Appendix B

4/14/97 Letter from Howard Gruenspecht to Mary Hutzler requesting NEMS Climate Change Analysis and

And

9/18/97 Letter from Howard Gruenspecht to Andy S. Kydes requesting one final analysis to complete report information

Energy Information Administration

Director, Office of Economic, Electricity, and Natural Gas Analysis
April 14, 1997

Date:

Subject:

NEMS Climate Change Analyses

We greatly appreciate your work to extend and exercise the National Energy Modeling System to 2020 to support of DOE and Administration analyses being conducted 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. Although that process is considering both a Policy Announcement Case and an Accelerated Technology Case, the contribution of NEMS to the interagency process and the Department's own consideration of these issues is likely to be much more significant in the former case. Therefore, NEMS analysis should focus on the former case. As the Administration process has advanced, the number of cases needed has grown beyond the set identified in my memo of January 24. The cases of primary interest (all with 5 year ramps unless otherwise noted) are as follows:

1. stabilize at 1990 level in 2010 through 2020 (also do 10 year ramp)

2. stabilize at 1990 level in 2015 through 2020

3. stabilize at 10 percent below 1990 level in 2010

4. analyses of protocol flexibility parameters in the stabilization at 1990 levels case.
5. analyses of alternative carbon values derived from assumptions regrading the clearing
price with international emissions trading.

In addition to the main body of work using the NEMS suite, there are two additional types of analyses on which we are seeking your assistance. First, there is a need for multiple runs of the macroeconomic model for the stabilization at 1990 levels case to assess the sensitivity of the results to alternative assumptions regarding fiscal policy, distribution, and the behavior of the monetary authority. This should not require additional runs of the energy model. Second, we are requesting a comparison of the results from the NEMS and DRI energy model runs, the latter to be supplied by EPA, for the stabilization case.

Finally, you should note that our technology assumptions for the policy announcement case have been slightly modified since my earlier request. An updated set of assumptions is attached to this

memo.

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.

Assumptions: Policy Announcement Case

Chnages in AEO97 reference case assumptions to be used in carbon stabilization cases for "Policy Announcement Case"

more rapid costs reductions of advanced technologies as characterized in the AE097 "Advanced Cost Reduction" cases in the technology cases for residential, commercial and transportation sectors; cost reductions do not begin, however, until 2010;

reductions of 20% of the "non-cost-of-money" component in the effective hurdle rate for residential and commercial markets;

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;

phased-in reductions (25% from base levels by 2020) in energy use of energyintensive industries reflecting plant location decisions and technology advances; price sensitivity has been added and increased to all end-use sectors in the residential and commercial markets, including 'miscellaneous electricity.

In the electricity generation market,

nuclear power plant was life extended in the carbon cap cases;

economic retirements of older generation plants are permitted, up to 10 percent
per year beginning during any ramp-up period:

introduction of new non-carbonaceous generation system which comes on-line in
2015 and has the same characteristics as new nuclear generation system;
where coal plants may use a secondary fuel, the maximum share was increased
from 5% in the policy announcement case to 20% in the stabilization cases;

New non carbonaceous supply added:

introduction of new ethanol supply curves ranging in price from $0.50/gallon to $0.75/gallon; the fuel is available as E85 for ethanol driven vehicles or as a mix with gasoline (gasohol).

Thank you for the opportunity to review the September 15 draft EIA report “An Analysis of Carbon Stabilization Cases." The draft report appears to be very responsive to the interest of former Deputy Secretary Curtis in examining the implications of alternative greenhouse gas mitigation commitment parameters for the U.S. energy-economy system. As noted at the beginning of the draft report, the National Energy Modeling System (NEMS) focuses on the U.S. energy-economy system. While the cases presented in the draft report are responsive to our request and usefully illustrate the possible implications of emissions limitations without emissions trading and Joint Implementation (JI), they are likely to overstate the implications of commitments that incorporate these features. It would be of great interest for the report to also approximate, using NEMS, the impacts of emissions trading and joint implementation (JI) with credit, two important elements of the U.S. proposal in ongoing international negotiations regarding new climate commitments.

In order to gain some insight into the possible benefits of emissions trading and JI. we would like you to prepare an additional case based on a set of assumptions from outside of NEMS regarding the effect of trading and JI on carbon permit values. An extensive literature on the role of "where" flexibility in emissions reduction suggests that such flexibility can reduce carbon permit values by an average of 70 percent as compared to a “go it alone" approach. This literature is consistent with preliminary results reported in the May 30 draft report of the Interagency Analysis Team. We are therefore requesting that you prepare a 1344 stabilization case under the assumption that carbon permits would be available on the international market at a price of $40 per metric ton (reflecting a 70 percent reduction from the 1344 stabilization case carbon permit values in the draft report) throughout the 2010 to 2020 period. The detailed specifications are as follows:

We assume the international permit price in year 2010 and thereafter is $40 per ton. We assume that behavior in the U.S. energy system reflects a phase-in of the carbon permit value from $0 per ton in 2005 to $40 per ton in 2010.