Q19.5 Reducing Power Sector Carbon Emissions The ACEEE Study's fourth strategy is “reducing power sector carbon emissions." The Study states: "Apart from greater end-use efficiency and expanded use of "Further efficiency improvements could be made given that the “Our strategy calls for a heat rate ‘cap and trade' system for “Unlike the other energy efficiency strategies, this initiative is 54-190 99-5 and offset many times over by the net economic benefits from The ACEEE Study claimed that this strategy would avoid 65 million metric tons of carbon emissions by 2010 and 115 million metric tons by 2020. Further, the Study claimed that net present value of costs for measures installed during 1999-2010 would be about $10 billion, for a net loss of $10 billion. (ACEE Study, page xi). Please comment on the ACCEE Study's methodology, assumptions, and findings with respect to this strategy. A19.5 EIA agrees with the ACEEE that improvements in power plant thermal efficiency will play an important role in any effort to reduce U.S. carbon emission. In fact the table below shows that in our study the average fossil plant heatrates (efficiencies) in 2010 and 2020 are either equal to or below the ACEEE targets in all but the least stringent carbon reduction case that we portrayed. However, we do not agree that the major reason that many older, less thermally efficient plants, especially coal plants, are still operating is because of some sort of market barrier. It is true that many of these plants do not meet the environmental standards for new plants. However, many of these coal plants are extremely economical, producing some of the lowest cost power in the country. Many of these existing coal plants currently produce power for half of what it would cost to build and operate a new natural gas plant. And, with our projections of falling fuel prices and operations and maintenance costs, production costs for these older coal plants are expected to decline further. As a result, it may require a significant financial incentive to induce coal powerplant operators to retire existing coal plants and build new more thermally efficient plants. We were unable to determine the source of the cost estimate cited by ACEEE. However, in our 1990+14% case, the case that comes the closest to the ACEEE targets, the price of electricity is estimated to be 39 percent higher in 2010 than in the reference case. This compares to a price that is 2 to 3 percent higher, which would result from the $10 billion figure ACEEE quotes. COMMITTEE ON SCIENCE U.S. HOUSE OF REPRESENTATIVES Hearing on The Road from Kyoto-Part 4: The Kyoto Protocol's Impacts on U.S. Energy Markets and Economic Activity October 9, 1998 Post-Hearing Questions Submitted to Dr. W. David Montgomery Vice President Charles River Associates, Incorporated Questions Submitted by Chairman F. James Sensenbrenner, Jr. Criticism of EIA's 2005 Start for Emissions Reductions Mandated by the Kyoto Protocol Q1. Al. Mr. Geller is very critical of EIA assumption that the U.S. wait until 2005 to begin emissions reductions and say that it is both “dumb” and “would be contrary to the Protocol." What is your realistic assessment of the time it will take to work out all of the Kyoto Protocol details, including the developing country participation issue? Is 2005 pessimistic, realistic, or optimistic? Also, what “start” date do you use in your modeling? The EIA assumption that the U.S. will wait until 2005 to begin emissions reductions is not unreasonable, given current disputes about how the Kyoto Protocol should be implemented. The Administration has stated that the United States will not introduce an emissions trading program in the United States until the 2008 to 2012 budget period. The Administration's proposed subsidies are generally agreed to be insufficient to produce much progress in reducing emissions in the next few years. Using other regulatory programs to provide earlier emissions reductions would increase the cost of compliance, because domestic emissions trading or an equivalent program is required to accomplish emissions reductions at least cost, and has been prohibited by Congress in the recent reconciliation bill. It took about 50 years, from the end of World War II to the creation of the World Trade Organization (WTO), to establish an effective system to monitor and enforce global trade agreements. The economic stakes in the climate treaty are on the same scale as those of recent trade negotiations, such as the Uruguay Round, and also require strong international institutions for monitoring and enforcement. To assume that all this can be country participation are to begin by 2005, is extremely optimistic. In this sense, ue EIA starting point of 2005 for global permit trading may well be optimistic. In our modeling, we assume that there is no enforcement of emissions limits until the 2008-2012 budget period, but we assume that agents can foresee these limits and begin to take actions in anticipation of the limits as early as 2000. However, we conclude that relatively little is likely to be done to reduce emissions before 2005, because savings from allowing the capital stock to turn over at its normal rate and discounting of future costs make early emissions reductions relatively costly. Comparison of EIA and Charles River Analyses of the Kyoto Protocol Q2. A2. How do the EIA Kyoto Protocol modeling results compare with those of Charles EIA's modeling results are broadly consistent with those of Charles River Associates (CRA), when certain differences in the scope of the studies are taken into account. Three of our cases--no international trading, full Annex I trading, and full global trading-correspond approximately to the EIA Cases: 1990 - 7%, 1990 + 14%, and 1990 + 23%. The table below compares estimates of required emissions reductions from baseline, GDP loss, and permit prices for these three cases in 2010 and 2020. It includes estimates from EIA and CRA and also from studies recently released by DRI and Battelle (based on the SGM model used by the Administration). EIA's 2010 carbon permit prices are somewhat larger than ours, due at least in part to the fact that the NEMS model has only limited foresight and that EIA appears to have relatively low end-use demand elasticities. Our assumptions are different, but those of EIA are also plausible and defensible. GDP losses in the early years are larger in the EIA study because EIA uses a short-term macro model that includes effects of an energy price shock on the performance of the economy under specific assumptions about the management of monetary policy. These transitional costs are likely, and are not included in our results. The one area where we differ significantly is on the low side. The estimates of potential GDP loss reported by EIA in their report underestimate the minimum cost of the Kyoto Protocol, because of deficiencies in how the DRI model used by EIA captures the real resource cost of limits on energy use. If the direct cost of the Kyoto Protocol in the EIA 1990 - 7% case were calculated using the formula used in the Administration's analysis and EIA's estimates of the price of permits and required emissions reduction, the result would be a cost of about $100 billion in 2010. The potential GDP loss reported by EIA is so far below this minimum estimate that it must be due to the highly simplified |