Legislation and Regulations

Introduction

Because analyses by the Energy Information Administration (EIA) are required to be policy-neutral, the projections in this Annual Energy Outlook 1999 (AEO99) are based on Federal, State, and local laws and regulations in effect on July 1, 1998. The potential impacts of pending or proposed legislation and sections of existing legislation for which funds have not been appropriated are not reflected in the projections.

Federal legislation incorporated in the projections includes the Omnibus Budget Reconciliation Act of 1993, which adds 4.3 cents per gallon to the Federal tax on highway fuels [1]; the National Appliance Energy Conservation Act of 1987; the Clean Air Act Amendments of 1990 (CAAA90); the Energy Policy Act of 1992 (EPACT); the Outer Continental Shelf Deep Water Royalty Relief Act of 1995; and the Tax Payer Relief Act of 1997. AEO99 also incorporates regulatory actions of the Federal Energy Regulatory Commission (FERC), including Orders 888 and 889, which provide open access to interstate transmission lines in electricity markets, and other FERC actions to foster more efficient natural markets. gas State plans for the restructuring of the electricity industry and State renewable portfolio standards are incorporated as enacted.

CAAA90 requires a phased reduction in vehicle emissions of regulated pollutants, to be met primarily through the use of reformulated gasoline. In addition, under CAAA90, annual emissions of sulfur dioxide by electricity generators are, in general, capped at 8.95 million short tons a year in 2010 and thereafter, although “banking" of allowances from earlier years is permitted. CAAA90 also calls for the U.S. Environmental Protection Agency (EPA) to issue standards for the reduction of nitrogen oxide (NO) emissions, leading to regulations that impose limits on electricity generators for NO, emissions. The impacts of CAAA90 on electricity generators are discussed in "Market Trends" (see page 86).

The provisions of EPACT focus primarily on reducing energy demand. It requires minimum building efficiency standards for Federal buildings and other new buildings that receive federally backed mortgages. Efficiency standards for electric motors, lights, and other equipment are required, and owners of fleets of automobiles and trucks are

required to phase in vehicles that do not rely on petroleum products.

The projections include only those equipment standards for which final actions have been taken and which specify efficiency levels, including the refrigerator standard that goes into effect in July 2001. AEO98 included a discussion of proposed actions, but no additional standards have been finalized.

Climate Change Action Plan

The AEO99 reference case projections include analysis of provisions of the Climate Change Action Plan (CCAP) 44 actions developed by the Clinton Administration in 1993 to achieve the stabilization of greenhouse gas emissions (carbon dioxide, methane, nitrous oxide, and others) in the United States at 1990 levels by 2000. CCAP was formulated as a result of the Framework Convention on Climate Change, which was adopted at the United Nations on May 9, 1992, and opened for signature at Rio de Janeiro on June 4. As part of the Framework Convention, the economically developed signatories, including the United States, agreed to take voluntary actions to reduce emissions to 1990 levels. Energy combustion is the primary source of anthropogenic (human-caused) carbon emissions. AEO99 estimates of emissions from fuel combustion do not include emissions from activities other than fuel combustion, such as landfills and agriculture, nor do they take into account sinks that absorb carbon, such as forests. Of the 44 CCAP actions, 13 are not related either to energy combustion or to carbon dioxide and, consequently, are not incorporated in the analysis. The projections do not include any other carbon mitigation actions that may be enacted as a result of the Kyoto Protocol, agreed to on December 11, 1997 (see "Issues in Focus," page 30, for further discussion).

Climate Wise and Climate Challenge are two programs cosponsored by EPA and the U.S. Department of Energy (DOE) to foster voluntary reductions in emissions on the part of industry and electricity generators, as reported in the ELA publication Mitigating Greenhouse Gas Emissions: Voluntary Reporting [2]. The AEO99 reference case includes analysis of the impacts of both programs (see Appendix G).

Extension of Outer Continental Shelf
Leasing Moratoria

On June 12, 1998, the President extended the current moratoria on new leases for offshore oil drilling on the U.S. Outer Continental Shelf (OCS) through June 30, 2012. The extension withdraws from possible leasing the areas of the OCS currently under moratoria in the following OCS planning areas: the North Aleutian Basin; WashingtonOregon; Northern, Central, and Southern California; South Atlantic; Mid-Atlantic; North Atlantic; and sections of the Eastern Gulf of Mexico. Also withdrawn were those areas of the OCS designated as marine sanctuaries under the Marine Protection, Research, and Sanctuaries Act of 1972. The sanctuaries range in size from less than 1 square mile to more than 5,300 square miles [3]. The extension of OCS moratoria does not affect any current leases. Because the AEO99 forecast does not include production from restricted areas, the extension has no impact on the projections.

Regulation of Natural Gas
Transportation Services

On July 29, 1998, the Federal Energy Regulatory Commission (FERC) proposed changes in its regulations governing interstate natural gas pipelines. The purpose of the changes is to allow more flexibility and competitiveness in the market for shortterm transportation services. Under the proposed changes, cost-based regulation would be replaced by policies intended to maximize competition, mitigate the ability of firms to exercise residual monopoly power, and provide opportunities for greater flexibility in the provision of pipeline services. Pipelines would be permitted to negotiate rates and terms of service. The Commission is also seeking comments on its pricing policies for the existing and long-term market and for new capacity. Comments on both proposed changes and existing policy are due on January 22, 1999 [4]. Although the specific changes proposed by the FERC are not included, the AEO99 reference case does assume an increasingly competitive market for natural gas transportation services.

Extension of Ethanol Tax Credit

The Federal Highway Bill of 1998 included an extension of the ethanol tax credit, which has been granted since 1986 and was scheduled to expire in

Legislation and Regulations

2000. The tax credit is currently 54 cents per gallon and applies to ethanol and the ethanol portion of the gasoline additive ethyl tertiary butyl ether (ETBE). The Highway Bill extends the tax credit through 2007 but specifies 1-cent-per-gallon reductions in 2001, 2003, and 2005. Ethanol and ETBE may be blended into gasoline to boost either octane or oxygen content. The tax credit effectively reduces the cost of ethanol and ETBE, making them more attractive for blending with gasoline. AEO99 assumes that the ethanol tax credit will not expire in 2007 but will continue at the nominal level of 51 cents per gallon. The benefit of the credit is eroded by inflation over time, however, reducing its value to 27 cents per gallon (in 1997 dollars) by 2020.

Tier 2 Vehicle Standards

The Clean Air Act Amendments of 1990 (CAAA90) set "Tier 1" exhaust emission standards for carbon monoxide (CO), hydrocarbons, nitrogen oxides (NOx), and particulate matter (PM) for light-duty vehicles and trucks beginning with model year 1994. CAAA90 also required the U.S. Environmental Protection Agency (EPA) to study further "Tier 2" emission standards that would take effect between model years 2004 and 2007. EPA provided a Tier 2 study to Congress in July 1998 [5] and is expected to publish a Notice of Proposed Rulemaking for the Tier 2 standards early in 1999.

Air quality projections included in the EPA's Tier 2 study indicate that the existing Tier 1 vehicle emissions standards, and the implementation of the voluntary National Low Emissions Vehicle (NLEV) program set for implementation between 1999 and 2001, will not be enough to achieve attainment of National Ambient Air Quality Standards (NAAQS) for ozone and particulate matter (PM) between 2007 and 2010. The study concludes that further emissions reductions for volatile organic compounds (VOCs), NOx, and PM will be needed to move many areas of the country, and the Nation as a whole, toward compliance. In addition, the study concludes that more stringent Tier 2 vehicle emissions standards are a cost-effective means of improving air quality. The study also examined the feasibility of technologies that would reduce emissions from light-duty vehicles and trucks, ranging from advanced engine designs to improved exhaust aftertreatment systems.

Legislation and Regulations

The Tier 2 study emphasizes the importance of the relationship between emissions reduction technology and gasoline sulfur content. Sulfur reduces the effectiveness of the catalyst used in the emission control systems of advanced technology vehicles, increasing their emissions of hydrocarbons, carbon monoxide, and NOx. Because of the link between sulfur and emissions, the EPA is developing proposed restrictions on gasoline sulfur content in connection with the Tier 2 standards.

Tier 2 standards and restrictions on gasoline sulfur are not reflected in the AEO99 reference case because the end result of the upcoming rulemaking process is unknown. Analysis of the potential costs of reducing sulfur in gasoline is included in "Issues in Focus" (see page 29).

Low-Emission Vehicle Program

The Low Emission Vehicle Program (LEVP) was originally passed into legislation in 1990 in the State of California. It began as the implementation of a voluntary opt-in pilot program under the purview of CAAA90, which included a provision that other States could opt-in to the California program and achieve lower emissions levels than required by CAAA90. Both New York and Massachusetts chose to opt-in to the LEVP program, implementing the same mandates as California.

The LEVP was an emissions-based policy, setting sales mandates for three categories of low emission vehicles according to their relative emissions of air pollutants: low emission vehicles (LEVs), ultra-low emission vehicles (ULEVs), and zero emission vehicles (ZEVs). The only vehicles certified as ZEVs by the California Air Resource Board were dedicated electric vehicles [6].

The LEVP was originally scheduled to begin in 1998 with a requirement that 2 percent of the State's vehicle sales be ZEVs, increasing to 5 percent in 2001 and 10 percent in 2003. In California, however, the beginning of mandated ZEV sales was rolled back to 2003, because it was determined that ZEVS would not be commercially available in sufficient numbers or at sufficiently competitive cost to allow the targets to be met. In Massachusetts and New York, after several years of litigation, the Federal courts overturned the original LEVP mandates in

favor of the same deferred schedule adopted by California.

Ozone Transport Rule

Over the past several years, extensive effort has gone into examining the impact of interstate ozone emissions. Many of the States in the Northeast believe that they will not be able to reduce their ozone concentrations to required levels unless outof-state emissions are also reduced. The Ozone Transport Assessment Group (OTAG), made up of State, Federal, utility, and nonutility representatives, was established to analyze the issue. OTAG's analyses suggested that nitrogen oxide (NO) emissions from power plants in some midwestern States are having an impact on ozone concentra. tions in downwind northeastern States [7].

In response to OTAG's recommendations, the EPA issued a notice of proposed rulemaking (NOPR) on November 7, 1997 [8]. In the NOPR, EPA established summer season NO, emission limits (referred to as budgets) for electricity power plants in 22 eastern and midwestern States. Originally the NOPR set the NO, limit for the summer season (May 1st through September 30th) for the 22 States at 489,000 tons, but the limit was raised to 563,800 tons in the final rule issued on September 24, 1998 (Table 2). The change resulted from technical corrections made by the EPA to the population of sources of NOx emissions in the baseline data from which the budgets were derived.

The NOPR and its supplement require States to develop plans to meet their NOx emission budgets in 2003 and beyond. The EPA hopes to encourage States to participate in a NOx "cap and trade"