Most of the drop in energy intensity in the U.S. industrial sector occurred between 1980 and 1985, when prices for both energy and capital inputs were rising and the ability of U.S. manufacturers to compete internationally was deteriorating. The recessions of 1980 and 1981-1982 forced many less efficient plants to close. many permanently. Particularly hard hit were the primary metals industries and motor vehicle manufacturing Output of the U.S. steel industry has never recovered to the levels of the late 1970s. Manufacturing profits did not return to the levels attained in 1981 until 1988. Energy prices certainly played a role in shaping these changes in the industrial sector, but general economic conditions, recession, record high interest rates, and reduced ability of key industries to compete in international markets were more important determinants of change."

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45

In the reference case, industrial energy prices are projected to increase very slightly or fall through 2010. For example, the price of natural gas is projected to increase by 0.5 percent, and the price of electricity is projected to fall by 16 percent. From 1996 to 2010, industrial output is projected to grow by 39 percent and energy consumption by only 16 percent. Industrial intensity falls by 17 percent during the same period, approximating the intensity decline between 1980 and 1996. The factors that are expected to produce the rapid decline in industrial energy intensity despite moderate changes in energy

prices include a relative shift from energy-intensive to less energy-intensive industries; replacement of existing equipment with less energy-intensive equipment as existing capacity is retired; adoption of improved and less energy-intensive technologies; and the pressures of international competition.

Carbon Reduction Cases

In the carbon reduction cases, the combined effect, of reduced demand for U.S. industrial output and higher energy prices produces lower energy consumption than in the reference case. Compared with the reference case in 2010, industrial output is $69 billion (1 percent) lower in the 1990+24% case. $157 billion (3 percent) lower in the 1990+9% case, and $308 billion (6 percent) lower in the 1990-3% case (see Table 29 in Chapter 6).

Compared with the reference case, average energy prices in the industrial sector in 2010 are projected to be 22 percent higher in the 1990+24% case, 55 percent higher in the 1990+9% case, and 95 percent higher in the 1990-3% case. In comparison, the industrial sector's average energy price increased by almost 189 percent from 1970 to 1980. Prices of all fuels are projected to be higher in the carbon reduction cases, with coal prices 135 percent higher than the reference case in 2010 in the 1990+24% case and natural gas prices 33 percent higher The projected price increase for coal is attributable solely to the projected carbon price, whereas the carbon price and higher demand contribute about equally to the increase for natural gas. In the 1990+9% case. natural gas and coal prices are projected to be 93 percent and 328 percent higher, respectively, than in the reference case. and in the 1990-3% case they are 162 percent and 589 per cent higher.

Lower projections of industrial output and higher projected energy prices reduce the projections for deliv ered energy consumption in the industrial sector by 0.7 quadrillion Btu (2 percent) in the 1990+24% case, by 1.3 quadrillion Btu (4 percent) in the 1990+9% case, and by 2.3 quadrillion Btu (7 percent) in the 1990-3% case in 2010 relative to the reference case (Figure 45). In the 1970-1980 period, industrial consumption was unchanged even though prices increased by 189 percent. Year-to-year industrial energy consumption began to fall in 1980, and the decline accelerated when general economic conditions began to deteriorate during the 1980 and 1981-1982 recessions. Energy consumption reached its minimum in 1983, even though prices had begun to decline. These events reinforce the concept that while energy prices do play a role in industrial energy

51

consumption, general and industry-specific economic conditions also play an important role.

Coal consumption is projected to drop sharply in the carbon reduction cases, given its extreme price disadvantage. In the 1990+24% case, coal consumption in 2010 is lower by 422 trillion Btu (16 percent) than in the reference case; in the 1990+9% case it is 737 trillion Btu (28 percent) lower, and in the 1990-3% case it is about 1 quadrillion Btu (36 percent) lower. The projected reductions in coal consumption are predominantly due to projected reductions in boiler fuel use.

46

The industrial sector consumes coal mainly as a boiler fuel and for production of coke in the iron and steel industry. For example, 75 percent of manufacturing consumption of steam coal was used in boilers in 1994. Coal-fired boilers have substantially higher capital costs than do gas-fired boilers, because of their materials handling requirements. For large steam loads, however, coal's price advantage over natural gas offsets its capital cost disadvantage. But in the carbon reduction cases, coal suffers from both a capital cost and a fuel cost disadvantage. As a result, a substantial amount of boiler fuel use switches from coal to natural gas and petroleum products.

The projected reduction in total steam coal consumption in the industrial sector in 2010 (including for uses other than boiler fuel) in the 1990-3% case relative to the reference case is more than 50 percent. Still, the reduction is less severe than that projected for the electric utility

sector. Electricity generators, in addition to switching to natural gas, also have the available options of nuclear power and renewable energy sources.

Consumption of metallurgical coal, which is used to produce coke for iron and steel production, also is reduced sharply in the carbon reduction cases. The reduction has several causes: substitution of natural gas in production processes, replacement of domestic coke production with coke imports, replacement of some coke-based steelmaking capacity with electricity-based capacity, and reduced production of domestic steel.

In the carbon reduction cases, natural gas consumption is subject to two countervailing effects. The effect of generally higher energy prices, and consequent lower levels of industrial activity, is to reduce natural gas consumption. On the other hand, natural gas prices do not increase by as much as the prices of competing fuels. As noted above, this results in relatively greater use of natural gas as a boiler fuel. The carbon reduction cases also induce additional cogeneration using natural gas, which increases natural gas consumption and reduces requirements for other boiler fuels.

In the 1990+24% and 1990+9% cases, natural gas consumption is projected to increase slightly, because the impact of increased boiler fuel use outweighs the reduction caused by lower industrial output. In the 1990-3% case, natural gas consumption is unchanged from the reference case in 2010. Here, the drop in industrial output and the substitution for other boiler fuels have offsetting effects.

In the reference case, industrial carbon emissions are projected to be 83 million metric tons higher in 2010 than they were in 1996 (Figure 46). Emissions attributable to increased electricity consumption account for more than half the increase. In contrast, electricity-based emissions account for more than 70 percent of the emissions reductions in the carbon cases. For example, in the 1990+9% case, electricity-based carbon emissions in 2010 are 79 million metric tons lower than in the reference case. A reduction of 19 million metric tons in carbon emissions from the combustion of fossil fuels brings industrial sector emissions to approximately their 1990 level. Carbon emissions in the 1990-3% case fall to 418 million metric tons, 58 million tons below the 1996 level and 35 million tons below the 1990 level. Again, electricity-based emissions account for threefourths of the reduction from projected levels in the reference case.

Part of the reduction in electricity-based carbon emissions for the industrial sector is due to lower electricity consumption in the carbon reduction cases

Note: Electricity emissions are from the fossil fuels used to generate the electricity used in this sector.

Sources: History: Energy Information Administration, Emissions of Greenhouse Gases in the United States 1996, DOE/EIA-0573(96) (Washington, DC, October 1997), Projections: Office of Integrated Analysis and Forecasting National Energy Modeling System runs KYBASE.D080398A, FO24ABV D0803988, FD1998. D0803988, FD09ABV.D0803988, FD1990.00803988 FD03BLW.D0803988, and FD07BLW.D0603968.

(Figure 47). A larger part of the reduction results from sharply lower carbon intensity of electricity production. In the reference case, approximately 16.5 million metric cons of carbon are emitted in the production of 1 quadrillion Btu of delivered electrical energy, as compared with only 12.6 million metric tons in the 1990+9% case and only 10.2 million metric tons in the 1990-3% case (38 percent less than in the reference case).

Industrial energy intensity fell by 17 percent between 1980 and 1996. In 1996, approximately 7,100 Btu of energy was required to produce a dollar's worth of industrial output. In the reference case energy intensity continues to fall, and in 2010 it is projected that only 5,900 Btu will be required for each dollar of industrial output. The impact of the carbon reduction cases on industrial energy intensity results from opposing effects. The effect of higher energy prices is to reduce energy intensity, whereas reduced or falling output growth limits the amount of new, less energy-intensive capital equipment that will be added to the existing stock, thereby retarding the rate of decline in energy intensity. Additional structural shifts in the composition of industrial output further reduce energy intensity. (Fuel switching contributes to reduced carbon but does not affect energy intensity.)

The projected rate of decline in industrial energy intensity is smaller in the more stringent carbon reduction cases (Figure 48). Some process steps in the energy-intensive industries approach the minimum level of energy intensity assumed to be practically achievable. In addition, in the more stringent carbon reduction cases, industrial output is more severely

1970 1980 1996 Reference 1990 1990 1990 +24% +9% -3% Sources: History: Energy Information Administration, State Energy Da Report 1995, DOE/EIA-0214(85) (Washington, DC, December 1997 Projections: Office of Integrated Analysis and Forecasting. National Energy Modeling System runs KYBASE D080398A, FD24ABV D0603988, FOOMEN D0803988, and FD03BLW.D0803988

2005 2015 2020 Sources: History: Consumption: Energy Information Administration, Sale Energy Data Report 1995, DOE/EIA-0214(96) (Washington, DC, December 1997) Output Constructed by Standard & Poor's ORI from US Department of Commerce, "Benchmark Input-Output Accounts for the U.S. Economy, 1982 Make, Use, and Supplementary Tables," Survey of Current Business, November 1997, and predecessor benchmark tables Projections: Office of Integ Analysis and Forecasting, National Energy Modeling System runs KYBASE D080398A, FD24ABV.D0803988, FD1998.D0803986, FD09ABY.D080398, FD1990.D0803988, FD038LW.D0803968, and FD078LW.D0603968

reduced, resulting in smaller incentives for the addition of new, less energy-intensive capital equipment. The changes in energy intensity for the industrial subsectors (Figure 49) indicate that slower growth in output can lead to less pronounced declines in energy intensity in the more stringent carbon reduction cases.

The change in aggregate industrial energy intensity can be decomposed into two effects. One is the change in energy intensity that results from a change in the composition of industrial output. For example, if the