U.S. Climate Policy Prospects in Wake of COP15

Henry LeePrinceton University

February 9, 2010

Why is getting a Domestic Climate Agreement so hard?

• Public support is shallow and thus easily persuaded to delay action

• US energy policy has historically emphasized low prices, while actions to reduce carbon emissions require higher energy prices.

• Strong anti-establishment sentiment arising in US (see Tea Party) – targets include business, government and academic elites

• 47% of American public receive their information from the “new media”

What actions may happen

• Attempt to reduce scope to electric and large industrial sectors

• Attempt to have EPA regulate• Attempt to subsidize and promote particular

energy options—nuclear, offshore oil, renewables, biofuels, efficiency

• All will face major challenges • To watch post-2010: fiscal crisis meets anti-tax

sentiment

Transportation Sector• Transportation accounts for 28% of US GHG emissions

and most of these emissions are in the passenger vehicle sector.

• Most of US oil consumed in this sector, and thus any effort to reduce US oil imports will have to focus on reductions in gasoline consumption.

• The cost of reducing GHG emissions in this sector is higher than the cost of reductions in the stationary source sectors.

• Projected increases in gasoline consumption (2010-2030) are driven by increases in GDP and personal income.

ETIP Study• Starts with EIA’s Reference Case from 2009

Annual Energy Outlook– Oil prices increase from $77 in 2010 to $124 in

2030 and gasoline prices in 2030 are $1 higher than today.

– Higher prices trigger greater demand response and greater penetration of renewable options

– Also looked at a high price scenario where 2030 prices are $198

– Used NEMS model to assess impacts on different cases.

Scenarios1. Places a price of $30/ton of CO2 on emissions in 2010

that escalates to $60 in 2030 (surrogate for cap and trade)

2. Add to the CO2 tax a gasoline tax , which increases prices by $0.50 in 2010 and escalates 10% per year –reaching $3.36 in 2030.

3. Extend CAFE 2020-2030 at the same level of increases (2010-2020) called for in EISA legislation

4. Tax Credits for alternative motor vehicles based on extending Plug-In Hybrid credits to a larger array of vehicles

Results

• None of these scenarios is sufficient to meet the Obama Administration goal of a 14% reduction from 2005 levels by 2020.

• The carbon tax alone has very little impact on gasoline consumption.

• Accompanied by the gasoline tax, the impact is much greater. Assuming the high priced scenario ($198 oil) plus the $3.36 tax, CO2 emissions in the transport sector are reduced by 17% and oil imports by 4.5 million barrels below the AEO reference case.

Results (continued)

• CAFE alone results in higher efficiency gains, but fails to obtain significantly greater CO2 reductions because of increased vehicle miles traveled, especially in the 2020-2030 period.

• Tax credits are a very expensive option costing the government between $22-$37 billion per year.

• Even with the high priced scenario plus the gasoline tax, losses in GDP relative to the reference case are less than 1% and GDP is expected to grow 2-4% through 2030.

Is Shale Gas an Option?

• There is a growing consensus that the resource base is very large and could dramatically increase reserve estimates for natural gas.

• Estimates of costs seem to be location-specific and range between $4.50 per Mcf and $8.00 per Mcf (price of conventional gas on Feb 3: $5.52 per Mcf).

Shale gas must be competitive

• Must be competitive with other sources, including LNG

• Gas must increases sales into 1) electric markets (versus coal), or 2) transportation markets (versus gasoline).

Challenges1. Regulatory– Water– Siting– Institutional

2. Without a price on carbon, it will be difficult to penetrate the electric market

3. CO2 reductions from significant penetration of the transport sector are limited (3-4% reduction for converting 50% of fleet by 2030)