming allowance prices are low enough that there is little demand for or purchase of reserve allowances, this difference will make the Senate bill slightly more costly.
(4) The Senate auctions emissions allowances on a different time schedule than the House auctions its allowances and thereby more effectively stabilizes its bill's impact on the federal budget.

Although the legislation’s political opponents are trumpeting differences in the timing of the allocations and the protective set-asides, the EPA found these differences to be, on the whole and in terms of overall costs, not important.

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The bills’ economic impacts are so similar because they have so much in common. Similarities between the bills noted by the EPA:
(1) Though the 2020 GhG caps differ, they start the same in 2012 and are the same from 2030 to 2050.
(2) Cumulatively, the caps are only 1% different through 2050.
(3) Both bills cover the same GhG sources.
(4) Both have nonbinding offset limits.
(5) Both allow offsets from a spectrum of agriculture and forestry sources.
(6) Both allow unlimited banking of allowances.
(7) Both provide allowance rebates to industry if output drops due to leakage of industrial activity to places that have no caps.
(8) Both have provisions to protect the competitiveness of energy intensive and trade exposed U.S. industries.

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There are 2 key uncertainties to all the EPA assessments, (1) the availability of offsets and (2) New Energy and Energy Efficiency technology advances. If offset projects do not develop, increasing the demand for and the concomitant prices of allowances, the cost of S.1733 will be greater. If technology advances are slower than anticipated, New Energy and Energy Efficiency will be more expensive and so will the costs imposed by the bill.

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Summary of the economic impacts of the bills:
1- By transforming energy production and consumption from inefficiency and imported fossil fuel dependency to an efficient New Energy economy, energy consumption levels in 2040 will be what they would they would have reached in 2015 without the policy.
2- Under the bills, low- or zero-carbon energy (nuclear, New Energy and “clean” coal) will be 18% of primary energy by 2020, 26% by 2030, and 38% by 2050 but without legislation, they would be a consistent 14% to 2050.
3-Increased Energy Efficiency and reduced energy demand will cut primary energy consumption 7% in 2020, 10% in 2030, and 12% in 2050.
4-Petroleum primary energy use will be cut 0.4 million barrels per day in 2020, 0.7 million barrels per day in 2030, and 1.6 million barrels per day in 2050.
5-The biggest GhG cuts come from electricity generation and use. This will be most impacted by the legislation’s cap&trade system, which can be expected to drive the U.S. to low- and zero-emissions energy by 2050.

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6- The allowance price is the most critical element in cap&trade. If it rises to more than $20 per metric ton of GhGs, it will drive the energy generation transition and put the existing coal plant fleet out of business.
7-Additional policies and incentives, such as New Energy and Energy Efficiecny standards and CCS bonus provisions can ease the economic impact of the transition. Such policies must be targeted to overcome specific market failures (example: suboptimal private investment in research and development) or they will drive up the cost of GhG-cutting legislation.
8- The most likely EPA scenario puts the 2015 allowance price at $13 per of carbon dioxide equivalent (tCO2e) in 2015 and $16/tCO2e in 2020. The range: $13 to $24/tCO2e in 2015 and $16 to $30/tCO2e in 2020.
9-With or without the bills, household consumption will continue to grow. Average household consumption is reduced by less than 1% from BAU in all years.
10-Per household, costs are $0.23 to $0.29 per day in 2020 and $0.76 to $1.00
per day in 2030. That amounts to $80-to-$111 dollars per year, 0.1%-to-0.2% of annual household consumption.

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11- The modest cost increases are from higher energy prices, price changes for other goods and services, impacts on wages and returns to capital.
12-The cost estimates include the value of revenue from emissions allowance auctions returned to lower income households to offset the effect of the cap&trade program on household consumption but do not consider the benefits of avoided climate change.
13-Electricity prices are expected to remain unchanged through 2020 because of free allowances to electricity providers. It would otherwise increase 13%.
14-The average household’s energy expenditure (not counting vehicle gas) would decrease 7% in 2020 and increase 2% in 2030.
15-Regional differences are expected to vary no more than 1%-to-2%.

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Considering the potential costs for global climate change, the EPA analysis clealy demonstrates the Boxer-Kerry and Waxman-Markey bills are about the best deals Washington will see this year.

Senator Boxer’s Environment and Public Works (EPW) Committee held hearings on S. 1733and took testimony from 9 panels with 54 witnesses over 3 days. Partisan rancor continued to be the order of business. The committee has begun mark up deliberations. With health care reform at the top of the agenda, it is not expected that the controversial energy and climate legislation will make it to the Senate floor in this session.

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QUOTES
- From the EPA analysis: “EPA’s analysis of S. 1733 demonstrates that the costs of the bill are likely to be quite similar to the costs of H.R. 2454. While there are some minor differences in the bills in several areas that will likely result in slightly higher costs for S. 1733, these differences are overshadowed by the fundamental similarities in approach, caps, offsets, and other critical design parameters that affect the costs.”
- From the EPA analysis: “Electric power supply and use are an important part of achieving emission reductions under cap-and-trade programs and are likely to represent the largest source of emissions abatement under S. 1733…The power sector is a large source of cost-effective emission reductions, driven by the long-term caps placed on emissions of greenhouse gases and the resulting price signal, which transforms the nature of electric supply from higher-emitting technologies to lower- and non-emitting technologies like renewables, nuclear, and coal with CCS technology…By 2050, most fossil electricity generation would be capturing and storing CO2 emissions and the power sector would largely be de-carbonized. The timing and magnitude of the reductions within this sector largely depend on the existing coal fleet, which provides almost 50% of our nation’s electricity…”

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- From the EPA analysis: “EPA’s analysis of H.R. 2454 shows that the bill would transform the structure of energy production and consumption, moving the economy from one that is relatively energy inefficient and dependent on highly-polluting energy production to one that is highly energy efficient and powered by advanced, cleaner, and more domestically-sourced energy.”
- Senator Boxer: "We've reached another milestone as we move to a clean energy future, creating millions of jobs and protecting our children from dangerous pollution. I look forward to the hearings and the markup as we move ahead to the next step."

The whole story, worth clicking to enlarge

- From the NY Times:
Senator Boxer: "I would not have a bill that is not deficit-neutral, so we're not changing that."
Senator Kit Bond (R-MO), holding up a pie chart showing the Boxer draft has 1.46 billion fewer allowances than the House measure at a cost of about $133 billion: "It's a smaller pie."
Senator Boxer: "You're absolutely correct…There's less in there because of the deficit reduction trust fund."
Senator Sheldon Whitehouse (D-R.I.): "We are a little handcuffed by the CBO scoring methodology…We're in a bit of a pickle."
Senator Bond: "People want to know what's going on…We're still trying to figure out how these complicated, cockamamie schemes are going to work. Anything that's that complicated is by definition highly suspect and the more I hear, the more I suspect."
Senator Lisa Murkowski (R-AK), Ranking Member, Energy and Natural Resources Committee: "[The House bill is an] exercise akin to doling out pieces of a pie…But as climate legislation is developed in the Senate, we're faced with a hard reality. There aren't enough pieces left to satisfy the groups vying for them to repeat this process a second time."