With the carbon prices included in the delivered cost of energy, the prices under the various carbon targets rise significantly above the reference case. Figures 4, 5, and 6 show the average delivered prices of coal, natural gas, petroleum, and electricity in the 1990+24%, the 1990+9% and the 1990-3% cases, respectively. In percentage terms, coal prices are most affected by the carbon prices, with the delivered price of coal in the 1990+9% case Increasing 346 to 368 percent above the reference case price in the 2008 to 2012 period (Figure 7). Natural gas prices in the 1990+9% case increase 64 to 74 percent above the reference case prices, and oil prices increase by 25 to 29 percent. Electricity prices, reflecting the higher costs of fossil fuels used for generation, as well as the incremental cost of additional plant investments to reduce carbon emissions by replacing coal-fired plants, increase to 47 to 50 percent above the reference case level.

Compared with the changes in coal and natural gas prices, the average increase in electricity prices is relatively low. Larger amounts of electricity would be generated from renewable and nuclear power, for which fuel costs are unaffected by carbon prices. In addition, cost-of-service electricity pricing is assumed for most of the country, so that fuel costs would be only a partial determinant of electricity prices. Nonfuel operating and

maintenance costs and capital equipment costs have a larger role in setting electricity prices under cost-ofservice pricing. In regions where electricity prices are assumed to be set competitively on the basis of marginal costs (California, New York, and New England), carbon prices would have a more significant influence on electricity prices, particularly when coal-fired plants are the marginal generators. On the other hand, those regions are less dependent on coal than are many other areas of the country.

The pattern of projected delivered energy prices matches the trend for carbon prices, especially in the more restrictive carbon reduction cases. In these cases, the carbon prices become a dominant component of the delivered cost of fossil energy; however, market forces continue to play a role in energy prices, especially for petroleum products. The reduced demand for oil under the various carbon reduction targets tends to reduce world oil prices. World oil prices are projected to fall as demand is reduced in the United States and in other developed countries that are committed to reducing emissions under the Kyoto Protocol. In 2010, world oll prices are projected to be about $20.00 per barrel in the 1990+24% case, $18.70 in the 1990+9% case, and $17.80 in the 1990-3% case, as compared with $20.80 per barrel in the reference case. With lower world oil prices, the change in delivered petroleum product prices with the various carbon prices is not as high as for natural gas prices, despite the higher carbon content of petroleum." In contrast to petroleum, coal prices are unlikely to be moderated by competitive forces. Much of the demand for coal by electricity generators is eliminated in the carbon reduction cases, particularly with the more stringent targets. Coal consumption for other uses, including Industrial steam coal and metallurgical coal, is also reduced but on a smaller percentage basis than for electricity generation. Although coal produced for export is also lower in the carbon reduction cases due to lower demand in the Annex I nations, the change is relatively small in comparison with the reductions in production for domestic use. Coal exports, projected at 113 million short tons in 2010 in the reference case, are 89 million short tons in 2010 in the 1990+24% and 1990+9% cases and 76 million short tons in the 1990-3% case. Because the industrial and export coal markets are served primarily by eastern coal producers, eastern production declines less in the carbon reduction cases than does production from western mines, which primarily serve the electricity generation market. Thus, while regional minemouth prices generally decline in the carbon reduction cases relative to the reference case, the national

average minemouth price increases because of the shift in share to the higher-priced coal mined in the East. Western coal production is also discouraged by higher rail transportation costs and reduced incentive for the development of new mines.

Natural gas demand is higher in the carbon reduction cases relative to the reference case primarily because of higher use in the electricity generation sector, offsetting reductions in the end-use demand sectors. As a result, the average wellhead price of natural gas, excluding any carbon price, is higher relative to the reference case in all the carbon reduction cases. The higher wellhead prices are an indication that greater reliance on natural gas under the Kyoto Protocol could benefit some domestic energy producers.

Impacts by Fuel

To meet the required carbon emissions reductions, the mix of energy fuels consumed would change dramatically from that projected in the reference case (Figure 8). Relative price changes cause a reduction in coal and petroleum use, coupled with greater reliance on natural gas, renewable energy, and nuclear power (see Figures 9 through 13). Coal, with its high carbon content and relatively low end-use efficiency, is severely curtailed in the more stringent cases, replaced by more use of natural gas, renewable fuels, and nuclear power in electricity generation. Coal's share of generation is reduced from 52 percent in 1996 to 42 percent, 26 percent, and 15 percent in 2010 in the 1990+24%. 1990+9%, and 1990-3% cases. By 2020, coal is nearly

Natural gas consumption is higher than in the reference case, as greater use of natural gas in the generation sector outweighs the reductions in the residential, commercial, and industrial sectors (Figure 10). In those cases with less stringent carbon reduction targets, and correspondingly lower carbon prices, generators find it more economical to substitute natural gas for coal than

1970 1980 2000 Sources: History: Energy Information Administration, Annual Energy Review 1997, DOE/EIA-0384(87) (Washington, DC, July 1998). Projections: Office of Integrated Analysis and Forecasting. National Energy Modeling System runs KYBASE D080398A, FO24ABV.D0803988, FD1988.D0803968, FOOBABV D0803988. FD1990 D0803988, FD038LW.D0803968, and FD07BLW D0803988.

to invest in renewable technologies. In the more. stringent cases, with high carbon prices, increasing use of renewable fuels eventually leads to reductions in the demand for natural gas by generators. This pattern is reflected in Figure 10, as natural gas consumption in the more stringent cases falls below that in the less stringent cases toward the end of the forecast period. In the earlier portion of the forecast, the rapid growth of natural gas use exerts pressure on suppliers and distributors to increase production and pipeline capacity. The ability of the gas industry to respond to higher demand growth is discussed in Chapter 5.

Petroleum, used primarily for transportation, is lower in all the carbon reduction cases (Figure 11). Motor gasoline demand, accounting for 43 percent of total

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 runs KYBASE.0060398A, FD24ABV.D0803988, FD1998 D0803988, FOOBABY 00603988, FD1900.D0803988, F0038LW.D0800988, and FD07BLW D0803988

petroleum consumption in 1996, is lower by 15 percent in 2010 in the 1990-3% case, by 8 percent in the 1990+9% case, and by 3 percent in the 1990+24% case than in the reference case. Consumers respond to higher gasoline prices by reducing miles driven and purchasing more efficient vehicles.

Nuclear power. which produces no carbon emissions, becomes more attractive under carbon reduction targets. While no new nuclear plants are allowed 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 reference case, approximately half of the nuclear capacity now in operation is expected to be retired by 2020, reducing U.S. nuclear capacity by 53 gigawatts between 1996 and 2020. Much of that capacity would be life-extended in the carbon reduction cases (15 gigawatts, 26 gigawatts, and 38 gigawatts in the 1990+24%, 1990+9%, and 1990-3% cases, respectively). As a result, the use of nuclear power for electricity generation is projected to be higher in all three cases than in the reference case (Figure 12).

Consumption of renewable energy, which results in no net carbon emissions, is projected to be higher with carbon reduction targets (Figure 13). Most of the increase is in electricity generation, primarily with additions to wind energy systems and an increase in the use of biomass (wood, switchgrass, and refuse). The share of generation supplied by renewables increases from 9 percent in 2020 in the reference case to 11 percent, 15 percent, and 20 percent in the 1990+24%, 1990+9%, and 1990-3% cases, respectively. Most of the increase in renewable generation occurs after the 2008-2012 compliance period, reflecting a relatively prolonged

1990 1995 2000 2005 2010 2015 Sources: History: Energy Information Administration, Annual Energy Review 1997, DOE/EIA-0384(97) (Washington, DC, July 1998). Projections: Office of Integrated Analysis and Forecasting, National Energy Modeling System rune KYBASE.D080388A, FD24ABV.00803988, FO1998.00803088, FD0BABY 00803988, FD1990 D0803988 FOOSBLW.D0803988, and FD07BLW. D0803988.

period of market penetration as renewable technology costs and performance improve over time.

Electricity generation, which accounted for 35 percent of energy-related carbon emissions in 1996, is also significantly lower across all the cases (Figure 14). In the 1990-3% case, electricity sales in 2010 are 15 percent below the reference case projection, with percentage reductions of about 13 percent occurring in the residential and industrial sectors and about 19 percent in the commercial sector. The relative changes in electricity