A LOOK AT SENATE ENERGY/CLIMATE BILL ECONOMICS

Assessing the American Power Act: The Economic, Employment, Energy Security and Environmental Impact of Senator Kerry and Senator Lieberman’s Discussion Draft
Trevor Houser, Shashank Mohan, Ian Hoffman, May 2010 (Peterson Institute for International Economics)

THE POINT
The next necessary decision about legislation – though it may be postponed by the oil spill catastrophe, potentially incendiary events on the Korean Peninsula and off the Gaza coast, the immigration question brought to a boil by Arizona’s excessive law and the Tea Party’s midterm elections intrusion – is whether the energy/climate bill that emerges from the Senate will drive the transition to a New Energy economy adequately to be worthy of support or whether it is such a sell-out to the Old Energies that no energy/climate bill at all is better.

The authors of the American Power Act (APA), Senators John Kerry (D-Mass) and Joe Lieberman (I-Conn), assert that it will: (1) cut the nation’s oil consumption and dependence on oil imports, (2) bring U.S. greenhouse gas emissions (GhGs) 17% below the 2005 level by 2020 and 80+% below it by 2050; and (3) move the U.S. toward international leadership in the New Energy economy and create 200,000+ new direct and indirect New Energy economy jobs yearly through 2020.

Climate Reality Check, a coalition of 15 staunch environmental advocacy groups, has coalesced in opposition to the Kerry/Lieberman bill. It is an impressive group of environmental stalwarts and they make substantial points. They call the Senate bill “…the wrong direction for U.S. climate and energy policy…” because it “…prioritizes reliance on offshore drilling and other dirty and dangerous technologies over effective pollution controls, clean energy, consumer protections, and creating real and just international climate solutions.”

Assessing the American Power Act: The Economic, Employment, Energy Security and Environmental Impact of Senator Kerry and Senator Lieberman’s Discussion Draft by economic analysts Trevor Houser, Shashank Mohan and Ian Hoffman, considers how effectively the provisions of the bill are likely to drive the realization of the authors’ claims for it. It sees benefits from the legislation in 5 key areas: (1) its energy sector changes, (2) its energy security implications, (3) its environmental impact, (4) its employment effects and (5) its impact on consumers.

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(1) The energy sector changes would come from the bill’s economy-wide cap and pricing of GhGs and its incentives that would drive the growth of New Energy and Energy Efficiency. It would reduce the fossil fuels from sources of supply from today’s 84% of U.S. energy to 70% in 2030. New Energy would be 16% of U.S. energy in 2030 and nuclear energy would be 14%. 106 gigawatts of New Energy, 78 gigawatts of nuclear energy, and 72 gigawatts of “clean” coal (from carbon capture and sequestration (CCS) technology) would be built in place of the present fleet of dirty coal plants. New Energy Efficiency deployment in homes, businesses, and vehicles would cut overall energy demand 5% from 2030 business as usual (BAU).

(2) Energy security would be significantly increased by provisions in the bill that would cut U.S. oil imports 33-to-40%, 9-to-19% below 2030 BAU. This would decrease U.S. spending on imported oil $51 billion per year. It would drive global oil prices down and cut revenues to oil producers revenue by $263 billion per year by 2030.

(3) The core of the American Power Act is its cap and price on GhGs that gradually becomes economy-wide and reaches $55.44 per ton in 2030. The combined effect would be, according to the analysis, to achieve the targeted GhG-cuts (17% below the 2005 level by 2020, etc.)

(4) With unemployment high and elections coming, jobs are at the top of November's electoral agenda and Democrats will likely try to represent APA as a jobs bill. Is it? Peterson says answers are “all over the map” but the best analysis suggests that because the bill adds $22.5 billion more than 2030 BAU to power generation investment, it would result in the creation of an average of 203,000 new direct and indirect jobs per year through 2020. Though job creation might fall off between 2020 and 2030, the productivity from 10 years of economic expansion would likely lead to offsetting sustained growth.

(5) The price on GhGs would clearly impact consumers by its 2-to-5% household energy price increase through 2020 and 3-to-7% increase through 2030. Energy Efficiency improvements that cut utility bills and vehicle fuel costs are expected to offset some or all such impacts. Mirroring most other studies, Peterson concludes the GhG-price would likely cause a per household impact that falls between a $136 per year increase and a $35 per year decrease. Revenues raised through the sale of emission allowances will also be rebated to offset the worst impacts.

In its essence, the debate over the bill is not about megawatts and tons of emissions but about ideology. Those who accept politics as the art of the possible tend to believe this is the best energy/climate bill they can get in the current political atmosphere and are fighting for it. Those who believe politics is the extension of war by other means tend to reject it in the belief that what is politically possible is less important than what the earth needs.

[6-3 UPDATE: The President just announced he will join the fight to get this bill passed in the same way that he took on the fight for health insurance reform and financial reform. That means the coming months will see exciting action. NewEnergyNews remains interested in details about the legislation and is not yet prepared to endorse or reject it. Remember this: A lot of seasoned pols have lost big by betting against this President.]

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THE DETAILS
Signatories to the Climate Reality Check principled opposition:
350.org, Center for Biological Diversity, Climate Collaboration Network of Corporate Ethics International, CREDO Action, Friends Committee on National Legislation, Friends of the Earth, Global Exchange, Greenpeace, International Forum on Globalization, International Rivers, NC WARN (North Carolina Waste Awareness and Reduction Network), Public Citizen, Rainforest Action Network, Sustainable Energy & Economy Network, Institute for Policy Studies, United Methodist Women

They believe the legislation fails in that it does not:
(1) make big enough and rapid enough cuts in GhGs;
(2) protect the Clean Air Act’s requirement for states’ rights to drive cuts;
(3) eliminate loopholes in GhG-cutting requirements;
(4) provide consumer protections to low- and middle- income families and vulnerable communities from emissions-pricing through revenue rebates and dividends;
(5) channel adequate investment into New Energy and Energy Efficiency development and deployment;
(6) eliminate the potential for large-scale GhG-emitters to profit from the market-based emissions-cutting mechanism; and
(7) require the U.S. to lead in supporting and funding international climate solutions.

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A summary of the APA provisions:

Title I—Domestic Clean Energy Development
(1) Incentives that fund the deployment of Energy Efficiency, New Energy, nuclear energy, “clean” coal (CCS, carbon capture and sequestration), and low- and no-emissions vehicles.
(2) Provisions for offshore drilling that the Peterson analysts find would “not materially alter” the growth of offshore drilling projected by DOE’s Energy Information Administration (EIA) BAU model.

Title II—Greenhouse Gas Pollution Reduction
(1) Establishes sector-specific regulations that evolve into economy-wide GhG caps and cuts. The electric power sector is required to buy emission allowances beginning in 2013, creating a market and a price for GhGs. Natural gas and industry are included as of 2016. (2) These sectors can use up to two billion tons of offset credits and 25% of them can come from international sources.
(3) The transportation sector’s allowance price is equal to the average market price for the power and industrial sectors.
($) Allowance price is “collared” at a ceiling price of $25 per ton in 2013 and increases 5% per year. The floor price is $12 per ton in 2013, increasing at 3% per year.
(6) The Environmental Protection Agency (EPA) holds back 3.6% of all allowances as a strategic reserve. If the ceiling price is reached, reserve allowances are sold to drive the price down.

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Title III—Consumer Protection
(1) 65% of revenues from allowance sales are used to compensate consumers for energy price increases.
(2) Compensation starts in the form of free allowances to electricity and natural gas local distribution companies (LDCs) and designated for the benefit of rate payers. Later, revenues are rebated directly to consumers.
(3) 15% of all revenue is held for low-income households.

Title IV–—Job Protection and Growth
(1) In the first 10 years, revenue from energy-intensive and trade-exposed industries is returned to them so as to keep them internationally competitive. More of the revenue goes to those companies that install more New Energy and Energy Efficiency.
(2) In 2026, the protections begin to phase out. If, by then, inequalities remain between countries’ emissions price systems, the President is required to tax imports to balance out the competitive disadvantages.
(3) Incentives for heavy vehicles to move from oil to compressed natural gas (CNG) and requires EPA to establish vehicle fuel standards after 2016 that get the best GhG cuts and vehicle efficiency possible.

Not analyzed in the Peterson paper: (1) Titles V and VI—International Cooperation on Adaption, and (2) Title VII—Compliance. Peterson has a further, more detailed description of the American Power Act that discusses them.

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U.S. Energy Sector Changes

A-By 2030, overall energy demand would be cut 5% below BAU, though 5% higher than today
B-Fossil fuels go from the present 84% of U.S. energy to 70% by 2030
C-They are replaced by New Energy (16%) and nuclear energy (14%) in 2030.
D-106 gigawatts of New Energy capacity would be added (the biggest addition to capacity), 24 GW more than BAU. Most would be wind (58% of the new capacity), then biomass (23%), solar (13%).
E-2030 New Energy would go from 12% to 18% of all power generation and from 10% to 21% of electricity.
F-Nuclear power grows fastest due to $36 billion in new loan guarantees and a 10% investment tax credit for plants put in operation by 2025. 78 gigawatts would be added, 68 gigawatts more than BAU.
G-2030 nuclear goes from 10% of power to 15% and from 20% to 30% of electricity.
H-Qualifying CCS projects get a $96 per ton bonus for the first 10 gigawatts built, $85 per ton for the second 10 gigawatts built and a bonus determined by EPA for the next plants.
I-A “levy” on fossil fuel electricity would raise $20 billion for CCS demonstration
projects.
J-72 gigawatts more of CCS capacity would be installed by 2030, 53.7 gigawatts on coal plants and 18.3 gigawatts on natural gas plants.
K-40 gigawatts of natural gas generation capacity would be deployed by 2030.
L-2030 electricity will be 50+% emissions free, up from the present 29%.
M-Incentives cut the coal and oil consumed in the industrial, commercial, residential, and transportation sectors, creates incentives for buying efficient vehicles, producing biofuels for transportation, and moving to New Energy and Energy Efficiency in homes and businesses.
N-There are also tax credits for moving heavy transport to CNG, making building codes more efficiency-friendly, and doing industrial Energy Efficiency research and development (R&D). They would likely cut household heating oil demand 21% below BAU in 2030, cut industry coal demand 13% and cut transportation gasoline use 5%, making it 14% lower than BAU in 2030.

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Energy Security Implications

A-Energy security would be significantly increased by provisions in the bill that would cut U.S. oil imports 33-to-40%, 9-to-19% below 2030 BAU.
B-This would decrease U.S. spending on imported oil $51 billion per year. It would drive global oil prices down and cut revenues to oil producers by $263 billion per year by 2030.

Environmental Impact
A-The core of the American Power Act is its cap and price on GhGs that gradually becomes economy-wide and reaches $55.44 per ton in 2030. The combined effect would be, according to the analysis, to achieve the targeted GhG-cuts (17% below the 2005 level by 2020, etc.)
B-Besides cutting CO2, APA also establishes a cap-and-trade program for
hydrofluorocarbon (HFC) gases.
C-Achieving GhG-cut goals beyond 2030 is less determinate.
D-The 2013 allowance price is predicted to be $16.47 and rise to $55.44 in 2030. It is expected to be collared at the ceiling between 2030 and 2035, at which time the EPA will use the strategic reserve to control the price. Reserves must be replenished from international offsets and the strategy to control the allowance price will only work if there are adequate international offsets to do so.
E-Increases in New Energy and Energy Efficiency would cut local air pollutants (mercury, nitrogen oxide and sulfur dioxide).
F-Cutting GhGs will favorably impact human and ecological health and welfare, though these are not easily quantifiable.
G-Cutting back on coal and gas plants will reduce water consumption. Though nuclear power plants, solar power plants and biomass power plants require water, the APA will cut 2030 net water use (based on on estimated gallon per kilowatt-hour) a total of 292 billion gallons (11.7 billion gallons per year). Peak yearly water savings would be from 2014 to 2017.

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(4) The bill’s employment effects would virtually make it a jobs bill. It adds $22.5 billion more than 2030 BAU to power generation investment which would result in an average of 203,000 new direct and indirect jobs per year through 2020. Though new job creation might fall off between 2020 and 2030, the productivity from a 10-year economic stimulus would likely lead to offsetting growth.

There are 2 types of Employment Effects assessments: (1) Bottom-up approaches and (2) Top-down approaches.

Bottom-up approaches (Political Economy Research Institute (PERI) and Center for American Progress (CAP) studies) predicted spending of $100 billion in stimulus money would create 2 million jobs, four times what the same spending will get in the oil industry. These studies used gross employment effects and ignored net effects. Energy and climate legislation is paid for with higher energy prices and not government borrowing. Higher energy prices work against job creation but calculating net employment impacts is not precise.

Top-down approaches use computable general equilibrium (CGE) or macroeconomic models. In most top-down models, more expensive energy means lower real wages because there is less money left over after paying for electricity, natural gas, and petroleum to buy other goods. Lower real wages reduces the labor pool, further cutting spending and diminishing economic activity. It also disadvantages energy-intensive U.S. industries, further hurting growth. This does cut emissions by slowing industrial output but leads to still more job cuts. Top-down models fail, however, to consider jobs created by energy and climate legislation from investment in power generation due to incentives and the pricing of emissions.

The Peterson analysis reconciles the two approaches to capture the employment impacts of both new investment and higher energy prices.

BAU predicts new power sector investment of $18.6 billion per year to 2030. With the APA, it would be $41.1 billion per year. Because the economy is not at full employment and construction of new power plants happens before energy prices rise, modest economic growth and 203,000 net jobs per year would be added to 2020.

General job impacts would come from (1) investment in New Energy and Energy Efficiency (would add jobs), (2) reduced fossil fuel demand (would subtract jobs), (3) higher energy prices (would subtract jobs), (4) recycling of allowance revenues (would add jobs), and (5) macroeconomic factors (would subtract jobs).

By 2020, the US economy is expected to be at full employment and investment in new power generation would likely slow. Energy prices will rise more steeply because free emissions allowances will be phasing out.

Net effect after 2025: New job creation drops off and overall job gain to 2030 will be just above (6,300 more than ) BAU.

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(5) The price on GhGs would clearly impact consumers by its 2-to-5% household energy price increase through 2020 and 3-to-7% increase through 2030. Energy Efficiency improvements that cut utility bills and vehicle fuel costs are expected to offset some or all such impacts. Mirroring most other studies, a GhG-price would likely cause a per household impact between a $136 per year increase and a $35 per year decrease. Revenues raised through the sale of emission allowances will also be rebated to offset the worst impacts.

Imperfections in energy markets are not uncommon and market failures could readily compromise the impacts of the APA, probably favorably. Energy Efficiency advances, especially, could make economic benefits much stronger than costs.

Export competitiveness is protected by provisions for energy-intensive businesses.

Benefits and costs will be affected by technology advances. Innovatations delivering energy or efficiency will control prices in ways that cannot be modeled or predicted.

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Impact on Consumers

A-Pricing emissions drives up energy costs. Heating oil prices go up 13 cents per gallon above BAU. to 2020 and 25 cents per gallon to 2030. Gasoline is 11 and 24 cents per gallon more. Natural gas prices go up 1.2% and 3.8%. Residential electricity goes up 2% and 3.3%.
B-With higher CAFE standards, decreased demand keeps energy and transportation fuel prices from going up as much.
C-Improved efficiency keeps household energy prices down. Average household energy costs go up an average of $107 per year to 2020 and another $165 per year to 2030. This is a total of $136 per year more than BAU.
D-With a higher CAFE standard, average household spending increases $75 per year to 2020 but drops $144 per year to 2030, averaging a decrease of $35 per year over the 20 years.
E-Households will pay more for non-energy goods but this could be balanced by higher income from more and better employment to 2020 and from allowance revenue rebates to 2030.
F-Overall, real household consumption goes up $37 per year more than BAU to 2030.
G-GDP would be 0.07% below BAU to 2020 and 0.23% below BAU to 2030.

State and regional impacts of the APA will be assessed in subsequent reports.

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QUOTES
Climate Reality Check statement: "The policies in the Kerry-Lieberman bill were wrong for the U.S. before the Deepwater Horizon disaster, and the Senate must recognize that they are wrong now. The well-being of our nation and the world are being sacrificed for the interests of big polluters, which continue to rake in record profits at the expense of the environment and the public. Our recent mining and drilling tragedies make clear that it’s time to choose clean and safe renewable energy for our future. We need legislation that prioritizes clean industries and energy efficiency, and which protects the Clean Air Act, not the dirty industries causing these crises. We need legislation that is sufficiently ambitious in curbing greenhouse gas emissions and in meeting our responsibilities to developing nations which are bearing the disproportionate brunt of the effects of climate change."

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From the Peterson analysis: “Evaluating the impact of the American Power Act on US energy security is a somewhat subjective exercise as energy security is poorly defined in quantitative terms. Discussion in the United States tends to focus on American dependence on imported energy (though the reliability of domestic energy supply is also a security concern as demonstrated by the Northeast blackout of 2004 or Hurricane Katrina)...[There are] four categories…The economic toll of US oil consumption, particularly at the high and volatile oil prices of recent years. The foreign policy impact of US economic ties to oil producing states, particularly those in the Middle East. The security consequences of income transfers to oil producers, many of whom are considered “states of concern.” The international relations implications of competition for oil resources…Through a combination of improved efficiency and fuel switching to ethanol, biodiesel, natural gas, and electricity, the American Power Act (under the core scenario) reduces net US oil imports (imports minus exports) by 33 percent below 2008 levels and 9 percent below business as usual in 2030…[These lower] oil producer revenue by $263 billion in 2030, split 50/50 between Organization of Petroleum-Exporting Countries (OPEC) and non-OPEC countries…"