EPA study confirms comprehensive climate and energy legislation is affordable, equitable, and effective

The Environmental Protection Agency (EPA) published an analysis today of the economic impact of the American Power Act (APA), released by Senators Kerry and Lieberman mid-May. The study finds that climate protection is very affordable. For a modest investment the APA would anchor a global effort that could dramatically reduce the risk of catastrophic global warming.

The study includes estimates of what it calls “household costs.” I prefer to call these “investment costs,” since we expect benefits from climate protection.

EPA finds that American households would need to invest on average $79 to $146 per year (51 to 95 cents per day) through 2050 for climate protection. At the same time, the results indicate that, on average, median household income will be $4,893 to $6,497 higher than today’s levels.

The news is good, though not surprising. Multiple past analyses of other climate and energy legislation, for example by EPA, the Energy Information Administration (EIA) and the Congressional Budget Office (CBO), find similarly modest investment costs, along-side healthy economic growth. Respectively, the agencies estimated that the American Clean Energy Security Act (ACESA, passed last June by the House) would cost $80-$111, $83, and $160 per household. As with this new analysis of APA, GDP and incomes grew at a healthy clip.

This is a somewhat long blog, so here’s an outline to help you navigate:

1.    Overview of EPA’s key results

2.    Factors left out of EPA’s analysis

• Environmental benefits
• Employment benefits from clean energy job creation
• Employment and national security benefits from enhanced oil recovery (EOR)
• Additional national security benefits
• Energy efficiency savings
• Cost –reducing break-through innovations

3.    The outliers in EPA’s analysis that obstructionists will seize upon

4.    Other obstructionist tactics to expect

5.    Conclusion

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1.  Overview of EPA’s key results

Without action to reduce emissions, EPA finds that there is a 99% probability that global warming will exceed 2 degrees Celsius (3.6 degrees Fahrenheit), a threshold above which scientists project that the risk of catastrophe increases rapidly. With the APA anchoring a global effort to curb emissions consistent with commitments made by G8 countries last year, the risk of global warming exceeding 2 deg. C is reduced to 25% and the risk of temperatures rising more than 4 degrees becomes negligible.

EPA runs two different models, called IGEM and ADAGE, under many different scenarios. The $79 to $146 figures above are from its “core” scenario, what the agency considers the most representative case.

To put these costs in perspective, I calculated average projected increases through 2050 in median household income over today’s levels suggested by EPA’s estimates of household consumption growth. Income growth does not vary much between scenarios, but to be conservative, I chose the scenario from each model in which income grew the least. The following chart summarizes the story:

 ** NPV refers to the net present value, which expresses future dollar amounts in today’s terms. (For example, if $100 today grows to $105 in some future year, in today’s terms that $105 is equal to $100. In this example, a “discount rate” of 5% would be applied to the $105 to convert it to $100).

*** To calculate average increases in income over today’s level, I assume that median household income grows at the same rate as consumption. I use the census’s most recent estimate of median household in come (2007). 

The results are straight forward: for both IGEM and ADAGE, income growth is 45 (ADAGE) to 62 (IGEM) times higher than investment cost. (Though not presented here, GDP growth follows a similar pattern. I focus on household costs because they adjust for population growth). EPA also finds that APA is progressive across most of the income distribution. In fact, the bottom two income deciles actually receive a net gain (a $158 gain for the lowest decile, and $71 for the second lowest).

2. Factors left out of EPA’s analysis

While EPA’s projected investment costs are modest, we should still keep in mind factors left out of the modeling, some of which would lower technology costs and others which should be included as benefits from climate legislation.

* Environmental benefits. As EPA is careful to point out, the analysis only looks at the cost of reducing emissions. “Net effects” refer to overall costs to households (from higher energy prices) minus savings from energy efficiency and rebates back to households from the proceeds from selling pollution allowances. A true measure of net costs to households, however, would subtract off the environmental benefits from reduced pollution. Measuring only a very small fraction of benefits from climate protection that can actually be monetized (e.g. protecting crops from temperature increases, and coastal properties from rising sea levels), the Institute for Policy Integrity at New York University's School of Law took the bold step of adding these benefits up and comparing them to the (much smaller) abatement cost of mitigation. Using the most conservative assumptions at every corner, their study finds that this limited subset of benefits could be as much as 9 times higher than the costs. Notably, these benefits exclude the potentially catastrophic outcomes scientists worry the most about (e.g. a complete melting of the West Antarctic ice shelf or Greenland’s ice sheets, either of which would by itself result in a 20 foot rise in sea level), and many environmental assets that are difficult if not impossible to monetize, such as the loss of species and ecosystems—some of which are already underway (click here, here, and here for examples). 

* Employment benefits from clean energy production. EPA’s models are not designed to estimate employment effects. However, models that do find significant job growth under APA. A recent study by Climate Works (click here and here) finds that under APA, there will be 440,000 more jobs on average between 2012 and 2020, and 540,000 more between 2012 and 2030. The analysis uses a new and highly innovative tool developed by McKinsey & Company, the first of its kind to combine several powerful macroeconomic models with McKinsey’s extensive modeling of individual markets in energy efficiency technologies and abatement options. Another analysis, from the widely-respected Peterson Institute of International Economics, finds on average 203,000 more jobs between 2011 and 2020, due largely to additional investments in the electricity sector (the McKinsey model projects more jobs due to its rich detail in energy efficiency technologies).

* Employment and national security benefits from enhanced oil recovery. New oil production from a process called enhanced oil recovery (EOR) would drive further job creation. EOR is a technology that has been used for decades to produce additional oil from fields by injecting CO2 (or steam) to free oil that is ordinarily left trapped in the underground formation. Currently, most of the CO2 used for EOR is extracted from natural sources which are limited in supply. With climate legislation, the supply of CO2 would increase dramatically from CO2 waste captured at power plants and industrial facilities. In addition to providing a place to sequester CO2, an abundance of existing and abandoned oil fields are available for CO2-EOR. They could yield an estimated 3 million of barrels of oil per day (mbd) by 2030, and displace 2.25 mbd in oil imports[1]. By 2020, over 40,000 jobs could be created in the oil industry, rising to approximately 350,000 by 2030 (click here, here, here, and here to learn more about EOR).[2] CO2-EOR would also reduce pressure to open up new areas for oil exploration.

* Additional national security benefits. In addition to oil import savings from EOR discussed above, a recent study by the non-partisan Peterson Institute for International Economics finds that the American Power Act could lower oil imports by 1.58 mbd by 2030, for a total of 3.83 mbd fewer oil imports, a decline of 47% below a business-as-usual level of 8.203 mbd.

* Energy efficiency savings. The ADAGE and IGEM models have a “top-down” structure that can only capture changes in general macroeconomic variables, such as prices, income, interest rates, and GDP. Missing are detailed representations of different energy efficiency technologies that can affect these variables. As a result, EPA’s modeling shows only modest improvement in energy efficiency. The first study cited above, under “employment benefits from clean energy production, better captures energy efficiency potential, and finds utility bills declining on average by $69 per year by 2020, and $71 by 2025.

* Cost-reducing breakthrough innovations. IGEM and ADAGE cannot model cost-reducing breakthrough innovations, for the simple reason that they don’t yet exist. Yet how likely is it that over the course of forty years we won’t see any? Just looking at the evolution of computers and cell phones over only the last decade, our success in reaching the moon in a decade’s time, and the inexorable force of market innovation wherever profitable opportunities exist, it is difficult to imagine that rewarding clean energy production won’t unleash an unprecedented wave of clean energy innovation.

3. The outliers in EPA’s analysis that obstructionists will seize upon

There are three high cost estimates in EPA’s analysis equal to $204, $313, and $350 per year. While they are all still far smaller than the average annual increase in median household income over today’s levels, $6,497, they nevertheless result from of a set of assumptions originally selected by Ohio Senator Voinovich in a request for a supplementary analysis of ACESA; assumptions EPA did not consider realistic. After having already exhaustively analyzed ACESA twice for Congress, Voinovich forced EPA to run the models with these assumptions by putting a "hold" on Senate confirmation of Robert Perciasepe as EPA’s deputy administrator. As EPA's cover letter to the Senator noted, the agency did not include the scenarios in previous analyses "because we were not aware then—and still are not aware—of information suggesting a reasonable possibility that they would occur."   

The outliers reflect a world in which essentially there are no low-cost abatement options, despite the existence of promising pilot projects already on the ground, numerous incentives in the bill for cost-reducing technological development, and the powerful market forces of clean energy innovation that will be unleashed with a price on carbon emissions. Specifically, one scenario there is no nuclear power growth, no availability (or delayed availability) of carbon capture and storage technology (CCS), and no increased use of biomass. A second assumes there are no international offsets available all the way through 2050. Finally, a third combines all of these assumptions. The first two scenarios are highly implausible by themselves; combining them is more than extreme.

EPA documents a number of promising projects currently underway for all three technologies. As EPA notes on p. 87 in the Appendix, “CCS technology has been demonstrated for decades in industrial applications and is widely used by the oil and gas industry [for enhanced oil recovery]. Although challenges remain for larger scale applications, the basic engineering has been applied at numerous facilities for long periods of time…[N]early 3 GW of CCS power plant projects [are] in planning, design, and/or construction phases.” Indeed, most DOE (Department of Energy) grants for CCS are oversubscribed by a ratio of 2 to 1, and one full-scale CCS power project is underway, with vendor guarantees.

The generous (some say overly so) CCS bonus allowances for the first 72 gigawatts (GW) of CCS built are nothing to sneeze at: currently the U.S. relies upon approximately 1,000 GWs to supply its energy. With 72 GWs, we can expect significant capital/operational cost reduction, as well as learning by doing, from economies of scale. The incentives start at $90/ton of CO2 sequestered, while long term forecasts project CCS will cost $35-$40/ton. Even in EIA’s business-as-usual/no-policy case, high oil prices will make capturing approximately 20 GW of CO2 profitable for the oil industry, which can use the CO2 for enhanced oil recovery (EOR). This CO2 will be supplied by five different industry sectors, including power.

With respect to biomass, EPA notes on p. 89 of the appendix that “The U.S. has used biomass for electricity production for decades…[with] over 190 facilities that currently use biomass as the primary fuel (7.5 GW), and many others that co-fire biomass with coal…[and] some utilities have recently completed or are planning to convert coal facilities to biomass.” EPA goes on to list seven current projects and a few new examples under development.

EPA also finds the assumption of no international offsets unrealistic. As EPA notes, assuming that no international offsets ever become available through 2050 is an extreme case (slide 27). EPA examined the effect of a delay in the availability of international offsets by 10 or 20 years, a much more realistic possibility, and found that this would only increase allowance prices by 1% or 3% respectively (see slide 53).

Given the uncertainty involved in predicting the future, and the temptation for both sides to pick estimates that best suit their objectives, it is instructive to consider all of the estimates together. Below I present average investment costs from each model. These equal $82 in IGEM, and $217 in ADAGE, a drop in the bucket compared to the increases in median household income of $4,893 and $6,497, respectively.

** NPV refers to the net present value, which expresses future dollar amounts in today’s terms. (For example, if $100 today grows to $105 in some future year, in today’s terms that $105 is equal to $100. In this example, a “discount rate” of 5% would be applied to the $105 to convert it to $100).

*** To calculate average increases in income over today’s level, I assume that median household income grows at the same rate as consumption. I use the census’s most recent estimate of median household in come (2007).

 

4. Other obstructionist tactics to expect

In addition to focusing exclusively on outliers that rely upon unrealistic assumptions, we should expect other misleading tactics from the opposition:

• In the past, rather than presenting net impacts on households, which subtract rebates households get from the proceeds of the sale of pollution allowances, opponents have incorrectly asserted (even after being corrected) that the cost per household is equal to the market value of the allowances divided by the number of households (click here and here). This is factually incorrect: the actual cost of mitigation is the expenditure needed to eliminate the pollution for which no allowances exist.
• Sometimes obstructionists distort costs by presenting increases in energy prices, rather than total household energy expenditures. To the extent that consumers conserve energy in response to higher prices or complementary provisions in legislation that reduce consumption, such as energy efficiency standards, changes in energy prices say nothing about a household’s energy costs.
• Consulting firms hired by industries with financial interests opposed to legislation will churn out analyses that rely upon a host of unrealistic assumptions (click here and here for examples) to generate exaggerated losses. Worse, the authors of the studies will hide in their presentation the fact that their own model projects increases in household income far greater than the costs they present (click here for an example). Sometimes the connection between an opposition study and industry interests is more subtle, with “independent” analyses being produced by think tanks receiving funding from industry (the Heritage Foundation, which receives support from Exxon Mobil, is one example).

5. Conclusion

EPA’s new analysis shows what we already knew: APA is not only affordable, but a very worthwhile investment. For only a modest price, APA will create clean energy jobs, reduce our dangerous dependence on oil, and help protect the planet. We can expect in the days to come many misleading numbers and junk analyses from interests opposed to passing comprehensive climate and energy legislation. But no matter how you slice it, their numbers won’t stack up. Investment costs are modest, and household gains in income far exceed these costs.

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[1]Projected EOR production is taken from “U.S. oil production from accelerated deployment of carbon capture and storage,” Advanced Resources International, March 2010. We conservatively assume that each incremental barrel of oil produced relative to EIA’s Annual Energy Outlook displaces 0.75 barrels of imports and 0.25 barrels of domestic oil from other sources.

[2] Jobs are calculated by applying the multiplier for oil and gas extraction from PERI (2009) to the amount of additional oil produced from CO2-EOR.