EPA Analysis of the American Power Act

EPA Analysis of the 

American Power Act 

in the 111th Congress 

6/14/10

U.S. Environmental Protection Agency Office of Atmospheric Programs

* This version was updated on 6/30/10 to present a corrected version of ADAGE “Scenario 5 – No 

problem with the model code that overly limited nuclear power in this scenario. This version also 

ADAGE reference case average annual household energy expenditures.

*
EPA Analysis of the American Power Act 

Major Findings

• The American Power Act (APA) of 2010:

– Establishes a multi-sector cap-and-trade program with delayed phase-in for the industrial s

program for the transportation fuels and refined petroleum products sectors.

– Creates other incentives and standards for increasing energy efficiency and low-carbon en

• This analysis models the multi-sector cap-and-trade program, the alte

for the transportation fuels and refined petroleum products sectors, thand 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 th

regulation for offshore oil and gas extraction, powering vehicles with natural gas provisionsmodeled in this analysis; and, the special incentives for nuclear power are not modeled in tanalyzed in the detailed electricity sector modeling).

– See Appendix 1 for a detailed description of the bill and of the provisions modeled in this a

• While there are important differences between the American Power A

(discussed in the following section), the modeled impacts of the APA 

H.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 20

– Both bills allow for 2 billion tons of offsets in each year. – Both bills contain provisions to prevent emissions leakage and to address competitiveness 

– The Cost Containment Reserve provisions of the APA provide a greater level of price certa

Strategic Reserve Allowance Program by, among other things, allocating a greater share olevel of price certainty comes at a slightly higher cost to the APA over H.R. 2454. 

– The APA’s approach to cover GHGs from the transportation fuels and refined products sec

prices.
EPA Analysis of the American Power Act

Major Findings

• Under reference assumptions the probability of observed temperature c

industrial levels, remaining below 2° C (or 3.6° F) is roughly 1%, and the 

temperature change exceeding 4° C (or 7.2° F) is approximately 32%. 

• Under the combined APA and the G8 international agreement assumpti

temperature changes in 2100 remaining below 2° C (or 3.6° F) increaseobserved temperature changes exceeding 4° C is negligible given clima

– Under a climate sensitivity of 3° C, the observed temperature increase in 2100 relative to pre-in

under the APA and the G8 agreement, compared to the no-policy, no-agreement result of a 3.5o 

mean temperature.

– CO2e concentrations are projected to rise to 931 ppm by 2100 without policy; however, with the 

concentrations are projected to be 457 ppm in 2100.

– Even if developing countries delay taking action until 2050, and then simply hold emissions con

observed temperature changes in 2100 remaining below 2° C (or 3.6° F) increases to approxim

temperature changes exceeding 4° C (or 7.2° F) falls to roughly 15%. 

• Allowance prices under both the APA and under H.R. 2454 are projecte

CO2 equivalent (tCO2e) in 2013 and $23 to $24/ tCO2e in 2020 in the co

– Across all scenarios modeled without constraints on international offsets, the expected allowanc

and from $17 to $32/tCO2e in 2020.

– While the APA allows for up to one billion tons of international offsets each year, we have includ

international offsets in order to demonstrate the impact these provisions of the bill have on costs

those that prohibit the use of international offsets, the expected allowance price ranges from $1

tCO2e in 2020. Additional sensitivities show that if the availability of international offsets to the 

allowance prices increase by only one percent.

* All prices in this analysis are presented in 2005 dollars. The range of allowance prices represents the est

used in this analysis.
EPA Analysis of the American Power Act

Major Findings

• The APA still has a relatively modest impact on U.S. consumer

revenues from the program are returned to households lump-s

– Average household consumption is reduced, relative to the no-polic

between 0.0 – 0.2% in 2020, by 0.2 – 0.5% in 2030, and by 0.9 – 1.

– Despite the expected decrease in consumption over the no-policy c

consumption is still expected to rise over the period of analysis: the 

rate from 2010-2030 under the core scenario is expected to be betw

– The net present value of the annual household consumption loss av

year.*

– These costs include the effects of higher energy prices, price chang

impacts on wages and returns to capital. Cost estimates also reflec

emissions allowances returned to households, which offsets much o

consumption. 

– If auction revenues that are modeled as being returned to househol

directed to particular funds, the expected reduction in household an

would likely be greater. However, such revenues could be used to and thus reduce policy costs. 

• The APA cost estimates do not account for the benefits of avoi

change (or, stated from a different perspective, the no-policy sc

estimates of the costs of climate change induced damages).

* Annual net present value cost per household (discounted at 5%) averaged over 2010-2050.
EPA Analysis of the American Power Act

Major Findings

• Offsets have a strong impact on cost containment.

– The annual limit on domestic offsets is never reached in the core scenario. Domestic offset us

in each year. This represents approximately 19 percent of cumulative GHG abatement form al

– The limits on the usage of international offsets (accounting for the extra international offsets all

not reached. International offset usage averages between 0.6 and almost 1 billion tCO2e each 

from 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 international offsets each year, we have inclu

international offsets in order to demonstrate the impact these provisions of the bill have on costallowance price would increase 34 to 107 percent relative to the core policy scenario, and hous

to 114 percent, the large range due to the differing international offset core scenario usage proj

– The cost containment reserve price is met in ADAGE scenarios that limit the usage of internatio

are released from the reserve, which somewhat limits the increase in allowance prices seen in international offsets are not allowed in these scenarios, it is not possible to refill the cost contai

to exceed the reserve price.

• While the competitiveness provisions of the APA are modeled in this ana

impacts of those provisions are not included in this report; however, com

leakage are topics explicitly addressed in the December 2, 2009 interag

Effects of H.R. 2454 on International Competitiveness and Emission Lea

Exposed Industries.” – The interagency report is available at www.epa.gov/climatechange/economics/economicanalys

– Consistent with prior EPA modeling of this issue in its June 23, 2009 analysis of H.R. 2454, the 

shows that the allowance allocations in H.R. 2454 can essentially eliminate any adverse effect have on energy-intensive trade-exposed industries’ international competitiveness, and can ther

otherwise arise if such a program were to reduce the competitiveness of U.S. industry.

– The modeling also concludes that, even in the absence of the allowance allocations in H.R. 245

competitiveness of energy-intensive trade-exposed industries would be relatively limited. Howegreater impacts than others.

• While this analysis contains a set of scenarios that cover some of the im

modeling the economic impacts of a comprehensive climate policy, othe

significantly affect the results.

*Scenario 5 ADAGE results updated 6/30/10
EPA Analysis of the American Power Act

The American Power A

Comparison to H.R. 24
EPA Analysis of the American Power Act

• Compared to EPA’s January 29, 2010 supplemental analysis of H.R. 24

Power Act includes updated assumptions about the U.S. reference case emissions.

• Updated U.S. Reference Scenario:

• Previous EPA analyses of H.R. 2454 used a reference case based on the Ma• The reference scenario used for this analysis is based on the AEO 2010.

• Updated International Reference Emissions Projections & 

Updated International Energy Related CO2 Marginal Abatement Cost 

• International reference emissions and international energy related CO2 MAC 

H.R. 2454 were based on the MiniCAM Climate Change Science Program (CProduct (SAP) 2.1a reference case.

• Clarke, L., J. Edmonds, H. Jacoby, H. Pitcher, J. Reilly, and R. Richels. 2

Product 2.1, Part A: Scenarios of Greenhouse Gas Emissions and Atmos

Government Printing Office, Washington DC.

• The reference scenario and the international energy related CO2 MAC curves 

the GCAM (formerly MiniCAM) Energy Modeling Forum 22 reference case.

• Calvin KV, JA Edmonds, B Bond-Lamberty, LE Clarke, SH Kim, GP Kyle

Wise. 2009. "2.6: Limiting Climate Change to 450 ppm CO2 Equivalent 

Economics 31(S2): S107-S120.

Changes Since EPA January 29, 2010 A
EPA Analysis of the American Power Act

• Because of the changes discussed in the previous slide, the results in this analysis are not 

analyses of H.R. 2454. In order to enable a comparison between the APA and H.R. 2454, 10 of this analysis with a set of assumptions consistent with those used for the core APA poscenario 10 – H.R. 2454 are presented throughout this analysis, and in this section we highmodel results across analyses of the two bills.

• While there are important differences between the two bills that are summarized and explai

similarities. Overall, the estimated impacts of the APA are very similar to those of H.R. 245prices 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 

• The APA allows landfill, natural gas and coal mine CH4 as potential offset sources, whereas H.R

standards. This will lower allowance prices slightly and result in an increase in total GHG emissi

• The cost containment reserve allowance provisions in the APA are changed to provide greater p

allowance provisions in H.R. 2454. The APA also allocates more allowances to the cost contain

strategic reserve. This change will result in slightly higher expected allowance prices, but greater 

compared to H.R. 2454.

• Instead of including transportation emissions in the allowance market, the allowances needed fo

auction each quarter and sold directly to covered entities at the auction-clearing price. This will n

emissions reductions.

• The APA begins in 2013 instead of 2012, and phases-in coverage of industrial GHG emissions in 

emissions slightly, but will have only a negligible impact on allowance prices.

• The energy efficiency provisions in APA (including those specified for inclusion in this analysis fr

included in H.R. 2454. This change will result in slightly higher allowance prices in the APA com

costs is less certain.

• While the overall limits on offsets are similar in APA and H.R. 2454, the one billion ton ultimate li

than the 1.5 billion ton ultimate limit in H.R. 2454. While this does not impact scenarios that use offsets annually, it does increase allowance prices in scenarios that limit other GHG abatement o

offset usage.

• The percentage reduction in covered GHG emissions represented by the caps are identica

• Coverage is the same after 2016. • Both bills have output-based rebate provisions designed to reduce emissions leakage and addre

intensive and trade exposed industries, these provisions are modeled in all scenarios of this ana

APA Comparison to H

Overview
EPA Analysis of the American Power Act

APA Comparison to H

Cost Containment Reserv

• Both H.R. 2454 and the American Power Act set aside a portion of allowances to establish a reserve 

auction each compliance period, and would be purchased if allowance prices rise high enough. Auctallowances can then be used to purchase offsets that are used to refill the reserve. These provisions 

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 A

sets the reserve price (price ceiling) at $28 (in constant 2009 dollars) in 2012, and the price rises at a 

in 2015, the reserve price is set at 60 percent above the 36-month rolling average of that year’s emisthe reserve price allows the reserve to be triggered when price volatility leads to suddenly high prices

allowance prices would not trigger the reserve. The strategic reserve in H.R. 2454 appears primarily cost containment in general. 

• In contrast, the APA sets the reserve price (price ceiling) at $25 (in constant 2009 dollars) in 2013 ris

results in a predetermined reserve price for every year, which can be met either by high allowance phigh allowance prices. The cost containment reserve in the APA is designed to address both price vrevenues from auctioning the reserve allowances are used to purchase either international REDD off

offsets are not available for purchase, then the reserve cannot be refilled, and it is possible for the reprices to exceed the reserve price.

• Both bills contain an auction price floor, which in the APA is $12 (in constant 2009 dollars) in 2013 ris

• Another key difference between the strategic reserve in H.R. 2454 and the cost containment reserve 

allowances are taken out of the cap and placed in the reserve under the APA.

Share of Total AllowancesHR. 2454 Strategic Reserve APA Cost Containment Reserve2012 – 2019 1% 2013 – 2021 1.5%

2020 – 2029 2% 2022 – 2029 2.5%

2030 – 2050 3% 2030 – 2050 5.0%

• Cumulatively over 2012 – 2050, H.R. 2454 places 2.8 billion allowances in the strategic reserve, repr

2013 – 2050 the APA places 4.0 billion allowances in the cost containment reserve representing 3.1% 

• If allowance prices remain low and the minimum prices for releasing allowances from the reserves a

has the effect of tightening the cap and raising allowance prices. 

• In the APA, removing the reserve would decrease allowance prices by 0.7% in all years, and als

18% (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, an

offsets by 11% (compared to IGEM scenario 10 – H.R. 2454).
EPA Analysis of the American Power Act

APA Comparison to H

Coal Mine, Landfill & Natural G

• An additional difference between the two bills is that H.R. 2454 requires the establishment 

uncapped stationary sources including: any individual sources with uncapped emissions gr

source category responsible for at least 20% of uncapped stationary GHG emissions. The be identified by EPA include those responsible for at least 10% of uncapped methane emissources would then be set under the provisions of section 111 of the Clean Air Act. In geneemissions limits set based on an analysis of best demonstrated technologies but do not reqused. Under section 111(d), states are then directed to set performance standards for exisperformance standards and may take into account other criteria such as a facility’s remaininpotentially be covered by this provision likely includes, at a minimum: landfills; coal mines; apossible that reductions occurring prior to adoption of standards and reductions beyond thowould be eligible for offsets, modeling of these sources assumes reductions stemming from potential reductions from these sources and eliminates their eligibility to provide offset cred

• In the American Power Act, these performance standard provisions are no longer mandated 

gas 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 s

availability of offsets from these sectors; however, previous EPA modeling of climate legislation hdiscretionary options are not exercised. 

• An extension of EPA’s June 23, 2009 analysis of H.R. 2454 has shown that allowing these 

2454 instead of covering them under performance standards would increase 2012 – 2050 c

GtCO2e; increase 2012 – 2050 cumulative domestic offsets usage by 46% (6 GtCO2e); dec

international offset usage by 12% (5 GtCO2e); and decrease allowance prices by 2% in all y

core scenario of EPA’s H.R. 2454 analysis ($13/tCO2e 2015; $16/tCO2e in 2020) (Fawcett, 

modeled cost of the policy would likely be small.

• However, there are other general equilibrium consequences from the way that these emission so

in the reduced form modeling used to generate these results. Including these sources in an offse

the appropriate level of abatement from these sources so that the marginal cost of abatement is standard dictates what level of abatement particular sources must achieve. If costs end up being less abatement activity than under an offsets program, although sources may be able to over-co

costs end up being higher than expected, there will be more abatement activity than under an offabatement for these sources will be higher than for sources covered by the cap. 
EPA Analysis of the American Power Act 

APA Comparison to H

Transportation Fuels and Refined Petr

• Under H.R. 2454, covered entities with compliance obligations for GHG emissions from tran

products must obtain allowances to meet their compliance obligations either at auction or in 

• Under APA, instead of purchasing allowances at auction or in the

secondary market, cover

and refined petroleum products must purchase allowances directly from EPA. 

• Ahead of each quarter’s auction, EPA must set aside from the allowances to be auction

be needed to cover emissions from combustion of refined products for that quarter.

• If the number of allowances to be auctioned is less than the number of allowances that must 

combustion of refined products, then EPA may borrow allowances from the next year, or mafor other purposes. This consignment of allowances must be large enough to fulfill the set asallowances for auction to ensure adequate market liquidity, price discovery, and allowance aconsigned allowances are returned to the original allowance holder. In this analysis, EPA haallowances that must be consigned, and the models assume that any necessary consignmen

• Refined product providers purchase set-aside allowances 30 days after the end of each 

auction-clearing price from the previous quarter.

• The number of allowances refined product providers must purchase is based on the am

determined emissions factors for the type of fuel sold. 

• The system will be officially reassessed no later than January 1, 2033 and may subseq

appropriate.

• This analysis assumes that the system phases out in 2033. If the system is not phased out o

allowances required to be set aside from the auction will eventually exceed the total number 

• Allowing the direct purchase of allowances from the EPA for GHG emissions from transport

under the APA may result in less price volatility for covered entities in these sectors compa

• Because the models used in this analysis do not represent price volatility, this differenc

including allowance price or the sources of GHG abatement.

• For other covered entities that must obtain allowances at auction or in the secondary m

market for allowances may result in greater price volatility. Additionally, the alternative 

other entities purchasing a greater amount of offsets than in H.R. 2454, as entities that mechanism are not allowed to obtain offsets to meet their compliance obligations.
EPA Analysis of the American Power Act 

Contents

• Major Findings• APA Comparison to H.R. 2454• Contents• Bill Summary & Analytical Scenarios• Global Results: CO2e Concentrations and Temperature Changes

• Economy-Wide Impacts: GHG Emissions & Economic Costs

• Energy Sector Modeling Results from Economy-Wide Modeling• Detailed Near-Term Electricity Sector Modeling Results

• Offsets Usage & Limits• Global Results: Market for International GHG Abatement• Literature Review & Near Term Incidence Analysis • Appendix 1: Bill Summary, Modeling Approach and Limitations

• Appendix 2: Additional Qualitative Considerations • Appendix 3: Additional Information on Offsets and the International G• Appendix 4: Modeling of Energy Efficiency Provisions

• Appendix 5: Additional Information on Economy Wide Modeling (ADA

• Appendix 6: Additional Information on Near Term Electricity Sector M

• Appendix 7: Model Descriptions
EPA Analysis of the American Power Act 

Bill Summary & Analytical S
EPA Analysis of the American Power Act 

• Title I of the APA outlines a direction for energy policy that incl

nuclear power generation, new regulation for offshore oil and g

and deployment of carbon capture and sequestration (CCS) terenewable energy and energy efficiency, development of a cle

and further support for clean energy research.

• Title II of the APA outlines the GHG reduction mechanism and 

– Cap target is identical to H.R. 2454 (17% reduction from 2005 levels by 2020, 83% by – The set of GHGs is defined to include C02, methane, nitrous oxide, sulfur hexafluoride

byproduct, perfluorocarbons, and nitrogen trifluoride.

– Cap and trade program regulates entities to hold allowances equal to their annual em

– Covered entity may bank allowances without limit, borrow from the following year’s al

borrow allowances from vintages up to five years in the future with interest to comply obligation.

– Establishment of a cost containment reserve of 4 billion allowances to be open for sal

reaches $25 (constant 2009 dollars, adjusted annually for inflation plus 5%). Reserve developing country offsets from the Reducing Emissions from Deforestation and Degr

– Establishment of a compliance program for the transportation fuels and petroleum pro

are obligated to buy allowances at the most recent allowance auction clearing price to 

– Establishment of an offset credit program, defining crediting rules for both domestic a– Details the yearly allocation of emissions allowances to covered

entities, categorized 

job protection and growth, clean energy development and deployment, adaptation, GHinfrastructure and efficiency, and deficit reduction (see appendix 1 for further details).

– Sets the allowance auction reserve price of $12 (2009 constant dollars, adjusted year– Establishes a separate reduction program for hydrofluorocarbons with a target of 15% – Supports further research on and continuation of programs confronting black carbon a– In general, precludes the Environmental Protection Agency from using the existing Cl

entities covered under this bill.

– Establishes strict rules governing the carbon market, giving the Commodity Futures T

The American Powe

Bill Summary
EPA 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 comp

consumer costs, while allowances are distributed to states to offset increased 

and propane.

– Low income households will benefit from the Working Families Refundable Re

Program. The Universal Refund is established as a rebate to all U.S. citizens t

• Title IV of the APA focuses on job protection and U.S. econom

– Covered entities identified as energy-intensive trade-exposed (EITE) will initial

them to adjust to emissions requirements.

– Beginning in 2020, an international reserve allowance program may be establis

than 70% of whose global production originates in countries that have signed o

reduction agreement to which the U.S. is a party. Importers of EITE products wallowances to cover GHG emissions arising from production.

– Education and grant support for clean energy curriculum and career developm– Substantial support for the development of plug-in drive and natural gas (heavy

– Requires the Environmental Protection Agency to set and enforce mobile sour

• Title V of the APA outlines proposed international climate chan

– Establishes program to build capacity in developing countries to reduce emissi– Requires annual interagency report on the climate change and energy policies 

non-OECD countries.

• Title VI of the APA provides a plan for domestic adaptation to g

• Title VII requires the APA to be deficit-neutral. *See 

The American Powe

Bill Summary
EPA Analysis of the American Power Act 

EPA analyzed 10 different scenarios in this report. A full descripavailable in Appendix 1. The assumptions about other domestic that affect the results of this analysis do not necessarily reflect Eactions.

Scenario 1 - EPA 2010 Reference 

– This reference scenario is benchmarked to the AEO 2010 forecast and inc

Independence and Securtity Act (EISA) and the American Recover and Re

• Does not include any additional domestic or international climate policies or measure

• 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 

• 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 

• Widespread international actions by developed and developing countries o

International policy assumptions are consistent with the agreement among Major Economies Forum “to reduce their emissions 80% or more by 2050 

emissions 50% by 2050.”

• Group 1 countries (Kyoto group less Russia) follow an allowance path that is falling li

levels in 2012 to 83% below 2005 in 2050.

• Group 2 countries (rest of world) adopt a policy beginning in 2025 that caps emission

emissions to 26% below 2005 levels by 2050.

• The combination of U.S., Group 1, and Group 2 actions caps 2050 emissions at 50% 

* Building codes provision from S. 1462, Sec. 241, included per Senate specifications to EPA

Analytical Scena

Reference and Core Policy S
EPA Analysis of the American Power Act 

A full description of all scenarios is available in AppInternational action sensitivities• Scenario 3 – Early developing country action• Scenario 4 – No developing country actionTechnology and offset sensitivities requested by Se• Scenario 5 – V – No Int’l Offsets*• Scenario 6 – V – Reference Nuclear & Biomass / Delayed 

• Scenario 7 – V – Reference Nuclear & Biomass / Delayed 

• Scenario 8 – V – IPM electricity sector reductions impos• Scenario 9 – No CCS Bonus Allowances

H.R. 2454 Comparison Scenario• Scenario 10 – H.R. 2454* “V” signifies scenarios requested by Senator Voinovich. See Appendix 6 for a discussion o

bioelectricity, and CCS deployment.

Analytical Scena

Sensitivity Scenarios
EPA Analysis of the American Power Act 

Key Uncertainti

• There are many uncertainties that affect the economic impacts of the 

• This analysis contains a set of scenarios that cover some of the impo

– The degree to which CCS and new nuclear power are technically and polit– The availability of international offset projects.– The extent and stringency of international actions to reduce GHG emission

countries. 

• Some additional uncertainties covered in this analysis outside of the 

– 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 achieving substantial GHG abatement.

• Note that because of banking, uncertainty in long run abatement costs can have a s

– The pace of domestic economic and emissions growth in the absence of c– The impact of output based rebates to energy intensive and trade exposed 

leakage, trade patterns, and allowance prices. 

– Possible interactions among modeled and non-modeled policies.– The impact of subsidizing electricity prices versus lump sum transfers to c

distribution companies.

– The responsiveness of household labor supply to changes in wages and p

– The impacts of technology learning and spillover effects.– Other parameter uncertainty, particularly substitution elasticities (e.g., the 

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 som
EPA Analysis of the American Power Act 

Global Results: 

CO

2e Concentrations and Te

Changes
EPA Analysis of the American Power Act 

Overview of Bene

• Scientists project that the world could face a significa

average surface temperature in the absence of effect

GHG concentrations.

– CO

2 concentrations may double from pre-industrial leve

• This doubling of concentrations is associated with a li

temperature increase of 2 to 4.5°C (3.6 to 8.1°F), with (5.4°F) (IPCC 2007).

• Climate change associated with these temperatures w

potentially negative impacts, including 

– increased heat-related mortality rates, 

– reduced agricultural yields in many parts of the world, 

– rising sea levels that could inundate low-lying coastal ar

– increased power of the strongest hurricanes and typhoo

– increased risk of catastrophic climactic tipping points, su

and collapse of the Greenland and West Antarctic ice s

– increased frequency and intensity of other extreme wea

waves, heavy precipitation, floods, and droughts.

• Economic effects of these impacts are likely to be sig

negative, and to vary substantially by region; howeveof GHG mitigation are not estimated for this analysis.
EPA Analysis of the American Power Act 

International Action Ass

• At the July 9, 2009 Ma

agreed to reduce their share of a global goal 

assumptions about intare consistent with the 

• Developed countries 

allowance path that emissions levels in 2

• Developing countries 

2025 that caps emisemissions to 26% be

• The combination of U

actions cap 2050 em

• After 2050, caps for 

2050 levels.

• For the scenario with n

2050, developing counand after 2050 GHG elevels. The U.S. and osame caps in this scenscenario.

• In the global GHG con

we have also analyzed incremental impact of 

• In the U.S. only scen

targets in the APA, wGHG emissions path

• In the no U.S. scena

emissions path, and international action G

0

1020304050607080

1990 2000 2010 2020 2030 2040 2050

GtCO2e

World 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 Cap
EPA Analysis of the American Power Act 

CO

2e Concentration

Impacts of International Action Assumption

• CO2e concentrations through 2100 are 

warming climate and the carbon cycle a(CS) of 3.0°C. (CS is the equilibrium te

is deemed “most likely” by the IPCC).

• The five scenarios shown here are:

– Reference: no climate polices or m

– US Only: US adopts the APA, all o

– Developing Countries After 2050

as G8 scenario. Developing (group emissions constant at 2050 levels. 

– No US: US follows BAU emissions– G8 - International Action Assum

reduce global emissions to 50% bedeveloped countries (group 1) redu

2050, and developing (group 2) cou

return emissions to 26% below 200targets constant after 2050.*

• CO2e concentrations are approximately 

action assumptions.

– Note that CO2e concentrations are 

concentrations from continuing to rwould need to be further reduced. 

concentrations at 457 ppm would r

very long run). 

• No participation from developing count

concentrations to 723 ppm in 2100, wh

concentrations of 931 ppm in 2100.

• Removing US action from the G8 scen

2100 to 503 ppm. Adding US action to 

concentrations by 64 ppm in 2100 to 86

•Note that the ADAGE and IGEM models do not model post 2050 caps, doing so would likely raise allowance prices by only 2%. See the ba

CO2-equivalent Concentrations

(Climate Sensitivity = 3.0)

0

100200300400500600700800900

1000

2000

2010

2020

2030

2040

2050

2060

2070

2080

2090

2100

ppm

ReferenceUS OnlyDeveloping Countries After 2050No USG8 - International Action
EPA Analysis of the American Power Act 

• This chart demonstrates projec

(from pre-industrial time) in 210climate sensitivity. A climate se“most likely” by the IPCC.

• For any given climate sensitivity

temperature change. 

• Under the G8 – international go

below 2005 by 2050), a 2 degre

climate sensitivities of 3° C or lo

• The temperature and GHG con

rising after 2100 – continued Gstabilize temperatures and conc

• At a CS of 3.0° C, in order to ac

change of 2 degrees CO2e con457 ppm.

– This would require continued aba

concentrations at 2100 levels.

– It would be possible to reduce CO

by even further reducing GHG emscenario such as this would furthemaking it possible to achieve the sensitivity of 3.0° C. 

– See Appendix 5 for equilibrium te

Global Mean Temperature Ch

Impacts of International Action Assum

Observed Change in 

Global Mean Temperature in 2100

(from pre-industrial)

0.00.51.01.52.02.53.03.54.04.55.0

1.5 2.5 3.0 4.5

Climate Sensitivity

degrees Celsius

ReferenceUS OnlyDeveloping Countries After 2050No USG8 - International Action
EPA Analysis of the American Power Act 

2

1.18%

29.3%

37.8%

18.9%

8.1%

4.7%

Reference

0‐22‐33‐44‐55‐66‐8

11.1%

47.2%

27.0%

10.1%

4.0% 0.6%

Developing CountryDelay

• The pie charts show the approximate probability of observed global mean temperature cha

falling within specific temperature ranges under reference, developing country action delayescenarios.

– The figures were developed using MAGICC 5.3 and the truncated (at 10° C) Roe and Baker (2– 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 the change in equilibrium temperature becau

– CO2 e concentrations rise after 2100: Equilibrium temperature change is not achieved until af

analysis, CO2e concentrations will continue to rise after 2100. Therefore, changes in equilibrium 

temperature changes. 

– Ocean temperature inertia: This inertia causes the equilibrium global mean surface temperat

mean surface temperature change by as much as 500 years. Even if CO2e concentrations in 2

would continue to rise for centuries before the equilibrium was reached.

• Under the Reference scenario (1st chart), the probability of the observed temperature chang

approximately 1%, while there is a nearly 75% probability associated with this under the Fu

• The probability of being above 4 degrees C is about 32% in the Reference case, while it is j

Participation scenario (2nd chart) and zero under Full Participation (3rd chart).

° Celsius

Probability of Observed Temperatur

Reference, Delayed Participation, and Full 
EPA Analysis of the American Power Act 

Economy-Wide Impac

GHG Emissions & Econom
EPA Analysis of the American Power Act 

Total US GHG Emissions & Sourc

Scenario 1 - Reference & Scenario 2 

Covered GHG Emissions 

(Net of Offsets)

APA Cap

AEO 2010 

Reference Case

AEO 2009 

Reference Case

0

1,0002,0003,0004,0005,0006,0007,0008,0009,000

1990 2000 2010 2020 2030 2040 2050

MtCO2e

• Th

th24re

• Th

of 

• Th

ar

• Co

caabalfro

• D

care
EPA Analysis of the American Power Act 

GHG Allowance P

Scenario 2 – APA & Scenario 10 - 

• The marginal cost of GHG abateme• Range of 2030 allowance price in “

This range only reflects differences scenarios or additional uncertaintie

• The limit on international offsets us

the domestic allowance price is eqdiscounting) and the international oprice.

• When the international offsets limit 

prices between the models arises f

• The differences between the m

domestic abatement show up iused instead of differing allowa

• In scenario 2, ADAGE projects 

offsets will be used annually, aoffsets usage to be 522 MtCO2

• See the ‘Offsets Usage & Limit

offsets.

• Allowance prices under the Americ

to allowance prices estimated for H

$0

$10$20$30$40$50$60$70$80$90

$100

2010 2020 2030 2040 2050

2005 Dollars / tCO2e

Scn. 2 - APA ADAGEScn. 2 - APA IGEMScn. 10 - H.R. 2454 ADAGEScn. 10 - H.R. 2454 IGEM

2013 202

ADAGE $17 $24 IGEM $16 $23 

2013 202

ADAGE $17 $24 IGEM $16 $23 

Scn. 

Sc
EPA Analysis of the American Power Act 

34%

18%

-26%

7%

34%

146%

107%

-100%

-50%

0%

50%

100%150%200%

IGEM IGEM IGEM ADAGE ADAGE ADAGE ADAGE 

Scn. 3 - Early

Developing

Country Action

Scn. 4 - No

Developing

Country Action

Scn. 5 - V - No Int'l Offsets* Scn. 6 - V - Low

Tech*

Scn. 7 - V - Low

Tech & No Int'l

Offsets*

Scn. 8 - V - IPM

Elec. Imposed o

ADAGE

Allowance Price % Change from Scn. 2

GHG Allowance Prices & 

APA Scenario Comparison – Percentage Ch

• 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 acts an allowance price floor. Because of this, the impact of these sensitivities on allowa

international offsets and the amount of abatement occurring in the U.S. (e.g. a change that would ordinarily lead to lowinternational offsets.) 

• ADAGE shows greater usage of international offsets than IGEM in scenario 2, so removing international offsets in sce

prices in ADAGE than in IGEM. It should be noted that allowing no international offsets is an extreme case. If insteathe 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 reduces 

international offsets are not allowed, it is not possible to use the revenues from auctioning reserve allowances to purchase RE

is 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 pr

of the 5% growth rat of the price ceiling and allowance price in this analysis and is not expected to be triggered under any scethan 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 A

the early phases of planning, design, and/or construction that could potentially capitalize on the funding opportunities available Commission currently has 30-40 GW of new nuclear capacity under review, before taking into account additional nuclear powe

incentives for nuclear power in APA Title I, Subtitle A, Part II, Sec. 1121-1122. See Appendix 6 for more detail.

Note that Scn. 2 int’l offset usage is 929 MtCO2e/yr in ADAGE and 571 MtCO2e/yr in IGEM, thus the reduction in international offsets in scn. 5 is much greater in ADAGE. 

*Scenario 5 ADAGE results updated 6/30/10
EPA Analysis of the American Power Act 

• The average annual cost of the APA per h

net present value of the per household co

• The net present value of the per hou

year discounted back to today.

• The costs above include the effects of hig

and services, impacts on wages and retur

emissions allowances returned lump sum 

effect on household consumption. The cos

• This analysis is a cost-effectiveness analy

benefits of reducing GHG emissions were 

• The $79 - $146 average annual cost per h

emissions reductions and resulting climate 

• Across all scenarios, the highest average 

scenario 7, requested by Senator Voinovicnuclear, bioelectricity and CCS.

• See Appendix 1 for a discussion of consu

IGEM and of composition of GDP.

• See Appendix 5 for a more detailed discus

household calculation, and additional cons

Consumption

Scenario 1 – Reference & Scena

Avg. Annual Consumption Growth Rate 

(2010-2030)

2.51%

2.53%

2.79%

2.81%

0.0% 1.0% 2.0% 3.0%

Scn. 2 - APA

Scn. 1 - Reference

Scn. 2 - APA

Scn. 1 - Reference

IGEM ADAGE

ADAGE 2015 

% Change -0.14% Annual Change / HH -$122 NPV of Change / HH -$91 

Average Annual Cost per Househol

Total Cost per Household (2010-2050IGEM 2015 % Change 0.00% Annual Change / HH -$3 PV of Change / HH -$2 

Average Annual Cost per Househol

Total Cost per Household (2010-2050

U.S. Consumption

$0$5

$10$15$20$25$30

2015 2020 2030 2040 2050

Trillion 2005 $

Scn. 1 - Reference - ADAGEScn. 2 - APA - ADAGEScn. 1 - Reference - IGEMScn. 2 - APA - IGEM
EPA Analysis of the American Power Act 

Distribution of Allowance Value

$0

$20$40$60$80

$100$120$140$160

2013 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 Allowa

(IGEM/ADAGE)

• While being able to provide outcomes on aggregate household impacts, the limitation of a single representative 

distributional results of the various policy scenarios. Distributional results of a separately conducted analysis ar

• If auction revenues that are modeled as being returned to households lump sum were instead directed to partic

annual consumption and GDP would likely be greater. However, such revenues could be used to lower existing See “Scenario 16 – Revenue Recycling – Labor Tax” of EPA’s January 29, 2010 supplemental analysis of H.R. 

Bill Component (part of Clean Air Act, Sec. 781)
EPA Analysis of the American Power Act 

Energy Sector Modeling Res

Economy-Wide Mode
EPA Analysis of the American Power Act 

Primary Energy

APA Scenario Comparison (

*Scenario 5 ADAGE results updated 6/30/10

0

20406080

100120

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

Scn. 1 -

Reference

. Scn. 2 -

APA

. Scn. 5 - V -

No Int'l

Offsets

. Scn. 6 - V -

Low Tech

. Scn. 7 - V -

Low Tech &

No Int'l

Offsets

. Scn. 8 - V -

IPM Elec. in

ADAGE

. Scn. 9 - No

CCS Bonus

Allow ances

. 

Quadrillion Btu
EPA Analysis of the American Power Act 

Primary Energy

APA Scenario Comparison (AD

• A joint constraint on nuclear power and CCS in ADAGE is based on the constraint used in IPM (see Appendix 5 • In the reference scenario, primary energy use is 94 quadrillion Btu in 2010, grows 13% by 2030 and 21% by 205

• 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 suppor

primary energy production would serve to further reduce total primary energy use in comparison to the proposed 

• H.R. 2454 is estimated to reduce primary energy use (from the reference case) to a slightly larger extent than w

• In the reference case, low- or zero-carbon energy (including nuclear, renewables, and CCS) is expected to rise 

2030 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 prima

• Preventing international offsets from entering the trading system would substantially increase allowance prices 

zero- carbon energy sources. 

• Although not modeled in this analysis, the APA requires EPA to set new GHG standards for light-duty, heavy-d

would be expected to further reduce U.S. petroleum demand.

*Scenario 5 ADAGE results updated 6/30/10

Scenario Description

2010 2020 2030 2040 2050 

1 Reference 94 102 107 110 114 

2 American Power Act 94 96 95 94 96 5 No International Offsets 94 92 89 88 89 6 Nuclear/Biomass Reference and Delayed 94 94 92 89 86 

7 Scenario 6 and no International Offsets 94 90 85 82 83 8 IPM Electricity Imposed in ADAGE 94 98 97 96 95 9 No CCS Bonus Allowances 94 95 95 95 97 

10 H.R. 2454 94 94 94 93 95 

Quadrillion BTU Total Primary Energy Use 

Scenario Description

2010 2020 2030 2040 2050 

1 Reference 13% 15% 15% 12% 14% 2 American Power Act 14% 18% 24% 29% 43% 5 No International Offsets 14% 19% 27% 34% 45% 6 Nuclear/Biomass Reference and Delayed 14% 16% 18% 21% 28% 

7 Scenario 6 and no International Offsets 14% 17% 20% 27% 45% 8 IPM Electricity Imposed in ADAGE 14% 18% 24% 29% 44% 9 No CCS Bonus Allowances 14% 17% 22% 28% 44% 

10 H.R. 2454 14% 18% 25% 30% 43% 

Low/Zero Carbon Energy Use as Share of Total 
EPA Analysis of the American Power Act 

U.S. Electricity Gene

APA Scenario Comparison (

*Scenario 5 ADAGE results updated 6/30/10

0

1,0002,0003,0004,0005,0006,000

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

Scn. 1 -

Reference

. Scn. 2 -

APA

. Scn. 5 - V -

No Int'l

Offsets

. Scn. 6 - V -

Low Tech

. Scn. 7 - V -

Low Tech &

No Int'l

Offsets

. Scn. 8 - V -

IPM Elec. in

ADAGE

. Scn. 9 - No

CCS Bonus

Allow ances

. Scn

H.R

Billion kWh
EPA Analysis of the American Power Act 

U.S. Electricity Gene

APA Scenario Comparison (

• The APA is estimated to lead to a significant decline in electricity generation from non-CCS fossil fu

2030 and an 81% decrease by 2050. This is in stark contrast to the expected steady increase in nthe APA policy – a 22% increase by 2030 and a 56% increase by 2050.

• The APA is also expected to encourage electricity generation from cleaner technologies (CCS/IGCC 

geothermal, and nuclear), an increase over the 2010 level of 80% by 2030 and more than tripling 

• The APA allows covered entities to meet compliance obligations in a number of ways. Restrictions 

international offsets as shown in scenarios 5 and 7) tend to increase electricity prices, thus lowerin

• Prohibiting international offsets from entering the APA emissions reduction program in scenario 5 inc

amounts of GHG abatement to occur in covered sectors, including the power sector. CCS deploymescenario 2. With high allowance prices in scenario 5, the small amount of GHG emissions from CCS

efficiency, make nuclear the preferred option. Given the joint constraint on nuclear and CCS, as nuc2, CCS must decrease.

• Approaching 2050, prohibiting international offsets as in scenario 7 results in substitution away from 

such that the resulting changes over 2015 are similar to those to result from the APA. In the shorter-t

occur.

• Eliminating CCS bonus allowances from APA (scenario 9) is estimated to result in a slower decrease 

a slower advancement of clean electricity generation compared with the expected result of implemen

the CCS bonus allowances results in slightly higher allowance prices, it could potentially reduce the o

*Scenario 5 ADAGE results updated 6/30/10

Scen ario D escriptio n 2010 2020 2030 2040 2050 

1 R eference 2,619 2,810 3,201 3,879 4,086 2 American Power Act 2,572 2,438 1,972 1,644 499 5 N o International Offsets 2,560 2,288 1,710 1,218 496 6 N uc lear/Biomass R eference and D elayed C CS 2,595 2,623 2,581 2,480 1,959 7 Scenario 6 and no International O ffsets 2,593 2,498 2,335 1,750 262 8 IPM Electricity Imposed in AD AG E 2,569 2,419 1,869 1,525 478 9 N o CC S Bonus Allow ances 2,572 2,565 2,255 1,922 359 

10 H .R . 2454 2,572 2,286 1,818 1,471 411 

Fossil Fuels w /o C CS (B il K Wh ) 

Scen ario D escriptio n 2010 2020 2030 2040 2050 

1 R eference 1,219 1,488 1,532 1,290 1,528 2 American Power Act 1,266 1,681 2,284 2,784 4,077 5 N o International Offsets 1,274 1,724 2,319 2,913 3,884 6 N uc lear/Biomass R eference and D elayed C CS 1,241 1,450 1,622 1,858 2,407 7 Scenario 6 and no International O ffsets 1,241 1,450 1,622 2,239 3,995 8 IPM Electricity Imposed in AD AG E 1,267 1,692 2,327 2,847 4,102 9 N o CC S Bonus Allow ances 1,266 1,549 2,032 2,547 4,256 

10 H .R . 2454 1,266 1,681 2,284 2,784 4,041 

Lo w/Zero C arbo n En ergy (B il KW h) 
EPA Analysis of the American Power Act 

Energy efficiency provisions addressed (*see Note below)• Allowance allocations. Impacts on electricity and natural gas demand were calculated for the vario

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 con

• Building codes. Impacts on electricity and natural gas demand, and associated costs, were calcula

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 

in 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 

demand 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 sH.R. 2454 Comparison

• Calculated electricity demand impacts from the energy efficiency provisions of the American Power A

savings, 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 

significantly less allowance value devoted to energy efficiency programs, the lack of a Combined Effi

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 num

energy consumption to other products/services, conservation behavior (e.g., turning off lights), as we

efficiency. 

• A portion of estimated energy demand reduction from energy efficiency provisions may be a-priori in

demand to a price increase in ADAGE. Further analyses are needed to quantify the extent to which these scenarios.

• The costs of EE provisions are captured in the estimated economy-wide cost of APA. However, a po

ADAGE and then imposed within the model, rather than endogenously determined.

• Allowance allocations for energy efficiency are used to fund energy efficiency projects assuming a co

$46/MWh (electric) and $6.8/mmBTU (natural gas), and average measure lives of 13 and 19 years, radministrator” and “participant” costs. CSE escalated at 1%/year. Source ACEE (2009).

* NOTE: See Appendix 4 for further detail on provisions addressed, as well as methodology, 

American Power 

Energy Efficiency Provis
EPA Analysis of the American Power Act 

Energy Prices

APA Scenario Comparison (

*Scenario 5 ADAGE results updated 6/30/10

Natural Gas Price

$0$5

$10$15$20$25

2010 2015 2020 2030 2040 2050

$ per MMBtu

Gasoline Price

$0$1$2$3$4$5$6$7

2010 2015 2020 2030 

$ per Gallon

Household Electricity Price

$0.00$0.05$0.10$0.15$0.20$0.25

2010 2015 2020 2030 2040 2050

$ per kWh

Scn. 1 - ReferenceScn. 2 - APAScn. 5 - V - No Int'l OffsetsScn. 6 - V - Ref. Nuclear & Biomass / Delayed CCSScn. 7 - V - Ref. Nuclear & Biomass / Delayed CCS Scn. 8 - V - IPM Elec. Imposed on ADAGEScn. 9 - No CCS Bonus Allow ancesScn. 10 - H.R. 2454
EPA Analysis of the American Power Act 

Household Energy Exp

APA Scenario Comparison 

• In 2020, the average household’s energy expenditures (excluding motor gasoline) falls by 2% in scenario 2 – APA.” In 2030, t

increase is 28%.

• In 2020, electricity prices are equal to reference levels in “scenario 2 – APA.” In 2030 they increase by 27% over referen

• Actual household energy expenditures increase by a lesser amount due 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 

• In ADAGE, energy expenditures represent approximately 2% of total consumption in 2020, falling to 1% by 2050 in all scenari

• The energy expenditures presented here do not include any potential increase in capital or maintenance cost associated with 

energy efficiency programs.

• While energy expenditures begin to rise by significant amounts in 2030 to 2050, these increases are largely offset by the per-c

other ways of returning allowance value to households. (Slide 28 shows the net impact on households accounting for both inc

- 71 show the detailed incidence analysis.)

* In addition to the updated scenario 5, this slide corrects an error in reference case average annual household expenditu

*Scenario 1 and 5 ADAGE results updated 6/30/10

Avera

ge Annual Household Energy Expenditures 

(excluding gasoline)*

$0

$500

$1,000$1,500$2,000$2,500$3,000

2010 2015 2020 2030 2040 2050

2005 $

Chan

ge in Aver

Expenditu

-10%

0%

10%20%30%40%50%60%

2015 20

% Change from Reference

Scn. 1 - Reference Scn. 2 - APAScn. 5 - V - No Int'l Offsets Scn. 6 - V - Ref. Nuclear & Scn. 7 - V - Ref. Nuclear & Biomass / Delayed CCS & No Int'l Offsets Scn. 8 - V - IPM Elec. ImpoScn. 9 - No CCS Bonus Allowances Scn. 10 - H.R. 2454
EPA Analysis of the American Power Act 

Detailed Near-Term Electricit

Modeling Results
EPA Analysis of the American Power Act 

Detailed Electricity Sector Mo

Motivation for Using the Integrated Planning Model (IPM):

• The CGE models used for this analysis do not have detailed technology repre

for capturing long-run equilibrium responses than near-term responses.

• Since the electricity sector plays a key role in GHG mitigation, EPA has emplo

(IPM) to project the near-term impact of this policy scenario on the electricity s

Power Sector Modeling (IPM 2010 Ref. Case):

• This version of the model incorporates key assumptions/ projections from the 

Annual Energy Outlook 2010.

• Although it has been updated since the one used for the H.R. 2454 analysis re

is still built on the versions used previously to analyze H.R. 2454, the WaxmanS. 1766, and S. 2191.

• This version of the model incorporates key carbon-related options and assum

storage technology for new and existing coal plants, biomass co-firing optionsconstraints 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 ADAG

– CO2 allowance 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 for IPM at http://www.ep

* Allowance prices for the core IPM scenario are taken from the ADAGE core scenario (Scenario 2).
EPA Analysis of the American Power Act 

IPM Scenarios and Major P

Provisions Modeled 

Major Bill Provisions:Special Funding Program for Development & Deployment of CCS and Conversion Technologies (

Designed to “accelerate the commercial availability of carbon dioxide capture and sequestration technolo

• A CCS Program Partnership Council is created and administers funds generated through fees on e

will administer and distribute roughly $2 billion in annual funding for 10 years from date of enactme

• IPM implementation: Assumed that this funding spurs 12 additional GW of CCS capacity by 2025 

are “hard-wired” into IPM and are not a result of the model’s economic analysis. The model may in

an 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 f

allowances.

• A portion of allowances are reserved for incentivizing carbon capture and storage technology (star

The specific incentive is designed as a fixed monetary value for every ton of CO2 sequestered, rath

value is specified as $96/ton for the first 10 GW, then $85/ton for the next 10 GW (plus $10/ton for 

then the amount determined through reverse auction until a maximum of 72 GW of CCS receives t

allowances are made into “current” allowances and made available to qualifying projects dependen

allocated. The bonus for the remaining capacity is administered as a reverse auction.

• IPM implementation: Similar to past IPM applications, CCS projects receive a subsidy equal to the 

distributed on a first-come, first-serve basis and can be banked. In this analysis, $50/ton was used generation beyond the first 20 GW. This constant value does not reflect the potential for competitiv

the 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 period to 5 years. Modeled in IPM • Investment tax credit for nuclear power facilities provides 10% credit for certain expenditures for th

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 appfor 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. HIgh natural 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.
EPA Analysis of the American Power Act 

Key Model Updat

Updates 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 

• International electricity imports and exports: Calibrated to AEO • Limits on new wind additions in 2012 and new nuclear builds: 

Previous Updates Carried Over to IPM 2010:

• Natural gas supply curves: Same assumptions as IPM 2009 AR• Cost of Climate Policy Uncertainty: An increase to the capital ch

(consistent with AEO 2009). This change is only applied in the ref

sensitivity runs.

• CCS in Baseline: Reflecting updated financial incentives including 

are projected for 2015 in the baseline.

Comparison to Previous IPM Analyses:

• Electricity Demand: The reference case electricity demand foreca

analyses of legislative proposals (but slightly higher than in the H.R

revised economic growth and recently enacted laws supporting en

• New Capacity: Since overall electricity demand is lower, fewer ne

in 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 appfor IPM at http://www.epa.gov/airmarkets/progsregs/epa-ipm/index.html.
EPA Analysis of the American Power Act 

GHG Allowance Prices and 

CO

2 Emissions (IP

Core Scenario GHG Allowance Price

(from ADAGE Scenario 2)* Power S

* Allowance prices for the core IPM scenario are taken from the ADAGE APA core scenario (Scenargenerally consistent with AEO 2010, although projections are not identical because IPM is a power s

treatment of key assumptions and variables. 

$18

$24

$31

$-

$5

$10$15$20$25$30$35

2015 2020 2025

$2005/ Metric Ton

2,312

2,120 

0

500

1,0001,5002,0002,5003,000

2015 

CO2 Emissions (million metric tons)

IPM 
EPA Analysis of the American Power Act 

1,969 2,145 2,189 2,203 1,945 1,946 1,803

14 14 14

29 58 124

845 544 671 816

586 646 733

806

809

816

816

809 816 882

253 284 290

288

277 281 278

107 303

345

373

352

383 399

-

500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

2008 2015 2020 2025 2015 2020 2025

IPM 2010 Ref. Case APA

TWh

Coal Adv Coal w/CCS Oil/Natural Gas Nuclear Hydro Renewables

Electricity Generation M

2008 data from EIA’s Electric Power Annual (for electric utilities, independent power producers, and CHP electric power). IPM 2010 Reference C

are not identical because IPM is a power sector model and has 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 

reference cARRA prov

• Renewable

10 percent scenario. Mbiomass coby 2025.

• Electricity d

increase in later periodthan in the 

• The differe

reference c2025. This electricity usingle fami
EPA Analysis of the American Power Act 

2222 4 4 8

30

35

39

42

36

39

4210

8

0

1020304050607080

2015 2020 2025 2015 2020 2025

IPM 2010 Ref. Case APA

GW

Adv Coal w/CCS Oil/Natural Gas Nuclear Renewables

New Generation Capac

New Generation Capacity, Cumulative 

Note: New capacity additions less that 1 GW of capacity are not indicated. IPM 2010 Reference Case is generally consistenidentical 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 system.

• The IPM 2010 refer

renewables expect

financial incentives deployment of som

(including nuclear a

• Early deployment f

provision for captur

total of 15 GW of CGW are retrofits. Tcase.

• The 6 GW of a

determined exodeployment funon an economi

• 9 GW of CCS r

deployed, facilito existing facilamount of retro(while the limit reached).*

• In addition, 8 GW o

the investment tax power. The increasincluded in the modmore nuclear if it hanuclear capacity is penetration limit thr
EPA Analysis of the American Power Act 

Analysis of CCS Tec

• The CCS early deployment provisions, along with the bonus allowance provision f

of new coal capacity with CCS technology and retrofits of existing plants with CCS 

– New coal with CCS is projected to penetrate starting in 2015 in response to th

program and the financial incentives as part of the bonus. The amount of new scenario has been “hardwired” (or forced) to reflect the financial incentives of 

– Existing coal plants do not find it economic to retrofit with CCS without the CC

wires charges. This may be in part attributable to the additional incentives for competes. When the CCS incentives are eliminated, more nuclear capacity is policy case.

• The CCS bonus provision is modeled as a fixed incentive in IPM. APA directs EP

to set the per-ton value of bonus allocations beyond the first 20 GW, which could 

necessary to spur additional deployment of CCS. The total bonus is set as a port0.8% of allowances and rising to 10% through 2034.

• Provisions in APA provide incentives for CCS, nuclear power, and renewables sim

having unintended consequences. The combined effects of these multiple incentiveach other, at least in the near-term. In addition, the cumulative impact of such incprice signal and raise the total cost of emissions abatement, especially where thesenergy efficiency improvements. The consequences will have greater impact in thperiod modeled in IPM.

• Because of considerable uncertainty regarding technology cost and performance, 

for CCS would help determine the appropriate incentive for the technology without 

• Cost assumptions are basically uniform nationwide in IPM, but in reality, there is li

profiles, capital costs, and transport/storage costs that would result in a wider rangcurrently reflects.*

* The next version of the EPA reference case using IPM will reflect more regional variability for CCS costs, particularly transportation and 

assumptions used in EPA’s application of IPM, please see more detailed documentation for IPM at http://www.epa.gov/airmarkets/progsre
EPA Analysis of the American Power Act 

Effects of the Bonus Al

• The bonus allowances for CCS has notable effects on markets

– Allowance prices are lower in scenarios that include bonus allowan

allowances encourage the use of CCS that would otherwise be unereductions provided by these technologies allow the economy to relower prices for carbon allowances.

– The lower allowance prices, in turn, lead to lower electricity prices l

allowance 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 unec

allowances substitute high-cost for low-cost emission reductions. Tcosts of meeting a given cap.

– By keeping electricity prices lower than they otherwise would have 

indirectly reduce consumers’ incentives for saving energy. Without 

the total cost of meeting a given emission cap is higher.

– These inefficiencies lead to “deadweight losses” and are not factore

• The tendency of bonus allowances to drive up the total costs of me

mitigated or even reversed if the impact on the deployment of CCS 

technologies. That possibility, however, has not been modeled. 

* In competitive markets, lower allowance prices cut electricity prices by reducing marginal gene

lower costs for purchasing allowances keep average generation costs down, and those lower c
EPA Analysis of the American Power Act 

55

36 36 

0

102030405060708090

100

2015 2020 

IPM 2010 Ref. Ca

GW

1,042

190 182 177 174 175 163

212 212 218 199 203 207

638 660 670

568 567 533

-

200400600800

1,0001,200

2008 2015 2020 2025 2015 2020 2025

IPM 2010 Ref. Case APA

Million Tons

Appalachia Interior West

Coal Production for Electricity 

Retirements of Existing Ca

Note: Regional coal production data includes coal production for power generation only. Historical data is from EIA’s AEO 2010. Coal produc

perfectly because different grades of coal have greater heat content (e.g. bituminous coal has greater heat content than sub-bituminous coal)

coal imports, which increase over time in IPM. IPM 2010 Reference Case is generally consistent with AEO 2010, although projections are not 

different 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 proje

2025. Relatively low allowance prices and relatively high costs to build new technology make existing 

• These results show greater amounts of coal and oil/gas steam retirements in the updated policy scena

part, by the by the allowance price that represents the cost of emitting CO2, the energy efficiency prov

need for the less efficient existing stock of coal-fired power.

• In reality, uneconomic units may be “mothballed,” retired, or kept running to ensure generation reliabil

these potential outcomes. Most of these are marginal units with low capacity factors.

• Most uneconomic units are part of larger plants that are expected to continue generating. Currently, t

capacity and 315 GW of coal capacity.

Retirements of 

(Total Coal + Oil/
EPA Analysis of the American Power Act 

Power Sector Natur

Consumption and Pric

Nat. Gas Consumption (TCF)

Ref. 

Case 

APA 

Nat. Gas Price, Delivered ($2005/mmBtu)

Ref. 

Case 

APA 

Natural Gas Consumption and Average 

Delivered Prices (Electric Power)

Note: Natural gas prices and consumption presented here are determined endogenously in IPM and do not reflect changes sector as a result of the policy (the ADAGE model is the economy-wide model that EPA uses to reflect this dynamic). To the outside the power sector, the price impacts reflected here may be a bit lower (higher) than if the total demand for natural gas ADAGE is projected to decrease by 2% in 2015, 4% in 2020, and 8% in 2025. Note that ADAGE does not model the “Powe

which may increase natural gas demand. ADAGE models the natural gas LDC allocation as mitigating the natural gas price consumers. If ADAGE were to model the natural gas LDC allocation as mitigating the price increase for all consumers, this wgas demand.* Source of 2009 natural gas data is EIA Electric power Monthly Table 2.4.A. Total is for electric utilities and independent po

Lower natural gas prin natural gas demanin part, to the power emissions cap. Gas include the cost of C

$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$8.0

2009 2015 2020 2025

Price, $2005/mmBtu

0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.0

Consumption, TCF

IPM 2010 Ref Case Consumption APA ConsumptionIPM 2010 Ref Case Price APA Price
EPA Analysis of the American Power Act 

555 

36 36 36 

0

2 04 06 08 0

100120

2015 2020 2025 2

IPM 2010 Re f. Ca se R

1,969 2,077 

11 

845 628

806 809 

253 278 

107 286

-

500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

2008 2015 

IPM 20

TWh

Coal 

Sensitivity – Higher Natura

Natural Gas Consumption and Average N. Gas 

Delivered Prices (Electric Power)

• Recent projections of natural gas supply forecast a potentially 

significant increase in unconventional gas availability in the nearterm.

• Greater supply and lower natural gas prices increase the use of 

natural gas throughout the entire period in the policy sensitivity, where in the past there were decreases in gas consumption. It also results in significantly less coal generation by 2025.

• There are more coal retirements and fewer oil/gas steam 

retirements relative to the policy scenario when natural gas prices are lowered.

• This sensitivity was modeled using the allowance price and 

demand response from ADAGE Scn. 2.

$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$8.0

2009 2015 2020 2025

Price, $2005/mmBtu

0.00.51.01.52.02.53.03.54.04.55.05.56.06.57.07.58.0

Consumption, TCF

Re f C ase L ow Ga s C on su m ption AP A Low G as Co nsum ptionRe f C ase L ow Ga s Price APA Low G as Price
EPA Analysis of the American Power Act 

Offsets Usage & Lim
EPA Analysis of the American Power Act 

Offsets Sensitivitie

Side Scenarios (IGEM

Several factors could influence the availability and price of domestic and internatio

but are not limited to, the structure of international offsets markets and timing for 

governing domestic offsets markets, and responses of domestic and internationa

scenarios are included here to further explore the relationship between offset suquantity of abatement from covered sectors. A reduced form version of the IGE

scenarios. These scenarios can be compared to scenario 2, which places no reoverall 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%.
EPA Analysis of the American Power Act 

2013-2050 Cumulative Covered U.S. GHG E

Domestic Offset Sensitivit

(IGEM)

• Since the annual li

binding in scenario allowance prices (ehave a smaller impusage, and thus thchange.

• Because of the pos

available over the eoffsets influences awhen that cumulati

• The 1.5 GtCO2e an

GtCO2e limit on cu

– 2050 time frame.

• In the core polic

GtCO2e, or an a

binding.

• The 0.5 GtCO2e an

19 GtCO2e limit on entire 2013 – 2050 

• If the domestic o

offsets can be inlimit and actual 1.0 GtCO2e of in

international offs

international offs

• In the core polic

GtCO2e, or an a

non-binding.

• When domestic off

increases 89% up increases 6%, and 

• If domestic offset p

usage increases 49allowance prices in

• If domestic offset p

offset usage falls band allowance pric

• Scenarios 5e and 5

were run using the to the maximum amdomestic offset avaGHG abatement, a

• See Appendix 3 fo

125 125 125 125

20

38 30

10

22 11 32

70 74 71 69

0

50

100150200250300

scn 2 scn 5e scn 5f scn 5g

American Power

Act

No Domestic

Offsets

Low Domestic

Offsets

High Domestic

Offsets

2013-2050 Cumulative GtCO2e

-100%-67%-33%0%33%67%100%

% Change from Scenario 2

Covered 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 Price
EPA Analysis of the American Power Act 

2013-2050 Cumulative Covered U.S. GHG E

International Offset Sensitiv

(IGEM)

• While the America

domestic and interscenarios where oshow the impact thGHG abatement.

• In scenario 5d, wh

not allowed, coverand the allowance 

• In this scenario, th

increases by 4 bilcost containment 

• Because offsets a

purchase offsets worder to refill the rprice ceiling.

• In scenario 5, whe

domestic offset usincreases 22%, an

• While eliminating a

allowance prices, sto the U.S. has a m

• Delaying internati

international offseincreased after th1%. A 20 year deusage 10% and inwould have a greainternational offsethe limited availab

• Note that IGEM sh

offsets than ADAGinternational offset

the IGEM allowanc

• The reason ADAG

domestic covered partially due to the IGEM’s perfectly m

total GHG emissioemissions are higreference case. Tthe representation steps in IGEM.

125 125 125 125

2022 22 22

26

70 70 72

129

19 18

85 107

0

4080

120160200240280

scn 2 scn 5b scn 5c scn 5 scn 5d

American

Power Act

10 Yr Delay 20 Yr Delay No Int'l

Offsets

No Int'l or

Domestic

Offsets

Delayed Int'l Offsets

Availability to the U.S.

. .

2013-2050 Cumulative GtCO 2e

-100%-67%-33%0%33%67%100%133%

% Change from Scenario 2

Covered 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 Price
EPA Analysis of the American Power Act 

2013-2050 Cumulative Covered U.S. GHG E

Technology and Offsets Sens

(ADAGE)

• In the core policy 

22 GtCO2e, or an 

is non-binding.

• In the core policy 

is 35 GtCO2e, or adjusted limit on 

• In scenario 6, wh

reference levels abecomes more eusage increases usage increases 

• In scenario 5, wh

domestic offset uabatement increaoffsets, and allow

• In this scenario

cap increases through the co

• While the price 

allowances do

• Because offse

to purchase ofallowances in thus able to ex

• In scenario 7, wh

reference levels aoffsets are not aland covered GHG prices increase 1

• As in scenario 

ceiling is exce

• Imposing the IPM 

ADAGE in scenabut increases inteoffset usage by 1

• Without CCS bon

abatement falls bdomestic offset uincrease 1%.

*Scenario 5 ADAGE results updated 6/30/10

125 125

35 37 38 38

0 0

22 22 25 27

36 38

64 62 59 79

129

125 125

129

58 82

0

50

100150200250

Scn. 2 Scn. 9 Scn. 8 Scn. 6 Scn. 5 Scn. 7

American

Power Act

No CCS

Bonus

IPM Elec in

ADAGe

Low Tech No Int'l

Offsets

Low Tech &

No Int'l

Offsets

2013-2050 Cumulative GtCO 2e

-100%-50%0%50%100%150%

% Change from Scenario 2

Covered 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 Price
EPA Analysis of the American Power Act 

Global Results: 

Market for International GHG 
EPA Analysis of the American Power Act 

Market for International GHG A

International Offsets in 

• International offsets are one of the most important cost containment f

passed American Clean Energy and Security Act of 2009 (H.R. 2454

• H.R. 2454 allows over one billion tons of international offsets annuall

allows up to one billion tons.

• Estimates of the cost and availability of international offsets are one o

determining estimates of the cost of these bills. 

• Assumptions about the market for international offsets can have a ma

costs of a bill.

• Assumptions about both the international reference GHG emissions 

adopted by other countries affect the international demand for GHG a

– Greater international demand for GHG abatement increases the 

abatement, which in turn increases the cost of international offs

domestic allowance prices.

– Scenarios 3 and 4 explore the impacts of differing assumptions 

action, and scenario 2a looks at the effect of varying assumptio

emissions projections.

• Assumptions about GHG abatement potential (e.g. availability of RED

related CO2 abatement potential), affects the international supply of 

– Less international supply of GHG abatement increases the cost 

abatement, which in turn increases the cost of international offs

domestic allowance prices.

– Scenarios 2b and 5a examine the impacts of differing assumptio

international GHG abatement.
EPA Analysis of the American Power Act 

Because the market for international GHG abatement has significant im

international offsets, several side scenarios are included here to furth

between international GHG supply and demand, and the market for a

reduced form version of the IGEM model was used for these side sce

compared to scenario 2, which places no restrictions on offsets beyo

Additional sensitivities using the reduced form IGEM model:• Scenario 2a – Slower International Reference Emissions Growth (CCSP Re

– For the purpose of analyzing the international offset market, international reference emiss

reference scenario, instead of the GCAM Energy Modeling Forum 22 reference scenario 

• Scenario 2b – Less International CO2 Abatement Potential (CCSP MACs)

– For the purpose of analyzing the international offset market, international energy related C

generated by the CCSP SAP 2.1a era GCAM model, instead of the Energy Modeling Forinternational energy related CO2 MAC curves used for other scenarios in this analysis.

• Scenario 2c – Slower International Reference Emissions Growth & Less Int

(CCSP Reference & MACs)

– For the purpose of analyzing the international offset market, international reference emiss

reference scenario, instead of the GCAM Energy Modeling Forum 22 reference scenario 

– For the purpose of analyzing the international offset market, international reference emiss

reference scenario, instead of the GCAM Energy Modeling Forum 22 reference scenario 

• Scenario 5a –No International REDD Offsets

– No reduced emissions from deforestation and degradation (REDD) offsets for the U.S. or 

Market for International GHG 

Sensitivity Scenario
EPA Analysis of the American Power Act 

International GHG Referenc

& Climate Policy Assum

• At the July 9, 2009 Major Economies Forum, “the G8 

more by 2050 as its share of a global goal to lower e

(scenarios 2, and 5-10), EPA is using a set of assumG8 agreement:

• Group 1 countries (Kyoto group less Russia) follow a

Kyoto emissions levels in 2012 to 83% below 2005 in 

• Group 2 countries (rest of world) adopt a policy begin

linearly reduces emissions to 26% below 2005 levels 

• The combination of U.S., Group 1, and Group 2 actio

• Scenario 3 explores the impact of earlier action by d

consistent with the G8 agreement:

• Group 1 countries (Kyoto group less Russia) follow a

Kyoto emissions levels in 2012 to 83% below 2005 in 

• Group 2 countries (rest of world) adopt a policy begin

and linearly reduces emissions to 26% below 2005 le

• The combination of U.S., Group 1, and Group 2 actio

• Scenario 4 explores the impact of developing countr

achieve the G8 2050 goals:

• Group 1 countries (Kyoto group less Russia) follow a

Kyoto emissions levels in 2012 to 83% below 2005 in 

• Group 2 countries (rest of world) do not cap GHG em

0

1020304050607080

1990 2010 2030 2050

GtCO2e

World Reference EmissionsWorld Cap - G8 (Scn. 2) World Cap - Early Group 2 Action World Cap - Group 2 After 2050 (S.Group 2 Reference EmissionsGroup 2 Cap - G8 (Scn. 2) Group 2 Cap - Early Group 2 Actio.Group 1 Reference EmissionsGroup 1 Cap.US Reference EmissionsUS Emissions Reduction Goals
EPA Analysis of the American Power Act 

2013-2050 Cumulative Covered U.S. GHG E

International GHG Abatement Demand and 

(IGEM)

• This f

policysupply large emiss

• In sce

policiethe Udomedome

• In sce

insteaincreainternusage respe

• In sce

abateincreaallowa

• In sce

internincrea

• A 

blfaoeraiC

• Becau

growinless to internincrea24%. 

• Finally

internenergGCAM 2454. allowa

125 125 125 125 125 125 125

20 37 28

22

18

24 25

18 20

70 55 73 57 63

38 16 10

6

23

80

78

0

50

100150200250300

scn 2 scn 4 scn 3 scn 2b scn 5a scn 2a scn 2c

American

Power Act

No Group 2 Early

Group 2

CCSP CO2 No REDD EMF CO2 CCSP CO2

EMF Ref CCSP Ref

2013-2050 Cumulative GtCO 2e

-100%-67%-33%0%33%67%100%

% Change from Scenario 2

Covered 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 Price
EPA Analysis of the American Power Act 

Literature Review 

& Near Term Incidence A
EPA Analysis of the American Power Act 

Comparing Costs of Three P

Emissions Targets through 2

• 287 GtCO2e: ADAGE, IGEM and EPPA predict a similar rise in allowance prices. The 

approximately $4 to $6 per ton in 2020 to $20 to $25 in 2050. However MiniCAM pre

allowance prices ($1 to $5), while MRN-NEEM predicts allowance prices will rise from 

• 203 GtCO2e: The models predict allowance prices in 2020 that range from $25 to $7

range of $90 to $300 in 2050.

• 167 GtCO2e: The models predict allowance prices in 2020 that range from $55 to $1

range of $230 to $485 in 2050 

0

102030405060708090

100

2020 2025 2030 2035 2040 2045 2050

$/tCO2 (2005 U.S. $)

ADAGEMRN-NEEMEPPAIGEMMERGE (opt)MiniCAM (base)

To put the EPA models (ADAGE and IGEM) in context, we compare the results of the Energy Modelin

2009) of three emission goals that span a wide range of possible U.S. 2050 targets. Caps are based o

gases. These scenarios were not intended to represent any specific bill, and no domestic or internati(before subtracting abatement from offsets) under the American Power Act would fall between the 20

203 GtCO 

2 287 GtCO -e 2 -e

0

50

100150200250300350400450500

2020 2025 2030 2035 2040 2045 2050

$/tCO2 (2005 U.S. $)

ADAGEMRN-NEEMEPPAIGEMMERGE (opt)MiniCAM (base)

0

50

100150200250300350400450500

20

$/tCO2 (2005 U.S. $)
EPA Analysis of the American Power Act 

Comparing Costs of Three P

Emissions Targets through 2

• 287 GtCO2e: Annual consumption losses remain below 1% for all m

• 203 GtCO2e: Annual consumption losses are all 1.4% or below in 20

to 2.8% in 2050.

• 167 GtCO2e: Annual consumption losses are between 1% and 2.6% 

3.5% 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 Consumption

ADAGEMRN-NEEMEPPAIGEM

Changes in consumption approximate changes in c

Annual Consumption Losses across Sce

287 GtCO2 -e 203 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 Consumption

ADAGEMRN-NEEMEPPAIGEM

% of Reference Consumption
EPA Analysis of the American Power Act 

Comparing Primary Energy Us

in the EMF 22 Mod

Primary Energy Usage – EMF-22 203 GtCO2 e Scenario 

• Imposing a climate policy not only changes total primary energy consumption, but also the energy s

nuclear energy, bioenergy, and non-biomass renewables show increased use of these fuels under 

and storage as a means of reducing the emissions associated with fossil fuels but the degree to wh

it enters only in the final period at a very low level. In other models, it enters as early as 2030. Lowbioenergy, nuclear, and non-biomass renewables) account for between 39% (EPPA) and 62% (MEthe 203 GtCO2e scenario. In contrast, these technologies accounted for between 12% (ADAGE, M

primary energy supply in 2050 in the reference scenario.
EPA Analysis of the American Power Act 

Comparing Costs of Three P

Emissions Targets through 2

* AEO 2008 Early release was used by the EPA models for EMF-22. The baseline in EPA’s analysis of th

Common messages from the models

• The majority of the cost-effective reductions come from the elect• Greater technical availability and lower costs for both nuclear po

of reaching the GHG emissions caps.

• Different Models, Different Baselines and A

EPA MIT CRA EP

Model ADAGE,IGEM EPPA MRN-NEEM ME

Baseline Used for EMF 22

AEO 2008 Early Release*

AEO 2009 Early Release

AEO 2008 Early Release

Ow

Nuclear Assumptions

Capacity growsat 150% 2005

levels

Not permitted to expand in the base case (Advanced Nuclear available in 2020)

Capacity limited but growing over time (3 GW in 2015; 100 GW in 2050)

New 202limioveuracon

CCS Assumptions Available in 2020 Available in 2020 Available in 2015 

but with capacity limits

Avaalloeac
EPA Analysis of the American Power Act 

Comparing Costs of Three P

Emissions Targets through 2

$0

$20$40$60$80

$100$120

0.0 1.0 2.0 3.0

GtCO2-e

$/tCO2

2020 2050

Marginal Abatement Cost Functions (MACs) in 

2020

- All models, except MERGE, require abatement of less than 1 GtCO2-e to reach 287 bmt – MACs ra

reaches $20.

- All models require abatement between 0.8-2.25 GtCO2-e to reach the 203 bmt – MACs range from 

- All models, except MERGE and MiniCAM, require abatement between 1.55-2.8 GtCO2-e to reach 1

2050

- All models, except MERGE, require abatement between 0.6-3.75 GtCO2-e to reach 287 bmt – MAC

reaches $90.

- All models require abatement between 4.8-6.5 GtCO2-e to reach 203 bmt – MACs range from $90-$

- 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$500

0.0 2.0 4.0 

GtCO2-e

$/tCO2
EPA Analysis of the American Power Act 

Household Distribution

• The ADAGE and IGEM models assume a single representative agent h

near term cost of the APA across households in different income brack

incidence modeling exercise that is calibrated to ADAGE results.

• To put these results in context, we first briefly review the findings of stu

distribution of the costs of a cap-and-trade program across households 

(Dinan and Lim Rogers 2002; Rose and Olados

u 2002; CBO 2003; Pa

– A GHG cap-and-trade policy increases the price of energy-intensive goods and d

extent that the energy used results in relatively high GHG emissions. The increasmore efficient use of such energy and development and use of energy technolog

GHGs. The majority of this price increase is ultimately passed onto consumers.

– Before accounting for how allowances are allocated or auction revenues are dist

are disproportionally affected because they spend a higher fraction of their incom

direct energy expenditures.

– The way the value of allowances is allocated affects the distribution of the cost o

auctioned, the auction revenue can be used to influence the distribution of costs.

– Providing allowances gratis (i.e., grandfathering) to firms that operate in competit

regressive. This is because the value of these allowances flows to households in 

or capital gains. These assets are held primarily by high-income households.

• Higher income households may even be better off with a GHG policy if this al

– If the allowances are auctioned and the revenues are redistributed by lowering pa

tends to be less regressive than when allowances are grandfathered. 

• Reducing distortionary taxes also reduces the overall cost of the cap-and-trad

– However, lowering payroll or corporate taxes is more regressive than when the a

equal lump-sum rebates to households. Distributing the revenues lump sum to ho

regressive cap-and-trade policy analyzed and is usually shown to be progressive• But by providing lump-sum compensation rather than reducing distortionary ta

trade policy is higher.
EPA Analysis of the American Power Act 

Household Distribution

• Some cap-and-trade approaches use allowance value to mitigate increases in the pr

some approaches return allowance value to consumers through local distribution com

electricity or fuel they consume.

– The overall distributional impacts of these policies are not always clear. The

overall cost of the policy because they require greater emission reductions 

in turn leads to higher prices of other goods.

– The direct effect of preventing electricity and fuel prices from rising will likel

more than higher income households, but the incidence of the indirect effec

intensive goods) may counter the direct effect to some extent. 

• Recent studies show how the distribution of the cost of a cap-and-program differs ac

of distributing allowance value (Burtraw et al. 2009, Hassett et al. 2009). 

– For instance, a cap-and- (taxable) dividend policy that results in a ~$21/me

in an average welfare gain of 2.7% for the households with incomes in the lHowever, regionally this varies from 1.1% to 3.8%.

– Regional differences result from differences in pre-existing policies, levels o

electricity, and the inputs used to produce goods (e.g. coal, natural gas).

• There are important caveats to the findings of climate policy incidence studies:

– Most use annual household expenditures as a proxy for income. When a we

distributional difference between low and high income households is less pr

2002; CBO 2003). However, lower income households are still disproportio

in goods prices relative to higher income households.

– They typically do not consider the distribution of the benefits of reducing em– They do not consider how expenditure patterns and demand for energy goo

of the policy. 

– They do not always consider the effect of the policy on the prices of non-en

• Regressivity and progressivity are normative concepts that do not have commonly ag

– In this discussion we refer to a progressive policy as one where the net cos

income is lower for poorer households than it is for wealthier households. A cost as a percentage of income for low income households. This is a commincidence of climate policy in the economics literature (e.g. Metcalf 2009 an
EPA Analysis of the American Power Act 

Near Term Incidence 

Scenario 2

• This graphic and table report the estimated cost in 2016 of the APA per household in ten income classes using an 

Burtraw et al. (2009). The allowance and electricity prices used in the incidence model come from Scenario 2 ADAconsumed by households and producers are estimated using the carbon content of the fuel and allowance price. Testimated based on the share of energy inputs used to produce them. The welfare cost in the incidence model is c

• The height of each blue bar shows the welfare cost (loss in consumer surplus) in 2016 as a percentage of househ

entire value of allowances to households. Households are grouped by income decile. Average household income axis. The table provides the value of these losses in 2005$. The average household income in the table is for the p

• The incidence model is intended to reflect detailed demographic differences across the population based on recen

on a near term year, 2016, the first year that all provisions of the legislation take effect, preserves the underlying c

• The next slide reports the way the allowance value is assumed to be allocated in this analysis.

Note: EPA's January 29, 2010 "Supplemental Analysis of H.R. 2454" contained a similar incidence analysis (slide 

because of several changes to the underlying data and methodology between this analysis and the January analy

Income Decile

Ave

Inc

(20

1 (lowest) $6

2 $143 $224 $295 $376 $477 $588 $749 $9710 (highest) $17

Average $56
EPA Analysis of the American Power Act 

Near Term Incidence 

Treatment of Allowance 

Disposition of AllowanceValue*

Share of2016Allowance

Value

Treatment in Incidence Model 

Electricity Consumers (LDC) 30.00% Effect on electricity prices and abatement behavior taken from ADAGE results. 

Merchant Coal 3.50% Provided as shareholder dividend. 

Long Term ContractGenerators

1.50% Provided as shareholder dividend. 

Natural Gas Consumers (LDC) 7.20% Abatement behavior of households reflected in ADAGE results. Allowance value used to re

households burden proportional to their non direct electricity initial welfare losses.

Natural Gas Consumers (EE) 1.80% Effect of lower demand and fuel prices captured by calibrating to ADAGE results. Home Heating Oil

& Propane

Consumers (LDC and EE)

1.50% Lump‐sum non‐taxable per‐capita rebate. 

Trade‐Exposed Industries 15.00% Reflected in equilibrium abatement behavior in ADAGE. 

Refiners 3.75% Provided as shareholder dividend 

Energy Refund 6.59% Rebate to households with incomes below 150% of poverty line accounting for household 

in purchasing power. Up to 9.78% allocated for use, but not all is needed. Excess to deficit 

Working Families Relief 2.50% Rebate to households with incomes $1,000 below 150% of poverty line to 250% of poverty 

household size adjustment and phase out beginning at incomes $2,000 below 250% of pov

Clean Energy TechnologyResearch and Development

2.00% Lump‐sum non‐taxable per‐capita rebate. 

Clean Vehicle Technology 1.00% Lump‐sum non‐taxable per‐capita rebate. Industrial Technologies

Research and Development

1.00% Lump‐sum non‐taxable per‐capita rebate. 

State Energy Efficiency and

Renewables

2.00% Reflected in equilibrium abatement behavior in ADAGE. 

Highway Trust Fund 3.07% Lump‐sum non‐taxable per‐capita rebate. TIGER Grants 2.30% Lump‐sum non‐taxable per‐capita rebate. CLEAN TEA 2.30% Lump‐sum non‐taxable per‐capita rebate. Cost Containment 1.50% Not allocated. Deficit Reduction Fund 11.60% 6.81%: Share that is from direct allocation to deficit reduction and is presumably required 

neutrality. It is not allocated in the incidence model.

1.53%: Share that is the unused amount of the transportation infrastructure and efficiency 

which is the amount in excess of the maximum dollar amount that can be allocated to thesIt is not allocated in the incidence model.

3.21%: Share that is the unused allowance value from the Energy Refund and Working Fam

program set‐aside. This value is returned to households as a proportional income tax redu
EPA Analysis of the American Power Act 

• The allocation strategy in Scenario 2, as modeled, leads to an increase in the welfare of household

top decile by more than the increased cost of goods and services resulting from the APA. The majo

household income is borne by households in the fourth to ninth income deciles. 

• The incidence analysis does not completely capture the incentive and incidence effects of the APA. 

the ultimate use of some of the allowance value, the incentive effects of certain allowance uses are 

existing studies on the distributional consequences of certain uses of allowance value. A method of from what is assumed in this analysis will yield different distributional results. For example, 

– The allowance value withheld explicitly for deficit reduction is assumed to be retained by the government to 

to the Act. An alternative treatment of this share of the allowance value would be to represent the avoided f

make up for this shortfall. This approach would make the average cost per household appear lower in the n

approach would also show that the average cost per household would be higher in later years.

– In this scenario more allowance value is allocated to the Energy Refund and Working Families Relief provis

the allowances set aside to fund these two programs flows into the Deficit Reduction Fund. We assume thatax revenues. Consequently, we assume that this excess amount is returned to households through a propo

households 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 incre

However, the APA requires the LDC rebate be accounted for in the fixed portion of electricity bills, which m

consumption as modeled. If the incidence analysis assumed that industrial and commercial ratepayers do nLDC rebate this would change the distributional results because producers would instead pass the value of approach would have similar distributional effects as providing allowances gratis to producers and lead to a households (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 g

development may lead to innovations that lower the cost of cleaner technologies. If the intensity of use of th

deciles, the distributional results will change. 

– Forecasting the effect on households of the allowance value used to fund transportation infrastructure is ch

depends on which projects are funded and the timing of their completion. For example, the larger the share variable cost of mass transit, the better off lower-income households may be. If the share allocated to the Hthe incidence would mimic the lowering the gasoline tax. 

• The incidence model is based on partial equilibrium analysis, which preserves detail but sacrifices c

burden of policy would be expected in the near term before households adjust their durable good puproduction processes. Modeling in a near term framework also reduces uncertainty regarding baseviewed as an income shock). An analysis of the incidence of the policy over time would show the cuthe flow of allowance value to different uses, and would fully represent how the Act affects househo

– Appendix 1 provides additional information on the assumptions of the incidence model and its linkages to A

Near Term Incidence 

Discussion
EPA Analysis of the American Power Act 

Near Term Incidence 

Scenario 6: Reference Nuclear & Biom

• The above graphic and table report the estimated distribution of the cost of the APA in 2016 under the • The allowance price is higher and the cost of the APA to the average household is higher under Scena

impact of the Act follows a pattern similar to Scenario 2, but with greater magnitude for all income dec• However, the limitations of the incidence model may affect the results more the greater is the allowa

the composition of the fuels and technologies used to produce goods may change significantly from 

• Because of the difference in the allowance price, there are some differences in the disposition of allow

• In 2016, 6.47% (versus 6.59 % for scenario 2) of the allowance values is needed to fund the Energy 

there is slightly more unused allowance value from the low income households allocation which is u

Fund. Furthermore, there are fewer allowances needed to fully fund the transportation programs (1.9allowances from the transportation programs set aside that are deposited in the Deficit Reduction Fu

Income Decile

Aver

Inco

(200

1 (lowest) $6,92 $14,93 $22,4 $29,5 $37,96 $47,7 $58,98 $74,09 $97,10 (highest) $174

Average $56,4
EPA Analysis of the American Power Act 

References

ACEEE (2009). “Saving Energy Cost-Effectively: A National Review of the Cost of Energy Saved Through Utility-

American Council for an Energy Efficiency Economy, September 2009

Burtraw, D., R. Sweeney, M. Walls (2009). The Incidence of U.S. Climate Policy: Alternative Uses of Revenues fr

Journal. Forthcoming. (Also available as RFF Discussion Paper 09-17-REV. June 2009.)

Calvin K.V., J.A. Edmonds, B. Bond-Lamberty, L.E. Clarke, S.H. Kim, G.P. Kyle, S.J. Smith, A.M. Thomson, and M

Change to 450 ppm CO2 Equivalent in the 21st Century," Energy Economics 31(S2): S107-S120.

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Dinan, T. and D. Lim Rogers (2002). “Distributional Effects of Carbon Allowance Trading: How Government Decis

Tax Journal v. LV, n. 2: 199–221.

Fawcett, A.A., K.V. Calvin, F.C. de la Chesnaye, J.M. Reilly, J.P. Weyant (2009) Overview of EMF 22 U.S. Transi

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Fawcett, Allen A. (2009). “Potential Supply of Offset Emissions: From the EPA Analysis of the American Clean En

the 111th Congress.” Presented at the EPRI Greenhouse Gas Emissions Offset Policy Dialogue July 30, 2

(http://mydocs.epri.com/docs/PublicMeetingMaterials/0907/42NL25NHW5H/E232297_Fawcett_Offset_Sup

Fullerton, D. (2009). “Distributional Effects of Environmental and Energy Policy: An Introduction.” Distributional Ef

Ed., D. Fullerton, UK: Aldershot: Ashgate Publishing.

Hassett, K., A. Mathur, G. Metcalf (2009). The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis. Metcalf, G. (2009). “Designing a Carbon Tax to Reduce U.S. Greenhouse Gas Emissions.“ Review of EnvironmenParry, I. (2004). “Are Emission Permits Regressive?” Journal of Environmental Economics and Management v. 47

Parry, I., H. Sigman, M. Walls, and R. Williams (2006) “The Incidence of Pollution Control Policies.” The Internatio

Economics 2006/2007. Eds., T. Tietenberg and H. Folmer. Northhampton, MA: Edward Elgar.

Rose, A. and G. Oladosu (2002). “Greenhouse Gas Reduction Policy in the United States: Identifying Winners an

System.” The Energy Journal v. 23, n. 1: 1–18.
EPA Analysis of the American Power Act 

Contact Informatio

The analysis was conducted by EPA’s Office of AtContact: Allen A. Fawcett Tel: 202-343-9436 Email: fawcett.allen@epa.govThe full analysis is available online at:www.epa.gov/climatechange/economics/economic