TODAY’S STUDY: ECONOMIC BENEFITS ON THE EASTERN SEABOARD FROM CLEAN FUELS

For guys, the great thing about dancing is this: Girls want to dance. If a guy asks, she might have to smile and mutter to herself that “it’s a dance, not a date” but for those few glorious minutes, she’s his.

A lot of guys aren’t nearly as bad as girls think, they just suffer from guilt-by-association (with the male gender). After a few dances over the course of an evening, some guys can get that across. As unlikely as it seems, romance could ensue. It has happened.

What does dancing have to do with clean fuels on the eastern seaboard? This: Even those opposed to New Energy are tired of sitting in the bar watching the oil-rich nations of the world, many who nurture movements hostile to the major oil consuming societies, grow rich and indolent off dependents on the gasoline-powered transportation system. Nobody but a drunk likes sitting with a liquor salesman who delights in the fact that nobody’s dancing and everybody’s drinking.

Just as there are girls who will say yes to a guy for a whirl around the floor even if they can’t imagine taking him for a walk up the aisle, there are a lot of New Energy doubters who want somebody to ask them to dance with domestically-produced fuel alternatives instead of imports, even if it takes some kind of mandate to start the process.

And, as the report highlighted below details, New Energy wants a dance with those doubters. It may be asking with an ulterior motive, like a lonely guy asking just because he wants to hold a girl. But the dance brings them together and something good could happen.

As the report below shows, a whole lot of good things could come from a market-based Renewable Fuels Standard (RFS) that requires fuel producers to offer alternative fuels (advanced biofuels, electricity and natural gas) that cut total emissions perhaps 10 percent over 10 years. Fuel producers would make their own decisions about which alternatives to invest in to achieve the emissions reductions.

While New Energy advocates intend to get greenhouse gas (GhG) emission cuts and a host of other benefits from an RFS, it is just possible a majority of policy makers – including conservatives – could get excited about such a dance for a very simple reason: It would ease drivers off the imported oil habit, eliminating the billion-dollar-a-day drain on the national economy and making U.S. energy supplies more secure.

Coincidentally, it would cut GhG emissions in the transmission sector, the source of a third of U.S. GhGs, by reducing gasoline and diesel use by 12-to-29 percent. It would save drivers money when oil prices are high and it is break-even, with all the other benefits, when oil prices are low. And it would have a small but positive impact on jobs, gross regional product, and disposable personal income.

In other words, everybody gets to dance and somebody might even fall in love. That’s a win-win if there ever was one.

Economic Analysis of a Program to Promote Clean Transportation Fuels in the Northeast/Mid-Atlantic Region
August 2011 (Northeast States for Coordinated Air Use Management)

Executive Summary

Introduction

This report summarizes the results of an analysis of potential economic impacts of reducing carbon emissions from transportation fuels in the eleven state northeast and mid-Atlantic region…On a regional basis, the transportation sector accounts for about one-third of all greenhouse gas (GHG) emissions. Nearly 100 percent of the transportation fuel used in the region is imported from outside the eleven states.

The results of the analysis suggest that the transition to lower carbon fuels could provide important energy security, climate change, and economic benefits in the region. For example, electricity, advanced biofuels, and natural gas are low carbon fuels not yet widely used in the region for transportation. A gradual transition to one or more of these fuels would reduce carbon emissions and those of other harmful pollutants, enhance energy independence and reduce vulnerability to price swings in imported petroleum, and create jobs in the region. The primary purpose of this report is to assist states as they evaluate the potential for implementing a regional clean fuels program that could reap these benefits.

One of the policy tools under evaluation is a regional low carbon fuel standard or clean fuels standard (CFS), which is a fuel-neutral, market-based program that would require a reduction in the overall carbon intensity (CI) of the region’s transportation fuels over time. Carbon intensity is a measure of GHGs released throughout a fuel’s full lifecycle, including extraction, production, transport, combustion and indirect effects, per unit of energy produced. In simple terms, the program would work by assigning a CI score for all fuel pathways, calculating the average CI for the applicable pool of fuels at the beginning of the program, and establishing a target average CI value to be achieved by a specified date.

click to enlarge

This program would allow all fuels to compete based on their greenhouse gas impacts and costs. It would create incentives for advances in biofuels and promote broader deployment of other low carbon transportation fuels such as electricity and natural gas. By establishing a standard of performance for fuels, such a program could create competition among producers leading to technological innovation, and would provide industry with flexibility to employ the most cost-effective approaches for meeting program requirements.

This analysis of the costs and benefits of a regional clean fuels standard is not designed as a forecast of future economic conditions, fuel prices, CI values, or rates of innovation and market penetration for low carbon fuels. Rather, the study’s design recognizes the significant uncertainties surrounding future values for important factors, and constructs several “what if?” scenarios with assumptions designed to explicitly address key uncertainties.

The results include modeled impacts on: (1) gasoline and diesel demand; (2) GHG emissions; (3) fuel expenditures, delivery infrastructure, and the vehicle mix; and (4)
macroeconomic factors such as employment, gross regional product, real disposable personal income, and value-added changes by industry sector. Notably, the analysis did not attempt to identify and quantify other likely effects of the transition to cleaner fuels, such as improved public health and reduced health care costs. Although this economic analysis focused on the evaluation of a generic CFS that achieves a specified CI reduction in given time period, the data and tools used in this assessment may help in the evaluation of other programs that achieve similar reductions in the carbon intensity of fuels.

click to enlarge

Key Findings

This analysis found that the program analyzed could:

• reduce GHG emissions by introducing more low carbon fuels into the transportation sector;
• reduce gasoline and diesel use by 12 to 29 percent (4.0 to 8.7 billion gallons annually) once the program is fully implemented;
• enhance energy security by diversifying transportation fuels away from those produced from imported oil and toward domestic alternatives such as advanced biofuels, electricity and natural gas with more stable prices;
• achieve overall net savings on transportation costs when oil prices are high and near parity at low oil prices; and
• achieve these goals with a small but positive impact on jobs, gross regional product, and disposable personal income within the region.

Other important findings based on this analysis include:

• gasoline and diesel would continue as the dominant transportation fuels in the region for the next decade (providing from 80 to 87 percent of fuel energy use under low oil prices, and 73 to 81 percent of energy use under high oil prices);
• among the low carbon fuels evaluated, electricity provides the largest reductions in petroleum energy use; and
• greater volumes of low carbon fuels are needed when CI values are high; this results in higher overall costs (for fuels, infrastructure, and vehicles) to meet a given target compared to using fuels with low CI values, but also greater reductions in gasoline and diesel use and more significant benefits associated with those reductions.

The most important variables driving the results of the analysis include:

• the price of petroleum;
• the price of low carbon alternatives (fuel, infrastructure and vehicles); and
• the carbon intensity of petroleum and low carbon fuels.

A range of values were used to capture the underlying uncertainties in these variables to the extent feasible.

click to enlarge

Methods and Data

NESCAUM analyzed a regional CFS that would achieve a 10 percent reduction in the carbon intensity of transportation fuels over a 10-year period. The participating states and interested stakeholders provided considerable insight on the appropriate design for this study. Key data sources used in this analysis included peer-reviewed studies, government sources, industry sources, reports, and databases. To capture the range of uncertainty for important variables, sources were surveyed for values that could be used as reasonable representations of lower- and upper-end values. In cases where empirical studies were limited, a range of estimates representing “optimistic” and “pessimistic” boundary values were developed by extrapolating related data.

click to enlarge

The analysis evaluated the program’s effect on a number of metrics including:

• gasoline and diesel demand;
• GHG emissions;
• changes in fuel expenditures, delivery infrastructure, and the number of advanced vehicles in the fleet; and
• macroeconomic factors such as employment, gross regional product, disposable personal income, and industry value-added.

click to enlarge

Table ES-1 presents the design features of three main carbon reduction scenarios and two sensitivity scenarios that were analyzed in this study. The three core policy scenarios each demonstrate a 10 percent CI reduction over 10 years (assumed to be 2013 to 2022). In this analysis, it was assumed that the largest reductions are made in the latter part of the 10-year period. For the purposes of this study, NESCAUM focused on three types of potential low carbon fuel alternatives: advanced biofuels, electricity and natural gas. Each scenario depicts one fuel type more favorably and assumes that fuel will achieve 60 percent of the CI reduction required in the scenario being analyzed. The low-end range of CI scores and cost are applied to the preferred fuel in each scenario. The other two low carbon fuel types are each assumed to achieve 20 percent of the reduction and are assigned high-end CI and cost values.

NESCAUM also evaluated other possible reduction scenarios—5 percent over 10 years and 15 percent over 15 years—to explore the impact of key variables such as program stringency, implementation schedule, and the availability of low cost, low CI fuels on results. The 5 percent scenario assumes the high-end of the CI and cost range for all three fuel types. The 15 percent scenario assumes the low-end of the CI and cost ranges for all three. Together, these scenarios are intended to provide decision-makers with information about the impacts of a regional clean fuels standard under a wide range of potential market responses to the program’s requirements.

All policy scenarios were compared to two business-as-usual (BAU) reference cases. The BAU is intended to represent the transportation fuel market absent policy intervention and provides a baseline against which to compare the impacts of a clean fuels program.

This analysis employed two BAU cases, reflecting low and high oil price forecasts based on the U.S. Energy Information Administration’s Annual Energy Outlook (AEO) 2010. These low and high oil price forecasts predict 2022 retail gasoline prices at $3.79 and $5.50 per gallon, in nominal terms, respectively.2 Another assumption that varies across the BAU cases is the carbon intensity of gasoline and diesel. These are assumed to stay constant in the low oil price BAU case and increase annually under high oil prices. The Low and High Oil Price BAU cases also reflect different rates of compliance with existing regulations, including the federal Renewable Fuel Standard and state Zero Emission Vehicle programs.

The REMI Policy Insight model, a multi-state economic policy analysis tool, was used to assess the macroeconomic impacts of these scenarios. The version of the model used in this analysis covers the six New England states, New Jersey, New York, Delaware, Maryland, Pennsylvania, and the District of Columbia.

click to enlarge

Results

Impact on Transportation Fuel Diversity and Demand

This analysis suggests that a clean fuels program could shift the composition of the region’s transportation fuels from one totally dominated by gasoline (blended with 10 percent conventional ethanol) and diesel to a more diverse mix that includes new advanced liquid biofuels, electricity and natural gas. Figures ES-1 and ES-2 show how the fuel mix might change under the three core policy scenarios with high and low oil price assumptions. The program would have a significantly greater impact on fuel diversity with high oil prices.

It is important to note that under a 10 percent CI target, gasoline and diesel would remain the dominant transportation fuels. Under low oil prices, at least 80 percent of fuel energy still comes from petroleum fuels. Under high prices, at least 73 percent of fuel energy is modeled to come from petroleum fuels when the 10 percent target is achieved. Based on
this result, a more stringent CI target could further enhance fuel diversity and price stability goals.

These figures illustrate the inverse relationship between the carbon intensity of a fuel and the volumes of that fuel needed to achieve a given CI reduction target. For example, in the Biofuels Future, biofuels actually account for a smaller fraction of overall fuel energy than in the other scenarios, but provide greater carbon reductions due to a much lower CI value. Significantly fewer gallons of low CI biofuels, such as cellulosic ethanol, are needed to achieve the same carbon reduction as conventional corn ethanol. Because the magnitude of many categories of costs and benefits correlate with fuel volumes, this relationship significantly impacts many of the results in the analysis.

As shown in Table ES-2, this analysis suggests that a regional CFS could result in significant reductions in gasoline and diesel consumption compared to BAU over the 10-year period. Combined gasoline and diesel use under the Low Oil Price case is modeled to decrease by 4 to 7 percent (14 to 23 billion gallons) in the region relative to the BAU forecast. Under the High Oil Price case, demand could decrease by 8 to 13 percent (25 to 40 billion gallons).

Since nearly all of the alternatives to gasoline and diesel are assumed to be domestically produced, a clean fuels program could provide important energy security benefits in the northeast and mid-Atlantic region. Further, if the cost of alternatives to gasoline and diesel are, as expected, more stable over time, the program would help protect consumers of low carbon fuels from price volatility, which characterizes the current transportation fuel market.

click to enlarge

GHG Emissions Reductions and Values

The transportation sector is the single largest source of GHG emissions in the region, accounting for 33 percent of the total GHG inventory. This analysis suggests that the CFS could achieve significant GHG emission reductions from this sector. Figures ES-3 and ES-4 compares total lifecycle GHG emissions from transportation fuels under BAU and the three policy scenarios over the initial 10 year program period, under both High and Low Oil Price cases. In 2022, when the 10 percent reduction target is achieved, estimated GHG reductions range from 5 to 6 percent under the Low Oil Price case and 7 to 9 percent under the High Oil Price case. A similar level of annual GHG reductions would be expected in subsequent years, assuming the 10 percent CI reduction target is in place. These reductions would help participating states meet existing GHG emissions reduction obligations.

The economic value of reducing (or avoiding future) GHG emissions is a subject of active debate, due to the uncertainties about the possible magnitude and type of climate impacts and also differing viewpoints on how to evaluate emissions reductions occurring at different points in time. In this analysis, values used for the “social cost of carbon,” (SCC) range from nearly $24 per ton of carbon-equivalent in 2013 on the low-end (increasing to $29 per ton in 2022) to approximately $107 per ton at the high-end (2013 through 2022).

Based on these SCC values, the value of cumulative GHG emissions reductions for the 10 percent CI reduction at year 10 range from $2.1 to $2.5 billion under low SCC and low oil prices. The range is $14 to $17 billion using high SCC and oil price assumptions. The SCC values vary within these ranges depending on the scenario.

click to enlarge

Net Program Costs and Benefits

Tables ES-4 and ES-5 show the modeled cumulative change in expenditures on transportation fuels, infrastructure, vehicles, and program administration resulting from implementation of the various carbon reduction scenarios under the Low and High Oil Price cases. For all scenarios, the costs of low carbon fuels are less than the cost of the gasoline and diesel they replace. However, the introduction of these low carbon alternatives requires investments in fuel delivery infrastructure and alternative fuel vehicle, which are also factored into the estimates of total cost.

The program costs shown for a given scenario reflect the total for all three fuels, not just the dominant fuel. Because of the inverse relationship between fuel CI and required volumes, the infrastructure and vehicle costs for a given policy “future” may in fact be dominated by a fuel other than the featured fuel for that scenario. For example, under the Biofuels Future, a significant share of the infrastructure and vehicle cost shown in the tables are for electricity and natural gas, which are assumed to have high CI values and high vehicle/infrastructure costs under this scenario. Consequently more vehicles and refueling infrastructure will be needed to achieve the CI reduction target, and the cost for a unit of carbon reduction is higher.

click to enlarge

Net program benefits (or costs) are determined by comparing the total cost for low carbon alternatives to the benefits from reductions in both gasoline and diesel purchases and GHG emissions. This analysis suggests that the clean fuels program analyzed would result in net benefits under all scenarios, even excluding the value of GHG reductions, when oil prices are high. Depending on the scenario, the cumulative savings over 10 years range from around $18 billion to $52 billion, without GHG reductions, compared to the High Oil Price BAU case. When the value of GHG reductions is included in the net benefit calculation, cumulative savings increase to $26 billion to $55 billion under high oil prices.

Under the Low Oil Price case, the scenarios show either small net benefits or small net costs relative to BAU, even when the value of GHG reductions is excluded. The exception is the Biofuels Future, which shows $13 billion in net costs under low oil prices, which falls to $4 to $11 billion in net costs when the SCC of GHG reductions are included. These results suggest the price of oil is a more important determinant of the net impact of a clean fuels program than the low carbon fuel mix that might emerge to comply with the program’s CI reduction target. The less optimistic 5 percent scenario is predicted to deliver lower net benefits, and the more optimistic 15 percent scenario higher net benefits than the three 10 percent reduction scenarios.

Net reductions in transportation fuel expenditures relative to BAU would accrue jointly to consumers of low carbon fuels, in the form of fuel savings, and to low carbon fuel producers, in the form of sales revenues. Consumers would accrue savings from purchases of the low carbon fuels that are projected to be lower in cost, on average, than gasoline and diesel, especially if oil prices are high. Actual consumer savings would depend on the retail prices set by producers for low carbon fuels.

click to enlarge

Producers of low carbon fuels would increase revenues through sales of these products, and could increase profits depending on market demand and their ability to pass through costs. Since producers of different fuel types would compete to bring the most costeffective CI reductions to the market, the retail prices of low carbon fuels would be strongly influenced by the lowest-cost producer of CI reductions.

Regulated companies would incur compliance and administration costs. They would seek strategies to achieve the lowest possible cost of compliance with the requirements of a clean fuels standard including: (1) direct purchases or production of advanced biofuels, and/or (2) purchases of credits generated by the introduction of electricity, natural gas or other alternative transportation fuels. Some low carbon fuels would provide CI reductions at a lower cost than others. The cost of a credit would be determined by the incremental marginal cost of producing fuel that provides a unit of CI reduction. Infrastructure investments and the incremental cost of advanced vehicles could also be bundled into the value of program credits. Since the underlying economics of the market for low carbon credits are so uncertain at this stage, this analysis does not provide a quantitative estimate of cost impacts on petroleum producers, or how those might translate into impacts on retail gasoline and diesel prices.

Macroeconomic Impacts

Table ES-6 summarizes the REMI modeling estimates of the program’s impacts on employment, gross regional product, and real disposable personal income in the region for the three policy scenarios under low and high oil price projections for year 10, when the CI reduction target is fully achieved. The table also displays the cumulative totals for the 10-year program period, and results for the 5 and 15 percent scenarios. These impacts are relative to what would be expected without the program in place.

click to enlarge

Employment

According to this analysis, the clean fuels program analyzed would add jobs in the region compared to BAU for all modeled scenarios. More jobs are projected under the High Oil Price case. In year 10, when the clean fuels achieves a 10 percent CI reduction target, results of the REMI model show approximately 10,000 to 40,000 incremental jobs annually under the Low Oil Price case and 20,000 to 50,000 under the High Oil Price case, compared to BAU. The jobs calculated by the REMI model include both part-time and full-time jobs and simply reflect the number of people employed beyond BAU for a given year. The annual values cannot be added to project a cumulative change in the number of jobs.

Gross Regional Product

Gross regional product (GRP), a measure of the states’ economic output, increases under all of the policy cases evaluated in this analysis compared to BAU. Over the ten year period analyzed, cumulative GRP in the region is estimated to increase by $7.3 billion to $20.2 billion under the Low Oil Price case and by $17.1 to $28.7 billion under the High Oil Price case.

Disposable Personal Income

Real disposable personal income (DPI), the amount of income that households have available for spending and saving, is modeled to increase as a result of transportation fuel cost savings under the program analyzed. Household income in the region would grow by $2.2 billion to $9.6 billion under low oil prices and by $7.2 to $15.2 billion under high oil prices over the 10 years analyzed.

click to enlarge

Impact on Industry Sectors

The REMI modeling suggests that a CFS would have both direct and indirect economic impacts on a range of industries within the region. Direct impacts are those associated with industries involved in the development, manufacture and deployment of low carbon fuels and infrastructure. Indirect affects accrue in those industry sectors that attract increased investment from disposable income that becomes available through savings on purchases of transportation fuels.

The utilities sector experiences the highest level of positive impacts, in terms of valueadded,across all three scenarios. This reflects not only increased levels of electricity and natural gas sales for transportation purposes, but also production and installation of infrastructure for fueling and charging. The construction and manufacturing sectors also realize strong positive direct impacts, for both value-added and jobs, across all policy scenarios. These industries would experience positive value-added and job impacts related to installing fuel delivery infrastructure, building and operating biofuel and biogas production plants, and installing home charging and fueling systems.

Health care and finance/insurance are the two sectors generally found to experience the most positive indirect impacts from the program analyzed. While no spending was initially allocated to these industries in the analysis as a direct result of the program, indirect benefits take place as households and businesses retain more income or profit from reduced expenditure on transportation and invest those dollars elsewhere in the economy. Because health care spending accounts for a large portion of total spending in the U.S. economy, REMI predicts that dollars made available by a clean fuels program will spur additional spending in that sector.

click to enlarge

According to this analysis, some sectors would experience negative impacts as a result of the clean fuels program analyzed. Retail and wholesale trade are estimated to experience net negative value-added and employment impacts. This sector includes fuel wholesalers as well as retail gasoline stations, which would both likely experience decreases in sales. However, the negative impacts experienced by the wholesale and retail trade industries would not be limited to directly affected businesses such as gas stations, because indirect effects of the program associated with commodity price changes would affect other types of retail and wholesale sales.

Although net impacts on the chemical manufacturing sector are estimated to be net positive as a result of the program analyzed, within that broad industry classification, the petroleum and coal products manufacturing sub-sector is expected to lose value-added and jobs as well. For example, in 2022 (Year 10), job losses in petroleum manufacturing will range from 150 jobs under low oil prices to 560 jobs under high oil prices. Reference case levels of jobs in petroleum manufacturing are estimated at 11,000, so these losses represent under one-tenth to one-half of one percent, respectively, relative to current employment levels in that sub-sector.

It is important to note that value-added and employment impacts shown in Table ES-6 for the region already include these negative impacts on the wholesale and retail trade industries. In other words, despite the negative impacts on these two industry sectors, the net employment, industry value-added, and income impacts of the program would still be positive overall for the region.

click to enlarge

Conclusion

This analysis suggests that an eleven-state regional clean fuels program could achieve the climate and energy goals articulated by the region’s Governors in their 2009 Memorandum Of Understanding, with positive impacts on key macro-economic indicators.

Such a program would increase fuel security and reduce the region’s reliance on imported oil by encouraging a broader range of fuels to compete in the transportation market. It would reward cleaner and less expensive technologies and create competition among producers that could stimulate investment, innovation and broader deployment of low carbon fuels. This would help protect consumers from the price volatility of the global oil market, and increase production of domestically-produced lower-carbon alternative fuels, some of whose costs are expected to be lower and more stable over time than petroleum. The results of this study indicate that the higher the price of gasoline and diesel, the greater the savings would be for consumers.

This analysis suggests that a clean fuels standard could effectively reduce GHG emissions from the transportation sector across the region and stimulate economic growth. While the economic growth and jobs stimulated by the program are projected to be relatively small within an economy projected to total $4.9 trillion in 2022, they are positive under a wide range of possible market responses to the program’s carbon intensity reduction requirements.