Report#:SR/OIAF/98-03(S) Kyoto
Testimony Electricity & Coal Industries Face Major Adjustments All Sectors Need to Adjust; Motor Vehicles Face Main Non-Electric Impact Rising Price Could Level Off or Lower Gasoline Use Industrial Energy Efficiency, Already Rising, Would Further Improve Energy Efficiency Could Improve in the Building Sectors with Rising Prices Shift Toward Natural Gas and Renewables Characterizes New Energy Mixes Output and Cost-of-Living Impacted During the Transition Period Would Some Changes in Assumptions Revise These Projections? How? How Much? What Are Some of the Issues in Reducing Carbon Emissions in the United States Completed
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A Briefing Paper on
the Prepared for October 1998 Economic Effects of a Complex Agreement Depend on Many Assumptions The Kyoto Protocol, negotiated by more than 160 nations in December 1997, aims to reduce net emissions of certain greenhouse gases (primarily carbon dioxide (CO2)). Each of the participating developed countries must decide how to meet its respective reduction goal during a five-year period (2008-2012); but specific ground rules remain to be worked out at future negotiating sessions. The next meeting is in Buenos Aires (November 1998). In a study entitled Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity, the Energy Information Administration (EIA), an independent statistical and analytical agency in the U.S. Department of Energy, has projected that meeting the U.S. targets under the Protocol will call for significant market adjustments:
EIA undertook this study in response to a request by the Chairman and Ranking Minority Member of the House Committee on Science that it analyze impacts of the Protocol (which the President has not yet submitted to the U.S. Senate for ratification) on U.S. energy use, prices, and the general economy in the 2008-2012 time frame. That is when this country is supposed to reach an average level of net greenhouse gas emissions 7 percent lower than they were in 1990--having shown demonstrable progress toward that goal by 2005. At the Committee's request, EIA assumed that actions begin in 2005. EIA was asked to do the study for several reasons. More than 80 percent of the human-originated greenhouse gas emissions are energy-related. EIA's National Energy Modeling System (NEMS) is perhaps the most complete, integrated, regional computer model available to simulate all elements of U.S. energy supply and demand in the context of the full U.S. macroeconomy. NEMS presents year-by-year projections over a 20-year horizon, accounting for capital stock turnover and the availability and penetration of specific energy-consuming technologies. Its annual "Reference Case" assumes no change from existing laws and regulations, and so it provides a base from which to evaluate policy options or alternative assumptions. EIA
Analyzed 6 Cases for Reducing Energy's Reference--A reference case (based on Annual Energy Outlook 1998) with no new actions to reduce carbon emissions. 1990+24%--Substantial international activities, including trading of "carbon emission permits", but with some new domestic actions to reduce carbon. 1990+14%--Stabilization at roughly 1998 levels. 1990+9%--Moderate level of international activities as well as offsets from other gases and carbon sinks. 1990--Equivalent to 1990 emissions. 1990-3%--Substantial domestic actions, plus offsets and sinks. 1990-7%--Kyoto Protocol target for U.S. lowers 1990 emissions by 7%, with none of the offsets, sinks, trading in the previous cases. (All carbon reduction cases represent average emissions for 2008-2012.) Percentages shown represent deviation from the 1990 level. EIA analyzed six cases to investigate the uncertain range of impacts which could result from the Kyoto Protocol. Differences among the cases analyzed arise from three facts: 1) The Protocol gives credit for "CO2- equivalent" reductions in five gases other than CO2--methane, nitrous oxide, and three synthetic gases--as well as for certain actions that take carbon out of the atmosphere (such as preserving or extending forests); 2) participating developed countries are allowed to sell excess "permits" (e.g., because of economic problems since 1990 in the participating countries of the former Soviet Union, they may have about 165 million metric tons of carbon permits easily available); and 3) support for effective programs in other countries can earn permits. Details of this last process (called "Joint Implementation" among developed countries and the "Clean Development Mechanism," or CDM, for developing countries) are unsettled. EIA's six cases cover a range of reductions in energy-linked carbon emissions from an annual average of 122 million metric tons below the expected baseline emissions (1990+24% Case) to 542 million metric tons (1990-7% Case) in 2008-2012. In the 1990+24% Case, domestic actions may furnish about one-fifth of all reductions, with the rest coming from international activities (including trading), offsets of other gases, and carbon sinks in the U.S., while the 1990+9% Case assumes that nearly 60 percent of the reductions result from such domestic initiatives as fuel-switching, improved technology, and cutbacks in energy use. EIA did not separately calculate the contributions of international activities, offsets or sinks for any case. The 1990-3% Case assumes all reductions are from domestic actions, with a 4 percentage point contribution from sinks and offsets from other gases. In the 1990-7% case, all reductions must come from domestic energy-related reductions. The Kyoto Protocol does not specify targets for greenhouse gases after the period 2008-2012. At the Committee's request, EIA held the target for energy-related carbon emissions in the commitment period constant to 2020, the end of the forecast horizon. Targets following the 2008-2012 period will be a topic at future negotiating sessions. "Carbon Price" For a Range of Deviations From 1990 Carbon Emission Levels To reduce carbon emissions, EIA assumes that a "carbon price" is added to the price of delivered energy fuels based on their carbon content. For example, coal prices rise more than petroleum and natural gas prices; and the cost of generating electricity from non-carbon-emitting nuclear and renewable fuels is not increased due to the carbon price. Although electricity does not have the carbon price directly added to it, its price is increased due to the higher cost of fossil fuels used for generation. The price increases encourage a reduction in the use of energy services (heating, lighting, and travel, for example), the adoption of more energy-efficient equipment, and a shift to less carbon-intensive fuels. The carbon price reflects the amount fossil fuel prices in the U.S., adjusted for the carbon content of the fuel, must rise to achieve the removal of the last ton of carbon emissions that meets the carbon reduction target in each case. "Carbon Price" Rises with Higher Emissions Reductions, 2008-2012 In most of the cases, the carbon price peaks early in the 2008-2012 period, reaching between $67 and $348 per metric ton in 2010, and then declines as energy markets adjust and more efficient, new technologies become available and gradually penetrate the market. In the least stringent reduction cases, the increase is more gradual throughout the period because less severe reductions need to be made. Looking at average carbon prices over the commitment period 2008 to 2012 shows how the cost of compliance increases with increasingly stringent targets. Differences in the cost of energy will
affect the outlook for U.S. jobs, consumer prices, investment, technical change, and
economic growth. Whenever use of a factor of production such as energy is restricted,
economic performance falls for some period of time, the price of energy and other goods
and services rises, and consumption and employment decline. Hence the various cases affect
the national economy to varying degrees. Well over one-third of all primary energy consumed by the United States today goes into producing and delivering electricity. At the point of use, electricity can be highly efficient; and there are certain end uses where fuel substitution is not feasible. More than one-half of all U.S. electricity generated in 1997 was produced from coal--a fuel that emits more carbon dioxide during combustion than any other fossil fuel. Thus, electricity production and consumption is likely to be a major focus in meeting Kyoto targets, accounting for between two-thirds and three-fourths of the domestic carbon reductions in 2010 in the various cases examined. Historically, this industry has responded when relative fuel prices have changed. Cost of Fuels Used to Generate Electricity in the 1990 +9% Case Because coal is the most carbon-intensive of the fossil fuels, delivered prices for coal are affected by carbon prices more than other fuel prices. They are between 153 and 800 percent higher in 2010. The various cases studied for show prices for electricity between 20 and 86 percent higher in all end-use sectors, reflecting both the increased fuel costs and the incremental capital investments for non-coal generating capacity--either by traditional utilities or by non-utility generators in an increasingly restructured industry. The price rise for electricity is moderated somewhat by the fact that fuel is only part of the cost of generating electricity and that the cost of generation from renewables and nuclear power are unaffected by carbon prices. Neither of these fuels, however, can replace significant amounts of coal in the 2008-2012 timeframe. By 2020, non-hydro renewables (chiefly wind turbines, biomass in advanced technological applications, and to a lesser extent, geothermal facilities) penetrate the market in a significant way--providing as much as one-fifth of generation at the highest carbon prices. While hydroelectric dams have accounted for four-fifths of the renewable energy used for U.S. electricity production to date, the expansion of hydroelectric capacity is capital-intensive and is likely to meet with environmental objections; thus little additional hydroelectric capacity is expected. The bulk of the substitution for coal generation would be natural gas, because of its lower carbon content and the high efficiency of gas-fired combined cycle plants. Average Price of Electricity to End-Users Furthermore, demand for industrial steam coal and metallurgical coal is also reduced because of a shift to natural gas in industrial boilers and a reduction in industrial output. Electricity Generation by Fuel (Reference) Because domestic coal consumption is between 18 and 77 percent lower in 2010 in the carbon reduction cases, there would be ripple effects on the industry. For example, even though total coal production drops, the average price per ton for coal at the minemouth in 2010 is between 3 and 28 percent higher than the Reference Case price. This is because a larger share of production would come from higher-cost Eastern coal mines, which tend to serve the remaining markets. Carbon prices raise the cost of rail transportation (involved now in delivering two-thirds of all coal) and make Western coal less competitive. The production of Western coal is discouraged further by the reduced size of the market and the reduced profitability of investing in new coal mines (which have been mostly in the West).
For the past two decades or so, the number of coal miners in this country has been declining by nearly 6 percent per year, primarily as a result of improved labor productivity (especially in large Western surface mines). Without taking the Kyoto Protocol in consideration, the Reference Case already projects a further employment drop of more than 15 percent--leaving only about 69,000 U.S. coal miners by 2010. In the carbon reduction cases, between 10,000 and 43,000 more jobs could be lost. Some of these job losses could be offset by growth in employment in the natural gas and renewable industries. Electricity Generation by Fuel (1990+9% Case) While no new nuclear power plants are considered in these cases, extending the licenses of existing plants is projected to become more economical with higher carbon prices. In more stringent carbon reduction cases, most existing nuclear plants are operated through 2020, in contrast to the Reference Case outlook that projected about half of the nuclear plants would be retired by that time. Electricity Generation by Fuel (1990-7% Case) Although reduced demand for electricity and improved efficiency in its generation can contribute to reducing carbon emissions from electricity generation, fuel-switching accounts for most of the reductions. In the short run, power suppliers would increase their use of less carbon-intensive plants, including steam plants that use oil and gas to heat their boilers. Much more efficient and cost-effective combined-cycle systems increase their share as new capacity is added.
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