cases. Similar to the residential sector, most of the reduction occurs for space conditioning-heating, cooling. and ventilation; however, more efficient lighting and office equipment and reduced miscellaneous electricity use-for example, for vending machines and telecommunications equipment-also contribute to lower energy consumption.

The average price of gasoline in 2010 across the carbon reduction cases is between 11 and 53 percent higher than the projected reference case price. Carbon reductions in the transportation sector in 2010 range from 2 to 16 percent, primarily as the result of reduced travel and the purchase of more efficient vehicles. The relatively low carbon reductions for transportation result from the continued dominance of petroleum, although some increase in market share is projected for alternative-fuel vehicles. Improvements in average fuel efficiency are slowed by vehicle turnover rates. Although new car efficiency in 2010 improves from 30.6 miles per gallon in the reference case to between 32.0 and 36.4 miles per gallon in the carbon reduction cases, total light-duty fleet efficiency rises only from 20.5 miles per gallon to between 20.7 and 21.7 miles per gallon. The impact of carbon prices on the economy lowers light-duty vehicle and airline travel and freight requirements while inducing some efficiency improvements.

Impacts by Fuel

In order to achieve carbon emission reductions, the slate of energy fuels used in the United States is projected to change from that in the reference case (Figure ES8).

Because of the higher relative carbon content of coal and petroleum products, the use of both fuels is reduced, and there is a greater reliance on natural gas, renewable energy, and nuclear power. Although the use of petroleum declines relative to the reference case, it increases slightly as a share because most petroleum is used in the transportation sector, where fewer fuel substitutes are available.

Because of the high carbon content of coal, total domestic coal consumption is significantly reduced in the carbon reduction cases, by between 18 and 77 percent relative to the reference case in 2010 (Figure ES9). Most of the reductions are for electricity generation, where coal is replaced by natural gas, renewable fuels, and nuclear power; however, demand for industrial steam coal and metallurgical coal is also reduced because of a shift to natural gas in industrial boilers and a reduction in industrial output. Coal exports are also lower in the carbon reduction cases, by between 21 and 32 percent, due to lower demand for coal in the Annex I nations.

Although total U.S. coal production is reduced, the average minemouth coal price rises in the carbon reduction cases, by between 3 and 28 percent in 2010, because a larger share of production is from higher-cost eastern coal mines that tend to serve the remaining markets. Production of western coal is further discouraged by the higher cost of fuels used for rail transportation and by reduced incentive for investment in new mines, which are primarily in the West. Because of lower coal production, coal mine employment in 2010 is projected to be 15 to 63 percent lower than in the

reference case; however, employment in the energy industry related to the production of natural gas and renewable fuels is likely to increase.

Petroleum consumption is lower in all the carbon reduction cases than in the reference case, by between 2 and 13 percent (Figure ES10). Because most of the petroleum is used for transportation, between 68 and 82 percent of the total reduction is in the transportation sector, as travel and freight requirements are reduced and higherefficiency vehicles are used. Because of lower petroleum demand in the United States and in other developed countries that are committed to reducing emissions under the Kyoto Protocol, world oil prices are lower by

between 4 and 16 percent in 2010, relative to the reference case price of $20.77 per barrel. In 2010, net crude oil and petroleum product imports are lower by a range of 3 to 22 percent relative to the reference case. Consequently, the dependency of the United States on imported petroleum is reduced from the reference case level of 59 percent to as little as 53 percent in 2010.

In 2010, natural gas consumption is higher than in the reference case, by a range of 2 to 12 percent across the carbon reduction cases (Figure ES11). Increased use of natural gas in the generation sector is only partially offset by reductions in the end-use sectors. Later in the forecast period, continued growth in natural gas

consumption for electricity generation is mitigated by the increasing use of renewables and nuclear power. particularly in the more stringent carbon reduction cases. As a result, in 2020, natural gas use does not necessarily increase with higher levels of carbon reductions. As the result of higher demand, the average wellhead price of natural gas in 2010 is higher in all the carbon cases than in the reference case, by a range of 2 to 30 percent. Although meeting the levels of production that may be required will be a challenge for the industry, sufficient natural gas resources are available. The potential increases in both drilling and pipeline capacity are within levels achieved historically (or about to be achieved) and are not likely to be a constraint, given appropriate incentives and planning.

Nuclear power, which produces no carbon emissions, increases with carbon reduction targets by between 8 and 20 percent in 2010, relative to the reference case (Figure ES12). Although no new nuclear plants are assumed to be built in the carbon reduction cases, extending the lifetimes of existing plants is projected to become more economical with higher carbon prices. In the more stringent carbon reduction cases, most existing nuclear plants are life-extended through 2020, in contrast to the gradual retirement of approximately half of the nuclear plants projected in the reference case.

Consumption of renewable energy, which results in no net carbon emissions, is projected to be significantly higher with carbon reduction targets (Figure ES13). Across the carbon reduction cases, renewable energy consumption increases by between 2 and 16 percent in 2010 and by between 9 and 70 percent in 2020. Most of

History

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Projections

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Sources: History: Energy Information Administration, Annual Energy Review 1997, DOE/EIA-0384(07) (Washington, DC, July 1998). Projections: Office of Integrated Analysis and Forecasting, National Energy Modeling System nuns KYBASE D080398A, FD24ABY D0803988, FD1998.00803988, FD09ABV. D0803980 FD1990.0080998D, FD03BLW.D0603988, and FD07BLW. D0803988.

this increase occurs in electricity generation, primarily with additions to wind energy systems and an increase in the use of biomass (wood, switchgrass, and refuse). In the carbon reduction cases, the share of renewable generation is as much as 14 percent in 2010, compared with 10 percent in the reference case, increasing to as high as 22 percent in 2020, compared with 9 percent in the reference case. Because additional renewable technologies become available and economical later in the forecast period, the share of renewable generation continues to increase through 2020.

Macroeconomic Impacts

In the energy market analyses, the projected carbon prices reflect the prices the United States would be willing to pay to achieve the Kyoto targets, without addressing the international trade in carbon permits. The macroeconomic analysis assumes that the carbon permit trading system would function as an auction run by the Federal Government, and that the United States would be free to purchase carbon permits in an international market at the marginal abatement cost in the United States. The U.S. State Department's assessment of the accounting of carbon-absorbing sinks and offsets from reductions in other greenhouse gases is assumed to reduce the U.S. emissions target to 3 percent below 1990 levels. The 3-percent target is then achieved through a combination of domestic actions and the purchase of permits on the international market. Thus, two flows of funds occur-domestic and international.

On the domestic side, U.S. permits are sold in a competitive auction run by the Federal Government, raising large sums of funds. In the 1990-3% case, where the revenues come entirely from the domestic market, the revenue collected in 2010 is projected to total $585 billion nominal dollars and $317 billion and $128 billion in the 1990+9% and 1990+24% cases, respectively. The collection of this money necessitates a careful consideration of appropriate fiscal policy to accompany the permit auction. Two approaches are considered: first, returning collected revenues to consumers through a personal income tax lump sum rebate and, second, lowering social security tax rates as they apply to both employers and employees. The two policies are meant only to be representative of a set of possible fiscal policies that might accompany an initial carbon mitigation policy. The second flow of funds is associated with U.S. purchases of international carbon permits and assumes that the carbon price determined in the U.S. energy market analysis is the international price at which permits would be traded. The differences between the reduction level in the 1990-3% case and those in the other cases are assumed to be met by purchases of permits in international markets. Table ES3 shows average carbon

reductions, purchases of international permits, and the carbon price for the three cases considered in the macroeconomic assessment for the 2008-2012 period.

The energy market analysis in this report does not address the international implications of achieving a particular target at the projected carbon price. For the macroeconomic assessment, the simplifying assumption is made that in each case the domestic carbon price is the same as the international permit price when different levels of trading are used to achieve the Kyoto target, implying that different international supplies of permits would be available in the alternative cases considered. This is an important simplifying assumption, and the value placed on the overseas transfer of funds to purchase international permits is subject to considerable uncertainty. However, this element must be considered a key factor in performing any assessment of the impacts on the economy, and therefore it is explicitly factored into the analysis.

As a direct consequence of the carbon price, aggregate energy prices in the U.S. economy are expected to rise. One way to measure this effect is to look at the percentage change in prices in the economy. For example, in the 1990+9% case, energy prices are 56 percent higher than the reference case projection in 2010 and remain more than 50 percent above the reference case over the rest of the forecast period. The projected energy price increases would also affect downstream prices for all goods and services in the economy as measured by the producer price index. The projected increase in producer prices relative to the reference case in 2010 is 9 percent in the 1990+9% case. Final prices for goods and services in 2009, as shown by the consumer price index (CPI) series, are about 4 percent higher in the 1990+9% case (Figure ES14). Expressed as a rate of change, CPI inflation rises by 0.7 percentage points between 2005 and 2010, as the reference case CPI rises by 3.6 percent a year and the 1990+9% case rises by 4.3 percent a year. These figures suggest the following rule of thumb for the year 2010: each 10-percent increase in aggregate prices for energy may lead to a 1.5-percent increase in producer prices and a 0.7-percent increase in consumer prices.