2010 Source: Office of Integrated Analysis and Forecasting, National Energy Modeling System nun FD24ABV.D0803988.

Figure 22. Projected Fuel Use for Electricity
Generation by Fuel In the 1990+9%
Case, 1996-2020

Among the sources of uncertainty in the effects of caron mitigation polices over the next 20 years are the assumed rate of economic growth, the speed of adoption of advanced technologies, and the role of nuclear power. A series of sensitivity cases illustrate how these factors influence the results of the carbon reduction cases. The sensitivity cases were analyzed against the 1990+9% case. The nuclear power sensitivity case was analyzed against the 1990-3% case, because new nuclear power plants were found to be economical only with the higher carbon prices in that case.

Source: Office of Integrated Analysis and Forecasting. National Energy Modeling System run FD03BLW.D0603688

Because each of the sensitivity cases is constrained to the same level of carbon emissions as the case to which it is compared, the primary impact is not on the carbon emissions levels, or even aggregate energy consumption, but rather on the carbon prices required to meet the emissions target. For example, in the high technology case, with an emissions reduction target of 9 percent above 1990 levels, projected carbon emissions during the compliance period are the same as in the corresponding reference technology case (1990+9%) with emissions at the same level. What differs is the cost of meeting the target, as reflected in the required carbon price or in expenditures for energy services. As a result, the carbon price and energy expenditures are the primary measures by which the sensitivity cases are compared in this report, in contrast to the presentation of similar sensitivities in AEO98. Because the technology sensitivities in the AEO typically are run with energy prices and macroeconomic assumptions held constant and without any target for carbon emissions, sensitivities are normally compared on the basis of levels of energy consumption.

Macroeconomic Growth

The assumed rate of economic growth has a strong impact on the projection of energy consumption and. therefore, on the projected levels of carbon emissions. In AEO98, the high economic growth case includes higher growth in population, the labor force, and labor productivity, resulting in higher industrial output, lower inflation, and lower interest rates. As a result, GDP increases at an average rate of 2.4 percent a year from 1996 to 2020, compared with a growth rate of 1.9 percent a year in the reference case. With higher macroeconomic growth, energy demand grows more rapidly, as higher manufacturing output and higher income increase the demand for energy services. In AEO98, total energy consumption

in the high economic growth case is 117 quadrillion Btu In 2010, compared with 112 quadrillion Btu in the referance case. Carbon emissions are 80 million metric tons, or 4 percent, higher than the reference case level of 1,803 million metric tons.

Assumptions of lower growth in population, the labor force, and labor productivity result in an average annual growth rate of 1.3 percent in the AEO98 low economic growth case between 1998 and 2020. With lower eco nomle growth, energy consumption in 2010 is reduced from 112 quadrillion Btu to 107 quadrillion Btu, and car bon emissions are 90 million metric tons, or 5 percent, lower than in the reference case. Thus, the effect of higher or lower macroeconomic growth can have a sig nificant impact on the ease or difficulty of meeting the carbon targets.

To reflect the uncertainty of potential economic growth, high and low economic growth sensitivity cases were analyzed against the 1990+9% case, using the same higher and lower economic growth assumptions as in AFO98. With higher economic growth, the industrial output and energy service demand are higher. As a result, carbon prices must be correspondingly higher to attain a given carbon emissions target. With low economic growth, the effects are reversed, leading to lower carbon prices. In addition to industrial output, some of the most important economic drivers in NBMS are dis posable personal income, housing stock, housing size. commercial floorspace, Industrial output, light-duty vehicle sales, and travel.

Figure 24 shows the effect of the high and low macroeconomic growth assumptions on the projections for 2010 in the 1990+9% case. The carbon price in 2010 is $215 per metric ton in the high economic growth case, or $52 per metric ton higher than the price of $163 per metric ton in the 1990+9% case with reference economic growth. In the low economic growth case, the carbon permit price in 2010 is $128 per metric ton or $35 per metric ton lower than in the 1990+9% case.

The higher carbon prices necessary to achieve the carbon reductions with higher economic growth will tend to moderate the growth rates of the economy as a whole and the economic drivers in the energy system. Despite this price effect, total energy consumption in 2010 is higher with higher economic growth, by 2.2 quadrillion Btu relative to the 1990+9% with reference economic growth. Similarly, the lower economic growth assump tion results in lower carbon prices, which offset a portion of the projected reduction in energy consumption that would otherwise be expected when economic growth slows. Lower economic growth lowers total energy con sumption by 2.2 quadrillion Btu.

To meet a carbon reduction target with higher economic growth and energy consumption, there is a shift to less

Source: Office of Integrated Analysis and Forecasting, National Energy Modeling System runs FOOBABY D0603988 LMAC09.D080888A, HMACO D080808A FREEZE09.0080798A, and HITECHO0D080806A carbon-Intensive fuels and higher energy efficiency: however, economic growth affects energy consumption in the industrial and transportation sectors more signifi cantly than in the other end-use sectors. With higher economic growth, renewable energy and natural gas consumption is higher, primarily for generation but also in the industrial sector. Coal use for generation is lower, and more nuclear capacity is life-extended as a result of the higher carbon prices. Petroleum consumption is also higher with higher economic growth, in both the transportation and Industrial sectors. As shares of total energy consumption, natural gas and renewables are higher with higher economic growth, coal is lower, and nuclear and petroleum remain approximately the same. Opposite trends for fuel consumption and fuel shares are seen when lower economic growth is assumed. Total energy Intensity is lower in the high economic growth case, partially offsetting the changes in energy consumption caused by the different growth assump tions. There are three reasons for the improvement in energy intensity. First, although demand for energy services is higher with higher economic growth, there is greater opportunity to turn over and improve the stock of energy-using technologies. In the AEO98 cases, aggre gate energy efficiency in the high economic growth case decreases at a rate of 1.0 percent a year through 2020, compared with 0.9 percent in the reference case and 0.8 percent in the low economic growth case. Second, with higher carbon prices, additional efficiency improvements are induced by higher energy prices. Finally, the higher energy prices lead to some reductions in energy service demand, moderating the impacts of higher economic growth. In the 1990+9% carbon reduction case, aggregate energy intensity declines at an average annual rate of 1.6 percent through 2010. In the 1990+9% high

economic growth sensitivity case, the annual decline increases to 1.9 percent. In the 1990+9% low economic growth case, the decline in energy intensity slows to 1.3 percent per year.

Technological Progress

The assumed rate of development and penetration of energy-using technology has a significant impact on projected energy consumption and energy-related carbon emissions. Faster development of more energyefficient or lower carbon-emitting technologies than assumed in the reference case could reduce both consumption and emissions; however, because the AEO98 reference case already assumes continued improvement in both energy consumption and production technologies, slower technological development is also possible. To examine the influence of technology improvement, two sensitivity cases were analyzed relative to the 1990+9% case. The high technology case includes more optimistic assumptions on the costs, efficiencies, market potential, and year of availability for the more advanced generating and end-use technologies, assuming increased research and development activity. This sensitivity case also assumes a carbon sequestration technology for coal- and natural-gas-fired electricity generation, which would capture the carbon dioxide emitted during fuel combustion and store it in underground aquifers; however, use of the technology is not projected to be economical relative to other technologies within the time frame of this sensitivity case because of high operating costs and storage difficulties. The low technology case assumes that all future equipment choices are made from the end-use and generation equipment available in 1998, with building shell and industrial plant efficiencies frozen at 1998 levels.

Because

faster technology development makes advanced energy-efficient and low-carbon technologies more economically attractive, the carbon prices required to meet carbon reduction levels are reduced. Conversely, slower technology improvement requires higher carbon prices (Figure 24). In the 1990+9% case with high technology assumptions, the carbon price in 2010 is $121 per metric ton-$42 per metric ton lower than the price of $163 per metric ton in the 1990+9% case with reference technology assumptions. With the low technology assumptions, the projected carbon price is $243 per metric ton in 2010.

Total energy consumption in 2010 is lower by 2.1 quadrillion Btu in the high technology case, about 2 percent below the projection in the 1990+9% case, and average energy prices, including carbon prices, are 10 percent lower. As a result, direct expenditures on energy are 13 percent lower in the high technology case. Demand in both the industrial and transportation sectors is lower as efficiency improvements in industrial processes and

most transportation modes outweigh the countervailing effects of lower energy prices. In the residential and commercial sectors, the effect of lower energy prices balances the effect of advanced technology, and consumption levels are at or near those in the 1990+9% case. With the high technology assumptions in the generation sector, coupled with the lower carbon permit price, coal use for generation is 3.8 quadrillion Btu higher than the 9.7 quadrillion Btu level associated with reference technology assumptions.

In the low technology case, the converse trends prevail. In 2010, total consumption is higher by 1.5 quadrillion Btu with the low technology assumptions, and energy expenditures are 17 percent higher. Industrial and transportation demand is higher, and residential and commercial demand lower, suggesting that Industry and transportation are more sensitive to technology changes than to price changes, and that the residential and commercial sectors are more sensitive to price changes. With the higher carbon prices in the low technology case, coal use is further reduced in the generation sector, with more natural gas, nuclear power, and renewables used to meet the carbon reduction targets.

Nuclear Power

In the AEO98 reference case, nuclear generation declines significantly, because 52 percent of the total nuclear capacity available in 1996 is expected to be retired by 2020. A number of units are retired before the end of their 40-year operating licenses, based on industry announcements and analysis of the age and operating costs of the units. In the carbon reduction cases, life extension of the plants can occur, if economical, and there is an increasing incentive to invest in nuclear plant refurbishment with higher carbon prices; however, no construction of new nuclear power plants is assumed, given continuing high capital investment costs and institutional constraints associated with nuclear power.

A nuclear power sensitivity case was developed to examine the potential contribution of new nuclear plant construction to carbon emissions reductions, assuming that new nuclear capacity would be built when it was economically competitive with other generating technologies. In the nuclear power sensitivity case, electricity generators were assumed to add nuclear power plants when it became economical to do so. In addition, the reference case assumptions about higher costs incurred for the first few advanced nuclear plants were relaxed by reducing the premium in costs for the first phase of new nuclear plant additions.

In the 1990+9% case, even with the nuclear power sensitivity assumptions, nuclear plants are not competitive with fossil and renewable plants. In the 1990-3% case, however, when the new nuclear assumptions are used, 1 gigawatt of new nuclear capacity is added by 2010, and

41 gigawatts, representing about 68 new plants of 600 megawatts each, are added by 2020. In a trial case in which first-generation cost premiums were left unchanged, only 3 gigawatts of nuclear capacity was added.) The availability of this no-carbon capacity off. sets about 25 million metric tons of carbon emissions from additional natural gas plants in 2020; on the other hand, more coal is used, because the projected carbon prices are lower. Most of the Impact from the new nuclear plants comes after the commitment period of 2008 through 2012. As a result, there is little impact on carbon prices in 2010. By 2020, however, carbon prices

are $199 per metric ton with the assumption of new nuclear plants, as compared with $240 per metric ton in the 1990-3% case with the reference nuclear assumptions.

In the 1990-3% case, total energy consumption is about the same in 2010 with new nuclear plants allowed and higher by about 1.8 quadrillion Btu in 2020. Somewhat lower energy prices induce higher consumption in all sectors, and the greater availability of carbon-free nuclear generation allows the carbon reduction target to be met with higher end-use consumption.

Background

This chapter provides in-depth analyses of the carbon emissions reduction cases for the four end-use demand sectors-residential, commercial, industrial, and transportation. Additional analyses are included for a number of alternative cases, including low and high technology sensitivity cases, which have the most direct impacts on energy end use.

Primary and Delivered Energy
Consumption

In each of the reduction cases, carbon emissions are reduced through a combination of switching to carbonfree or lower-carbon fuels, reductions in energy services, and increased energy efficiency. The latter two options lower total energy consumption (Figure 25).

Electricity generation typically consumes about three times as much energy, on the basis of British thermal units (Btu), as is contained in the electricity delivered to final consumers. In AEO98, total delivered energy consumption in 1996 is estimated at 70.4 quadrillion Btu, compared with total primary energy consumption of 94.0 quadrillion Btu (Table 3). The difference comes from electricity-related generation and transmission losses and, consequently, is relatively small for the transportation sector, where little electricity is consumed. Although the delivered price of electricity per Btu generally is more than three times the delivered price of other energy sources, the convenience and efficiency of electricity use outweigh the price difference for many applications.

energy-consuming equipment or to use a particular fuel, their decisions are based on the cost and performance characteristics of the technology, mandated efficiency standards, and energy prices. End-use energy prices include all the direct costs of providing energy to the point of use.

The distinction between end-use and primary energy consumption is an important one for the evaluation of efficiency standards and other energy policies. Reducing electricity demand through the use of more efficient technologies reduces primary energy consumption by a factor of three. In addition, although electricity at its point of use produces no carbon emissions, reductions in electricity use produce savings in emissions from the fuels used for its generation.