0EPA Analysis of the American Power ActEPA Analysis of theAmerican Power Actin the 111thCongress6/14/10U.S. Environmental Protection AgencyOffice of Atmospheric Programs*This version was updated on 6/30/10 to present a corrected version of ADAGE “Scenario 5 –No International Offsets”that fixes aproblem with the model code that overly limited nuclear power inthis scenario. This version also corrects a reporting error inADAGE reference case average annual household energy expenditures.*1EPA Analysis of the American Power ActMajor Findings•The American Power Act (APA) of 2010:–Establishes a multi-sector cap-and-trade program with delayed phase-in for the industrial sector, and with an alternative complianceprogram for the transportation fuels and refined petroleum products sectors.–Creates other incentives and standards for increasing energy efficiency and low-carbon energy development and consumption.•This analysis models the multi-sector cap-and-trade program, the alternative compliance programfor the transportation fuels and refined petroleum products sectors, the competitiveness provisions,and many of the energy efficiency provisions of the APA.–Sensitivity analysis conducted to examine the impacts of:•Technology development•Pace of international action•Availability of international and domestic offsets–Several provisions outside of the multi-sector cap-and-trade program are not modeled in this analysis (e.g. lighting standards, newregulation for offshore oil and gas extraction, powering vehicles with natural gas provisions, and GHG tailpipe standards are notmodeled in this analysis; and, the special incentives for nuclear power are not modeled in the economy-wide modeling, but areanalyzed in the detailed electricity sector modeling).–See Appendix 1 for a detailed description of the bill and of theprovisions modeled in this analysis.•While there are important differences between theAmerican PowerAct (APA) and H.R. 2454(discussed in the following section), the modeled impacts of theAPAare very similar to those ofH.R. 2454.–Estimated allowance prices under the two bills differ on the order of 0-1%.–The percentage reductions represented by the emissions caps are identical beginning in 2013.–Both bills allow for 2 billion tons of offsets in each year.–Both bills contain provisions to prevent emissionsleakage and to address competitiveness concerns.–The Cost Containment Reserve provisions of the APA provide a greater level of price certainty than do provisions in H.R. 2454’sStrategic Reserve Allowance Program by, among other things, allocating a greater share of allowances to the reserve. This higherlevel of price certainty comes at a slightly higher cost to the APA over H.R. 2454.–The APA’sapproach to cover GHGs from the transportation fuels and refined products sectors does not impact modeled allowanceprices.2EPA Analysis of the American Power ActMajor Findings•Under reference assumptionsthe probability of observed temperature changes in 2100,relative to preindustrial levels, remaining below 2°C (or 3.6°F) is roughly 1%, and the probability of observedtemperature change exceeding 4°C (or 7.2°F)is approximately 32%.•Under the combined APAand the G8 internationalagreement assumptions, the probability of observedtemperature changes in 2100remaining below 2°C (or3.6°F) increases to 75%, and the probability ofobserved temperature changes exceeding 4°C is negligible given climate sensitivity assumptions.–Under a climate sensitivity of 3°C, the observed temperature increase in 2100 relative to pre-industrial levels is projected tobe 1.6oC (2.9oF)under the APA and the G8 agreement, compared to the no-policy, no-agreement result of a 3.5oC (6.3oF) rise in observed average globalmean temperature.–CO2e concentrations are projected to rise to 931 ppmby 2100 without policy; however, with the APA and the recent G8agreement, CO2econcentrations are projected to be 457 ppmin 2100.–Even if developing countries delay taking action until 2050, andthensimply hold emissions constant at 2050 levels, then the probability ofobserved temperature changes in 2100 remaining below 2°C (or 3.6°F) increases to approximately 11%, and the probability of observedtemperature changes exceeding 4°C (or 7.2°F) falls to roughly 15%.•Allowance prices under both the APAand under H.R. 2454are projected to be $16to $17 per metric tonCO2equivalent (tCO2e) in 2013 and $23 to $24/ tCO2e in 2020 in the core APA scenario (scenario 2).*–Across all scenarios modeled without constraints on international offsets, the expected allowance price ranges from $12 to $22/tCO2e in 2013and from $17 to $32/tCO2e in 2020.–While the APA allows for up to one billion tons of internationaloffsets each year, wehave included scenarios that limit the availability ofinternational offsets in order to demonstrate the impact these provisions of the bill have on costs. Across all scenarios modeled includingthose that prohibit the use of international offsets, the expected allowance price ranges from $12 to $41/tCO2e in 2013 and from $13 to $59/tCO2e in 2020. Additional sensitivities show that if the availability of international offsets to the U.S. is simply delayed 10 years, thenallowance prices increase by only one percent.*All prices in this analysis are presented in 2005 dollars. Therange of allowance prices represents the estimates of the twomodels (ADAGE and IGEM)used in this analysis.3EPA Analysis of the American Power ActMajor Findings•The APA still has a relatively modest impacton U.S. consumers, assuming the bulk ofrevenues from the program are returned to households lump-sum.–Average household consumption isreduced, relative to the no-policycase, by 0.0 –0.1% in 2015, bybetween 0.0 –0.2% in 2020,by 0.2 –0.5% in 2030, andby 0.9 –1.1% in 2050.–Despite the expected decrease in consumption over theno-policy case, average householdconsumption is stillexpected to rise overthe period of analysis: the average consumption growthrate from 2010-2030 underthe core scenario is expected tobe between 2.5% and 2.8%.–The net present value of the annual household consumption lossaverages $79 to $146 for eachyear.*–These costs include the effects ofhigher energy prices, price changes for other goods and services,impacts on wages and returns to capital. Costestimates also reflect the value of some of theemissions allowances returned to households, which offsets much of theAPA’seffect on householdconsumption.–If auction revenues that are modeled as being returned to households lumpsum were insteaddirected to particular funds,the expected reduction in household annual consumption and GDPwould likely be greater. However,such revenues could beused to lower existing distortionary taxesand thus reduce policy costs.•The APA cost estimates do notaccount for the benefits of avoiding the effects of climatechange (or, stated from a different perspective,the no-policy scenariodoes not includeestimates of the costs ofclimate change induced damages).* Annual net present value cost per household (discounted at 5%)averaged over 2010-2050.4EPA Analysis of the American Power ActMajor Findings•Offsets have a strong impact on cost containment.–The annual limit on domestic offsets is never reached in the core scenario. Domestic offset usage averages approximately 0.6 billion tCO2ein each year. This represents approximately 19 percent ofcumulative GHG abatement form all sources under the bill.–The limits on the usage of international offsets (accounting forthe extra international offsets allowed when the domestic limitis not met) arenot reached. International offset usage averages between 0.6 and almost 1 billion tCO2e each year in the core scenario. This representsfrom 18 to 29 percent of cumulative GHG abatement from all sources under the bill.–While the APA allows for up to one billion tons of internationaloffsets each year, wehave included scenarios that limit the availability ofinternational offsets in order to demonstrate the impact these provisions of the bill have on costs. If international offsets were not allowed, theallowance price would increase 34 to 107 percent relative to thecore policy scenario, and household consumption losses would increase 31to 114 percent, the large range due to the differing internationaloffset core scenario usage projections of EPA’s two models.–The cost containment reserve price is met in ADAGE scenariosthat limit the usage of international offsets, and 4 billion tCO2e of allowancesare released from the reserve, which somewhat limits the increasein allowance prices seen in these scenarios. However, becauseinternational offsets are not allowed in these scenarios, it isnot possible to refill the costcontainment reserve, and the allowance price is ableto exceed the reserve price.•While the competitivenessprovisions of the APA are modeled inthis analysis, scenarios isolating theimpacts of those provisions are not included in this report; however, competitiveness and emissionsleakage are topics explicitly addressed in the December2, 2009 interagency report on H.R. 2454, “TheEffects of H.R. 2454 onInternational Competitiveness and Emission Leakagein Energy-Intensive TradeExposed Industries.”–The interagency report is available at www.epa.gov/climatechange/economics/economicanalyses.html.–Consistent with prior EPA modeling of this issue in its June23,2009 analysis of H.R. 2454, the economic modeling in the interagency reportshows that the allowance allocations in H.R. 2454 can essentially eliminate any adverse effect that a cap-and-trade program would otherwisehave on energy-intensive trade-exposed industries’international competitiveness, and can thereby prevent emissions leakage thatmightotherwise arise if such a program were to reduce the competitiveness of U.S. industry.–The modeling also concludes that, even inthe absence of the allowance allocations inH.R. 2454, on average, the bill’s impacton thecompetitiveness of energy-intensive trade-exposed industries would be relatively limited. However, some industries would experiencegreater impacts than others.•While this analysis contains a set of scenarios that cover someof the important uncertainties whenmodeling the economic impacts of acomprehensive climate policy,other uncertaintiesremain that couldsignificantly affect the results.*Scenario 5 ADAGE results updated 6/30/105EPA Analysis of the American Power ActThe American Power ActComparison to H.R. 24546EPA Analysis of the American Power Act•Compared to EPA’s January 29, 2010supplemental analysis ofH.R. 2454, this analysis of the AmericanPower Act includes updated assumptions about the U.S.reference case and international referenceemissions.•Updated U.S. Reference Scenario:•Previous EPA analyses of H.R. 2454used a reference case based on theMarch release of the AEO 2009.•The reference scenario used for thisanalysis is based on the AEO 2010.•Updated International Reference Emissions Projections &Updated International Energy Related CO2Marginal Abatement Cost Curves:•International reference emissionsand international energy related CO2MAC curves in previous EPA analyses ofH.R. 2454 were based on the MiniCAMClimate Change Science Program(CCSP) Synthesis and AssessmentProduct (SAP) 2.1areference case.•Clarke, L., J. Edmonds, H. Jacoby, H. Pitcher, J. Reilly, and R.Richels. 2007. CCSP Synthesis and AssessmentProduct 2.1, Part A: Scenariosof Greenhouse Gas Emissions andAtmospheric Concentrations. U.S.Government Printing Office, Washington DC.•The reference scenario and the international energy related CO2MAC curves used for this analysis are based onthe GCAM (formerly MiniCAM) EnergyModeling Forum 22reference case.•Calvin KV, JA Edmonds, B Bond-Lamberty, LE Clarke, SH Kim, GP Kyle, SJ Smith, AM Thomson, and MAWise. 2009. "2.6: Limiting Climate Change to 450 ppmCO2 Equivalent in the 21st Century," EnergyEconomics 31(S2): S107-S120.Changes Since EPA January 29, 2010 Analysis of H.R. 24547EPA Analysis of the American Power Act•Because of the changes discussed in the previous slide, the results in this analysis are not directly comparable to EPA’s previousanalyses of H.R. 2454. In order to enable a comparison between the APA and H.R. 2454, EPA has reanalyzed H.R. 2454 in scenario10 of this analysis with a set of assumptions consistent with those used for the core APA policy case in scenario 2. The results ofscenario 10 – H.R. 2454are presented throughout this analysis, and in this section we highlight some of the important differences inmodel results across analyses of the two bills.•While there are important differences between the two bills thatare summarized and explained in this section, there are also manysimilarities. Overall, the estimated impacts of the APA are verysimilar to those of H.R. 2454. For example, estimated allowanceprices under the two bills differ on the order of zero to one percent.•There are a few differences between the APA and H.R. 2454 that will have a slight effect on allowance prices.•The APA allows landfill, natural gas and coal mine CH4as potential offset sources, whereas H.R. 2454 instead subjected them to performancestandards. This will lower allowance prices slightlyand resultin an increase in total GHG emissions.•The cost containment reserve allowance provisions in the APA arechanged to provide greater price certainty than the strategic reserveallowance provisions in H.R. 2454. The APA also allocates moreallowances to the cost containment reserve than H.R. 2454 allocates to thestrategic reserve. This change will result in slightly higherexpected allowance prices, but greater near-term price certainty,in the APAcompared to H.R. 2454.•Instead of including transportation emissions in the allowance market, the allowances needed for the transportation sector areheld back fromauction each quarter and sold directly to covered entities at the auction-clearing price.This will not impact modeled allowance prices or GHGemissions reductions.•The APA begins in 2013 instead of2012, and phases-in coverage of industrial GHG emissions in 2016 instead of 2014.This will increaseemissions slightly, but will have onlya negligible impact on allowance prices.•The energy efficiency provisions in APA (including those specified for inclusion in this analysis from S. 1462) are less substantial than thoseincluded in H.R. 2454. This change will resultin slightly higher allowance prices in the APA compared to H.R. 2454, but the effect on overallcosts is less certain.•While the overall limits on offsets are similar in APA and H.R.2454, the one billion ton ultimatelimit on international offsets in APA is smallerthan the 1.5 billion ton ultimate limit in H.R. 2454. While this does not impact scenarios that use less than one billion tonsof internationaloffsets annually, it does increase allowance prices in scenariosthat limit other GHG abatement options and thus drive greater internationaloffset usage.•The percentage reduction in covered GHG emissions represented bythe caps are identical starting in 2013.•Coverage is the same after 2016.•Both bills have output-based rebate provisions designed to reduce emissions leakage andaddresscompetitiveness concerns for energyintensive and trade exposed industries, these provisions are modeled in all scenarios of this analysis.APA Comparison to H.R. 2454Overview8EPA Analysis of the American Power ActAPA Comparison to H.R. 2454Cost Containment Reserve•Both H.R. 2454 and the American Power Act set aside a portion ofallowances to establish a reserve pool of allowances that are made available atauction each compliance period, and would be purchased if allowance prices rise high enough. Auction revenues from selling these reserveallowances can then be used to purchase offsets that are used torefill the reserve. These provisions are designed to contain price volatility,contain costs, or both, depending on the specifics of the provisions.•One difference between the strategic reserve in H.R. 2454 and the cost containment reserve in the APA is how the reserve priceis set. H.R. 2454sets the reserve price (price ceiling) at $28 (in constant 2009 dollars) in 2012, and the price rises at a real rate of 5 percent through 2014. Startingin 2015, the reserve price is set at 60 percent above the 36-monthrolling average of that year’s emissions allowance vintage.This way of settingthe reserve price allows the reserve to be triggered when price volatility leads to suddenly high prices; however, sustained non-volatile highallowance prices would not trigger the reserve. The strategic reserve in H.R. 2454 appears primarily designed to address pricevolatility and notcost containment in general.•In contrast, the APA sets the reserve price(price ceiling) at $25 (in constant 2009 dollars) in 2013 rising at a real rate of5percent. This changeresults in a predetermined reserve price for every year, which can be met either by high allowance prices caused by price volatility, or by sustainedhigh allowance prices. The cost containment reserve in the APA is designed to address both price volatility and cost containment in general. Therevenues from auctioning the reserve allowances are used to purchase either international REDD offsets or domestic offsets to refill the reserve. Ifoffsets are not available for purchase, then the reserve cannot be refilled, and it is possible for the reserve to completely empty, and for allowanceprices to exceed the reserve price.•Both bills contain an auction price floor, which in the APA is$12 (in constant 2009 dollars) in 2013 rising at 3% annually.•Another key difference between the strategic reserve in H.R. 2454 andthe cost containment reserve in the APA is that a greaternumber ofallowances are taken out of the cap and placed in the reserve under the APA.Share of Total AllowancesHR. 2454 Strategic ReserveAPA Cost Containment Reserve2012 –20191%2013 –20211.5%2020 –20292%2022 –20292.5%2030 –20503%2030 –20505.0%•Cumulatively over 2012 –2050, H.R. 2454 places 2.8 billion allowances in the strategic reserve, representing 2.1% of all allowances, while from2013 –2050 the APA places 4.0 billion allowances in the cost containment reserve representing3.1% of all allowances.•If allowance prices remain low and the minimum prices for releasing allowances from the reserves are not met, then the existence of the reservehas the effect of tightening the cap and raising allowance prices.•In the APA, removing the reserve would decrease allowance pricesby 0.7% in all years, and also decrease the usage of international offsets by18% (compared to IGEM scenario 2 –APA in this analysis).•In the H.R. 2454, removing the reserve would decrease allowance prices by 0.5% in all years, and also decrease the usage of internationaloffsets by 11% (compared to IGEM scenario 10 –H.R. 2454).9EPA Analysis of the American Power ActAPA Comparison to H.R. 2454Coal Mine, Landfill & Natural Gas CH4•An additional difference between the two bills is that H.R. 2454requires the establishment of performance standards foruncapped stationary sources including: any individual sources with uncapped emissions greater than 10,000 tons CO2e; and anysource category responsible for at least 20% of uncapped stationary GHG emissions. The bill requires that source categories tobe identified by EPA include those responsible for at least 10% of uncapped methane emissions. Performance standards for newsources would then be set under the provisions of section 111 ofthe Clean Air Act. In general, performance standards areemissions limits set based on an analysis of best demonstrated technologies but do not require that particular technologies beused. Under section 111(d), states are then directed to set performance standards for existing sources based on the new sourceperformance standards and may take into account other criteria such as a facility’s remaining useful life. Sources that wouldpotentially be covered by this provision likely includes, at a minimum: landfills; coal mines; and natural gas systems. Whileit ispossible that reductions occurring prior to adoption of standardsand reductions beyond those nominally required by standardswould be eligible for offsets, modeling of these sources assumesreductions stemming from performance standards maximize thepotential reductions from these sources and eliminates their eligibility to provide offset credits.•In the American Power Act, these performance standard provisionsare no longer mandated for landfills, coal mines, and naturalgas systems. Reductions from these sources are instead eligible to provide offset credits.•The bill does give the EPA Administrator discretion to set performance standards for uncapped sources after 2020, which could affect theavailability of offsets from these sectors; however, previous EPA modeling of climate legislation has generally assumed that suchdiscretionary options are not exercised.•An extension of EPA’s June 23, 2009 analysis of H.R. 2454 has shown that allowing these sources as offset projects under H.R.2454 instead of covering them under performance standards would increase 2012 –2050 cumulative U.S. GHG emissions by 6GtCO2e; increase 2012 –2050 cumulative domestic offsets usage by 46% (6 GtCO2e); decrease 2012 –2050 cumulativeinternational offset usage by 12% (5 GtCO2e); and decrease allowance prices by 2% in all years from the allowance price in thecore scenario of EPA’s H.R. 2454 analysis ($13/tCO2e 2015; $16/tCO2e in 2020) (Fawcett, 2009). The overall impact on themodeled cost of the policy would likely be small.•However, there are other general equilibrium consequences from the way that these emission sources are controlled that are notincludedin the reduced form modeling used to generate these results. Including these sources in an offsets program allows the market todeterminethe appropriate level of abatement from these sources so that themarginal cost of abatement is equal to the offset price. A performancestandard dictates what level of abatement particular sources must achieve. If costs end up being lower than expected, then there will beless abatement activity than under an offsets program, although sources may be able to over-comply and generate additional offsets; ifcosts end up being higher than expected, there will be more abatement activity than under an offsets program, and the marginalcost ofabatement for these sources will be higher than for sources covered by the cap.10EPA Analysis of the American Power ActAPA Comparison to H.R. 2454Transportation Fuels and Refined Petroleum Products•Under H.R. 2454, covered entities with compliance obligations for GHG emissions from transportation fuels and refined petroleumproducts must obtain allowances to meet their compliance obligations either at auction or in secondary markets.•Under APA, instead of purchasing allowances at auction or in thesecondary market, covered entities that supply transportation fuelsand refined petroleum products must purchase allowances directlyfrom EPA.•Ahead of each quarter’s auction, EPA must set aside from the allowances to be auctioned the number of allowances expected tobe needed to cover emissions from combustion of refined productsfor that quarter.•If the number of allowances to be auctioned is less than the number of allowances that must be set aside to cover emissions from thecombustion of refined products, then EPA may borrow allowances from the next year, or may require consignment of allowances allocatedfor other purposes. This consignment of allowances must be large enough to fulfill the set aside, and to provide a sufficientnumber ofallowances for auction to ensure adequate market liquidity, pricediscovery, and allowance availability. Revenues from the sale ofconsigned allowances are returned to the original allowance holder. In this analysis, EPA has not estimated the number of freely allocatedallowances that must be consigned, and the models assume that any necessary consignment occurs.•Refined product providers purchase set-aside allowances 30 days after the end of each quarter at the current year vintageauction-clearing price from the previous quarter.•The number of allowances refined product providers must purchaseis based on the amount of fuel sold multiplied by EPAdetermined emissions factors for the type of fuel sold.•The system will be officially reassessed no later than January 1, 2033 and may subsequently be revised if a modification isappropriate.•This analysis assumes that the system phases out in 2033. If the system is not phased out or modified, it is possible that thenumber ofallowances required to be setaside from the auction will eventually exceed the total number of allowances in the cap.•Allowing the direct purchase of allowances from the EPA forGHG emissions from transportation fuels and refined petroleum productsunder the APA may result in less price volatility for covered entities in these sectors compared to H.R. 2454.•Because the models used in this analysis do not represent price volatility, this difference does not impact model outcomesincluding allowance price or the sources of GHG abatement.•For other covered entities that must obtain allowances at auction or in the secondary market, the reduction in the size of themarket for allowances may result in greater price volatility.Additionally, the alternative compliance mechanism will result intheseother entities purchasing a greater amount of offsets than in H.R. 2454, as entities that are under the alternative compliancemechanism are not allowed to obtain offsets to meet their compliance obligations.11EPA Analysis of the American Power ActContents•Major Findings•APA Comparison to H.R. 2454•Contents•Bill Summary & Analytical Scenarios•Global Results: CO2e Concentrations andTemperature Changes•Economy-Wide Impacts: GHGEmissions & Economic Costs•Energy Sector Modeling Resultsfrom Economy-Wide Modeling•Detailed Near-Term Electricity Sector Modeling Results•Offsets Usage & Limits•Global Results: Market for International GHG Abatement•Literature Review & NearTerm Incidence Analysis•Appendix 1: Bill Summary, Modeling Approach and Limitations•Appendix 2: Additional Qualitative Considerations•Appendix 3: Additional Information on Offsets and the International GHG Abatement Market•Appendix 4: Modeling ofEnergy Efficiency Provisions•Appendix 5: Additional Information onEconomy Wide Modeling (ADAGE & IGEM)•Appendix 6: Additional Information on Near Term Electricity Sector Modeling (IPM)•Appendix 7: Model Descriptions12EPA Analysis of the American Power ActBill Summary & Analytical Scenarios13EPA Analysis of the American Power Act•Title I of the APA outlines a direction for energy policy that includes the expansion ofnuclear power generation, newregulation for offshore oil andgas extraction, developmentand deployment of carbon capture and sequestration (CCS) technology, promotion ofrenewable energy and energy efficiency, development of aclean transportation network,and further support for clean energy research.•Title II of the APA outlines the GHG reduction mechanism and emissions targets.–Cap target is identical to H.R. 2454 (17% reduction from 2005 levels by 2020, 83% by 2050) but begins a year later in 2013.–The set of GHGs is defined to include C02, methane, nitrous oxide, sulfur hexafluoride, hydrofluorocarbons emitted as abyproduct, perfluorocarbons, and nitrogen trifluoride.–Cap and trade program regulates entities to hold allowances equal to their annual emissions.–Covered entity may bank allowances without limit, borrow from the following year’s allowance vintage interest-free, and mayborrow allowances from vintages up to five years in the future with interest to comply with a maximum of 15% of its complianceobligation.–Establishment of a cost containment reserve of 4 billion allowances to be open for sale when the allowance market pricereaches $25 (constant 2009 dollars, adjusted annually for inflation plus 5%). Reserve is refilled with allowances fromdeveloping country offsets from the Reducing Emissions from Deforestation and Degradation (REDD) category when available.–Establishment of a compliance program for the transportation fuels and petroleum products sectors in which covered entitiesare obligated to buy allowances at the most recent allowance auction clearing price to cover their emissions.–Establishment of an offset credit program, defining crediting rules for both domestic and international projects.–Details the yearly allocation of emissions allowances to coveredentities, categorized in seven categories: consumer protection,job protection and growth, clean energy development and deployment, adaptation, GHG reduction early action, transportationinfrastructure and efficiency, and deficit reduction (see appendix 1 for further details).–Sets the allowance auction reserve price of $12 (2009 constant dollars, adjusted yearly for inflation +3%).–Establishes a separate reduction program for hydrofluorocarbons with a target of 15% of the 2005 emissions level by 2032.–Supports further research on and continuation of programs confronting black carbon and international methane.–In general, precludes the Environmental Protection Agency fromusing the existing Clean Air Act to issue GHG standards forentities covered under this bill.–Establishes strict rules governing the carbon market, giving theCommodity Futures Trading Commission regulatory authority.The American Power ActBill Summary14EPA Analysis of the American Power Act•Title III of the APA focuses on consumer protection.–Allowances are distributed to electricity and natural gas local distribution companies (LDCs) to offset increases inconsumer costs, while allowances are distributed to states to offset increased costs to consumers of home heating oiland propane.–Low income households will benefit from the Working Families Refundable Relief Programand the Energy RefundProgram. The Universal Refund isestablished as arebate to allU.S. citizens that will begin in 2026.•Title IV of the APA focuses on jobprotection and U.S. economic growth.–Covered entities identified as energy-intensive trade-exposed (EITE) will initially receive allowance credits to allowthem to adjust toemissions requirements.–Beginning in 2020, an international reserve allowance program may be established for covered EITE sectors, lessthan70% of whose global production originates in countries that havesigned onto an international emissionsreduction agreement to which the U.S.is a party. Importers of EITE products will be obligated to purchaseallowances to cover GHG emissions arising from production.–Education and grant support for clean energy curriculum and career development.–Substantial supportfor the development of plug-in drive and natural gas (heavy-duty) vehicles.–Requires the Environmental Protection Agency toset and enforce mobilesource GHG standards.•Title V of the APA outlines proposed international climate change activities.–Establishes program to build capacity in developing countries toreduce emissions from deforestation.–Requires annual interagencyreport on the climate changeand energy policies of the top five largest GHG emittingnon-OECD countries.•Title VI of the APA provides a plan for domestic adaptation to global warming.•Title VII requires the APA to be deficit-neutral.*See Appendix 1 for further details of the American Power ActThe American Power ActBill Summary15EPA Analysis of the American Power ActEPA analyzed 10 different scenarios in this report. A full description of all scenarios isavailable in Appendix 1. The assumptions about other domestic and international policiesthat affect the results ofthis analysis do not necessarilyreflect EPA’s views on likely futureactions.Scenario 1 - EPA 2010 Reference–This reference scenario is benchmarked to theAEO 2010 forecast and includes both the EnergyIndependence and Securtity Act (EISA) and theAmerican Recover and Reinvestemtn Act (ARRA).•Does not include any additional domestic or international climate policies or measures to reduce international GHG emissions•For international projections, uses the EMF-22 GCAM reference.Scenario 2 – American Power Act (core policy scenario)•This core policy scenario models the cap-and-trade program established in Title II of the American Power Act.•Provisions explicitly modeled in this scenario:•CCS bonus allowances•EE provisions (allowance allocations and building energy efficiency codes*)•Output-based rebates•The cost containment reserve•Allocations to electricity local distribution companies (LDCs)(used to lower electricity prices)•Widespread international actions bydeveloped and developing countriesover the modeled time period.International policy assumptions areconsistent with the agreement amongG8 leaders at the July 9, 2009Major Economies Forum “to reduce theiremissions 80% or more by2050 as its share of a global goal to loweremissions 50% by 2050.”•Group 1 countries (Kyoto group less Russia)follow an allowance path that is fallinglinearly from the simulated Kyoto emissionslevels in 2012 to 83% below 2005 in 2050.•Group 2 countries (rest of world) adopt a policy beginning in 2025 that caps emissions at 2015 levels, and linearly reducesemissions to 26% below 2005 levels by 2050.•The combination of U.S., Group 1, and Group 2 actions caps 2050 emissions at 50% below 2005 levels.* Building codes provision from S. 1462, Sec. 241, included perSenate specifications to EPAAnalytical ScenariosReference and Core Policy Scenarios16EPA Analysis of the American Power ActA full description of all scenarios is available in Appendix 1.International action sensitivities•Scenario 3 – Early developing country action•Scenario 4 – No developing country actionTechnology and offset sensitivities requested by Senator Voinovich•Scenario 5 – V – No Int’l Offsets*•Scenario 6 – V – Reference Nuclear & Biomass / Delayed CCS*•Scenario 7 – V – Reference Nuclear & Biomass / Delayed CCS – No Int’l Offsets*•Scenario 8 – V – IPM electricity sector reductions imposed on ADAGE*•Scenario 9 – No CCS Bonus AllowancesH.R. 2454 Comparison Scenario•Scenario 10 – H.R. 2454* “V” signifies scenarios requested by Senator Voinovich. See Appendix 6 for a discussion of the current state of nuclear,bioelectricity, and CCS deployment.Analytical ScenariosSensitivity Scenarios17EPA Analysis of the American Power ActKey Uncertainties•There are many uncertainties that affect theeconomic impacts ofthe APA.•This analysis contains a set ofscenarios that cover some oftheimportant uncertainties.*–The degree to which CCS andnew nuclear power are technically and politically feasible.–The availability of international offset projects.–The extent and stringency of international actions toreduce GHGemissions bydeveloped and developingcountries.•Some additional uncertainties covered in thisanalysis outside of themain scenarios include:–The impact of the Cost Containment Reserve on overall costs.–The distributional consequences of the APA.–The availability of domestic offsets.–The impact of post-2050 emissions caps.–The availability of REDD offsets.–International reference case GHG emissions.•Additional uncertainties include but are not limited to:–Long-run cost of achievingsubstantial GHG abatement.•Note that because of banking, uncertainty in long run abatementcosts can have a significant impact on near term prices.–The pace of domestic economic and emissionsgrowth in the absence of climate policy.–The impact of output based rebates to energy intensive and tradeexposed industries, on GHG emissionsleakage, trade patterns,and allowance prices.–Possible interactions among modeled and non-modeled policies.–The impact of subsidizing electricity prices versus lump sum transfers to consumers from local electricdistribution companies.–The responsiveness of household labor supply to changes in wagesand prices (labor supply elasticity).–The impacts of technology learning and spillover effects.–Other parameter uncertainty, particularly substitution elasticities (e.g., the abilities of firms to substitute capital,labor, and materials for energy inputs).* Note that because of time limitations this analysis does not contain an extensive set of scenarios that would cover some of the additional uncertainties described above.18EPA Analysis of the American Power ActGlobal Results:CO2e Concentrations and TemperatureChanges19EPA Analysis of the American Power ActOverview of Benefits•Scientists project that the world could face a significant increase in globalaverage surface temperature in the absence of effective policiesto reduceGHG concentrations.–CO2concentrations may double from pre-industrial levels as early as 2050•This doubling of concentrations is associated with alikelyglobal equilibriumtemperature increase of 2 to 4.5°C (3.6to 8.1°F), with a best estimate of 3°C(5.4°F) (IPCC 2007).•Climate change associated with these temperatures will lead to arange ofpotentially negative impacts, including–increased heat-related mortality rates,–reduced agricultural yields inmany parts of the world,–rising sea levels that could inundate low-lying coastal areas,–increased power of the strongest hurricanes and typhoons,–increased risk of catastrophic climactic tipping points, such asmelting permafrostand collapse of the Greenland and West Antarctic ice sheets, and–increased frequency and intensity of otherextreme weather events such as heatwaves, heavy precipitation, floods, and droughts.•Economic effects of these impacts arelikely to be significant and largelynegative, and to vary substantially by region; however, the economic benefitsof GHG mitigation are not estimated for this analysis.20EPA Analysis of the American Power ActInternational Action Assumptions•At the July 9, 2009 Major Economies Forum, “the G8 leadersagreed to reduce their emissions80% or more by2050 as itsshare of a global goal to lower emissions 50% by 2050.”Theassumptions about internationalaction used in this analysisare consistent withthe G8 agreement:•Developed countries (Kyoto group less Russia) follow anallowance path that is falling linearly from the simulated Kyotoemissions levels in 2012 to 83% below 2005 in 2050.•Developing countries (rest of world) adopt a policy beginning in2025 that caps emissions at 2015 levels, and linearly reducesemissions to 26% below 2005 levels by 2050.•The combination of U.S., developed, and developing countryactions cap 2050 emissions at 50% below 2005 levels.•After 2050, caps for all regions are assumed to be constant at2050 levels.•For the scenario with no developing country action before2050, developing countries adopt no policies before 2050,and after 2050 GHG emissions are held constant at 2050levels. The U.S. and otherdeveloped countries adopt thesame caps in this scenario as in the G8 international actionscenario.•In the global GHG concentration and temperature analysis,we have also analyzed twoscenarios that examine theincremental impact of U.S. policy.•In the U.S. only scenario, the U.S. adopts the GHG emissionstargets in the APA, while all other countries follow a referenceGHG emissions path.•In the no U.S. scenario, the U.S. follows a reference GHGemissions path, and all other regions follow the G8 –international action GHG emissions path.010203040506070801990 2000 2010 2020 2030 2040 2050

GtCO 2 eWorld Reference EmissionsWorld Cap - G8 (Scn. 2)World Cap - Developing Countries After 2050 (Scn. 4).Developing Countries Reference EmissionsDeveloping Countries Cap - G8 (Scn. 2).Developed Countries Reference EmissionsDeveloped Countries Cap21EPA Analysis of the American Power ActCO2e ConcentrationsImpacts of International Action Assumptions (GCAM & MAGICC)•CO2e concentrations through 2100 are presented here. Feedbacks between thewarming climate and the carbon cycle are calculated assuming a climate sensitivity(CS) of 3.0°C.(CS is the equilibrium temperature response to a doubling of CO2. 3.0is deemed “most likely”by the IPCC).•The five scenarios shown here are:–Reference: no climate polices or measures adopted by any countries.–US Only: US adopts the APA, all othercountries follow BAU emissions.–Developing Countries After 2050: US and developed (group 1) countries sameas G8 scenario. Developing (group 2) countries adopt policy in 2050 holdingemissions constant at 2050 levels.–No US: US follows BAU emissions, all other counties same as G8 scenario.–G8 - International Action Assumptions: Consistent with G8 agreement toreduce global emissions to 50% below 2005 levels by 2050. US adopts the APA,developed countries (group 1) reduce emissions to 83% below 2005levels by2050, and developing (group 2) countries cap emissions beginningin 2025, andreturn emissions to 26% below 2005 levelsby 2050. All countries hold emissionstargets constant after 2050.*•CO2e concentrations are approximately 457 ppmin 2100 under G8 –internationalaction assumptions.–Note that CO2e concentrations are not stabilized in these scenarios. To preventconcentrations from continuing to rise after 2100, post-2100 GHG emissionswould need to be further reduced. (For example, stabilization of CO2concentrations at 457 ppmwould require net CO2emissions to go to zero in thevery long run).•No participation from developing countries before 2050 would increase CO2econcentrations to 723 ppmin 2100, while reference assumptions produce CO2econcentrations of 931 ppmin 2100.•Removing US action from the G8 scenario raises CO2e concentrations by 46 ppmin2100 to 503 ppm. Adding US action to the reference scenario lowers CO2econcentrations by 64 ppmin 2100 to 868 ppm•Note that the ADAGE and IGEM models do notmodel post 2050 caps,doing so would likely raise allowance prices by only 2%. See the banking discussion in appendix 5 for more details.CO2-equivalent Concentrations(Climate Sensitivity = 3.0)01002003004005006007008009001000 2000 20 1 0 20 2 0 20 3 0 2 04 0 2050 20 6 0 20 7 0 20 8 0 2 09 0 2 10 0

ppmReferenceUS OnlyDeveloping Countries After 2050No USG8 - International Action22EPA Analysis of the American Power Act•This chart demonstrates projections of observed temperature changes(from pre-industrial time) in 2100under various assumptions about theclimate sensitivity. Aclimate sensitivity (CS)of 3.0°C is deemed“most likely”by the IPCC.•For any given climate sensitivity,lower emissions result in lesstemperature change.•Under the G8 –international goals (reducing global emissions to 50%below 2005 by 2050), a 2 degree target in2100 is attainable forclimate sensitivities of 3°C or lower.•The temperature and GHGconcentrations in these scenarios will keeprising after 2100 –continued GHG reductionswill be necessary tostabilize temperaturesand concentrations.•At a CS of 3.0°C, in order toachieve an equilibrium temperaturechange of 2 degrees CO2e concentrations must be stabilized below457 ppm.–This would require continued abatementbeyond the level needed to stabilizeconcentrations at 2100 levels.–It would be possible to reduce CO2e concentrations after 2100 below 457 ppmby even further reducing GHG emissions in the next century. An ‘overshoot’scenario such as this would further reduce the equilibrium temperature change,making it possible to achieve the 2 degrees C target even with aclimatesensitivity of 3.0°C.–See Appendix 5 for equilibrium temperature impacts.Global Mean Temperature Change in 2100Impacts of International Action Assumptions (MAGICC)Observed Change inGlobal Mean Temperature in 2100(from pre-industrial)0.00.51.01.52.02.53.03.54.04.55.01.5 2.5 3.0 4.5Climate Sensitivity

degrees CelsiusReferenceUS OnlyDeveloping Countries After 2050No USG8 - International Action23EPA Analysis of the American Power Act74.8%20.9%4.4%0‐3.63.6‐5.45.4‐7.27.2‐9.09.0‐10.810.8‐14.4FullParticipation1.18%29.3%37.8%18.9%8.1%4.7%Reference0‐22‐33‐44‐55‐66‐811.1%47.2%27.0%10.1%4.0%0.6%DevelopingCountryDelay•The pie charts show the approximate probability ofobservedglobal mean temperature changes in 2100, relative to pre-industrial,falling within specific temperature ranges under reference, developing country action delayed until 2050, and G8 internationalactionscenarios.–The figures were developed using MAGICC 5.3 and the truncated (at 10°C) Roe and Baker (2007) distribution over climate sensitivity.–Observed temperature change is that resulting from the concentration levels in a specific year.–See appendix 5 for equilibrium temperature results.•Observed temperature change does not equal thechange in equilibrium temperature because–CO2e concentrations rise after 2100: Equilibrium temperature change is not achieved until after CO2e concentrations are stabilized. In thisanalysis, CO2e concentrations will continue to rise after 2100. Therefore, changes in equilibrium temperaturewill differ from the observedtemperaturechanges.–Ocean temperature inertia: This inertia causes the equilibrium global mean surface temperature change to lag behind the observed globalmean surface temperature change by as much as 500 years. Even ifCO2e concentrations in 2100 werestabilized, observed temperatureswould continue to rise for centuries before the equilibrium was reached.•Under the Reference scenario (1stchart), the probability of the observed temperature change in 2100 being below 2 degrees C isapproximately 1%, while there is a nearly 75% probability associated with this under the Full Participation scenario (3rdchart).•The probability of being above 4 degrees C is about 32% in the Reference case, while it is just under 15% in the DelayedParticipation scenario (2ndchart) and zero under Full Participation (3rdchart).° CelsiusProbability of Observed Temperature Changes in 2100Reference, Delayed Participation,and Full Participation Scenarios° Fahrenheit24EPA Analysis of the American Power ActEconomy-Wide Impacts:GHG Emissions & Economic Costs25EPA Analysis of the American Power ActTotal US GHG Emissions & Sources of AbatementScenario 1 -Reference & Scenario 2 –APA (ADAGE)Covered GHG Emissions(Net of Offsets)APA CapAEO 2010Reference CaseAEO 2009Reference Case01,0002,0003,0004,0005,0006,0007,0008,0009,0001990 2000 2010 2020 2030 2040 2050

MtCO 2 eCO2 - ElectricityCO2 - TransportationCO2 - Energy Int. ManufacturingCO2 - OtherNonCO2 - CoveredOffsets - DomesticOffsets - InternationalDiscounted OffsetsHFCs (separate cap)•The reference case for this analysis is based onthe AEO 2010. Previous EPA analyses of H.R.2454 used a reference case based on the Marchrelease of AEO 2009.•The electricity sector provides the largest shareof abatement from covered sources.•The limits on domestic and international offsetsare non-binding.•Covered emissions net of offsets are below thecap in the early years as firms bank allowances,above the cap in later years as the bank ofallowances is drawn down, and cumulativelyfrom 2013 –2050 the cap is met.•Discounted international offsets, and the HFCcap provide additional abatement beyond what isrequired by the main cap.26EPA Analysis of the American Power ActGHG Allowance PricesScenario 2 –APA & Scenario 10 -H.R. 2454•The marginal cost of GHG abatement is equal to the allowance price.•Range of 2030 allowance price in“scenario 2 – APA”across models is $37 -$39.This range only reflects differences in the models and does not reflect otherscenarios or additional uncertainties discussed elsewhere.•The limit on international offsets usage is non-binding in both models, and thusthe domestic allowance price is equal to the international offset price (afterdiscounting) and the international offset price acts as a floor on the allowanceprice.•When the international offsets limit is non-binding, the differences in allowanceprices between the models arises from differing demands for international offsets.•The differences between the models interms of cost and availability ofdomestic abatement show up in the differing amount of international offsetsused instead of differing allowance prices.•In scenario 2, ADAGE projects an average of 929 MtCO2e of internationaloffsets will be used annually, and IGEM projects average annual internationaloffsets usage to be 522 MtCO2e.•See the ‘Offsets Usage & Limits’section for further discussion of internationaloffsets.•Allowance prices under the American PowerAct in scenario 2 are almost identicalto allowance prices estimated for H.R. 2454 in scenario 10.$0$10$20$30$40$50$60$70$80$90$1002010 2020 2030 2040 2050

2005 Dollars / tCO 2 eScn. 2 - APA ADAGEScn. 2 - APA IGEMScn. 10 - H.R. 2454 ADAGEScn. 10 - H.R. 2454 IGEM2013202020302050ADAGE $17 $24 $39 $102IGEM $16 $23 $37 $992013202020302050ADAGE $17 $24 $39 $102IGEM $16 $23 $38 $100Scn. 10 - H.R. 2454Scn. 2 - APA27EPA Analysis of the American Power Act-0.3%34%18%1.4%-26%7%1.3%34%146%107%-100%-50%0%50%100%150%200%IGEMIGEMIGEMADAGE ADAGE ADAGE ADAGE ADAGE IGEMADAGEScn. 3 - EarlyDevelopingCountry ActionScn. 4 - NoDevelopingCountry ActionScn. 5 - V - No Int'l Offsets* Scn. 6 - V - LowTech*Scn. 7 - V - LowTech & No Int'lOffsets*Scn. 8 - V - IPMElec. Imposed onADAGEScn. 9 - No CCSBonusAllowancesScn. 10 - H.R. 2454

Allowance Price % Change from Scn. 2GHG Allowance Prices & SensitivitiesAPA Scenario Comparison –Percentage Change from Scenario 2•In scenario 2 the limit on international offsets usage is non-binding, and thus the domestic allowance price is equal to the international offset price (after discounting) andthe international offset price acts an allowance price floor.Because of this, the impact ofthese sensitivities on allowanceprices is muted by the change in the usage ofinternational offsets and the amountof abatement occurring in the U.S. (e.g. a change that would ordinarily lead to lower allowance prices instead would lead to fewerinternational offsets.)•ADAGE shows greater usage of internationaloffsets than IGEM in scenario 2, so removing international offsets in scenario 5 hasa much larger impact on allowanceprices in ADAGE than in IGEM. It shouldbe noted that allowing no international offsets is an extreme case. If instead international offsets were simply not available forthe first ten years, then allowance prices in IGEM would only increase by 1% (see slide 53).*Scenarios 5 –7, requested by Senator Voinovich, place limits on technology and international offsets.•In ADAGE scenarios 5 and 7, the reserve price is reached, and all 4 billion tons of reserve allowances are sold. This reducesthe impact on allowance prices in these scenarios. Sinceinternational offsets are not allowed, it is not possible to usethe revenues from auctioning reserve allowances to purchase REDD offsets to refill the reserve. Thus the allowance priceis able to exceed the reserve (ceiling) price.•The cost containment reserve price is 36% higher than the scenario 2 price in ADAGE, and 40% higher than the scenario 2 price inIGEM. The price floor grows at 3% per year insteadof the 5% growth rat of the price ceiling and allowance price inthis analysis and is not expected to be triggered under any scenario analyzed. For example, the price floor is 33% lowerthan the scenario 2 price in 2013, and 67% lower in 2050.•While not allowing CCS technology before 2030 in the “low tech”scenarios provides pessimistic scenarios, even without the APA there are already more than 3 GW of CCS projects inthe early phases of planning, design, and/or construction that could potentially capitalize on the funding opportunities available under H.R. 2454; and the U.S. Nuclear RegulatorCommission currently has 30-40 GW of new nuclear capacity under review, before taking into account additional nuclear power that would be able to take advantage of the specialincentives for nuclear power in APA Title I, Subtitle A, Part II, Sec. 1121-1122. See Appendix 6 for more detail. Note: percentage changes apply in all years.Note that Scn. 2 int’l offsetusage is 929 MtCO2e/yr inADAGE and 571 MtCO2e/yrin IGEM, thus the reduction ininternational offsets in scn. 5is much greater in ADAGE.Cost ContainmentReserve Price*Scenario 5 ADAGE results updated 6/30/1028EPA Analysis of the American Power Act•The average annual cost of the APA per household is the 2010 through 2050 average of thenet present value of the per household consumption loss in “scenario 2 – APA.”•The net present value of the per household consumption loss is the cost in a particularyear discounted back to today.•The costs above include the effects of higherenergy prices, price changes for other goodsand services, impacts on wages and returns tocapital, and importantly, the thevalue ofemissions allowances returned lump sum tohouseholds, which offsets much of the APA’seffect on household consumption. The costdoes not include the impacts on leisure.•This analysis is a cost-effectiveness analysis, not a cost-benefit analysis. As such, thebenefits of reducing GHG emissions were not determined in this analysis.•The $79 -$146 average annual cost per household is the annual cost of achieving theemissions reductions and resulting climate benefits associated with this bill.•Across all scenarios, the highest average annual NPV cost per household is $350 in ADAGEscenario 7, requested by Senator Voinovich,without international offsets and restrictednuclear, bioelectricity and CCS.•See Appendix 1 for a discussion of consumption accounting differences between ADAGE andIGEM and of composition of GDP.•See Appendix 5 for a more detailed discussion of the average annual NPV cost perhousehold calculation, and additional consumption cost metrics.ConsumptionScenario 1 –Reference & Scenario 2 -APAAvg. Annual Consumption Growth Rate(2010-2030)2.51%2.53%2.79%2.81%0.0% 1.0% 2.0% 3.0%Scn. 2 - APAScn. 1 - ReferenceScn. 2 - APAScn. 1 - Reference

IGEM ADAGEADAGE2015 2020 2030 2040 2050% Change -0.14% -0.17% -0.46% -0.68% -0.86%Annual Change / HH -$122 -$169 -$529 -$901 -$1,316NPV of Change / HH -$91 -$99 -$190 -$199 -$178Average Annual Cost per Household (NPV)-$146Total Cost per Household (2010-2050) (NPV)-$5,985IGEM2015 2020 2030 2040 2050% Change 0.00% 0.01% -0.16% -0.72% -1.10%Annual Change / HH -$3 $12 -$153 -$786 -$1,360PV of Change / HH -$2 $7 -$55 -$173 -$184Average Annual Cost per Household (NPV)-$79Total Cost per Household (2010-2050) (NPV)-$3,225U.S. Consumption$0$5$10$15$20$25$302015 2020 2030 2040 2050

Trillion 2005 $Scn. 1 - Reference - ADAGEScn. 2 - APA - ADAGEScn. 1 - Reference - IGEMScn. 2 - APA - IGEM29EPA Analysis of the American Power ActDistribution of Allowance Value$0$20$40$60$80$100$120$140$1602013 2018 2023 2028 2033 2038 2043 2048

Allowance Value Billion $US (2005)Cost Containment Reserve (Sec.726)Research and Development (b)(4)Domestic Adaptation (d)Low Income Consumers (a)(4)Highway Trust Fund (f)(1)Tiger II (f)(2,3)Clean TEA (f)(2,3)Universal Refund (a)(5)Other EE (b)(2)(A)Sensors, InfoNetworks EE (b)(2)(A)Small Mid Size EE (b)(2)(A)Manufacturing Extension Partnership (b)(2)(B)Early Action (e)Total Deficit Funding (h)EITE (b)(1)International Adaptation (d)Domestic Refiners (b)(3)Industrial Tech R&D (c)(3)Clean Vehical Technology (c)(2)State EE (c)(5)(C)Rural Energy Savings (c)(5)(B)CCS Bonus Allowances (c)(1)heating and propane consumers (a)(3)natural gas consumers (a)(2)electricity consumers (a)(1)Value of Allocated &Auctioned Allowances(IGEM/ADAGE)•The American Power Act Sec. 2101 amends theClean Air Act by inserting “Sec. 781. Allocationof Emissions Allowances.”Parts (a) through (h)of this section allocate allowances whoseestimated value is shown in the figure.•The allowance prices used in this figure arefrom the IGEM “scenario 2 APA”. The sets ofcomponents explicitly modeled by ADAGE andIGEM are slightly different from each other –details can be found in appendix 1.•Except for items color-coded in gray,allowances are modeled in IGEM and/orADAGE such that they accrue directly to thecorresponding sector.•Those items color-coded in gray indicateallowances that are modeled such that they,along with the Universal Refund, accrue inlump-sum fashion to households.•Both of the computable general equilibriummodels used in this analysis have a singlerepresentative agent household. Any auctionrevenue returned to households clearly accrueto households. Additionally, any private sectorrevenues from allocated allowances also accrueto the employee-shareholder households.•While being able to provide outcomes on aggregate household impacts, the limitation of a singlerepresentative household modelis its inability to show householddistributionalresults of the various policy scenarios.Distributional results of a separately conducted analysis are discussed at the end ofthis report.•If auction revenues that are modeled as being returned to households lump sum were instead directed to particular funds, the expected reduction in householdannual consumption and GDP would likely be greater. However, such revenues could be used to lower existing distortionary taxesand thus reduce policy costs.See “Scenario 16 –Revenue Recycling –Labor Tax”of EPA’s January 29, 2010 supplemental analysis ofH.R. 2454 for analysis of this issue.Bill Component (part ofClean Air Act, Sec. 781)30EPA Analysis of the American Power ActEnergy Sector Modeling Results fromEconomy-Wide Modeling31EPA Analysis of the American Power ActPrimary EnergyAPA Scenario Comparison (ADAGE)* Note: only renewable energy usedin electricity generation is included.Biomass primary energy is not anoutput of the ADAGE model and isthus not included in this chart. Thisresults in some differences in totalprimary energy reported whencompared to AEO 2010.•The APA contains a number ofprovisions that are expected to limitthe decrease in primary energy inthe early years, in particular thenatural gas and electricity LDCallocations. In ADAGE, theseallocations mitigatethe increase innatural gas and electricity prices forhouseholds, but not for firms. Ifthese provisions were insteadmodeled as lessening the naturalgas and electricity price increasesfor all users of natural gas andelectricity, than the reduction inprimary energy usage would likelybe smaller than what is shown here.*Scenario 5 ADAGE results updated 6/30/10020406080100120 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050 2010 2020 2030 2040 2050Scn. 1 -Reference. Scn. 2 -APA. Scn. 5 - V -No Int'lOffsets. Scn. 6 - V -Low Tech. Scn. 7 - V -Low Tech &No Int'lOffsets. Scn. 8 - V -IPM Elec. inADAGE. Scn. 9 - NoCCS BonusAllow ances. Scn. 10 -H.R. 2454

Quadrillion BtuEnergy ReductionRenewable Elec.*HydroNuclearCoal w/ CCSCoal w/o CCSNatural GasPetroleum32EPA Analysis of the American Power ActPrimary EnergyAPA Scenario Comparison (ADAGE)•A joint constraint on nuclear power and CCS in ADAGE is basedonthe constraint used in IPM (see Appendix 5 and Appendix 6 for more detail).•In the reference scenario, primary energy use is 94 quadrillion Btu in 2010, grows 13% by 2030 and 21% by 2050.•The American Power Act, on average, would maintain 2010 primary energy use levels within 2%.•Not allowing international offsets to enter the American Power Act emissions reduction framework or not supporting the advancement of nuclear and biomassprimary energy production would serve to further reduce total primary energy use in comparison to the proposed bill in currentform.•H.R. 2454 is estimated to reduce primary energy use (from the reference case) to a slightly larger extentthan would the American Power Act.•In the reference case, low-or zero-carbon energy (including nuclear, renewables, and CCS) is expected to rise to a steady 15% of total primary energy through2030 before it drops to between 12-14% after 2030.•The American Power Act is estimated to more than triple the share of low-or zero-carbon energy in total primary energy use between 2010 and 2050.•Preventing international offsets from entering the trading system would substantially increase allowance prices and thus furtherencourage the use of low-andzero-carbon energy sources.•Although not modeled in this analysis, the APA requires EPA toset new GHG standards for light-duty, heavy-duty, and non-road vehicles and engines, whichwould be expected to further reduce U.S. petroleum demand.*Scenario 5 ADAGE results updated 6/30/10Scenario Description2010 2020 2030 2040 20502020 2030 2040 20501 Reference94 102 107 110 1148% 13% 17% 21%2 American Power Act94 96 95 94 96 1% 1% 0% 2%5 No International Offsets94 92 89 88 89-2% -5% -7% -6%6 Nuclear/Biomass Reference and Delayed 94 94 92 89 860% -2% -5% -8%7 Scenario 6 and no International Offsets 94 90 85 82 83-4% -9% -13% -11%8 IPM Electricity Imposed in ADAGE94 98 97 96 954% 3% 2% 1%9 No CCS Bonus Allowances94 95 95 95 972% 2% 1% 3%10 H.R. 245494 94 94 93 950% 0% -1% 1%Quadrillion BTU Total Primary Energy Use% Change from 2010Scenario Description2010 2020 2030 2040 2050 2020 2030 2040 20501 Reference 13% 15% 15% 12% 14% 13% 11% -10% 3%2 American Power Act 14% 18% 24% 29% 43% 31% 74% 111% 208%5 No International Offsets 14% 19% 27% 34% 45% 38% 89% 141% 220%6 Nuclear/Biomass Reference and Delayed 14% 16% 18% 21% 28%17% 33% 53% 102%7 Scenario 6 and no International Offsets 14% 17% 20% 27% 45%22% 44% 96% 231%8 IPM Electricity Imposed in ADAGE 14% 18% 24% 29% 44%31% 77% 116% 220%9 No CCS Bonus Allowances14% 17% 22% 28% 44%20% 58% 97% 217%10 H.R. 245414% 18% 25% 30% 43%32% 76% 113% 208%Low/Zero Carbon Energy Use as Share of Total% Change from 201033EPA Analysis of the American Power ActU.S. Electricity GenerationAPA Scenario Comparison (ADAGE)*Efficiency / Reduced Demandrepresents the energy savings fromthe consumer response toincreased electricity prices (e.g.conservation, substitution to othergoods/services from energy, etc.).**Energy Efficiency Programsrepresents the energy savingsachieved by the energy efficiencyprograms funded by allowanceallocations and the impact ofrevised building codes.*Scenario 5 ADAGE results updated 6/30/1001,0002,0003,0004,0005,0006,000 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050 2015 2020 2030 2040 2050Scn. 1 -Reference. Scn. 2 -APA. Scn. 5 - V -No Int'lOffsets. Scn. 6 - V -Low Tech. Scn. 7 - V -Low Tech &No Int'lOffsets. Scn. 8 - V -IPM Elec. inADAGE. Scn. 9 - NoCCS BonusAllow ances. Scn. 10 -H.R. 2454

Billion kWhEnergy Efficiency Programs**Efficiency / Reduced Demand*Wind / SolarBiomass / MSWHydro / GeothermalNuclearIGCC + CCSFossil fuels w/o CCS34EPA Analysis of the American Power ActU.S. Electricity GenerationAPA Scenario Comparison (ADAGE)•The APA is estimated to lead to a significant decline in electricity generation from non-CCS fossil fuels --a 23% decrease from2010 levels by2030 and an 81% decrease by 2050. This is in stark contrast to the expected steady increase in non-CCS fossil fuel electricitygeneration withoutthe APA policy –a 22% increase by 2030 and a 56% increase by 2050.•The APA is also expected to encourage electricity generation fromcleaner technologies (CCS/IGCC Coal, Wind, Solar, biomass, hydro,geothermal, and nuclear), an increase over the 2010 level of 80% by 2030 andmore than tripling the 2010 level by 2050.•The APA allows covered entities to meet compliance obligationsin a number of ways. Restrictions on such flexibilities (e.g.,by not allowinginternational offsets as shown in scenarios 5 and 7) tend to increase electricity prices, thus lowering total electricity consumption.•Prohibiting international offsets from entering the APA emissions reduction program in scenario 5 increases allowance prices andforces greateramounts of GHG abatement to occur in covered sectors, including the power sector. CCS deployment is actually lower in scenario5 than inscenario 2. With high allowance prices in scenario 5, the smallamount of GHG emissions from CCS, which is assumed to have a 90% captureefficiency, make nuclear the preferred option. Given the joint constraint on nuclear and CCS, as nuclear increases in scenario5 relative to scenario2, CCS must decrease.•Approaching 2050, prohibiting international offsets as in scenario 7 results in substitution away from fossil fuels and towardscleaner technologiessuch that the resulting changes over 2015 are similar to those toresult from the APA. In the shorter-term, however, this substitution is slow tooccur.•Eliminating CCS bonus allowances from APA (scenario 9) is estimated to result in a slower decrease in fossil-fuel based electricity generation anda slower advancement of clean electricity generation compared withthe expected result of implementing the APA as proposed. Whileeliminatingthe CCS bonus allowances results in slightly higher allowance prices, it could potentially reduce the overall cost of the bill.*Scenario 5 ADAGE results updated 6/30/10Scen ario D escriptio n2010 2020 2030 2040 2050 2020 2030 2040 20501 R eference 2,619 2,810 3,201 3,879 4,086 7% 22% 48% 56%2 American Power Act 2,572 2,438 1,972 1,644 499 -5% -23% -36% -81%5 N o International Offsets 2,560 2,288 1,710 1,218 496 -11% -33% -52% -81%6 N uc lear/Biomass R eference and D elayed C CS 2,595 2,623 2,581 2,480 1,959 1% -1% -4% -24%7 Scenario 6 and no International O ffsets 2,593 2,498 2,335 1,750 262 -4% -10% -33% -90%8 IPM Electricity Imposed in AD AG E 2,569 2,419 1,869 1,525 478 -6% -27% -41% -81%9 N o CC S Bonus Allow ances 2,572 2,565 2,255 1,922 359 0% -12% -25% -86%10 H .R . 2454 2,572 2,286 1,818 1,471 411 -11% -29% -43% -84%Fossil Fuels w /o C CS (B il K Wh ) % chang e over 2010Scen ario D escriptio n2010 2020 2030 2040 2050 2020 2030 2040 20501 R eference 1,219 1,488 1,532 1,290 1,528 22% 26% 6% 25%2 American Power Act 1,266 1,681 2,284 2,784 4,077 33% 80% 120% 222%5 N o International Offsets 1,274 1,724 2,319 2,913 3,884 35% 82% 129% 205%6 N uc lear/Biomass R eference and D elayed C CS 1,241 1,450 1,622 1,858 2,407 17% 31% 50% 94%7 Scenario 6 and no International O ffsets 1,241 1,450 1,622 2,239 3,995 17% 31% 80% 222%8 IPM Electricity Imposed in AD AG E 1,267 1,692 2,327 2,847 4,102 33% 84% 125% 224%9 N o CC S Bonus Allow ances 1,266 1,549 2,032 2,547 4,256 22% 60% 101% 236%10 H .R . 2454 1,266 1,681 2,284 2,784 4,041 33% 80% 120% 219%Lo w/Zero C arbo n En ergy (B il KW h) % chang e over 201035EPA Analysis of the American Power ActEnergy efficiency provisions addressed (*see Note below)•Allowance allocations.Impacts on electricity and natural gas demand were calculated for the various allowance allocations (or portions thereof)that are directed to support energy efficiency.These include allocations to the following:–Rural energy savings program--Early action recognition–Industrial energy efficiency--Natural gas consumers–State renewable energy and energy efficiency--Home heating oil and propane consumers•Building codes.Impacts on electricity and natural gas demand, and associated costs, were calculated for the building codes provision (Sec. 241)within S. 1462 (per Senate specifications to EPA)Calculated demand impacts and costs (* see Note below)•In ‘scenario 2 – APA’the reduction in total electricity demand due to the EE provisions is projected to be 1.2% of reference case electricity demandin 2020 and increase to 2.6% of reference case electricity demand in 2050.•In ‘scenario 2 – APA’the reduction in total natural gas demand due to the EE provisions is projected to be 1.0% of reference case natural gasdemand in 2020 and increase to 2.8% of reference case natural gas demand in 2050.•Cost impacts associated with building codes were calculated and applied to the manufacturing and services sectors within ADAGE.H.R. 2454 Comparison•Calculated electricity demand impacts from the energy efficiencyprovisions of the American Power Act (scenario 2), as a fraction of H.R. 2454savings, are roughly ~ 1/4 in 2020, 1/3 in 2030 and less than 1/2 in 2050•The main drivers of the lower calculated impacts of the energy efficiency provisions of the American Power Act relative to H.R.2454 aresignificantly less allowance value devoted to energy efficiencyprograms, the lack of a Combined Efficiency and Renewable Electricity Standard,and less aggressive building code targets.Caveats on modeling of energy efficiency provisions•A significant energy demand price response is forecast by ADAGE.This response is driven by a number of factors including substitution away fromenergy consumption to other products/services, conservation behavior (e.g., turning off lights), as well as increased investments in energyefficiency.•A portion of estimated energy demand reduction from energy efficiency provisions may be a-priori incorporated into the baseline responsiveness ofdemand to a price increase in ADAGE. Further analyses are needed to quantify the extent to which demand reduction may be double-counted inthese scenarios.•The costs of EE provisions are captured in the estimated economy-wide cost of APA. However, a portion of these costs are estimated outside ofADAGE and then imposed within the model, rather than endogenously determined.•Allowance allocations for energy efficiency are used to fund energy efficiency projects assuming a cost of saved energy (CSE) ata rate of$46/MWh (electric) and $6.8/mmBTU (natural gas), and average measure lives of 13 and 19 years, respectively. CSE includes “programadministrator”and “participant”costs. CSE escalated at 1%/year. Source ACEE (2009).* NOTE: See Appendix 4 for further detailon provisions addressed, as well as methodology, assumptions, caveats, and references.American Power ActEnergy Efficiency Provisions36EPA Analysis of the American Power ActEnergy PricesAPA Scenario Comparison (ADAGE)•Gasoline and natural gasprices are inclusive of theallowance price (i.e. theyrepresent the price faced byconsumers, not the pricereceived by producers whichwould be exclusive of theallowance price).•The gasoline price is obtainedby multiplying the petroleumprice index in ADAGE by the2010 price of gasoline fromthe AEO 2010 projection.•Although not modeled in thisanalysis, the APA requiresEPA to set new GHGstandards for light-duty,heavy-duty, and non-roadvehicles and engines, whichwould be expected to lowerU.S. petroleum demand.•The allocations to electriclocal distribution companies(LDC’s) mitigates thehousehold electricity priceincrease until the allocationsphase out beginning in 2025.•As shown on the next slide,energy bills are not expectedto increase as much asenergy prices because ofreductions in demand forenergy.*Scenario 5 ADAGE results updated 6/30/10Natural Gas Price$0$5$10$15$20$252010 2015 2020 2030 2040 2050

$ per MMBtuGasoline Price$0$1$2$3$4$5$6$72010 2015 2020 2030 2040 2050

$ per GallonHousehold Electricity Price$0.00$0.05$0.10$0.15$0.20$0.252010 2015 2020 2030 2040 2050

$ per kWhScn. 1 - ReferenceScn. 2 - APAScn. 5 - V - No Int'l OffsetsScn. 6 - V - Ref. Nuclear & Biomass / Delayed CCSScn. 7 - V - Ref. Nuclear & Biomass / Delayed CCS & No Int'l OffsetsScn. 8 - V - IPM Elec. Imposed on ADAGEScn. 9 - No CCS Bonus Allow ancesScn. 10 - H.R. 245437EPA Analysis of the American Power ActHousehold Energy ExpendituresAPA Scenario Comparison (ADAGE)•In 2020, the average household’s energy expenditures (excluding motor gasoline) falls by 2% inscenario 2 – APA.”In 2030, the increase is 13% over reference levels, and in 2050theincrease is 28%.•In 2020, electricity prices are equal to reference levels in “scenario 2 – APA.”In 2030 they increase by 27% over reference levels, and in 2050 the increase is 52%.•Actual household energy expenditures increase by a lesser amountdue to reduced demand for energy.•The differences between ‘scn. 2 –APA’and ‘scn. 10 –H.R. 2454’are largely driven by the differences in the energy efficiency provisions of the two bills.•In ADAGE, energy expenditures represent approximately 2% of total consumption in 2020, falling to 1% by 2050 in all scenarios.•The energy expenditures presented here do not include any potential increase in capital or maintenance cost associated with moreenergy efficient technologies incentivized by theenergy efficiency programs.•While energy expenditures begin to rise by significant amounts in 2030 to 2050, these increases are largely offset by the per-capita rebate, protection for low-income households, andother ways of returning allowance value to households. (Slide 28shows the net impact on households accounting for both increased costs and return of allowance value, and slides 66-71 show the detailed incidence analysis.)* In addition to the updated scenario 5, this slide corrects an error in reference case average annual household expenditures,and percentage changes from that reference case.*Scenario 1 and 5 ADAGE results updated 6/30/10Average Annual Household EnergyExpenditures(excluding gasoline)*$0$500$1,000$1,500$2,000$2,500$3,0002010 2015 2020 2030 2040 2050

2005 $Change in Average Annual Household EnergyExpenditures (excluding gasoline)*-10%0%10%20%30%40%50%60%2015 2020 2030 2040 2050

% Change from ReferenceScn. 1 - ReferenceScn. 2 - APAScn. 5 - V - No Int'l OffsetsScn. 6 - V - Ref. Nuclear & Biomass / Delayed CCSScn. 7 - V - Ref. Nuclear & Biomass / Delayed CCS & No Int'l OffsetsScn. 8 - V - IPM Elec. Imposed on ADAGEScn. 9 - No CCS Bonus AllowancesScn. 10 - H.R. 245438EPA Analysis of the American Power ActDetailed Near-Term Electricity SectorModeling Results39EPA Analysis of the American Power ActDetailed Electricity Sector Modeling with IPMMotivation for Using the Integrated Planning Model (IPM):•The CGE models used for this analysisdo not have detailed technology representations; they are better suitedfor capturing long-run equilibrium responsesthan near-term responses.•Since the electricity sector plays a key role in GHG mitigation,EPA has employed the Integrated Planning Model(IPM) to project the near-term impact of this policy scenario on the electricity sector.Power Sector Modeling (IPM 2010 Ref. Case):•This version of the model incorporateskey assumptions/ projections from the Energy InformationAdministration'sAnnual Energy Outlook 2010.•Although it has been updated since the one used for the H.R. 2454 analysis released in June, 2009, this versionis still built on the versions used previously to analyzeH.R. 2454, the Waxman-Markey discussion draft, S. 280,S. 1766, and S. 2191.•This version of the model incorporateskey carbon-related options and assumptions, such as carbon capture andstorage technology for new and existing coal plants,biomass co-firing options,and technology penetrationconstraints on new nuclear, renewable, and coal with CCS capacity.Modeling Approach:For this analysis, IPM 2010 Ref.Case incorporated two sets of data from the ADAGE model:–CO2allowance price projections*–Percent change in electricity demand*Note: For more detail on the assumptions used in EPA’s application of IPM, please see more detailed documentation forIPM athttp://www.epa.gov/airmarkets/progsregs/epa-ipm/index.html.* Allowance prices for the core IPM scenario aretaken from the ADAGE core scenario (Scenario 2).40EPA Analysis of the American Power ActIPM Scenarios and Major Power SectorProvisions Modeled in IPMMajor Bill Provisions:Special Funding Program for Development & Deployment of CCS andConversion Technologies (Title I, Subtitle C, Part II, Sec. 1412-1415):Designed to “accelerate the commercial availability of carbon dioxide captureand sequestration technologies and methods.”•A CCS Program Partnership Council is created and administers funds generated through fees on electricity production by fuel type. The Councilwill administer and distribute roughly $2 billion in annual funding for 10 years from date of enactment.•IPM implementation: Assumed that this funding spurs 12 additionalGW of CCS capacity by 2025 (beyond the baseline amount). These projectsare “hard-wired”into IPM and are not a result of the model’s economic analysis. The model may independently add CCS capacity after 2015 onan economic basis, subject to an upper-bound capacity development constraint.CCS Bonus (Title I, Subtitle C, Part III, Sec. 794):Designed to provide additional economic incentive for coal with CCS through allocation of “bonus”allowances.•A portion of allowances are reserved for incentivizing carbon capture and storage technology (starting at 0.8% of allowances andrising to 10%).The specific incentive is designed as a fixed monetary value forevery ton of CO2sequestered, rather than a certain number of allowances. Thevalue is specified as $96/ton for the first 10 GW, then $85/tonfor the next 10 GW (plus $10/ton for projects commencing operation by 2017), andthen the amount determined through reverse auction until a maximum of72 GW of CCS receives the bonus. A stream of specified bonusallowances are made into “current”allowances and made available to qualifying projects dependent upon allowance prices and thetotal quantityallocated. The bonus for the remaining capacity is administeredas a reverse auction.•IPM implementation: Similar to past IPM applications, CCS projects receive a subsidy equal to the bonus amount. The allowances aredistributed on a first-come, first-serve basis and can be banked.In this analysis, $50/ton was used as the reverse auction clearing price forgeneration beyond the first 20 GW. This constant value does not reflect the potentialfor competitive deployment and learning-by-doing to lowerthe reverse auction clearing prices over time.Special Incentives for Nuclear Power (Title I, Subtitle A, Part II, Sec. 1121-1122):•Accelerated depreciation reduces the accelerated depreciation periodto 5 years. Modeled in IPM as a reduction in the capitalcharge rate.•Investment tax credit for nuclear power facilities provides 10%credit for certain expendituresfor the construction of nuclearpower facilities.Capital cost in IPM reduced by 10% for modeling.•Increase in loan guarantee amount was not modeled in IPM.Note: See Appendix for more detail on updates to IPM. For more detail on the all of the assumptions used in EPA’s applicationof IPM, please see more detailed documentationfor IPM at http://www.epa.gov/airmarkets/progsregs/epa-ipm/index.html.The following scenarios were modeled for the power sector:1.Core ADAGE APA Scenario (Scenario 2)2.HIghnatural gas supply sensitivity (Same inputs as Scenario 2)3.Low technology-No int’l offsets sensitivity (Scenario 7)4.No CCS bonus allowances or wires charge (Scenario 9)5.H.R. 2454 with IPM 2010 (Scenario 10)Sensitivity modeling results for # 3 –5 are located in the appendix.41EPA Analysis of the American Power ActKey Model UpdatesUpdates to IPM 2010 Ref. Case:•Electricity Demand Growth:Calibrated to AEO 2010•Cost of New Power Technologies:Consistent with AEO 2010•State RPS and Climate Programs:Calibrated to AEO 2010 with finalized regulations like RGGI.•International electricityimports and exports:Calibrated to AEO 2010•Limits on new wind additionsin 2012 and new nuclear builds: Consistent with AEO 2010Previous Updates Carried Over to IPM 2010:•Natural gas supply curves:Same assumptionsas IPM 2009 ARRA.•Cost of Climate Policy Uncertainty:An increase to the capitalcharge rate for new coal plants(consistent with AEO 2009).This change is only applied in thereference case, notin the policy orsensitivity runs.•CCS in Baseline:Reflecting updated financialincentives including ARRA, 2 GW of CCS capacityare projected for 2015 in the baseline.Comparison to Previous IPM Analyses:•Electricity Demand:The reference case electricity demand forecast islower than in previous EPAanalyses of legislative proposals (but slightlyhigher than in the H.R.2454 analysis), reflectingrevised economic growth andrecently enacted laws supporting energy efficiency.•New Capacity:Since overall electricity demand is lower, fewer new power plants are needed thanin past EPA modeling with IPM.Note: See Appendix for more detail on updates to IPM. For more detail on the all of the assumptions used in EPA’s applicationof IPM, please see more detailed documentationfor IPM at http://www.epa.gov/airmarkets/progsregs/epa-ipm/index.html.42EPA Analysis of the American Power ActGHG Allowance Prices and Power SectorCO2Emissions (IPM)*Core Scenario GHG Allowance Price(from ADAGE Scenario 2)*Power Sector CO2Emissions* Allowance prices for the core IPM scenario are taken from the ADAGE APA core scenario (Scenario 2). IPM 2010 Reference Caseisgenerally consistent with AEO 2010, although projections are notidentical because IPM is a power sector model and has slightlydifferenttreatment of key assumptions and variables.$18$24$31$-$5$10$15$20$25$30$352015 2020 2025

$2005/ Metric Ton2,3122,4102,4782,1202,1492,03905001,0001,5002,0002,5003,0002015 2020 2025

CO2 Emissions (million metric tons)IPM 2010 Ref. CaseAPA43EPA Analysis of the American Power Act1,9692,1452,189 2,2031,945 1,9461,8031414142958124845544671816586646733806809816816809816882253284290288277281278107303345373352383399-5001,0001,5002,0002,5003,0003,5004,0004,5005,0002008 2015 2020 2025 2015 2020 2025IPM 2010 Ref. CaseAPA

TWhCoalAdv Coal w/CCSOil/Natural GasNuclearHydroRenewablesElectricity Generation Mix (IPM)2008 data from EIA’sElectric Power Annual (for electric utilities, independent power producers, and CHP electric power). IPM 2010 Reference Case isgenerally consistent with AEO 2010, although projectionsare not identical because IPM is a power sector model andhas different treatment of key assumptions and variables.*EIA. 2005 Residential Energy Consumption Survey. Table 3.http://www.eia.doe.gov/emeu/recs/recs2005/c&e/detailed_tables2005c&e.html.•An increase in renewable energy in both thereference case and APA scenario is largely driven byARRA provisions.•Renewablesgeneration only increases by less than10 percent between the reference case and the APAscenario. Most of this increase is attributed tobiomass co-firing which grows by around 35 percentby 2025.•Electricity demand declines gradually resulting in anincrease in natural gas generation in APA in 2015. Inlater periods, natural gas generation is lower in APAthan in the reference case.•The difference in electricity generation between thereference case and policy case is around 300 TWhin2025. This difference is equivalent to the amount ofelectricity used by more than 20 million (around 30%)single family homes in the US annually.*44EPA Analysis of the American Power Act222248430353942363942108010203040506070802015 2020 2025 2015 2020 2025IPM 2010 Ref. CaseAPA

GWAdv Coal w/CCSOil/Natural GasNuclearRenewablesNew Generation Capacity (IPM)New Generation Capacity, CumulativeNote: New capacity additions less that 1 GW of capacity are not indicated. IPM 2010 Reference Case is generally consistent withAEO 2010, although projections are notidentical because IPM is a power sector model and has different treatment of key assumptions and variables.* See appendix for more detail on EPA’s technology penetration limits applied in IPM, post-retrofit capacity of CCS includes associated de-rating and/or energy use of CCSsystem.•The IPM 2010 reference case includes a sizeable amount of newrenewablesexpected to be built in the short-term in response tofinancial incentives in ARRA. Allowance prices encouragedeployment of some additional low-or zero-carbon energy(including nuclear and renewables) by 2025.•Early deployment funding (wires charges) and a bonus allowanceprovision for captured and sequestered CO2emissions result in atotal of 15 GW of CCS capacity, of which 6 GW are new and 9GW are retrofits. This is in addition to the 2 GW in the referencecase.•The 6 GW of additional new capacity with CCS by 2025, weredetermined exogenously and forced in IPM to reflect earlydeployment funding. No additional new CCS capacity is builton an economic basis.•9 GW of CCS retrofits to the existing coal fleet are alsodeployed, facilitated by the bonus and wires charges (retrofitsto existing facilities are not reflected in the graphic). The totalamount of retrofits meets IPM’sCCS retrofit penetration limit(while the limit on new CCS capacity penetration is notreached).*•In addition, 8 GW of nuclear capacity is built in 2025 attributable tothe investment tax credit and other financial incentives for nuclearpower. The increased amount for loan guarantees was notincluded in the modeling. The model would possibly have addedmore nuclear if it had been accounted for. The amount of newnuclear capacity is well below the combined nuclear/CCSpenetration limit throughout the entire IPM modeling period.45EPA Analysis of the American Power ActAnalysis of CCS Technology•The CCS early deployment provisions, along with the bonus allowance provision for CCS, incentivize penetrationof new coal capacity with CCS technology andretrofits of existing plants with CCS capacity.–New coal with CCS is projected to penetrate startingin 2015 in response tothe bill’s early deploymentprogram and the financial incentivesas part of the bonus. The amountof new coal with CCS in the policyscenario has been “hardwired”(orforced) to reflect the financial incentives of this bill.–Existing coal plants do not find it economic to retrofit with CCS without the CCS bonus and funding from thewires charges. This may be in part attributable to the additional incentives for nuclear power, with which CCScompetes. When the CCS incentives are eliminated, morenuclear capacity is added relative to the corepolicy case.•The CCS bonus provision ismodeled as a fixed incentive in IPM. APA directs EPAto conduct a reverse auctionto set the per-ton value of bonus allocations beyond the first 20 GW, which could potentially optimize the incentivenecessary to spur additional deploymentof CCS. The total bonusis set as aportion of all allowances, starting at0.8% of allowances and rising to 10% through 2034.•Provisions in APA provide incentivesfor CCS, nuclearpower, andrenewablessimultaneously which may end uphaving unintended consequences. The combined effects of these multiple incentives may potentially act againsteach other, at least in the near-term. Inaddition, the cumulative impact of such incentives may distort the carbonprice signal and raise the total cost ofemissions abatement, especially where these incentives displace low-costenergy efficiency improvements. The consequences will have greater impact inthe longer term, beyond the timeperiod modeled in IPM.•Because of considerable uncertaintyregarding technology costand performance, the reverseauction approachfor CCS would help determinethe appropriate incentive for the technology without overor under incentivizing.•Cost assumptions are basicallyuniform nationwide in IPM, butinreality, there is likely tobe more variability in riskprofiles, capital costs, and transport/storage costs that would result ina wider range of CCS costs than IPMcurrently reflects.** The next version of the EPA reference caseusing IPM will reflect more regional variability for CCS costs, particularly transportation and storage costs, and updatedcapital costs. For more detail on theassumptions used in EPA’s application of IPM, please see more detailed documentation forIPM at http://www.epa.gov/airmarkets/progsregs/epa-ipm/index.html.46EPA Analysis of the American Power ActEffects of the Bonus Allowances•The bonus allowances for CCS has notable effects on markets–Allowance prices are lower in scenarios thatinclude bonus allowances because the bonusallowances encourage the use of CCS thatwould otherwise be uneconomic. The carbonreductions provided by these technologies allowthe economy to reach a given emission cap atlower prices for carbon allowances.–The lower allowance prices, in turn,lead to lower electricity priceslargely by limiting the effect ofallowance costs on generation costs at fossil-fueled power plants.*•The bonus programs are not cost-free–By giving the energy sector incentives to reduce carbon using uneconomic technologies, bonusallowances substitute high-cost for low-cost emissionreductions. The net effect is to increase thecosts of meeting a given cap.–By keeping electricity prices lower than theyotherwise would have been, bonus allowancesindirectly reduce consumers’incentives for savingenergy. Without those energy-saving actions,the total cost of meeting a given emission cap is higher.–These inefficiencies lead to “deadweight losses”and are not factored in the power sector modeling.•The tendency of bonusallowances to drive upthe total costs of meeting the cap could bemitigated or even reversed ifthe impact on the deployment ofCCS led to lower costs for thosetechnologies. That possibility,however, has not been modeled.*In competitive markets, lower allowance prices cut electricity prices by reducing marginal generation costs. In cost-of-serviceareas,lower costs for purchasing allowances keep average generation costs down, and those lower costs are passed on to consumers.47EPA Analysis of the American Power Act55527283036 36 3665656501020304050607080901002015 2020 2025 2015 2020 2025IPM 2010 Ref. CaseAPA

GWCoalOil/Gas Steam1,042190182177 174 175163212212218199203207638660670568567533-2004006008001,0001,2002008 2015 2020 2025 2015 2020 2025IPM 2010 Ref. CaseAPA

Million TonsAppalachiaInteriorWestCoal Production for Electricity Generation &Retirements of Existing Capacity (IPM)Note: Regional coal production data includes coal production forpower generation only. Historical data is from EIA’sAEO 2010.Coal production (in terms of tons) does not correlate to generationperfectly because different grades of coal have greater heat content (e.g. bituminous coal has greater heat content than sub-bituminous coal). In addition, coal production data shown here does not includecoal imports, which increase over time in IPM. IPM 2010 Reference Case is generally consistent with AEO 2010, although projections are not identical because IPM is a power sector model and hasdifferent treatment of key assumptions and variables.Coal Production for Electricity Generation•Roughly 25 GW of additional existing coal capacity and 29 GW of additional oil/gas capacity are projected to retire under the policy scenario by2025. Relatively low allowance prices and relatively high costs tobuild new technology make existing coal cost-competitive inthe shorter-term.•These results show greater amounts of coal and oil/gas steam retirements in the updated policy scenario. Electricity demand reductions achieved, inpart, by the by the allowance price that represents the cost of emitting CO2, the energy efficiency provisions, and incentives for CCS decrease theneed for the less efficient existing stock of coal-fired power.•In reality, uneconomic units may be “mothballed,”retired, or kept running to ensuregeneration reliability. Themodel is unableto distinguish amongthese potential outcomes. Most of these are marginal units withlow capacity factors.•Most uneconomic units are part of larger plants that are expected to continue generating. Currently, there are roughly 115 GWof oil/gas steamcapacity and 315 GW of coal capacity.Retirements of Existing Capacity, Cumulative(Total Coal + Oil/Gas Steam capacity is around 430 GW)48EPA Analysis of the American Power ActPower Sector Natural GasConsumption and Prices (IPM)N. Gas Consumption and Prices2009201520202025Nat. GasConsumption(TCF)Ref.Case6.64.25.26.2APA4.55.05.6Nat. Gas Price,Delivered($2005/mmBtu)Ref.Case$3.92$5.32$6.69$6.56APA$5.52$6.48$6.03Natural Gas Consumption and AverageDelivered Prices (Electric Power)Note: Natural gas prices and consumption presented here are determined endogenously in IPM and do not reflect changes in supply/demand (and thus prices) outside the powersector as a result of the policy (the ADAGE model is the economy-wide model that EPA uses to reflect this dynamic). To the extentthat natural gas demand increases (decreases)outside the power sector, the price impacts reflected here may be a bit lower (higher) than if the total demand for natural gaswere reflected in IPM. Demand for natural gas inADAGE is projected to decrease by 2% in 2015, 4% in 2020, and 8%in 2025. Note that ADAGE does not model the “Powering Vehicleswith Natural Gas”provisions of the APAwhich may increase natural gas demand. ADAGE models the natural gas LDC allocation as mitigating the natural gas price increasefor households but not for other natural gasconsumers. If ADAGE were to model the natural gas LDC allocation as mitigating the price increase for all consumers, this wouldplace an additional upward pressure on naturalgas demand.* Source of 2009 natural gas data is EIA Electric power Monthly Table 2.4.A. Total is for electric utilities and independent power producers only.Lower natural gas prices are the result of decreasesin natural gas demand in 2020and 2025. This is due,in part, to the power sector’s response to theemissions cap. Gas pricesreflected here do notinclude the cost of CO2allowances.$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5$5.0$5.5$6.0$6.5$7.0$7.5$8.02009 2015 2020 2025

Price, $2005/mmBtu0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.0 

# Consumption, TCFIPM 2010 Ref Case ConsumptionAPA ConsumptionIPM 2010 Ref Case PriceAPA Price49EPA Analysis of the American Power Act55588 82728304 34 44 536 36 3631 31 316565655 85 85 802 04 06 08 01001202015 2020 2025 2015 2020 2025 2015 2020 2025 2015 2020 2025IPM2010Re f.Ca se Re f.Ca se‐LowGasPr ices AP A AP A‐LowGasP rice sCoalOil/G as1,9692,0772,153 2,1691,8301,8131,6331114142958124845628714855707787908806809816816809816887253278284286277279278107286335369345375390-5001,0001,5002,0002,5003,0003,5004,0004,5005,0002008201520202025201520202025IPM 2010 Ref. Case - Low Gas PricesAPA - Low Gas Prices

TWhCoalAdv Coal w/CCSOil/Natural GasNuclearHydroRenewablesSensitivity –Higher Natural Gas SupplyNatural Gas Consumption and Average N. GasDelivered Prices (Electric Power)Generation Mix•Recent projections of natural gas supply forecast a potentiallysignificant increase in unconventional gas availability in the nearterm.•Greater supply and lower natural gas prices increase the use ofnatural gas throughout the entire period in the policy sensitivity,where in the past there were decreases in gas consumption. Italso results in significantly less coal generation by 2025.•There are more coal retirements and fewer oil/gas steamretirements relative to the policy scenario when natural gasprices are lowered.•This sensitivity was modeled using the allowance price anddemand response from ADAGE Scn. 2.Retirements$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5$5.0$5.5$6.0$6.5$7.0$7.5$8.02009 2015 2020 2025

Price, $2005/mmBtu0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.0 

# Consumption, TCFRe f C ase L ow Ga s C on su m ptionAP A Low G as Co nsum ptionRe f C ase L ow Ga s PriceAPA Low G as Price50EPA Analysis of the American Power ActOffsets Usage & Limits51EPA Analysis of the American Power ActOffsets SensitivitiesSide Scenarios (IGEM)Several factors could influence the availability and price of domestic and international offsets. These factors include,but are not limited to, the structure of international offsets markets and timing for their establishment, the rulesgoverning domestic offsets markets, and responses of domestic and international offsets providers. Several sidescenarios are included here to further explore the relationship between offset supply, allowance price, and thequantity of abatement fromcovered sectors. A reducedform version of the IGEM model was used for these sidescenarios. These scenarios can be compared to scenario 2, whichplaces no restrictions on offsets beyond theoverall limits on domestic and international offset usage included in the bill.Side Scenarios•Scenario 5b – International Offsets Delayed 10 Years–U.S. covered entities are not allowed to purchase international offsets for the first 10 years.•Scenario 5c – International Offsets Delayed 20 Years–U.S. covered entities are not allowed to purchase international offsets for the first 20 years.•Scenario 5d – No International or Domestic Offsets–U.S. covered entities are not allowed to use domestic or international offsets.•Scenario 5e – No Domestic Offsets–U.S. covered entities are not allowed to use domestic offsets.•Scenario 5f – Low Domestic Offsets–Domestic offset potential is reduced by 50%.•Scenario 5g – High Domestic Offsets–Domestic offset potential is increased by 50%.52EPA Analysis of the American Power Act2013-2050 Cumulative Covered U.S. GHG Emissions & AbatementDomestic Offset Sensitivities(IGEM)•Since the annual limit on the usageof international offsets is nonbinding in scenario 2, sensitivities that would be expected to impactallowance prices (e.g. changes in the availability of domestic offsets)have a smaller impact than expected,because international offsetsusage, and thus the amount of abatement within covered sectors, canchange.•Because of the possibility of banking,the cumulative number of offsetsavailable over the entire time horizon drives how the availability ofoffsets influences allowance prices, not the particular time path ofwhen that cumulative amountof offsets is available.•The 1.5 GtCO2e annual limit on domestic offsets translates into a 57GtCO2e limit on cumulative domesticoffset usage over the entire 2013–2050 time frame.•In the core policy scenario, cumulative domestic offset usage is22GtCO2e, or an average of 571 MtCO2e per year, and the limit is nonbinding.•The 0.5 GtCO2e annual limit on international offsets translates into a19 GtCO2e limit on cumulative international offset usage over theentire 2013 –2050 time frame•If the domestic offset limit is non-binding, the annual limit on internationaloffsets can be increased by the difference between the domestic offsetlimit and actual domestic offset usage, up to a maximum adjustedlimit of1.0 GtCO2e of international offset usage. This adjusted annual limit oninternational offsets corresponds to a 38 GtCO2e cumulative limit oninternational offset usage.•In the core policy scenario, cumulative international offset usage is 20GtCO2e, or an average of 522 GtCO2e per year, and the adjusted limit isnon-binding.•When domestic offsets are not allowed, international offset usageincreases 89% up to the adjusted limit, covered GHG abatementincreases 6%, and the allowance price increases 8%•If domestic offset potential is reduced 50%, then international offsetusage increases 49%, covered GHG abatement increases 1%, andallowance prices increase 2%.•If domestic offset potential is increased by 50%, then internationaloffset usage falls by 48%, covered GHG abatement decreases 1%,and allowance prices decreases 2%.•Scenarios 5e and 5f would show considerably different results intheywere run using the ADAGE model, as scenario 2 in ADAGE uses closeto the maximum amount of international offsets allowed, so reducingdomestic offset availability would force greater amounts of coveredGHG abatement, and have a larger impact on allowance prices.•See Appendix 3 for a discussion of domestic offsets modeling.1251251251252038301022113270747169050100150200250300scn 2scn 5escn 5fscn 5gAmerican PowerActNo DomesticOffsetsLow DomesticOffsetsHigh DomesticOffsets

2013-2050 Cumulative GtCO 2 e-100%-67%-33%0%33%67%100% % Change from Scenario 2Covered GHG AbatementDomestic OffsetsInternational OffsetsCovered GHG Allowances (Cap)% Change from Scn. 2 - Covered GHG Abatement% Change from Scn. 2 - Domestic Offsets% Change from Scn. 2 - International Offsets% Change from Scn. 2 - Allowance Price53EPA Analysis of the American Power Act2013-2050 Cumulative Covered U.S. GHG Emissions & AbatementInternational Offset Sensitivities(IGEM)•While the American Power Act clearly allows the usage of bothdomestic and international offsets, it is useful to examinescenarios where offsets are limited or not allowed in order toshow the impact these provisions have on costs and sources ofGHG abatement.•In scenario 5d, where both domestic and international offsets arenot allowed, covered GHG abatement is forced to increase 54%,and the allowance price increases 115%.•In this scenario, the price ceiling is exceeded, and the cumulative capincreases by 4 billion tons as reserve allowances are released through thecost containment reserve.•Because offsets are not allowed in this scenario, it is not possible topurchase offsets with the revenues from the sale of reserve allowances inorder to refill the reserve,and the allowance price isthus able to exceed theprice ceiling.•In scenario 5, where international offsets are not allowed,domestic offset usage increases 22%, covered GHG abatementincreases 22%, and the allowance price increases 34%.•While eliminating all international offsets has a large impact onallowance prices, simply delayinginternational offset availabilityto the U.S. has a much more modest impact.•Delaying international offsets 10 years in scenario 5b decreasescumulativeinternational offset usage by just 3% as international offset usage can beincreased after the 10 year delay, and allowance prices only increase by1%. A 20 year delay in scenario 5c reduces cumulative international offsetusage 10% and increases allowance prices 3%. Note that these scenarioswould have a greater impact on allowance prices in ADAGE, asinternational offset usage in later years could not increase in response tothe limited availability in early years.•Note that IGEM shows significantly less usage of internationaloffsets than ADAGE in scenario 2, therefore, removinginternational offsets in scenario 5 has a much smaller impact onthe IGEM allowance price than the ADAGE allowance price.•The reason ADAGE shows more international offsets usage is thatdomestic covered GHG abatement is more costly in ADAGE. This ispartially due to the putty-clay capital representation in ADAGE compared toIGEM’sperfectly mobile capital stock.Additionally, while reference casetotal GHG emissions are similarin ADAGE and IGEM, covered GHGemissions are higher in the ADAGE reference case compared to theIGEMreference case. This is in part due to the 5 year time steps inADAGE andthe representation of the coverage phase-in, compared to the annual timesteps in IGEM.125 125 125 1252022 22222670 7072129181985 10704080120160200240280scn 2 scn 5b scn 5c scn 5 scn 5dAmericanPower Act10 Yr Delay 20 Yr Delay No Int'lOffsetsNo Int'l orDomesticOffsetsDelayed Int'l OffsetsAvailability to the U.S.. .

2013-2050 Cumulative GtCO 2 e-100%-67%-33%0%33%67%100%133% % Change from Scenario 2Covered GHG AbatementDomestic OffsetsInternational OffsetsCovered GHG Allowances (Cap)% Change from Scn. 2 - Covered GHG Abatement% Change from Scn. 2 - Domestic Offsets% Change from Scn. 2 - International Offsets% Change from Scn. 2 - Allowance Price54EPA Analysis of the American Power Act2013-2050 Cumulative Covered U.S. GHG Emissions & AbatementTechnology and Offsets Sensitivities(ADAGE)•In the core policy scenario, cumulative domestic offset usage is22 GtCO2e, or an average of 584 MtCO2e per year, and the limitis non-binding.•In the core policy scenario, cumulative international offset usageis 35 GtCO2e, or an average of 929 MtCO2e per year, and theadjusted limit on international offset usage is non-binding.•In scenario 6, where nuclear and bioelectricity are held toreference levels and CCS is delayed, covered GHG abatementbecomes more expensive and falls 10%, international offsetusage increases 6% up to the adjusted limit, domestic offsetusage increases 22%, and the allowance price increases 34%.•In scenario 5, where international offsets are not allowed,domestic offset usage increases 60%, and covered GHGabatement increases 28% to make up for the lost internationaloffsets, and allowance prices increase 107%.•In this scenario, the price ceiling is exceeded, and the cumulativecap increases by 4 billion tons as reserve allowances are releasedthrough the cost containment reserve.•While the price ceiling is exceeded, releasing the 4 billion reserveallowances does lessen the impact on allowance prices.•Because offsets are not allowed inthis scenario, it is not possibleto purchase offsets with the revenues from the sale of reserveallowances in order to refill thereserve, and the allowance price isthus able to exceed the price ceiling.•In scenario 7, where nuclear and bioelectricity are held toreference levels and CCS is delayed, and where internationaloffsets are not allowed, domestic offset usage increases 72%,and covered GHG abatement increases 23%, and allowanceprices increase 146%.•As in scenario 5, the cap increase by 4 billion tons and the priceceiling is exceeded in this scenario.•Imposing the IPM electricity sector emissions reductions inADAGE in scenario 8 reduces covered GHG abatement by 8%,but increases international offset usage increases 7%, domesticoffset usage by 12%, and allowance prices by 18%.•Without CCS bonus allowances in scenario 9, covered GHGabatement falls by 3%, international offset usage increases 5%,domestic offset usage increases 1%, and allowance pricesincrease 1%.*Scenario 5 ADAGE results updated 6/30/10125125353738380 022222527363864 6259791291251251295882050100150200250Scn. 2 Scn. 9 Scn. 8 Scn. 6 Scn. 5 Scn. 7AmericanPower ActNo CCSBonusIPM Elec inADAGeLow Tech No Int'lOffsetsLow Tech &No Int'lOffsets

2013-2050 Cumulative GtCO 2 e-100%-50%0%50%100%150% % Change from Scenario 2Covered GHG AbatementDomestic OffsetsInternational OffsetsCovered GHG Allowances (Cap)% Change from Scn. 2 - Covered GHG Abatement% Change from Scn. 2 - Domestic Offsets% Change from Scn. 2 - International Offsets% Change from Scn. 2 - Allowance Price55EPA Analysis of the American Power ActGlobal Results:Market for International GHG Abatement56EPA Analysis of the American Power ActMarket for International GHG Abatement andInternational Offsets in APA•International offsets are one of the most important cost containment features of both the Housepassed American Clean Energy andSecurity Act of 2009 (H.R. 2454) and the American Power Act.•H.R. 2454 allows overone billion tons of international offsets annually, andthe American Power Actallows up to onebillion tons.•Estimates of the costand availability of international offsets are one ofthe most important factorsdetermining estimates of the cost of these bills.•Assumptions about the market for international offsets can have a major impacton the estimatedcosts of a bill.•Assumptions about both the international reference GHG emissionspath and about the policiesadopted by other countries affect the internationaldemand for GHG abatement.–Greater international demand for GHG abatement increasesthe cost of international GHGabatement, which in turn increases the cost of international offsets for theU.S., and increasesdomestic allowance prices.–Scenarios 3 and 4 explore theimpacts of differing assumptions aboutdeveloping countryaction, and scenario 2a looksat the effect of varying assumptions about international GHGemissions projections.•Assumptions about GHG abatement potential (e.g. availability of REDDoffsets, oramount of energyrelated CO2 abatement potential), affects the international supplyof GHG abatement.–Less international supply of GHG abatement increases the cost ofinternational GHGabatement, which in turn increases the cost of international offsets for theU.S., and increasesdomestic allowance prices.–Scenarios 2b and 5a examine the impacts ofdiffering assumptionsabout the supply ofinternational GHG abatement.57EPA Analysis of the American Power ActBecause the market for international GHG abatementhas significant impactson the U.S. use ofinternational offsets, several side scenarios are includedhere to further explore the relationshipbetween international GHGsupply and demand, and the market for allowances under the APA. Areduced form version of the IGEMmodel was used for these side scenarios. Thesescenarios can becompared to scenario 2, which places no restrictions on offsets beyond those in the bill.Additional sensitivities using the reduced form IGEM model:•Scenario 2a – Slower International Reference Emissions Growth (CCSP Reference)–For the purpose of analyzing the international offset market, international reference emissions are based on the CCSP SAP 2.1aGCAMreference scenario, instead of the GCAM Energy Modeling Forum 22reference scenario used in other scenarios in this analysis.•Scenario 2b – Less International CO2Abatement Potential (CCSP MACs)–For the purpose of analyzing the international offset market, international energy related CO2marginal abatement cost curves aregenerated by the CCSP SAP 2.1a era GCAM model, instead of the Energy Modeling Forum 22 era GCAM model used to generate theinternational energy related CO2MAC curves used for other scenarios in this analysis.•Scenario 2c – Slower International Reference Emissions Growth & Less International CO2Abatement Potential(CCSP Reference & MACs)–For the purpose of analyzing the international offset market, international reference emissions are based on the CCSP SAP 2.1aGCAMreference scenario, instead of the GCAM Energy Modeling Forum 22reference scenario used in other scenarios in this analysis.–For the purpose of analyzing the international offset market, international reference emissions are based on the CCSP SAP 2.1aGCAMreference scenario, instead of the GCAM Energy Modeling Forum 22reference scenario used in other scenarios in this analysis.•Scenario 5a –No International REDD Offsets–No reduced emissions from deforestation and degradation (REDD) offsets for the U.S. or for any other country.Market for International GHG AbatementSensitivity Scenarios58EPA Analysis of the American Power ActInternational GHG Reference Emissions& Climate Policy Assumptions•At the July 9, 2009 Major Economies Forum, “theG8 leaders agreed to reduce their emissions 80% ormore by 2050 as its share of a global goal to lower emissions 50% by 2050.”For this analysis(scenarios 2, and 5-10), EPA is using a set of assumptionsabout international action consistent with theG8 agreement:•Group 1 countries (Kyoto group less Russia) follow an allowance path that is falling linearly from the simulatedKyoto emissions levels in 2012 to 83% below 2005 in 2050.•Group 2 countries (rest of world) adopt a policy beginning in 2025 that caps emissions at 2015 levels, andlinearly reduces emissions to 26% below 2005 levels by 2050.•The combination of U.S., Group 1, and Group 2 actions cap 2050 emissions at 50% below 2005 levels.•Scenario 3 explores the impact of earlier action by developing countries, with a 2050 target that isconsistent with the G8 agreement:•Group 1 countries (Kyoto group less Russia) follow an allowance path that is falling linearly from the simulatedKyoto emissions levels in 2012 to 83% below 2005 in 2050.•Group 2 countries (rest of world) adopt a policy beginning in 2020 that caps emissions 15% below BAU levels,and linearly reduces emissions to 26% below 2005 levels by 2050.•The combination of U.S., Group 1, and Group 2 actions cap 2050 emissions at 50% below 2005 levels.•Scenario 4 explores the impact ofdeveloping countries not taking any action, resulting in a failure toachieve the G8 2050 goals:•Group 1 countries (Kyoto group less Russia) follow an allowance path that is falling linearly from the simulatedKyoto emissions levels in 2012 to 83% below 2005 in 2050.•Group 2 countries (rest of world) do not cap GHG emissions.010203040506070801990 2010 2030 2050

GtCO 2 eWorld Reference EmissionsWorld Cap - G8 (Scn. 2)World Cap - Early Group 2 Action (Scn. 3)World Cap - Group 2 After 2050 (Scn. 4).Group 2 Reference EmissionsGroup 2 Cap - G8 (Scn. 2)Group 2 Cap - Early Group 2 Action (Scn. 3).Group 1 Reference EmissionsGroup 1 Cap.US Reference EmissionsUS Emissions Reduction Goals59EPA Analysis of the American Power Act2013-2050 Cumulative Covered U.S. GHG Emissions & AbatementInternational GHG Abatement Demand and Supply Sensitivities(IGEM)•This figure shows how varying assumptions about internationalpolicy, reference emissions, and abatement potential affect thesupply and demand for international GHG abatement, havinglarge impacts on both how the U.S. meets the APA GHGemissions caps and on the price of allowances in the U.S.•In scenario 4, as developing countries do not adopt climatepolicies, the price of international offsets falls. Subsequently,the U.S. increases international offset usage up to the limit,domestic offset usage and covered GHG abatement fall, anddomestic allowance prices fall.•In scenario 3, as developing countries adopt policy in 2020instead of in 2025, demand for international GHG abatementincreases. Subsequently, the U.S. uses 21% fewerinternational offsets (whose price has risen). Domestic offsetusage and covered GHG abatement increase 4% and 5%respectively. Allowance prices increase by 7%.•In scenario 2b, with less international energy related CO2abatement potential, international offset usage falls 50%,increasing the need for domestic abatement and increasingallowance prices 16%.•In scenario 5a, as REDD offsets are not available globally,international offset usage falls69%, domestic allowance pricesincreasing by 23%.•A situation in which domestic forestry offsets are availablebut international forestry offsets are not could result inleakage of emissions abroad as agricultural activities andforest clearing shifts from the U.S. to Group 2 countries. Inaddition, limitationson international or domestic forestryoffsets could result in unaccounted emissions due to theexpansion of bioenergyproduction because combustion ofrenewable biomass is exempt from submitting emissionallowances. The IGEM results do not account for theimpact of these potential sources of leakage on globalCO2 emissions in limited or unavailable offsets scenarios.•Because reference GHG emissions for developing countries aregrowing more slowly in scenario 2a, those countries must abateless to meet their caps. This lower demand for GHG abatementinternationally decreases the price of international offsets,increasing their usage 85%, and decreasing allowance prices24%.•Finally, scenario 2c shows the results of using both the lowerinternational emissions growth and the lower internationalenergy related CO2 abatement potential from the CCSP eraGCAM model that were used for previous EPA analyses of H.R.2454. International offset usage increases by 41%, andallowance prices fall by 12%.125 125 125 125 125 125 12520372822182425182070557357633861016238078050100150200250300scn 2 scn 4 scn 3 scn 2b scn 5a scn 2a scn 2cAmericanPower ActNo Group 2 EarlyGroup 2CCSP CO2 No REDD EMF CO2 CCSP CO2EMF RefCCSP Ref

2013-2050 Cumulative GtCO 2 e-100%-67%-33%0%33%67%100% % Change from Scenario 2Covered GHG AbatementDomestic OffsetsInternational OffsetsCovered GHG Allowances (Cap)% Change from Scn. 2 - Covered GHG Abatement% Change from Scn. 2 - Domestic Offsets% Change from Scn. 2 - International Offsets% Change from Scn. 2 - Allowance Price60EPA Analysis of the American Power ActLiterature Review& Near Term Incidence Analysis61EPA Analysis of the American Power ActComparing Costs of Three Possible U.S.Emissions Targets through 2050 (EMF 22)•287 GtCO2e: ADAGE, IGEM and EPPA predict a similar rise in allowance prices. Thecost of allowances rises fromapproximately $4 to $6 per ton in 2020 to $20 to $25 in 2050. However MiniCAM predicts only a small increase inallowance prices ($1 to$5), while MRN-NEEM predicts allowance prices will rise from $20 in 2020 tonearly $90 in 2050.•203 GtCO2e: The models predict allowance pricesin 2020 that range from $25 to $70 and thatallowance prices grow to arange of $90 to $300 in 2050.•167 GtCO2e: The models predict allowance pricesin 2020 that range from $55 to $115 and thatallowance prices grow to arange of $230 to $485 in 205001020304050607080901002020 2025 2030 2035 2040 2045 2050

$/tCO 2 (2005 U.S. $)ADAGEMRN-NEEMEPPAIGEMMERGE (opt)MiniCAM (base)To put the EPA models (ADAGE and IGEM) in context, we compare theresults of the Energy ModelingForum (EMF) 22 analysis (Fawcett, et al.2009) of three emission goals that span a wide range of possibleU.S. 2050 targets. Caps are based on CO2-equivalents (CO2-e), covering all Kyotogases. These scenarios were not intended torepresent any specific bill, and no domestic or international offsets are allowed.Domestic emissions(before subtracting abatement from offsets) under the American Power Act would fall between the 203 and 287 GtCO2e cases.167 GtCO2-e203 GtCO2-e287 GtCO2-e0501001502002503003504004505002020 2025 2030 2035 2040 2045 2050

$/tCO 2 (2005 U.S. $)ADAGEMRN-NEEMEPPAIGEMMERGE (opt)MiniCAM (base)0501001502002503003504004505002020 2025 2030 2035 2040 2045 2050

$/tCO 2 (2005 U.S. $)ADAGEMRN-NEEMEPPAIGEMMERGE (opt)MiniCAM (base)62EPA Analysis of the American Power ActComparing Costs of Three Possible U.S.Emissions Targets through 2050 (EMF 22)•287 GtCO2e: Annual consumption losses remain below 1% for all models through 2050.•203 GtCO2e: Annual consumption losses areall 1.4% or below in 2020and rise to between 2.25%to 2.8% in 2050.•167 GtCO2e: Annual consumption losses are between 1%and 2.6% in 2020andrise to between3.5% to 4.75% in 2050.-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%2000 2010 2020 2030 2040 2050

% of Reference ConsumptionADAGEMRN-NEEMEPPAIGEMChanges in consumption approximate changes in consumer welfareAnnual Consumption Losses across Scenarios287 GtCO2-e203 GtCO2-e167 GtCO2-e-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%2000 2010 2020 2030 2040 2050

% of Reference ConsumptionADAGEMRN-NEEMEPPAIGEM-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%2000 2010 2020 2030 2040 2050

% of Reference ConsumptionADAGEMRN-NEEMEPPAIGEM63EPA Analysis of the American Power ActComparing Primary Energy Use through 2050in the EMF 22 ModelsPrimary Energy Usage – EMF-22 203 GtCO2e Scenario•Under the 203 GtCO2e EMF-22 policyscenario, all models show reductions inprimary energy from the referencescenario. In one model (MiniCAM), thereduction in energy consumption is small,representing less than 2% of referenceenergy consumption in all periods. Theother models show a more substantialreduction, ranging in 2030 from 14% ofreference energy in ADAGE to 21% ofreference energy in EPPA.•These reductions in energy capture bothefficiency improvements and reductions inenergy services. The degree to which amodel exhibits a reduction in energy usedepends on its technology availability andconsumer response in terms of willingnessto reduce energy-consuming activities. Theinclusion of more advanced end-usetechnologies in particular can result inreduced energy consumption, asconsumers switch to more efficienttechnologies to meet the same level ofservice.•Imposing a climate policy not only changes total primary energy consumption, but also the energy supply mix. All of the five models that includenuclear energy, bioenergy, and non-biomass renewables show increased use of these fuels under a policy. All of the models include CO2captureand storage as a means of reducing the emissions associated withfossil fuels but the degree to which it is used varies widely.In the EPPA modelit enters only in the final period at a very low level. In othermodels, it enters as early as 2030. Low-carbon sources (fossilfuels with CCS,bioenergy, nuclear, and non-biomass renewables) account for between 39% (EPPA) and 62% (MERGE) of total primary energy supply in 2050 inthe 203 GtCO2e scenario. In contrast, these technologies accounted forbetween 12% (ADAGE, MRN-NEEM) and 28% (MiniCAM) of totalprimary energy supply in 2050 in the reference scenario.64EPA Analysis of the American Power ActComparing Costs of Three Possible U.S.Emissions Targets through 2050 (EMF 22)* AEO 2008 Early release was used by the EPA models for EMF-22. The baseline in EPA’s analysis of the American Power Act is AEO 2010.Common messages from the models•The majority of the cost-effective reductions come from the electricity sector.•Greater technical availabilityand lower costs for both nuclear power andCCS reduce the costof reaching the GHG emissions caps.•Different Models, Different Baselines and AssumptionsEPAMITCRAEPRIPNNLModelADAGE,IGEMEPPAMRN-NEEMMERGEMiniCAMBaseline Used forEMF 22AEO 2008 EarlyRelease*AEO 2009 EarlyReleaseAEO 2008 EarlyReleaseOwn baselineOwn baselineNuclearAssumptionsCapacity growsat 150% 2005levelsNot permitted toexpand in the basecase (AdvancedNuclear availablein 2020)Capacity limitedbut growing overtime (3 GW in2015; 100 GW in2050)New capacity in2020: capacitylimited but growingover time subject touranium supplyconstraintsSoft constraints in2020; after 2020allowed to growunconstrained(Advanced nuclearcase)CCS AssumptionsAvailable in 2020Available in 2020Available in 2015but with capacitylimitsAvailable in 2020;allowed to tripleeach decadeAvailable in 202065EPA Analysis of the American Power ActComparing Costs of Three Possible U.S.Emissions Targets through 2050 (EMF 22)$0$20$40$60$80$100$1200.0 1.0 2.0 3.0GtCO2-e

$/tCO 2287 203 167ADAGE▲● ■MRN-NEEM▲● ■EPPA▲● ■IGEM (ndo)▲● ■MERGE (opt)▲● ■MiniCAM (base)▲● ■20502020Marginal Abatement Cost Functions (MACs) in 2020 and 20502020-All models, except MERGE, require abatement of less than 1 GtCO2-e to reach 287 bmt –MACs range from $1-$6, except for NEEM, whichreaches $20.-All models require abatement between 0.8-2.25 GtCO2-e to reach the 203 bmt –MACs range from $25-$70.-All models, except MERGE and MiniCAM, require abatement between1.55-2.8 GtCO2-e to reach 167 bmt –MACs range from $55-$113.2050-All models, except MERGE, require abatement between 0.6-3.75 GtCO2-e to reach 287 bmt –MACs range from $5-$25, except NEEM whichreaches $90.-All models require abatement between 4.8-6.5 GtCO2-e to reach203 bmt –MACs range from $90-$180, except NEEM, which reaches $300.-All models require 6-8 GtCO2-e to reach 167 bmt –MACs range from $230-$485..$0$50$100$150$200$250$300$350$400$450$5000.0 2.0 4.0 6.0 8.0GtCO2-e

$/tCO 266EPA Analysis of the American Power ActHousehold Distributional Issues•The ADAGE and IGEM models assume a single representative agenthousehold. To determine thenear term cost of the APA across households indifferent incomebrackets, we conduct a separateincidence modeling exercise that iscalibrated to ADAGE results.•To put these results in context, we first briefly review the findings of studies that account for thedistribution of the costs of acap-and-trade program acrosshouseholds in differentincome categories(Dinanand Lim Rogers2002; Rose and Oladosu2002; CBO 2003; Parry 2004; Metcalf 2009).–A GHG cap-and-trade policy increases the price of energy-intensive goods and direct energy expenditures to theextent that theenergy used results inrelatively high GHG emissions.The increase in price creates an incentive formore efficient use of such energy anddevelopment and use of energy technology and sources that emit less or noGHGs. The majority of this price increase is ultimately passed onto consumers.–Before accounting for how allowances are allocated or auction revenues are distributed, lower income householdsare disproportionally affected because they spend a higher fraction of their incomes on energy-intensive goods anddirect energy expenditures.–The way the value of allowancesis allocated affects the distribution ofthe cost of the policy. If allowances areauctioned, the auction revenue can be used to influencethe distribution of costs.–Providing allowances gratis(i.e., grandfathering) to firms thatoperate in competitive markets tends to be veryregressive.This is because the value of these allowances flows to householdsin the form of increased equity valueor capital gains. These assets are held primarily byhigh-income households.•Higher income households may even bebetter off with a GHG policy if this allocation method is used.–If the allowances are auctionedand the revenues are redistributed by lowering payroll orcorporate taxes, the policytends to be less regressive than when allowances are grandfathered.•Reducing distortionarytaxes also reduces the overallcost of the cap-and-tradepolicy (Fullerton 2009).–However, lowering payroll or corporate taxes is more regressive than when the auction revenues are distributed inequal lump-sum rebates tohouseholds. Distributing the revenues lump sum tohouseholds is often the leastregressive cap-and-trade policy analyzedand is usually shown to be progressive.•But by providing lump-sum compensation rather than reducing distortionarytaxes the overall cost of the cap-andtrade policy is higher.67EPA Analysis of the American Power ActHousehold Distributional Issues•Some cap-and-trade approaches use allowance valueto mitigate increases in the pricesof certain goods. For example,some approaches return allowance value to consumers through local distribution companies (LDC) based on how muchelectricity or fuel they consume.–The overall distributional impacts ofthese policies are notalways clear. These approaches may increase theoverall cost of the policy because theyrequire greater emissionreductions byother sectors ofthe economy, whichin turn leads to higher prices of other goods.–The direct effect of preventing electricity and fuel prices fromrising will likely benefitlower income householdsmore than higher income households,but the incidence of the indirect effect (higher prices for other energyintensive goods) may counter thedirect effect to some extent.•Recent studies show how the distribution ofthe cost of a cap-and-program differs across regions given alternative methodsof distributing allowance value (Burtrawet al. 2009, Hassettet al. 2009).–For instance, a cap-and-(taxable) dividend policy that results in a ~$21/metric ton CO2price is estimated to resultin an average welfare gain of 2.7%for the households with incomes in the lowest 20th percentile nationally.However, regionally this varies from 1.1% to 3.8%.–Regional differences result from differences in pre-existing policies, levels of goods consumed, pricing ofelectricity, and the inputs used toproduce goods (e.g. coal, natural gas).•There are important caveats to the findings of climate policy incidence studies:–Most use annual householdexpenditures as a proxy for income. Whena wealth measure is used instead, thedistributional difference between low and high income householdsis lesspronounced (Dinanand Lim Rogers2002; CBO 2003). However, lower income households are stilldisproportionately impactedby the direct increasein goods prices relative tohigher income households.–They typically do not considerthe distribution of the benefits of reducing emissions.–They do not consider how expenditure patterns anddemand for energy goods may change over time as a resultof the policy.–They do not always consider theeffect of the policy on theprices of non-energy goods.•Regressivityand progressivity are normative concepts that do not have commonly agreed upon definitions.–In this discussion we refer to a progressive policy asone wherethe net cost of the policy as a percentage ofincome is lower for poorer households than it is for wealthier households. Aregressive policy would have highercost as a percentage of income for low income households. This is a commonapproach to evaluating theincidence of climate policy in the economics literature (e.g. Metcalf 2009 and Hassettet al. 2009).68EPA Analysis of the American Power ActNear Term Incidence AnalysisScenario 2•This graphic and table report the estimatedcost in 2016 of the APA per household in ten income classes using an incidence modeland methodology adapted fromBurtrawet al. (2009). The allowance and electricity prices used intheincidence model come from Scenario 2 ADAGE results. The price changes for energy goodsconsumed by households and producers are estimated using the carbon contentof the fuel and allowanceprice. The indirect priceincreases of other final goods areestimated based on the share of energy inputsused to produce them. The welfare cost inthe incidence model is calibrated to theabatement cost forecast by ADAGE.•The height of each blue bar shows the welfare cost (loss in consumer surplus) in 2016 as a percentage of household income, accounting for the distribution of theentire value of allowances to households. Households are groupedbyincome decile. Average household income increases moving tothe right along the horizontalaxis. The table provides the value of these losses in 2005$. Theaverage household income in the table is for the period 2004 to2008.•The incidence model is intended to reflect detailed demographicdifferences across the population based on recent year consumerexpenditure survey data. Focusingon a near term year, 2016, the first year that all provisions ofthe legislation take effect, preserves the underlying characteristics of the population sample in the data.•The next slide reports the way the allowance value is assumed tobe allocated in this analysis.Note: EPA's January 29, 2010 "Supplemental Analysis of H.R. 2454" contained a similar incidence analysis (slide 70). However,the analyses are not comparablebecause of several changes to the underlying data and methodology between this analysis and the January analysis.IncomeDecileAverageIncome(2005$)LossinConsumerSurplusPerHouseholdin2016(2005$)1(lowest) $6,900‐$1582 $14,900‐$713$22,200 $394$29,700 $1065$37,900 $1636$47,500 $2177$58,900 $2748$74,000 $3189$97,200 $34010(highest) $174,500‐$39Average$56,400 $11969EPA Analysis of the American Power ActNear Term Incidence AnalysisTreatment of Allowance ValueDispositionofAllowanceValue*Shareof2016AllowanceValueTreatmentinIncidenceModelTreatmentinADAGEElectricityConsumers(LDC)30.00%EffectonelectricitypricesandabatementbehaviortakenfromADAGEresults.Subsidytohouseholdelectricityconsumption.MerchantCoal3.50%Providedasshareholderdividend.Lump‐sumrebatetorepresentativehousehold.LongTermContractGenerators1.50%Providedasshareholderdividend.Lump‐sumrebatetorepresentativehousehold.NaturalGasConsumers(LDC)7.20%AbatementbehaviorofhouseholdsreflectedinADAGEresults.Allowancevalueusedtoreducehouseholdsburdenproportionaltotheirnondirectelectricityinitialwelfarelosses.Subsidytohouseholdnaturalgasconsumption.NaturalGasConsumers(EE)1.80%EffectoflowerdemandandfuelpricescapturedbycalibratingtoADAGEresults.Createslowerdemandfornaturalgas.HomeHeatingOil&PropaneConsumers(LDCandEE)1.50%Lump‐sumnon‐taxableper‐capitarebate.Lump‐sumrebatetorepresentativehousehold.Trade‐ExposedIndustries15.00%ReflectedinequilibriumabatementbehaviorinADAGE.Removedirectcostofholdingallowancesandindirectelectricitypricesignalthroughrebateforallowancesheldandelectricitypriceincreases.Refiners3.75%ProvidedasshareholderdividendLump‐sumrebatetorepresentativehousehold.EnergyRefund6.59%Rebatetohouseholdswithincomesbelow150%ofpovertylineaccountingforhouseholdsizeandlossinpurchasingpower.Upto9.78%allocatedforuse,butnotallisneeded.Excesstodeficitreduction.Lump‐sumrebatetorepresentativehousehold.WorkingFamiliesRelief2.50%Rebatetohouseholdswithincomes$1,000below150%ofpovertylineto250%ofpovertyline,withhouseholdsizeadjustmentandphaseoutbeginningatincomes$2,000below250%ofpovertyline.Lump‐sumrebatetorepresentativehousehold.CleanEnergyTechnologyResearchandDevelopment2.00%Lump‐sumnon‐taxableper‐capitarebate.Lump‐sumrebatetorepresentativehousehold.CleanVehicleTechnology1.00%Lump‐sumnon‐taxableper‐capitarebate.Lump‐sumrebatetorepresentativehousehold.IndustrialTechnologiesResearchandDevelopment1.00%Lump‐sumnon‐taxableper‐capitarebate.Lump‐sumrebatetorepresentativehousehold.StateEnergyEfficiencyandRenewables2.00%ReflectedinequilibriumabatementbehaviorinADAGE.Createslowerdemandforenergygoods.HighwayTrustFund3.07%Lump‐sumnon‐taxableper‐capitarebate.Lump‐sumrebatetorepresentativehousehold.TIGERGrants2.30%Lump‐sumnon‐taxableper‐capitarebate.Lump‐sumrebatetorepresentativehousehold.CLEANTEA2.30%Lump‐sumnon‐taxableper‐capitarebate.Lump‐sumrebatetorepresentativehousehold.CostContainment1.50%Notallocated.Notallocated.DeficitReductionFund11.60%6.81%:Sharethatisfromdirectallocationtodeficitreductionandispresumablyrequiredfordeficitneutrality.Itisnotallocatedintheincidencemodel.1.53%:Sharethatistheunusedamountofthetransportationinfrastructureandefficiencysetasidewhichistheamountinexcessofthemaximumdollaramountthatcanbeallocatedtotheseprograms.Itisnotallocatedintheincidencemodel.3.21%:SharethatistheunusedallowancevaluefromtheEnergyRefundandWorkingFamiliesReliefprogramset‐aside.Thisvalueisreturnedtohouseholdsasaproportionalincometaxreduction.Lump‐sumrebatetorepresentativehousehold.70EPA Analysis of the American Power Act•The allocation strategy in Scenario 2, as modeled, leads to anincrease in the welfare of households in the bottom two income deciles and in thetop decileby more than the increased cost of goods and services resultingfrom the APA. The majority of the APA’scosts as a portion ofhousehold income is borne by households in the fourth to ninth income deciles.•The incidence analysis does not completely capture the incentiveand incidence effects ofthe APA. This is because the APA provides flexibility inthe ultimate use of some of the allowancevalue, the incentive effects of certain allowance uses are not captured in ADAGE, andthere are noexisting studies on the distributional consequences of certain uses of allowance value. A method of distributing the allowancevalue that differsfrom what is assumed in this analysis will yield different distributional results. For example,–The allowance value withheld explicitly for deficit reduction isassumed to be retained by the government to cover reductions intax revenue in future years dueto the Act. An alternative treatment of thisshare of the allowance value would be torepresent the avoided future increase inother taxes that would otherwisemake up for this shortfall. This approach would make the averagecost per household appear lower in the near-term, although a full analysis using thisapproach would also show that the average costper household would be higher in later years.–In this scenario more allowance value is allocated to the EnergyRefund and Working Families Relief provisions than is needed in2016. The unused portion ofthe allowances set aside to fund these two programs flows intothe Deficit Reduction Fund. We assume that this unused portion isnot needed to offset reducedtax revenues. Consequently, we assume thatthis excess amount isreturned to householdsthrough a proportional income tax reduction. Returning the value tohouseholds by an equal lump-sum amount would look more progressive.–The electricity LDC allocation is modeled in ADAGE as lowering the electricity price, which leads to an increase in the amountof electricity consumed.However, the APA requires the LDC rebate be accounted for in thefixed portion of electricity bills, which may result in consumers not increasing their electricityconsumption as modeled. If the incidence analysis assumed that industrial and commercial ratepayers do not adjust electricity consumption in response to theLDC rebate this would change the distributional results becauseproducers would instead pass thevalue of the LDC rebate onto their shareholders. Thisapproach would have similar distributional effects as providing allowances gratis to producers and lead to a decrease in the cost of the APA to higher incomehouseholds (those that are shareholders) and increase the cost for lower income households.–Some of the allocations are treated as lump-sum to households even though they may affect the prices of goods and inputs. For example, research anddevelopment may lead to innovations that lower the cost of cleaner technologies. If the intensityof use of these cleaner technologies varies across incomedeciles, the distributional results will change.–Forecasting the effect on households of the allowance value usedto fund transportation infrastructure is challenging as the incidence of these programsdepends on which projects are funded and the timing of their completion. For example, the larger the share of the allowance value that is used to reduce thevariable cost of mass transit, the betteroff lower-income households may be. If the share allocated to the Highway Trust Fundavoids gasoline tax increases,the incidence would mimic the lowering the gasoline tax.•The incidence model is based on partial equilibrium analysis, which preserves detail but sacrifices certain dynamic properties.The greatestburden of policy would be expected in the near term before households adjust their durable good purchases and producers changetheirproduction processes. Modeling in a near term framework also reduces uncertainty regarding baseline consumption patterns (the findings can beviewed as an income shock). An analysis of the incidence of thepolicy over time would show the cumulative impact on householdsof changes inthe flow of allowance value to different uses, and would fully represent how the Act affects household wealth.–Appendix 1 provides additional information on the assumptions ofthe incidence model and its linkages to ADAGE.Near Term Incidence AnalysisDiscussion71EPA Analysis of the American Power ActNear Term Incidence AnalysisScenario 6: Reference Nuclear & Biomass/Delayed CCS•The above graphic and table report the estimated distribution ofthe cost of the APA in 2016 under the assumptions of Scenario 6.•The allowance price is higher and the cost of the APA to the average household is higher under Scenario 6 than Scenario 2. Thedistribution of theimpact of the Act follows a pattern similar to Scenario 2, but with greater magnitude for all income deciles.•However, the limitations of the incidence model may affect the results more the greater is the allowance price. That is becauseat higher prices,the composition of the fuels and technologies used to produce goods may change significantly from what they are today.•Because of the difference in the allowance price, there are somedifferences in the disposition of allowance value between Scenarios 2 and 6.•In 2016, 6.47% (versus 6.59 % for scenario 2) of the allowance values is needed to fund the Energy Refund program in 2016. Thisimplies thatthere is slightly more unused allowance value from the low income households allocation which is ultimately deposited in the Deficit ReductionFund. Furthermore, there are fewer allowances needed to fully fund the transportation programs (1.90%), and therefore there aremore excessallowances from the transportation programs set aside that are deposited in the Deficit Reduction Fund.IncomeDecileAverageIncome(2005$)LossinConsumerSurplusPerHouseholdin2016(2005$)1(lowest) $6,900‐$1962 $14,900‐$793 $22,200 $664 $29,700 $1555 $37,900 $2306 $47,500 $2997 $58,900 $3758 $74,000 $4329 $97,200 $45610(highest) $174,500‐$103Average $56,400 $16372EPA Analysis of the American Power ActReferencesACEEE (2009). “Saving Energy Cost-Effectively: A National Reviewof the Cost of Energy SavedThrough Utility-Sector Energy Efficiency Programs,”American Council for an Energy Efficiency Economy, September 2009Burtraw, D., R. Sweeney, M. Walls (2009).The Incidence of U.S. ClimatePolicy: Alternative Uses of Revenues from a Cap-and-Trade Auction.National TaxJournal. Forthcoming. (Also available asRFF Discussion Paper 09-17-REV. June 2009.)Calvin K.V., J.A. 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Sigman, M. Walls, and R. Williams (2006)“The Incidence of Pollution Control Policies.”The International Yearbook of Environmental and ResourceEconomics 2006/2007. Eds., T. Tietenbergand H. Folmer. Northhampton, MA: Edward Elgar.Rose, A. and G. Oladosu(2002). “Greenhouse Gas Reduction Policy in the United States: Identifying Winners and Losers in an Expanded Permit TradingSystem.”The Energy Journalv. 23, n. 1: 1–18.73EPA Analysis of the American Power ActContact InformationThe analysis was conducted by EPA’s Office of Atmospheric Programs.Contact: Allen A. FawcettTel: 202-343-9436Email: fawcett.allen@epa.govThe full analysis is available online at:www.epa.gov/climatechange/economics/economicanalyses.html