economic&analysis&of&u.s.&low& … · 10/5/2012 ·...

James McFarland Climate Economics Branch, U.S. EPA

La<n American Modeling Project San José, Costa Rica October 5, 2012

Economic Analysis of U.S. Low Emission Development Strategies

Outline

•  Overview of U.S. GHG policy focus areas •  Past policy example •  EPA’s suite of analy<cal tools to asses GHG policy – Computable general equilibrium models – Par<al equilibrium models

•  Sample analysis

2

U.S. GHG Policy Focus Areas

3

Areas of US GHG Policy Focus

•  Economy-‐wide cap-‐and-‐trade or tax –  Permit alloca<on –  Banking and borrowing

•  State Level Policies –  RGGI, CA AB32, Western Climate Ini<a<ve

•  Sectoral Policies –  Electricity sector policies (e.g., clean energy standard, renewable porXolio standard)

–  Border carbon adjustments –  Output-‐based rebates

•  EPA Regulatory Authority Policy framework heavily influences model aggrega>on and structure.

4

Past Policy Example

5

EPA Public Analyses of Climate Legisla<on

111th Congress (5) •  American Power Act (Kerry – Lieberman) -‐ June 14, 2010 •  American Clean Energy and Security Act of 2009 (H.R. 2454) (Waxman – Markey House Passed) -‐ January 29, 2010

•  The Clean Energy Jobs and American Power Act of 2009 (Kerry -‐ Boxer) -‐ October 23, 2009

•  American Clean Energy and Security Act of 2009 (H.R. 2454) (Waxman – Markey Commi]ee Passed) -‐ June 23, 2009

•  American Clean Energy and Security Act of 2009 (Waxman – Markey Discussion Dra^) -‐ April 20, 2009

110th Congress (3) •  Lieberman-‐Warner Climate Security Act of 2008 (Lieberman – Warner) -‐ March 14, 2008

•  Low Carbon Economy Act of 2007 (S. 1766) (Bingaman – Specter) -‐January 15, 2008 •  Climate Stewardship and Innova<on Act of 2007 (S. 280) (Lieberman – McCain) -‐ July 16, 2007

All analyses available at www.epa.gov/climatechange/economics/economicanalyses.html 6

•  Title I of the APA outlines a direc<on for energy policy that includes: –  expansion of nuclear power genera<on, new regula<on for offshore oil and gas extrac<on,

development and deployment of carbon capture and sequestra<on (CCS) technology, promo<on of renewable energy and energy efficiency, development of a clean transporta<on network, and further support for clean energy research

• Title II of the APA outlines the GHG reduc<on mechanism and emissions targets. –  Cap target is 17% reduc<on from 2005 levels by 2020, 83% by 2050 beginning in 2013. –  The set of GHGs is defined to include CO2, methane, nitrous oxide, sulfur hexafluoride,

hydrofluorocarbons emi]ed as a byproduct, perfluorocarbons, and nitrogen trifluoride. –  Cap and trade program regulates en<<es to hold allowances equal to their annual emissions. –  Banking and borrowing –  Cost containment reserve of 4 billion allowances to be open for sale when the allowance

market price reaches $25 (constant 2009 dollars, adjusted annually for infla<on plus 5%). Reserve is refilled with allowances from developing country offsets from the Reducing Emissions from Deforesta<on and Degrada<on (REDD) category when available.

–  Offset credit program, defining credi<ng rules for both domes<c and interna<onal projects.

The American Power Act Bill Summary

• Title III of the APA focuses on consumer protec<on –  Allowance redistribuGon to electricity and natural gas local distribu<on companies (LDCs) to

offset increases in consumer costs, while allowances are distributed to states to offset increased costs to consumers of home hea<ng oil and propane.

• Title IV of the APA focuses on job protec<on and U.S. economic growth. –  Credits for energy-‐intensive trade-‐exposed (EITE) industries –  Beginning in 2020, an interna<onal reserve allowance program may be established for covered

EITE sectors –  Importers of EITE products will be obligated to purchase allowances to cover GHG emissions

arising from produc<on

• Title V of the APA outlines proposed interna<onal climate change ac<vi<es. –  Build capacity in developing countries to reduce emissions from deforesta<on. –  Requires annual interagency report on the climate change and energy policies of the top five

largest GHG emilng non-‐OECD countries

• Title VI of the APA provides a plan for domes<c adapta<on to global warming

• Title VII requires the APA to be deficit-‐neutral

The American Power Act Bill Summary

Scenario 1 -‐ EPA 2010 Reference –  This reference scenario is benchmarked to the AEO 2010 forecast and includes both the Energy Independence and

Secur<ty Act (EISA) and the American Recover and Reinvestemtn Act (ARRA).

Scenario 2 – American Power Act (core policy scenario)

Interna(onal ac(on sensi(vi(es •  Scenario 3 – Early developing country acGon •  Scenario 4 – No developing country acGon

Technology and offset sensiGviGes •  Scenario 5 – V – No Int’l Offsets* •  Scenario 6 – V – Reference Nuclear & Biomass / Delayed CCS* •  Scenario 7 – V – Reference Nuclear & Biomass / Delayed CCS – No Int’l Offsets* •  Scenario 8 – V – IPM electricity sector reducGons imposed on ADAGE* •  Scenario 9 – No CCS Bonus Allowances

H.R. 2454 Comparison Scenario •  Scenario 10 – H.R. 2454

Analy<cal Scenarios Reference and Core Policy Scenarios

Sample Analysis from EPA’s Analysis of the American Power Act (2010)

Summary of relevant bill provisions for power sector analysis –  Cap target is 17% reduc<on from 2005 levels by 2020, 83% by 2050 beginning in 2013.

–  The set of GHGs is defined to include CO2, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons emi]ed as a byproduct, perfluorocarbons, and nitrogen trifluoride.

–  Covered en<ty may bank allowances without limit, borrow from the following year’s allowance vintage interest-‐free, and may borrow allowances from vintages up to five years in the future with interest to comply with a maximum of 15% of its compliance obliga<on.

–  Establishment of a cost containment reserve of 4 billion allowances to be open for sale when the allowance market price reaches $25 (constant 2009 dollars, adjusted annually for infla<on plus 5%). Reserve is refilled with allowances from developing country offsets from the Reducing Emissions from Deforesta<on and Degrada<on (REDD) category when available.

–  Sets the allowance auc<on reserve price of $12 (2009 constant dollars, adjusted yearly for infla<on +3%).

Note: The full analysis of the American Power Act may be found at epa.gov/climatechange/economics/economicanalyses. 10

EPA’s Modeling Suite

11

EPA’s Modeling Suite

•  Mul<ple models are needed to cover a broad array of sectors, gases, regions, and their interac<ons

•  General equilibrium models examine economy-‐wide effects of policy and interac<ons between sectors and regions

•  Par<al equilibrium models provided necessary sectoral depth –  Power sector –  Industrial non-‐CO2 GHG’s –  Agriculture and land use

12

EPA Models and Corresponding GHG Mitigation

13

AbbreviaGon Name Purpose

General Equilibrium

ADAGE App. Dyn. Analysis of the Global Economy U.S. and Global Emissions, Economics

IGEM Intertemporal General Equilibrium Model U.S. Emissions, Economics

PHX “Phoenix” U.S. and Global Emissions, Economics, Interna<onal Trade

ParGal Equilibrium Providing Inputs to CGE

NCGM EPA’s non-‐CO2 GHG tools Industrial CH4, N2O, F-‐gas Abatement

FASOM-‐GHG Forest and Agriculture Sector Op<miza<on Model, GHG version

Forest & Ag Emissions CO2, CH4, N2O

GTM Global Timber Model Int’l. Credits CO2

GCAM Global Climate Change Assesmnt. Model Int’l. Credits CO2, CH4, N2O, F-‐gases

ParGal Equilibrium Using CGE Outputs

IPM Integrated Planning Model U.S. Electric Power Sector Detail

Computable General Equilibrium (CGE) Modeling of Climate Policy

14

CGE Modeling

•  Computable General Equilibrium (CGE) Model –  Combines economic theory with empirical data for policy analyses

•  General Equilibrium => covers all segments of economy (produc<on, consump<on, trade, household income, taxes, etc)

–  Es<mate how changes from a policy will flow through en<re economy –  Unlike input-‐output models, allows produc<on technologies and household consump<on

pa]erns to change because of policies •  Broad Scope and Aggregated Industry Groups

–  Not appropriate for detailed industry or firm-‐specific inves<ga<ons

•  Focus: –  Es<ma<ng allowance prices for emissions caps –  Es<ma<ng macroeconomic impacts of emissions caps

15

Overview of CGE models

Model DescripGon DisGncGve Abributes

IGEM Single country (US) model with 35 sectors Fully dynamic

Sectoral detail Econometrically es<mated

ADAGE US (6 regions), Global (TK regions) Fully dynamic

Regional and global aggrega<on Energy technology detail Calibrated model

PHX 24-‐region, 26-‐sector Global model Recursive dynamic

Bilateral trade flow Energy technology detail Calibrated model

16

The Intertemporal General Equilibrium Model (IGEM)

17

Intertemporal General Equilibrium Model (IGEM) Overview

•  IGEM is a neo-‐classical growth model of the U.S. economy with an emphasis on the energy and environmental aspects.

•  It is a dynamic model, which depicts growth of the economy due to capital accumula<on, technical change and popula<on change.

•  It is a detailed mul<-‐sector model covering 35 industries (5 energy and 30 non-‐energy)

•  It also depicts changes in consump<on pa]erns due to demographic changes, price and income effects.

•  The model is designed to simulate the effects of policy changes, external shocks and demographic changes on the prices, produc<on and consump<on of energy, and the emissions of pollutants.

•  The main driver of economic growth in this model is capital accumula<on and technological change. It also includes official projec<ons of the popula<on, giving us ac<vity levels in both level and per-‐capita terms.

•  Capital accumula<on arises from savings of a household that is modeled as an economic actor with “perfect foresight.”

18

IGEM Sectors

1 Agriculture, forestry, fisheries 19 Stone, clay and glass products 2 Metal mining 20 Primary metals 3 Coal mining 21 Fabricated metal products 4 Crude oil and natural gas extracGon 22 Non-‐electrical machinery 5 Non-‐metallic mineral mining 23 Electrical machinery 6 ConstrucGon 24 Other transportaGon equipment 7 Food products 25 Instruments 8 Tobacco manufactures 26 Miscellaneous manufacturing 9 TexGle mill products 27 TransportaGon and warehousing 10 Apparel and other texGle products 28 CommunicaGons 11 Lumber and wood products 29 Electric uGliGes 12 Furniture and fixtures 30 Gas uGliGes 13 Paper and allied products 31 Wholesale and retail trade 14 PrinGng and publishing 32 Finance, insurance, and real estate 15 Chemicals and allied products 33 Other personal and business services 16 Petroleum refining 34 Government enterprises 17 Rubber and plasGc products 35 Motor vehicles 18 Leather and leather products 19

Applied Dynamic Analysis of the Global Economy (ADAGE) Model

ADAGE Model Overview

•  Dynamic, Intertemporally-‐Op<mizing Model –  Forward-‐looking: households and businesses plan ahead to limit any policy costs

•  Produc<on Equa<ons & New Technologies Based on Other Models (MIT, CRA, EIA, EPA, various papers)

•  Includes Interna<onal and Domes<c Impacts •  Accounts for Interna<onal/Regional/State Differences In:

–  Energy produc<on, consump<on, and prices –  Electricity genera<on technologies –  Manufacturing base and produc<on techniques –  Household consump<on pa]erns

•  Economic Data from GTAP and IMPLAN •  Energy Data and Forecasts from IEA and EIA •  CO2 emissions from energy consump<on (reduc<ons controlled by structure) •  Non-‐CO2 emissions (endogenous modeling, abatement costs from EPA data)

ADAGE -‐ Sectors & Regions

“US Regional” Module

“International” Module •  United States •  Europe •  Canada •  Japan/Australia/ New Zealand •  China •  Rest of World

Pass international results to US Regional Module

•  Households –  Consump<on of goods & services, leisure <me –  Energy use –  Personal vehicle transporta<on –  Purchased transporta<on

•  Non-‐Energy (5) –  Agriculture –  Energy-‐intensive manufacturing –  Other manufacturing –  Services –  Transporta<on

•  Energy (5 + 9) –  Coal –  Crude oil –  Electricity –  Natural gas –  Refined petroleum

Generation Technologies Fossil (coal, gas, oil) Nuclear Hydro/geothermal Biomass Wind and solar IGCC + CCS CC+CCS

Pacific*

South

MidwestPlains

North-east

* Pacific region includes Alaska and Hawaii

Rocky Mountains

Sample Analysis

23

Sample Analysis from EPA’s Analysis of the American Power Act (2010)

Summary of relevant bill provisions for power sector analysis –  Cap target is 17% reduc<on from 2005 levels by 2020, 83% by 2050 beginning in 2013.

–  The set of GHGs is defined to include CO2, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons emi]ed as a byproduct, perfluorocarbons, and nitrogen trifluoride.

–  Covered en<ty may bank allowances without limit, borrow from the following year’s allowance vintage interest-‐free, and may borrow allowances from vintages up to five years in the future with interest to comply with a maximum of 15% of its compliance obliga<on.

–  Establishment of a cost containment reserve of 4 billion allowances to be open for sale when the allowance market price reaches $25 (constant 2009 dollars, adjusted annually for infla<on plus 5%). Reserve is refilled with allowances from developing country offsets from the Reducing Emissions from Deforesta<on and Degrada<on (REDD) category when available.

–  Sets the allowance auc<on reserve price of $12 (2009 constant dollars, adjusted yearly for infla<on +3%).

Note: The full analysis of the American Power Act may be found at epa.gov/climatechange/economics/economicanalyses. 24

Total US GHG Emissions & Sources of Abatement

Scenario 1 -‐ Reference & Scenario 2 – APA

Covered GHG Emissions (Net of Offsets)

APA Cap

AEO 2010 Reference Case

AEO 2009 Reference Case

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1990 2000 2010 2020 2030 2040 2050

MtCO2e

CO2 - ElectricityCO2 - TransportationCO2 - Energy Int. ManufacturingCO2 - OtherNonCO2 - CoveredOffsets - DomesticOffsets - InternationalDiscounted OffsetsHFCs (separate cap)

•  The reference case for this analysis is based on the AEO 2010. Previous EPA analyses of H.R. 2454 used a reference case based on the March release of AEO 2009.

•  The electricity sector provides the largest share of abatement from covered sources.

•  The limits on domestic and international offsets are non-binding.

•  Covered emissions net of offsets are below the cap in the early years as firms bank allowances, above the cap in later years as the bank of allowances is drawn down, and cumulatively from 2013 – 2050 the cap is met.

•  Discounted international offsets, and the HFC cap provide additional abatement beyond what is required by the main cap.

GHG Allowance Prices

Scn 2 – American Power Act Analysis & Scn 10 -‐ H.R. 2454

• The marginal cost of GHG abatement is equal to the allowance price.

• Range of 2030 allowance price in “scenario 2 – APA” across models is $37 -‐ $39. This range only reflects differences in the models and does not reflect other scenarios or addi<onal uncertain<es discussed elsewhere.

• The limit on interna<onal offsets usage is non-‐binding in both models, and thus the domes<c allowance price is equal to the interna<onal offset price (a^er discoun<ng) and the interna<onal offset price acts as a floor on the allowance price.

• When the interna<onal offsets limit is non-‐binding, the differences in allowance prices between the models arises from differing demands for interna<onal offsets.

• The differences between the models in terms of cost and availability of domes<c abatement show up in the differing amount of interna<onal offsets used instead of differing allowance prices.

• In scenario 2, ADAGE projects an average of 929 MtCO2e of interna<onal offsets will be used annually, and IGEM projects average annual interna<onal offsets usage to be 522 MtCO2e.

$0

$10

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2010 2020 2030 2040 2050

2005

Dol

lars

/ tC

O2e

Scn. 2 - APA ADAGEScn. 2 - APA IGEMScn. 10 - H.R. 2454 ADAGEScn. 10 - H.R. 2454 IGEM

26

Consump<on

Scn 1 – Reference & Scn 2 – American Power Act

Avg. Annual Consumption Growth Rate (2010-2030)

2.51%

2.53%

2.79%

2.81%

0.0% 1.0% 2.0% 3.0%

Scn. 2 - APA

Scn. 1 - Reference

Scn. 2 - APA

Scn. 1 - Reference

IGE

MA

DA

GE

U.S. Consumption

$0

$5

$10

$15

$20

$25

$30

2015 2020 2030 2040 2050

Trill

ion

2005

$

Scn. 1 - Reference - ADAGEScn. 2 - APA - ADAGEScn. 1 - Reference - IGEMScn. 2 - APA - IGEM

Consump<on


ADAGE 2015 2020 2030 2040 2050% Change -0.14% -0.17% -0.46% -0.68% -0.86%Annual Change / HH -$122 -$169 -$529 -$901 -$1,316NPV of Change / HH -$91 -$99 -$190 -$199 -$178

Average Annual Cost per Household (NPV) -$146Total Cost per Household (2010-2050) (NPV) -$5,985

IGEM 2015 2020 2030 2040 2050% Change 0.00% 0.01% -0.16% -0.72% -1.10%Annual Change / HH -$3 $12 -$153 -$786 -$1,360PV of Change / HH -$2 $7 -$55 -$173 -$184

Average Annual Cost per Household (NPV) -$79Total Cost per Household (2010-2050) (NPV) -$3,225

Consump<on


• The average annual cost of the APA per household is the 2010 through 2050 average of the net present value of the per household consump<on loss in “scenario 2 – APA.”

• The $79 -‐ $146 average annual cost per household is the annual cost of achieving the emissions reduc<ons and resul<ng climate benefits associated with this bill.

• The costs above include the effects of higher energy prices, price changes for other goods and services, impacts on wages and returns to capital, and importantly, the value of emissions allowances returned lump sum to households, which offsets much of the APA’s effect on household consump<on. The cost does not include the impacts on leisure.

• This analysis is a cost-‐effec<veness analysis, not a cost-‐benefit analysis. As such, the benefits of reducing GHG emissions were not determined in this analysis.

Par<al Equilibrium Modeling of Climate Policy:

The Integrated Planning Model

30

What is the Integrated Planning Model (IPM)?

• Model used by EPA to project the impact of emissions policies on the U.S. power sector

•  Finds the least-‐cost solu<on to mee<ng electricity demand subject to environmental, transmission, fuel, reserve margin, and other system opera<ng constraints.

•  Long-‐term capacity expansion and produc<on cos<ng model for analyzing the electric power sector.

• Mul<-‐regional, determinis<c, dynamic linear programming model.

31

Features of IPM

Key Features   MulG-‐regional, determinisGc, dynamic linear

programming model with perfect foresight.   Comprehensive natural gas supply, demand,

and pipeline model is embedded within IPM.   2012-‐2050 modeling horizon   Very detailed bobom up representaGon of 32

U.S. power market regions   Every electric generaGng unit and its emission controls   6 load segments,   14 coal grades,   Nearly 40 coal supply and 200 demand regions,   2 seasons.

  GeneraGng technology opGons   Coal with CCS   Coal without CCS   Coal to Gas conversions   CombusGon Turbines   Combined Cycle   Integrated GasificaGon

Combine Cycle (IGCC)

  Many emission control retrofit opGons for   SO2, NOx, Hg, HCl, CO2

IPM Model Regions – EPA v4.10

•  Nuclear •  Wind •  Biomass •  Solar •  Geothermal •  Landfill Gas •  Fuel Cells

EPA uses the Integrated Planning Model (IPM) to project the impact of environmental policies on the U.S. Electric Power Sector

32

Why EPA Uses IPM

33

•  To obtain fine grain projec<ons of the impact of policy decisions on the power sector

•  To design policies that achieve environmental goals at the lowest possible cost to society

•  To provide a strong technical, well-‐known, and transparent basis for policy decisions

•  To help iden<fy and compare alterna<ve policy op<ons over a 20-‐40 year <me horizon

EPA Use of IPM for Analysis of The American Power Act

34

•  Supplement CGE models with detailed resolu<on on effects in the power sector

•  Electricity demand and CO2 allowance prices are from CGE model (ADAGE)

•  Detailed bo]om-‐up representa<on of Carbon Capture, Transport, and Storage (CCS)

•  Wind resource base from NREL data

•  Capacity deployment constraints on nuclear, CCS, renewables

GHG Allowance Prices and Power Sector CO2 Emissions (IPM)*

Core Scenario GHG Allowance Price (from ADAGE Scenario 2)* Power Sector CO2 Emissions

* Allowance prices for the core IPM scenario are taken from the ADAGE APA core scenario (Scenario 2). IPM 2010 Reference Case is generally consistent with AEO 2010, although projec<ons are not iden<cal because IPM is a power sector model and has slightly different treatment of key assump<ons and variables.

$18

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$-

$5

$10

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$25

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$35

2015 2020 2025

$200

5/ M

etric

Ton

2,312

2,4102,478

2,120 2,1492,039

0

500

1,000

1,500

2,000

2,500

3,000

2015 2020 2025

CO2

Emis

sion

s (m

illio

n m

etric

tons

)IPM 2010 Ref. Case APA

35

1,969 2,145 2,189 2,2031,945 1,946 1,803

14 14 1429 58

124

845 544 671 816

586 646 733

806809

816816

809 816 882

253 284290

288

277 281 278107 303

345373

352383 399

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2008 2015 2020 2025 2015 2020 2025

IPM 2010 Ref. Case APA

TWh

Coal Adv Coal w/CCS Oil/Natural Gas Nuclear Hydro Renewables

Electricity Genera<on Mix (IPM)

2008 data from EIA’s Electric Power Annual (for electric u<li<es, independent power producers, and CHP electric power). IPM 2010 Reference Case is generally consistent with AEO 2010, although projec<ons are not iden<cal because IPM is a power sector model and has different treatment of key assump<ons and variables. *EIA. 2005 Residen<al Energy Consump<on Survey. Table 3. h]p://www.eia.doe.gov/emeu/recs/recs2005/c&e/detailed_tables2005c&e.html.

• An increase in renewable energy in both the reference case and APA scenario is largely driven by ARRA provisions.

• Renewables genera<on only increases by less than 10 percent between the reference case and the APA scenario. Most of this increase is a]ributed to biomass co-‐firing which grows by around 35 percent by 2025.

•  Electricity demand declines gradually resul<ng in an increase in natural gas genera<on in APA in 2015. In later periods, natural gas genera<on is lower in APA than in the reference case.

•  The difference in electricity genera<on between the reference case and policy case is around 300 TWh in 2025. This difference is equivalent to the amount of electricity used by more than 20 million (around 30%) single family homes in the US annually.*

36

2 2 2 2 484

3035

39

42

3639

42

10

8

0

10

20

30

40

50

60

70

80

2015 2020 2025 2015 2020 2025

IPM 2010 Ref. Case APA

GW

Adv Coal w/CCS Oil/Natural Gas Nuclear Renewables

New Genera<on Capacity (IPM)

New Genera<on Capacity, Cumula<ve

Note: New capacity addi<ons less that 1 GW of capacity are not indicated. IPM 2010 Reference Case is generally consistent with AEO 2010, although projec<ons are not iden<cal because IPM is a power sector model and has different treatment of key assump<ons and variables. * See appendix for more detail on EPA’s technology penetra<on limits applied in IPM, post-‐retrofit capacity of CCS includes associated de-‐ra<ng and/or energy use of CCS system.

•  The IPM 2010 reference case includes a sizeable amount of new renewables expected to be built in the short-‐term in response to financial incen<ves in ARRA. Allowance prices encourage deployment of some addi<onal low-‐ or zero-‐ carbon energy (including nuclear and renewables) by 2025.

•  Early deployment funding (wires charges) and a bonus allowance provision for captured and sequestered CO2 emissions result in a total of 15 GW of CCS capacity, of which 6 GW are new and 9 GW are retrofits. This is in addi<on to the 2 GW in the reference case. •  The 6 GW of addi<onal new capacity with CCS by 2025, were determined exogenously and forced in IPM to reflect early deployment funding. No addi<onal new CCS capacity is built on an economic basis.

•  9 GW of CCS retrofits to the exis<ng coal fleet are also deployed, facilitated by the bonus and wires charges (retrofits to exis<ng facili<es are not reflected in the graphic). The total amount of retrofits meets IPM’s CCS retrofit penetra<on limit (while the limit on new CCS capacity penetra<on is not reached).*

•  In addi<on, 8 GW of nuclear capacity is built in 2025 a]ributable to the investment tax credit and other financial incen<ves for nuclear power. The increased amount for loan guarantees was not included in the modeling. The model would possibly have added more nuclear if it had been accounted for. The amount of new nuclear capacity is well below the combined nuclear/CCS penetra<on limit throughout the en<re IPM modeling period.

37

27 28 30 28 29 33

64 6471

65 65 65 64 6464

73 7373

0

20

40

60

80

100

120

140

160

2015 2020 2025 2015 2020 2025 2015 2020 2025

APA APA -‐ No CCS Bonus APA -‐ Low Technology

Coal Retirements O/G Retirements

1,969 1,945 1,946 1,803 1,956 1,976 1,8731,659 1,641

1,424

29 58124

14 1414

845586 646 733 589 655 753

787 8201,055

806

809816 882

809 816 901

809 816 816

253

277281 278

276281 277

276 276 276

107352

383 399353

384 402

374 396 433

0

500

1,000

1,500

2,000

2,500

3,000

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4,500

5,000

2008 2015 2020 2025 2015 2020 2025 2015 2020 2025

APA APA -‐ No CCS Bonus APA -‐ Low Technology

TWh

Coal Adv Coal w/CCS Oil/Natural Gas Nuclear Hydro Renewables

Sensi<vi<es – No CCS Bonus or Wires Charges (Scn. 7) and Low Technology with No Int’l Offsets (Scn. 9)

GeneraGon Mix

ReGrements (CumulaGve)

Allowance Prices

• Allowance prices are rela<vely similar in the core policy scenario and the no bonus allowance scenario. However, prices more than double when low-‐emilng technologies are constrained.

• Without bonus allowances or wires charges, it is not economic to deploy new or retrofit coal with CCS in the near-‐term.

• Without more nuclear, biomass or coal with CCS capacity, re<rements increase and natural gas becomes a more a]rac<ve op<on for compliance. Renewables, including solar, also grow and overall genera<on falls.

$18

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$59

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etric To

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APA No CCS Bonus or Wires Charges Low Technology

38

Appendix: Addi<onal Slides

39

Important Issues and Model Features Affec<ng Results

40

Important CGE Model Features Affec<ng Climate Policy Results

•  Baseline Economic Growth –  Interna<onal (e.g., China) and Domes<c

•  Baseline Energy and Emissions –  Energy consump<on, non-‐CO2 gas projec<ons, and also energy prices –  Considera<on of state & regional climate policies

•  Model Structure –  Dynamics and investment (and how foresight affects reac<ons) –  Capital malleability and vintaging –  Parameter assump<ons:

•  ability to improve energy efficiency and/or switch fuels (e.g., coal to natural gas) •  willingness to lower energy consump<on in response to price increase •  labor supply response to changes in wage rates •  (also any induced technological change, or learning-‐by-‐doing)

–  Non-‐CO2 abatement costs –  Land use, agriculture, and biofuels

41

Important Issues Affec<ng Climate Policy Results

•  Advanced Electricity Genera<on Technologies –  CCS – storage availability across a region and cost –  Capital costs – what are they and how will they improve over <me –  Construc<on – how much can be built

•  Non-‐Fossil Electricity –  Nuclear – is it allowed and what will uranium fuel cost –  Biomass – available supply and cost (with carbon capture?) –  Wind, Solar, Geothermal – site availability and capital costs

•  Liquid Biofuels and Other Transporta<on Technologies •  Policy Defini<on

–  Coverage of system and trading of allowances –  Offsets –  Banking

  adds flexibility and reduces total costs, but raises early costs  model results are more dependent on assump<ons about future growth and

technologies

•  Allowance Alloca<on across U.S. and Among Households •  Economic Benefits of Avoiding Climate Change

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EPA Models and Corresponding GHG Mi<ga<on

Sectors Economy-wide Computable General Equilibrium (CGE)

Models

Models Used to Provide Inputs to CGEs

Partial Equilibrium Model

(Uses CGE Outputs)

ADAGE IGEM PHX NCGM FASOM GTM GCAM IPM

Domestic

Electricity Generation All GHGs All GHGs CO2 CO2, NOx, SO2

Transportation All GHGs All GHGs CO2

Industry All GHGs All GHGs CO2 CH4, N20,

F-gases

Commercial All GHGs All GHGs CO2

Agriculture (& Forestry) All GHGs All GHGs CO2 CO2, CH4, N20

Residential All GHGs All GHGs CO2 CH4, N20,

International Credits* CH4, N20,

CO2 CO2, CH4, N20,

F-gases F-gases

ADAGE Applied Dynamic Analysis of the Global Economy (Ross, 2009) IGEM Intertemporal General Equilibrium Model (Jorgenson, 2009) PHX “Phoenix” Model (Sue Wing et al., 2011) IPM Integrated Planning Model (EPA, 2010) NCGM EPA’s non-‐CO2 GHG spreadsheet tools for es<ma<ng projec<ons and mi<ga<on of CH4, N2O, and F-‐gases (EPA, 2005) FASOMGHG Forest and Agriculture Sector Op<miza<on Model, GHG version (EPA, 2005) GTM Global Timber Model (Sohngen, 2006) GCAM Global Climate Change Assessment Model (Edmonds, 2005) 43

IGEM’s Subs<tu<on Possibili<es

•  Subs<tu<ons among the inputs to produc<on – capital, labor, energy and materials and the details of energy and materials

•  Subs<tu<ons in household decisions –  The intertemporal subs<tu<on of present and future full consump<on

(i.e., consump<on and leisure) for a representa<ve consumer –  The subs<tu<on between consump<on and leisure for a representa<ve

consumer –  The subs<tu<ons among the goods and services within consump<on for

households categorized by income, family size, the age, race and sex of the household head, rural-‐urban status, and region

•  Subs<tu<ons among types of investment and capital goods •  Subs<tu<ons between compe<ng domes<c and imported goods and

services •  Subs<tu<ons among exported goods and services •  The restructuring of final demand among household consump<on,

private investment, government purchases and exports

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•  Capital accumula<on arises from the saving and investment behavior of households and businesses and provides an essen<al input to produc<on and consump<on

•  Households make choices regarding present and future consump<on (i.e., saving) and regarding the alloca<on of <me between labor and leisure

•  Contains backward-‐ and forward-‐looking dynamics –  capital availability results from previous investment –  capital goods prices reflect the discounted present value of future

capital service flows –  household decisions occur with perfect foresight on prices, interest

rates and permanent income –  capital is mobile across all producing and consuming sectors

•  The model is developed and run by Dale Jorgenson Associates for EPA.

•  Model homepage: www.igem.insightworks.com/

IGEM Dynamics

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For More Information

EPA Economic Analysis of Proposed Climate Policies epa.gov/climatechange/economics/economicanalyses.html Contact Informa<on Contact: James McFarland Email: [email protected]

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