greenhouse gas regulations and policy: …...greenhouse gas regulations and policy: implications for...

Center for Energy Studies

David E. DismukesCenter for Energy StudiesLouisiana State University

Greenhouse Gas Regulations and Policy: Implications for Louisiana Industry

Praxair Customer SeminarHouston, TexasAugust 14, 2008


Overview and Preliminary Thoughts

Considerable national and international attention has been given to this issue.

The current increase in energy prices and challenges in supply capabilities confound climate change issues and approaches.

GHG regulation also raises considerable questions about market organization and structure in restructured energy markets.

Uncertainty and “policy volatility” creates challenges for the high levels of expensive investment considered needed to address this issue.


Take Away Points and Conclusions

Significant increases in the cost (price) of all forms of energy.

Potentially greater increases in energy price than reductions in energy demand.

Significant redistribution of wealth between sectors, income classes, and even various different regions and countries around the world.

High near and intermediate term reliance on natural gas particularly for power generation.

Very large increases in the price of electricity.


Climate Change Policy & Goals


Commonly-Cited Policy Goals

Policy movement is premised upon the belief that man-made (“anthropogenic”) emissions are leading to a significant rise in global temperatures that will result in considerable harm to physical and human systems.

Goal is straightforward: reduce emission levels to levels that will reduce (or even correct for) negative environmental impacts.

Will have the added benefit of reducing overall energy costs and the reliance on foreign sources of energy.


Commonly-Cited Specific Emission Goals

Reduce carbon (GHG) emissions to 1990 levels by 2020 (or reductions to some share of 1990 levels, like 80 percent of 1990).

For the U.S., this would result in a 20 percent reduction in emissions from current levels, potentially as much as 40-50 percent of 2010 levels based upon historic rates of emissions growth (assumes 1990 level is target).

For Louisiana, this would result in about a 1 percent reduction in emissions from current levels, 4 percent from levels anticipated in 2020 (assuming current average emissions growth rates).


Different Policy Frameworks

Policy Type Definition

CarbonTax Places afixedtaxonend‐userenergyusage.

CapandTrade(Upstream,CarbonContent)

Wouldrequireupstreamproducersofenergyresourcestoacquire creditsbaseduponthecarboncontentofthefuelminedorproduced.

CapandTrade (Downstream,EmissionsType)

Wouldrequirecertainemitting sectorstoacquireemissioncreditsforfuelburnedinproductionprocesses.

Standards Wouldchangetheefficiency(emissions)standardsofappliances,motors, equipment,automobiles,etc.


Carbon Policy Tradeoffs

PoliciesCriteria

Carbon Tax Cap & Trade-Upstream-

(carbon content)

Cap & Trade-Downstream-

(source emissions)

Standards (Vehicles,Appliances, Buildings)

Economic Efficiency

High to Medium –but depends on coverage of tax. Large number of exemptions reduces efficiency.

High to Medium --depends on potential exemptions, fuel quality issues and adjustments. Administrative costs can be lower than downstream C&T.

Medium to Low –addressing transportation is difficult and administratively complex. Sector exemption greatly reduces efficiency.

Medium to Low – highly dependent upon standards design, timing and implementation.

Sector Consistency High - without exemptions

Medium - Subject to allocations

Medium to Low – depends on sector coverage.

Low – some sectors (residential and commercial) would bear bigger burden.

ResistanceTo Gaming

High Medium to High – property right is “commoditized.”

Medium to High – property right is “commoditized.”

Low

Simplicity High Medium to Low Low Medium (in theory)

Cost Predictability High LowMedium with safety value

LowMedium with safety value

LowMedium with phase-ins.

Cost Transparency High Low Low Low

Ease of Integration into Global Policy Framework

Medium Low Low Medium to High

Political Feasibility Low Low to Medium High High


How Does Cap & Trade Work?

Simply speaking, sources “long” on credits will trade with those that are “short.”


20,000

25,000

30,000

35,000

40,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

emis

sion

s -t

ons

Emissions exceed

allowance –Shortfall must be made up from:

(1) credit purchases from those

facilities individually

long ; and/or

(2) capital investments to

lower emissions profile.

BAU Emissions Profile

Allowance

“Allowances” are issued for the allowed level of emissions.

How Does Cap & TradeImprove Overall Emissions?

Framework creates “scarcity” because the initial regulatory “design” is intentionally “short” in the aggregate.


How Are Allowances Determined?

Allowances are offered to participants based upon two different methods:

Allocated Auction

Regulator makes an administrative determination of who gets allowances.

Market makes the decision about who gets the allowances.

Allocations made on a wide range of considerations and metrics including:

Metric (Heat Input, Output)Baselines (Year, Updates)Growth PoolSet-Asides

Periodic auction (think “eBay”) for the credits. Can be done in a variety of methods, but general approach is to allocate credits to those with the highest willingness to pay.

There is an important issue associated with what to do with “auction proceeds.” Who gets those?


Anticipated Forms of Mitigation

Method Description Challenges

Alternative Technologies Fuel Switching (Nuclear, renewables, alt fuels)

Expensive, longer-term investments, questionable development realization (cost, scope, reliability).

Efficiency Improvements AutomotiveAppliancesBuilding measuresDemand-Side Mgt. Demand Response

Good short run opportunities, significant, but limited in scope. Also require investment to reach pay-back.

Demand Reduction (Destruction)

Reduced output and employment.Industries move offshore.

Lastly implications for economic growth, standard of living, wages, and balance of payments.


Impact Analysis Studies on Climate ChangeSenate Bill S2191 (National Data)

Real GDP DisposableStudy Growth Personal(Short Name) Author(s) Institution Date Output / Input Rate Employment Income/Wages Notes

Beach, Averages based onHeritage- Lieberman, Heritage predicitons betweenS2191 Study Kreutzer, Loris Foundation 5/12/2008 GDP: -$228.5 billion -0.10% -496,700 -$71.3 billion DI 2010 and 2030

NERA/ David Net Impacts to:NPRA- HarrisonS2191 Study Jr., PhD NERA 04/01/08 $ Billions in NPV

Montgomery, GDP:Smith, CRA- -$402 billion in 2015 -2.3% in 2015 Cost per

CRA- Tuladhar, prepared -$471 billion in 2020 -2.3% in 2020 Household byS2191 Study Yuan for EEI 1/31/2008 -$3.03 billion in 2050 -6% in 2050 2020: $1,740 DI

GDP (low cost case): low cost case: low cost case: DI low cost case:-$135 billion in 2015 -0.8 % in 2015 850,000 in 2015 -$1,010 in 2015-$151 billion in 2020 -0.8 % in 2020 -1.22 million in 2020 -$739 in 2020-$631 billion in 2030 -2.6 % in 2030 -3.04 million in 2030 -$4,022 in 2030

NEMS/ GDP (high cost case): high cost case: high cost case: high cost case:ACCF/ NEMS/ -$269 billion in 2015 -1.6 % in 2015 -1.86 million in 2015 -$2,779 in 2015NAM S2191 ACCF/ -$210 billion in 2020 -1.1 % in 2020 -1.80 million in 2020 -$2,927 in 2020Study SAIC NAM -$669 billion in 2030 -2.7 % in 2030 -4.05 million in 2030 -$6,752 in 2030 $ Billions in NPV

Skelly, SmithCymbalsky GDP: Present Value

EIA S2191 Smith, Jones -$444 billion from -.02% change using 4%Study Eynon, Kearney EIA 4/1/08 2009-2030 from 2009-2030 discount rate

GDP: GDP Rate:ADAGE1 -$238 billion ADAGE -0.90%

by 2030 by 2030-$1,012 billion by 2050 -2.37% by 2050

IGEM2 -$983 billion IGEM -3.76%EPA S2191 Francisco de by 2030 by 2030Study la Chesnaye EPA 3/14/2008 -$2,856 billion by 2050 -6.90% by 2050

Refining Sector -$98 billionPetrochemical -$2.1 billion


Impact Analysis Studies on Climate ChangeSenate Bill S2191 (Louisiana Data)

Real GDP DisposableStudy Growth Personal(Short Name) Author(s) Institution Date Output / Input Rate Employment Income/Wages

Employment loss:Beach, Non-farm Personal

Heritage-S.2191 Lieberman, GSP loss: -4,255 by 2030 income loss:LA Impact Kreutzer, Heritage -$1,631.88 million Manufacturing -$1,548.38 millionStudy Loris Foundation 5/20/2008 by 2030 -19,075 by 2030 by 2030

GSP (low cost case): low cost case: low cost case:-$2.144 million by 2020 -17,000 by 2020 -794 by 2020

NEMS/ACCF/ -$7.907 million by 2030 -46,000 by 2030 -3,343 by 2030NAM S 2191 GSP (high cost case): high cost case: high cost case:Study - NEMS/ACCF/ -$2.971 million by 2020 -25,000 by 2020 -2,574 by 2020Louisiana Data SAIC NAM -$9.336 million by 2030 -61,000 by 2030 -6,095 by 2030


EIA Estimates of S. 2191(Lieberman-Warner)

Allowance prices range from $30-76/ton in 2020 and $61-156/ton in 2030 depending the cost and availability of technology.

Coal generation is expected to cost between 161% and 413% more in 2020 and 305% to 804% in 2030.

Power prices overall could climb from 5% to 27% in 2020 and 11% to 64% in 2030.

The average home’s energy bills could grow from $30 to $325 per year by 2020 and from $76 to $725 in 2030.

By 2030, GDP could shrink between $27 billion and $163 billion –about 0.1% to 0.8%.

Gasoline prices are only expected to rise 22-49 cents/gal in 2020 and 41cents to $1.01 per gallon in 2030, though use will shrink since mandatory fuel economy standards are set to rise to 35 miles per gallon.


16

Value at Stake with a Cap-and-trade ProgramAssumes 100% Pass Through of Carbon Costs in Electricity Prices

0%

2%

4%

6%

8%

10%

12%

14%

16%

Per

cent

0% Free Allocation100% Free Allocation

Note: Assumes $15 per ton CO2. Includes process emissions.Source: Nicholas Institute for Environmental Policy Solutions and The Center on Global Change, Duke University


17

Value at Stake with a Cap-and-trade ProgramAssumes 100% Pass Through of Carbon Costs in Electricity Prices

Note: Assumes $15 per ton CO2. Includes process emissions.Source: Nicholas Institute for Environmental Policy Solutions and The Center on Global Change, Duke University

Elasticity of Demand

0% Allocation100% Allocation

16%

14% -

12% -

10% -

8% -

6% -

4% -

2% -

0% --2 -1.8 -1.6 -1.4 -1.2 -1 -0.8 -0.6 -0.4 -0.2 0

Paper

Iron &Steel

ChemicalsAluminum

TransportationEquipment

Food

Petroleumand CoalProducts

Cement

Least Needfor Allocation

Most Needfor Allocation

Separates relatively elastic demands from

relatively inelastic demands.


Regional, State & Local Initiatives


Regional Initiatives

Regional Greenhouse Gas Initiative“RGGI”


State Initiatives on Climate ChangePolicies & Activities

States with GHG Emissions TargetsStates with Climate Policy Groups

States with GHG Registries

Regional Initiatives

Source: Pew Center on Global Climate Change

States with Climate Plans


Municipal Activities on Climate Change& Activities


States with Renewable Portfolio Standards

Currently there are 31 states that have RPS policies in place. Together these states account for more than 64% of the electricity sales in the US.

ME30%

VT Goal:20% by 2017

NH: 23.8%by 2025

WI: 10%by 2015

MT: 15%by 2015

IA: 105 MW

MN: 25%by 2025

WA: 15%by 2020

CA: 20%by 2010

NV: 20%by 2015

AZ: 15%by 2025

NM: 20%by 2020

UT: 20%by 2025

TX: 5,880 MWby 2015 (5%)

MO:11%

by 2020

IL: 25%by 2025

NC: 12.5% by 2021

VA: 12%by 2022

PA: 8/10%Tier I/IIby 2020

NY: 24% by 2013

State RPS

State Goal

OR: 25%by 2025

CO: 20%by 2020

ND: 10%by 2015

SD: 10%by 2015

OH: 12.5%by 2025

MA: 4% by 2009RI: 16% by 2020CT: 23% by 2020NJ: 22% by 2021PA: 18% by 2020MD: 20% by 2022DE: 20% by 2019DC: 11% by 2022

Note: As of May, 2008.Source: Database of State Incentives for Renewables and Efficiency.


These differentials will have to be recovered from various funding sources

Total Overnight Cost for New Plants

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

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Win

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$ pe

r kW

Source: Assumptions to the Annual Energy Outlook 2006

average cost of aconventional

combined-cycle

Resources are typically uneconomic without additional supportResources are typically uneconomic without additional support

uneconomic cost


These differentials will have to be recovered from various funding sources

$0

$20

$40

$60

$80

$100

$120

$140

Nuc

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$ pe

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average cost of aconventional combined-

cycle at $8 gas

Resources are typically uneconomic without additional supportResources are typically uneconomic without additional support

uneconomic cost

Average LevelizedGeneration Costs for New Plants

Source: Statement of Howard Gruenspecht, US DOE before the House Committee on Ways and Means, May 24, 2005


Louisiana Issues and Activities


Total Louisiana Carbon Emissions

125

135

145

155

165

175

185

195

205

215

225

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

1990 Level

Total

MM

Tons


Estimated Louisiana Carbon Emissions By Major Sector

0

20

40

60

80

100

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

IndustrialTransportationElectric Power


Relative Sector ShiftsIn Carbon Emissions

Residential & Commercial,

3%

Industrial, 54%Transportation, 26%

Electric Power, 18%

Residential & Commercial,

2%

Industrial, 50%Transportation,

27%

Electric Power, 21%

1990 Emission Shares 2004 Emission Shares

Relative shift away from industrial concentration and toward power generation and transportation.


Louisiana Challenges

Carbon responsibility may fall disproportionately on “processing” states like Louisiana.

Auction proceeds from cap and trade likely to be equally disproportional.

Likely to be little state flexibility.

Raises very serious questions about the nature of our continued economic development (industrial development becomes exceptional challenge).

No single solution -- will require significant creativity and the work needs to begin soon.

Very large increases in the price of electricity.


Louisiana Opportunities

Opportunity Examples Challenges ActionsRenewable energy Solar, wind (onshore,

offshore), biomass/biofuels, algae,

Costly, regulatory & institutional frameworks not in place. Market development & infrastructure issues.

Green pricing tariff,solar tax breaks, hydrokinetics interest, ethanol and biodiesel.

Alternative technologies

Gasification, alt fuels Contractual, financial, and regulatory issues.

Gasificationannouncements, nuclear interest.

Efficiency CHP, DSM, DR Regulatory andinfrastructure issues.

DR pilot program.

Underground storage EOR, salt & reservoir storage

Regulatory, institutional, infrastructure issues.

Statutory changes, rulemaking soon.

Other sequestration Forestation, coastal restoration

Verification andmonitoring, advocacy.

Little to none.


Upcoming CES Initiatives


CES Climate Change Policy Studies & Initiatives

1. Identification/Engagement of Stakeholders.

2. Estimate Statewide GHG inventories.

3. Assess potential implications of federal policies on Louisiana.

4. Provide recommendations for strategically positioning Louisiana on any resulting opportunities.


Energy Summit 2008


[email protected]

www.enrg.lsu.edu

Questions & Comments

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