set of countries that undertake new commitments, and between countries that undertake new commitments and those that do not. Effects can also vary over time, as industry practices change and energy price developments are one among the many factors that potentially influence the siting of new facilities. Some of the adjustment may affect production costs, which may lead to reduced output and employment. There may be redistributions among countries or industries. For instance, a country that can achieve its emissions commitment at low cost, or is not subject to such a commitment at all, may gain a trading advantage relative to a competitor that can only achieve its commitment at a high cost. These differences in adjustment can be accounted for in part by differences in production processes, substitution possibilities, baseline emissions absent the new requirements, differences in policies used to assure compliance, and differences in the price sensitivity of the markets served by their producers. While the working assumption is that the emissions limitations now under negotiation will constrain only the OECD countries, their effects on competition with producers located both inside and outside the OECD should be considered. As noted above, we have tentatively defined these industries in terms of SIC codes. However, the lead authors may wish to pursue an alternative approach based on their knowledge of the industry and its structure. One of the first tasks to be completed by the lead author, in consultation with the DOE/Argonne team, is to propose any necessary changes in the definition of the industry. The lead expert may also choose to provide separate consideration of a limited number of distinct industry segments in cases where he/she has reason to expect distinct differences in the nature of impacts across segments. New commitments to reduce GHG emissions could result in higher energy prices to industry in the U.S. and other countries that undertake them. These energy price effects may differ across participating countries depending on the size of the gap between baseline and desired emissions, national decisions on how to allocate needed reductions across sectors, and national choices of policy instruments. This study focuses on the effect of alternative energy price change scenarios on the economic health and competitive position of these six energy intensive industries in the U.S. Authors should take account of production processes changes and fuel substitutions that domestic and foreign producers would undertake in response to the hypothesized energy price scenarios. The impacts of primary interest are summarized by the following questions: (1) (2) What are the likely impacts on key industry indicators, such as output, What will be the effects of the specified energy price scenarios on the competitive position of U.S. producers, including import and export levels, and shares of world production by U.S. plants? (3) Where in the world and in the U.S. will new plants be most likely to open and where will plants be most likely to be closed? In all cases, these impacts should be measured as changes from the value of these indicators that would be expected to occur under baseline conditions. 3. STRUCTURE OF PROJECT This technical guidance document is being sent to the lead author of each of the six industries being considered in this study. Each lead author is to address the above questions with respect to his/her specific industry. We do not expect that each paper will follow an identical and rigid format because the industries have their own unique features that require special emphasis. Some papers may have a quantitative emphasis, while others may have a qualitative emphasis, as determined appropriate by the lead author. The papers are expected to command wide technical respect, but not to reflect the policy position of the industry or any interest group. We do not impose a page length, but conjecture that about 20 to 30 pages will be about average. The author may choose to provide additional information in an Appendix. Each paper will serve as the basis for a half-day workshop discussion (tentatively scheduled for the last two weeks of June) among a group of six to ten persons with industry expertise and a range of perspectives. This group will include persons from academia, financial institutions, industry and trade associations, labor unions, environmental groups, industry experts within government, and other interested persons. A summary of the workshop discussion will provide initial insights into industry-specific impacts, and help to identify key areas for further investigation. The papers prepared by the lead authors and a synthesis of the workshop discussion will be the main components of the overall project report. 4. DEFINITION OF INPUTS Industry experts are not expected to have extensive experience with climate policy issues. In this project we are not seeking information about the benefits of reducing GHG; nor are we considering what policy tools (e.g., carbon taxes, tradable emissions rights, emissions standards) may be chosen to reduce emissions. For purposes of this analysis, we assume that whatever policy actions are taken will increase the effective price to industry of fossil fuels and electricity. In particular, for purposes of this study, the translation of potential commitments into emissions reductions is assumed to affect average industrial fuel prices as described in Appendix A. The incrementally higher fuel prices presented in Appendix A are the main input to be used by the industry experts. While Appendix A provides information on energy prices on a regional basis for reasons of tractability, experts may identify subregions or countries that are expected to be particularly competitive in world markets under the baseline or the alternative price scenarios, and focus their attention on these areas rather than the larger region. Given space and time constraints, authors are encouraged to identify, and focus their attention on, major players. As noted above, the intent is for authors to take the scenarios of average industrial energy price impacts presented in Appendix A as a starting point for their work. The assumed price scenarios may be considered as reflecting alternative views regarding the relative difficulties of mitigating emissions in the different OECD regions. For scenario 1, the increase in effective industrial energy prices in the U.S. falls between that of OECD Europe (on the low end) and OECD Pacific (on the high end). This scenario reflects the likelihood that the rate of baseline emissions growth in OECD Europe will be below that of the U.S. due to energy use reductions following German reunification, the economicallydriven substitution of natural gas (which has the lowest carbon content per unit of energy among fossil fuels) for subsidized coal in Germany and the United Kingdom, and lower rates of population growth, reducing the magnitude of actions required to reach an emissions reduction target. The high level of baseline energy efficiency in Japan, together with projected rapid growth in demand for residential and personal transportation energy use starting from low initial levels, may lead to a high rate of baseline emissions growth in OECD Pacific, resulting in the need for more intense action to constrain emissions. Scenario 2 reflects an alternative perspective. While OECD Pacific nations still require relatively intense action to limit emissions, required actions affecting industrial energy prices in the U.S. and OECD Europe are assumed to be roughly comparable. This reflects the larger set of energy efficiency opportunities that some believe are available in the U.S., and the differential in potential for emissions reduction through fuel substitution in the electric utility industry between the U.S. and Europe. In both scenarios 1 and 2 industrial energy prices outside the OECD region remain at baseline levels, since new commitments are assumed not to constrain energy use or emissions in these areas over the time period considered. The impact on potential competition to U.S. producers from producers outside the OECD should be addressed as part of the competitive analysis. 5. DEFINITION OF OUTPUTS To convey as precisely as possible the expected contribution of the discussion papers, we now review their desired content. First, the papers should present a perspective on the evolution of key industry indicators over a twenty-year horizon absent possible energy price shifts induced by greenhouse mitigation efforts. In brief, what is the outlook for key indicators for the domestic industry in question absent new GHG mitigation commitments? Second, the papers should assess the impact of two alternative energy price scenarios on key industry indicators, where impacts are measured relative to the case without changes in the price of energy that are assumed, for purposes of this study, to result from greenhouse gas mitigation efforts. The indicators of primary interest include output, employment, levels of energy use, industry costs, industry prices, imports and exports, and decisions regarding the continued operation of existing plants and the location of new ones. The presentation may combine a qualitative description of the forces expected to generate effects of a particular direction and magnitude and, where possible, quantitative estimates of changes in specific indicators such as output, employment, exports and costs. If feasible, a summary of key industry indicators in the base case and under the two alternative energy price scenarios should be presented in tabular form. This guidance aims to provide a clear definition of project objective, while leaving significant discretion to the lead authors. We suggest that the discussion paper might have three sections. While some content suggestions are provided below, not all suggestions will be of equal relevance to each industry. The expert should determine what issues are of primary importance to his/her sector, and allocate his/her attention accordingly. The paper could begin with an industry overview section. The analysts definition of the industry and current competitive conditions within it could be briefly addressed. Then, the U.S. industry could be characterized in terms of current key indicators (e.g. employment, production, energy use by fuel type, energy costs as share of total production costs, imports, exports, world market share). This section might then outline the author's assessment of future industry trends under "business as usual" conditions. This assessment, which might identify the national industries presenting the strongest competition to U.S. producers in domestic and international markets, could cover the 20 year horizon for which price information is provided in Appendix A, although authors need not address all relevant indicators or address each subinterval. Finally, this section could briefly outline the unique characteristics of an industry, or key issues facing it, that might affect its response to higher energy costs. As drafts of this paper evolved, a conference call on March 29 with our lead authors provided additional input to identify unique industry characteristics of particular significance. The model implicit in our framework is that industrial output is produced from capital, labor, and materials including energy, where global emissions result from the combustion of various fossil fuels. However, some industries offer important exceptions. In the chemical industry, for example, some fossil fuels are used as feedstocks and produce emissions differently than when used for combustion. And fuels other than fossil fuels produce emissions, such as the combustion of wood chips in the paper industry. Emissions can also result from a production process, as in cement. We suggest that the technical papers respond to the explicit fuel price increases provided here. The price of fuel used as a feedstock in chemical manufacturing or as a bunker fuel for transportation are assumed to be unaffected in this analysis. The exceptions to our implicit model could be discussed in a background section, and these exceptions could lead to an important conclusion in our overall effort. The second section of the paper could focus on the production process and use of energy by the industry in question. It could address fuel switching opportunities and the ability to make substitutions that would reduce GHG emissions. This section could also consider technologies that are currently available or on the horizon that would reduce GHG emissions or use less energy. A discussion of the differences between production processes across national industries or U.S. regions could also be useful. This part of the paper could include the estimates of the effects on domestic industry indicator variables (e.g., production, employment, energy use, costs, and prices) that would correspond to the two alternative scenarios reflecting changes in energy prices that, for purposes of this study, serve as proxies for the effect of policies to reduce greenhouse gas emissions. The baseline outlined in the previous section would provide a basis for separating the effects of the alternative energy price scenarios from changes in present industry conditions that would be expected to occur absent such policies. The third part of the paper could focus on trade issues at the industry level. Changes in energy costs, both absolute and relative to those facing producers at other locations, may affect both U.S. exports and imports. Export and import levels could be addressed, as could the share of domestic industry output that is exported and share of consumption that is imported. If relevant, a distinction could be made between trade involving participating and non-participating countries. Over time, new plants are likely to be built and some existing plants are likely to close. The effect, if any, of the energy price scenarios on the location of these plant openings and closings is of particular interest. This interest relates to regional differences within the U.S. as well as effects across national borders. The deliverable of the lead industry experts is a draft discussion paper, participation in one workshop (in Washington DC) and a final draft of the discussion paper. This material will be synthesized into an overall project report to be prepared by Argonne, as part of a joint effort with the DOE. The report will contain an executive summary of findings, an introductory background chapter, which will provide introductory material on global warming and industrial energy use and emissions trends. The main body of the report will include the papers authored by each of the participating lead experts, as well as an edited summary of the discussions surrounding each of these papers at the workshops. A copy of this technical guidance will be included as an appendix. 6. PROJECT SCHEDULE The timetable for the project is as follows: DATE (1996) TASK January 4 March 15 March 29 April 12 May 15 May 31 June 13 - July 2* 1. Project Approval at DOE 2. Confirm lead expert authors and complete scoping paper 3. Lead authors conference call 4. Invite experts to industry specific workshops. 5. First draft of expert papers begin to be available 6. Begin to distribute papers to workshop participants Note: July 8 - July 19 Climate Convention parties meeting July 31 8. First draft of workshop discussion summaries available 10. Plans for additional work (if needed) |