Path, along which renewables would come to supply 14 percent of U.S. energy needs by 2010 and 32 percent by 2030.

Moreover, with the Innovation Path our air will be healthier to breathe. Compared to 1990 levels, a 64 percent reduction in sulfur dioxide (SO2) emissions (a primary precursor of fine particles) would be achieved by 2010 along with a 27 percent reduction in nitrogen oxide (NOx) emissions (a key precursor of ground-level ozone). Emissions of other damaging pollutants, including fine particles, toxic metals, and hydrocarbons, would also be greatly reduced.

Figure 3 contrasts rising CO2 emissions along the Present Path with the decreases projected for the Innovation Path. Increases in energy efficiency and changes in fuel mix combine to reduce U.S. CO2 emissions to 10 percent below 1990 levels by 2010, compared to a 21 percent increase in the Present Path. Such CO2 emissions reductions, coupled with carefully defined international trading protocols, would allow the United States to comply with the European Union's proposal for an international agreement requiring that by 2010, industrialized countries reduce greenhouse gas emissions by 15 percent compared to 1990 levels. Given the restrictive assumptions built into this analysis, we believe that even greater reductions would be feasible in this time frame.

EXECUTIVE SUMMARY

Million Short Tons of CO2

The Innovation Path also saves consumers money, with net savings reaching $58 billion nationwide, equivalent to $530 per household by 2010. These savings are the difference between total energy bill savings and increased investment costs on an annualized basis. Figure 4 shows annual costs and benefits averaged over five-year intervals between now and 2010. Investments in cleaner and more efficient buildings, appliances, automobiles, equipment, and power plants average $29 billion per year over the whole period. By comparison, savings from reduced expenditures on coal, oil, natural gas, and other fuels would average $48 billion per year. Moreover, as illustrated in the figure, net benefits grow each successive year, so that the benefits of the Innovation Path equal 1.7 times its costs for the 2006-2010 time period. These net savings don't even include the benefits to society of air pollution avoided by the Innovation Path.

Compared to the Present Path, following the Innovation Path starts us down a road of reduced petroleum dependence. Oil use drops from the 1990 level of almost 34 quadrillion British Thermal Units (Quads) to 32 Quads in 2010, instead of rising to 41 Quads, reducing the U.S. oil import bill that year by $21 billion.

Investing in a new generation of energy-efficient, low-pollution technologies also enhances U.S. employment. By 2010, following the Innovation Path creates nearly 800,000 additional jobs, beyond the baseline growth embodied in the Present Path. Consumer savings on fuel costs will allow greater spending on non-energy sectors of the economy, which entail a greater number of jobs per dollar of purchases than the capitalintensive energy sectors. Reduced oil imports also contribute to expanded employment here at home. As illustrated in Figure 5, our macroeconomic

energy/nnovations

modeling, based on detailed analysis of shifts in investment and energy demand, projects a modest increase ($14 billion) in wage and salary income as well as a slightly higher GDP (up nearly $3 billion) for the Innovation Path compared to the Present Path.

These economic results contrast sharply with the conclusions of analyses sponsored by fossil fuel interests. Such analyses have examined unrealistic policies using misleading assumptions that exclude many proven cost-effective energy efficiency opportunities, neglect the potential for technological innovations, and often fail to count the net savings of reduced energy bills.

Although our full economic analysis is limited to 2010, we did extend the energy analysis to 2030. Following the Innovation Path for the additional two decades yields much greater benefits as savings from efficiency investments compound, technology innovation provides yet greater payoffs, and renewable energy technologies come into extensive use. Instead of Present Path primary energy consumption reaching 119 Quads in 2030, the Innovation Path would cut it to 69 Quads, of which 22 Quads would come from renewable resources. Petroleum dependence declines to 23 Quads rather than rising to 48 Quads. Air pollution from energy use would be a fraction of what it is today.

EXECUTIVE SUMMARY

A

then incorporated into NEMS. Moreover, since the NEMS model used here provides outputs only through 2010, our long-run results are based on sector-specific models that estimate results through 2030.

NEMS was chosen for this study to facilitate comparison to government studies and because it provides an independent framework for energy forecasting. However, NEMS also entails some restrictions that limit the completeness of its results. The 1995 version of the model used for this study could not calculate energy price and economic activity feedbacks with the up-to-date economic and price inputs needed for the study. Furthermore, the model's basis in mainly short-term responses causes it to underestimate long-term shifts in the composition of economic output and opportunities to introduce new technology.

In order to examine the impacts on the overall economy, details on investment costs and changes in energy expenditures from NEMS and the supplemental models were fed into a macroeconomic model, known as IMPLAN, also developed by the federal government. This model represents interactions among all parts of the economy in order to produce projections of changes in employment, wage income, and Gross Domestic Product (GDP) implied by the changes in energy use.

➤ energyInnovations

New technologies are the motivating force behind the current restructuring of our electricity supply system. Combined with efficiency improvements wherever power is used and expanded cogeneration of heat and electricity, we have before us the choice to cut pollution and decrease costs by pursuing fair and balanced policies in a newly configured industry. In contrast, a myopic pursuit of the lowest possible short-run electricity commodity prices poses a great threat that the windfall from restructuring would accrue to a few large industrial customers, while vested interests in dirty and dangerous power plants thwart true competition, resulting in excess pollution and rapidly rising CO2 emissions.

Despite considerable progress since the original Clean Air Act of 1970, electricity generation remains our largest source of air pollution. In 1990 power plants emitted 21 percent of airborne mercury, 37 percent of NOx, 81 percent of SO2, and 36 percent of CO2 emitted in the United States. Most of this pollution comes from older coal-fired power plants exempted from meeting the cleaner emissions standards that apply to newer units.

For the electricity supply sector, the issue of business-as-usual is moot. The rules of the game are already changing; the real issue is how they will change. Thus, the Present Path for electricity reflects not so much the absence of new policies, but rather the risks of new rules that evade fair environmental standards, ignore the need for equitable services, and lack adequate incentives for investing in energy efficiency and renewable technologies.

A simplistic drive to retail competition could mean the elimination of incentives to invest in end-use efficiency for all consumers, research and development, and renewable energy supplies that had been established in many states during the last decade. Without such public guidance, highly-polluting power plants are likely to be used more intensively, and annual CO2 emissions from power plants would climb to 580 million metric tonnes of carbon (MTc) per year by 2010, 22 percent higher than in 1990.

We can follow a better path, plugging into clean power-and plugging into it with energy-efficient products and equipment--by enacting a set of sensible safeguards when writing the ground rules for a competitively restructured industry. The Innovation Path would address the above concerns through a set of policies that preserve incentives for equity, efficiency, renewables, and lower pollution:

➤ A system benefits charge, levied on access to the transmission system, would generate federal matching funds for state programs that ensure the delivery of crucial public services, including end-use efficiency (modeled in the end-use sectors), low-income services, and research and development.

➤ A renewables portfolio standard would ensure continued expansion of the share of electricity coming from emerging clean technologies, such as wind, geothermal, and solar energy. Alternatively, funds from a systems benefits charge could be used to ensure this result (which is how the modeling was conducted).

➤ Caps on NOx, particulate matter and CO2

emissions from electric generation, and a more stringent SO2 cap, lowered to less than 4 million tons by 2010, would ensure that emission goals were met. Such pollution allowances can be allocated in a competitively neutral manner by distributing them based on uniform output-based (pounds per megawatt-hour) generation performance standards.

EXECUTIVE SUMMARY

A