winners, and may offset any negative impact of the carbon stabilization policy on the aggregate trade balance. Nonetheless, there is likely to be a significant shift in the composition of industrial output in the economy away from the production of energy-intensive goods to non-energy-intensive goods production. In the $40 per ton case, the price paid for energy goods and services is substantially lower than in the five-year average stabilization case to 1990 levels between 2010 and 2015 (“the 5-year budget case"). The aggregate wholesale price of purchased fuel rose approximately 50 percent in the 5-year budget case, while in the in the $40 per ton case the wholesale price rose only by roughly 15 percent. As a result, the peak loss in GDP is $50 billion in the $40 per ton case, in contrast to the $85 billion loss occurring in the stabilization case. Over the entire period through 2020, emissions trading lowers the net present value of the GDP loss from $416 billion to $202 billion. Through 2020, the positive effects of lowering the price of carbon permits dominates any adverse consequences associated with an outflow of funds overseas. Major additional uncertainties that occur with the $40 per ton carbon trading fee case include the economic feasibility of life extensions of nuclear units and the early retirement of approximately 35 gigawatts of coal plants whose operating and maintenance costs are between 2.5 and 4.0 cents/kilowatt-hour. It may be uneconomic to life-extent, beyond their normal 40-year life, all or even some of the nuclear power plants at a $40 per ton carbon permit value. If technological costs to life-extend nuclear plants are too high to be economic, an additional 330 billion kilowatt-hours of electricity will have to be generated almost entirely by fossil fuel units and could result in approximately 30 - 100 million metric tons of additional carbon permits that must be purchased in 2020. It was assumed that approximately 35 gigawatts of coal plants whose operating and maintenance costs were between 2.5 - 4.0 cents per kilowatt-hour were retired because they were assumed not to be economic. If $40 per ton does not make these plants uneconomic to dispatch, over 50 million metric tons of additional carbon credits would need to be purchased from the international market. Energy Information Administration Appendix A 1/29/97 Letter from Howard Gruenspecht to Mary Hutzler requesting NEMS Climate Change Analyses Energy Information Administration We greatly appreciate the work you have done to extend the National Energy Modeling System to 2020 in preparation for supporting DOE's analytical effort in support of the climate change policy process. As you know, the Administration's analysis efforts are being coordinated by Undersecretary Everett Ehrlich of the Commerce Department. At last week's meeting of the interagency team, Dr. Ehrlich requested that we consider two alternative cases involving behavioral and technology changes that could accompany a U.S. commitment to carbon stabilization and expanded research and development efforts. I therefore request that the Office of Integrated Analysis and Forecasting implement and run two cases as follows: the Policy Announcement Case (PAC) and. the Accelerated Technology Case (ATC). Both the PAC and ATC cases should assume that (a) a protocol on carbon stabilization will be signed by the United States in December 1997 and approved by the Senate, (b) American institutions and consumers will begin to react to the U.S. commitment in year 2000 as suggested in the attachment, (c) and some sort of carbon trading scheme will be used beginning in year 2010 and beyond to stabilize anthropogenically generated carbon emissions to 1990 levels. No other policies or legislation are to be assumed enacted. The results of the runs with and without carbon stabilization in 2010 are needed by close of business on Tuesday, January 28, 1997, including the macro economic analysis for the stabilization run We will also need additional runs that analyze the effects of changing the values of the key flexibility parameters included in the recent U.S. submission to the Convention Secretariat by noon February 3, 1997. Thank you for your staff's excellent contributions to date. I look forward to working with you and you staff on the remainder of this project. The PAC is assumed to gradually reach a 1.25%/ year decline rate in the energy/CDP ratio by year 2005, beginning in year 2000. The Policy Announcement Case should generally target the achievement of what impact the announcement of the signed and approved protocol might have on energy equipment decisions. Recognizing that there is considerable uncertainty on how consumers and manufacturers might respond to such an announcement, assume for this phass that, relative to the ABO97 reference case, the announcement of the protocol will result in: more rapid cost reductions of advanced technologies as characterized in the reductions of 20% of the "non-cost-of-money" component in the effective hurdle the successful introduction of the PNGV vehicle which captures 5% of new light duty vehicle sales by 2015 and 30% by 2020; · achievement of the Administration's CCAP goals; reduction of the energy intensity trends due to output mix shifts and technology changes as follows in the industrial sector The average now values between 1995 and 2015 can be interpolated linearly in the reference onse. Hurdle rates are not applicable in the NEMS Industrial Module.' In the electricity generation market, 1Of importance to energy use in the industrial sector is the rate of equipment turnover seclear power plant will be life exterided in the carbon cap cases and the economic retirements of older generation plants are permitter Accelerated Technology Case The ATC is assumed to gradually reach a 1,75%/ year decline rats in the energy/GDP ratio by the year 2005, beginning in year 2000. The Accelerated Technology Case should generally target the achievement of what impact the announcement of the signed and approved protocol might have ́`on energy equipment decisions, and the impact of generally more effective R&D and DOB program management in bringing advanced technologies to market sooner and the elimination of non-cost-of money hurdle rates (assume 15% for the time valus of money for purposes of this study). Recognizing that there is considerable uncertainty on how consumers and manufacturers might respond to such an announcement, assume for this phase that, relative so the AB097 · reference case, the announcement of the protocol will result in: more rapid cost reductions of advanced technologies as characterized in advancement of the initial date of availability of the most advanced technologies in a reduction to 85% in the "plug load" growth rate for residential and commercial electricity demand; successful introduction of the PNGV vehicle, which captures 7% of new light . duty vehicle sales by 2015 and 50% by 2020; achievement of the Administration's CCAP goals: more rapid building shelf efficiency improvements as specified in the moderate of the OTA study: seductions in the rate of energy intensity in the industrial sector which is approximately consistent with the high technology case described in the ABO97. electricity generation market, use the advanced technology assumptions of the ABO97 case; economic retirements of older generation plants are permitted. |