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Senate Climate Bill Also a Clean Energy Bargain According to EPA

Dan Lashof

Posted October 27, 2009 in Solving Global Warming

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Last Friday EPA released its analysis of S.1733, the Clean Energy Jobs and American Power Act (CEJAPA), which will be the subject of marathon legislative hearings this week. EPA found that, like the ACES bill that passed the House in June, CEJAPA is a clean energy bargain: It would set the United States on a course to dramatically reduce global warming pollution 20 percent by 2020 and 83% by 2050 for an average of less than $120 per household per year from 2010 through 2050 (net present value). Another key finding is that the legislation will produce a net benefit for agriculture, a constituency that is even more influential in the Senate than in the House.

EPA's analysis of CEJAPA is based on previous analyses of ACES and a careful assessment of the economic impacts of difference between the two bills. Some of these differences would tend to slightly increase the cost of CEJAPA relative to ACES, while others would decrease costs. The main differences identified by EPA and their cost impacts compared to ACES are summarized here.

2020 Cap: increases costs by 1 percent. CEJAPA would require a 20% reduction from 2005 levels rather than the 17% reduction in the House bill. Surprisingly, EPA finds that this would increase allowance prices by only about 1 percent. The reason is that the bill allows banking and borrowing of emission allowances, which means that prices are determined by cumulative emissions from 2012 through 2050, rather than the target in any one year.

EPA's analysis does not account for the most recent Department of Energy forecast, which indicates that emissions in 2009 will end up 9 percent below 2005 levels. Some of this reduction is due to the recession, which is certainly no cause for celebration. Nonetheless, the fact is that the business-as-usual emission baseline has shifted downward, making a 20 percent reduction in 2020 easier to achieve as long as we fuel the recovery with clean energy by passing comprehensive legislation soon.

Offset limits: No change. CEJAPA initially limits the use of international offsets to 0.5 billion tons and domestic offsets to 1.5 billion tons, but these limits can be adjusted to as much as 1.25 billion international and 0.75 domestic if EPA finds that domestic offset usage is likely to be below 0.9 billion tons. This is somewhat different from ACES in which the offset limits are initially 1 billion tons of each with the option to revise them to as much as 1.5 billion international and 0.5 billion domestic. EPA finds that the demand for offsets is not likely to reach the revised limits in either ACES or CEJAPA, so there is no impact on estimated costs from this change.

Performance standards for non-capped sources: decreases costs by 2 percent or less. ACES includes a specific schedule for establishing New Source Performance Standards for methane emissions coal mines and landfills and other sources not covered by the overall emissions cap. CEJAPA does not include a schedule for issuing such performance standards and in fact bars EPA from setting this type of standard until 2020, making emission reductions from these sources eligible as offsets. EPA finds that this reduces allowance prices by increasing the supply of low-cost offsets, and increases overall emissions, because offsets allow sources covered by the cap to increase their direct emissions. EPA estimates that if the performance standards are never issued the net effect would be to reduce allowance prices by 2 percent and increase 2012-2020 cumulative emissions by 6 billion tons. If EPA does issue performance standards after 2020 both costs and emissions will change less than these amounts.  

Market stability reserve: increases costs by 1 percent.  CEJAPA sets aside a total of 3.5 billion allowances in a market stability reserve compared to 2.7 billion tons in ACES. This reserve would only be tapped if allowance prices exceed a trigger price calculated for each year. The trigger price is calculated differently in CEJAPA and ACES, but in EPA's economic models allowance prices don't exceed the trigger price under either bill. (That's not a surprising result because the models do not simulate price volatility, which is what the reserve is designed to prevent.) As a result, the reserve allowances will remain unused in the reserve, effectively tightening the cap. This is why EPA finds that enlarging the reserve in CEJAPA raises allowance prices by 1 percent.

Energy efficiency: costs increase 0.75 percent. CEJAPA and ACES allocate a similar amount of allowance value to energy efficiency measures, but CEJAPA does not include the Combined Efficiency and Renewable Electricity Standard contained in ACES. In the Senate that measure is in the jurisdiction of the Energy Committee, not the Environment Committee, so it would have to be added on the Senate floor. The Energy Committee has reported a standard somewhat weaker than the one in ACES.  For now EPA estimates that the efficiency provisions in CEJAPA will save about half as much energy as those in ACES.  EPA estimated that the full set of efficiency measures in ACES would reduce allowance prices by 1.5 percent. I assume that if the Senate bill achieves half the energy savings of ACES the impact on allowance prices will be half of this amount, or three-quarters of a percent.  

Bottom line: CEJAPA costs ~1 percent more than ACES. The net result is that the overall costs of CEJAPA would be very similar to the modest costs estimated for ACES.

EPA's summary table is reproduced here:

EPA Analysis of CEJAPA Summary Table

 

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