the Transition Period

the economy to bolster disposable income and encourage both consumption and investment, counteracting the adverse short-term effects on the economy associated with higher energy prices and speeding the transition to equilibrium. Taking money out of the economy through a carbon price and then returning it encourages a shift in priorities that accomplishes the goal of achieving a carbon emissions reduction while moderating the impacts on the economy. It modifies the national energy mix and makes the overall economy less energy-intensive, while partly compensating consumers and business for the loss in income resulting from higher energy prices. EIA evaluates two illustrative recycling cases: one providing rebates via reductions in the personal income tax, and the other through the social security tax.

EIA projects the loss in actual GDP in 2010 to range between $61 billion and $183 billion if revenues are recycled via a reduction in social security taxes, and between $96 billion and $397 billion if they are recycled via a reduction in personal income taxes (1992 dollars). Again, the economy grows even during the period of adjustment but does not reach the levels of growth in potential GDP. Although there is a definite slowing of economic growth during the transition period, actual GDP returns to its potential path, so the effects on the economy are almost totally muted over the longer term.

The total cost to the economy can be estimated as the loss in actual GDP (the loss in potential GDP plus the macroeconomic adjustment cost) plus the purchase of international permits. It is assumed that the U.S. will purchase international permits at the marginal abatement cost in the U.S., i.e., the domestic carbon price. Total costs range from an average annual level for the period 2008 to 2012 of $77 billion to $338 billion 1992 dollars depending on the carbon reduction case and how funds are recycled back to the economy.

As energy prices rise in the United States, downstream prices for all goods and services are affected. A rule of

Suppose... underlying economic growth of the nation were higher (or lower)?

If higher or lower growth is assumed in such factors as population, the labor force, and productivity, there would be differences in industrial output, inflation rates and interest-rate levels. Assuming a range of annual GDP growth between 1996 and 2020 from 1.3 to 2:4 percent, compared to 1.9 percent in the Reference Case, total U.S. energy consumption would be lower/ higher in 2010 by about 2.2 quadrillion Btu. (A quadrillion Btu is equivalent to consuming about 500,000 barrels of oil per day for one year). To meet the same level of carbon reductions with higher (or lower) energy consumption, the "carbon price" would also be higher (or lower)—as shown on the adjoining graph. With a higher carbon price, less coal and more natural gas, renewables, and nuclear power are used.

Suppose... technology advanced more rapidly as a result of increased national emphasis on research and development (or suppose-technology choices stayed as they were in 1998)?

The technology assumptions in the main cases in the EIA report reflect expert engineering opinion of likely technological advances—i.e., they are not technologically pessimistic. Nevertheless, to analyze the effects of even more advanced technology, assumptions were developed by energy technology experts for the end-use and generation sectors, considering possibilities based on increased Research and Development. This could mean earlier introduction of products and processes, lower costs, and higher efficiencies than assumed in the Reference Case. It was also assumed that technology for extracting and storing carbon emissions from coal and natural