485 Massachusetts Avenue, Suite 2

Cambridge, Massachusetts 02139

617.661.3248 | www.synapse

‐ energy.com 

# 2015 Carbon Dioxide Price

Forecast

March 3, 2015

AUTHORS

Patrick Luckow

Elizabeth A. Stanton

Spencer Fields

Bruce Biewald

Sarah Jackson

Jeremy Fisher

Rachel Wilson

# C ONTENTS

1. E XECUTIVE 

## S UMMARY



## ....................................................................................... 1

2. S TRUCTURE OF THIS 

## R EPORT



## ................................................................................ 4

3. W HAT IS A CARBON PRICE 

## ?

................................................................................. 5

4. F EDERAL 

## C LIMATE 

## A CTION IS 

## E XTREMELY 

## L IKELY



## ....................................................... 8

5. T HE 

## C OST OF 

## I MPLEMENTING 

## EPA’ S 

## C LEAN 

## P OWER 

## P LAN



## ........................................ 19

6. CO 2 

## P RICE 

## F ORECASTS IN 

## U TILITY 

## IRP S



## ................................................................ 25

7. O VERVIEW OF THE 

## E VIDENCE FOR A 

## F UTURE 

## CO 2 

## P RICE



## ........................................... 28

8. S YNAPSE 

## 2015 CO 2 

## P RICE 

## F ORECAST



## .................................................................. 29

9. A PPENDIX 

## A: S YNAPSE 

## F ORECASTS 

## C OMPARED TO 

## U TILITY 

## F ORECASTS AND 

## P AST 

## S YNAPSE



## F ORECASTS



## ................................................................................................... 35Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 1 

# 1. E XECUTIVE 

# S UMMARY

Prudent and reasonable planning requires electric utilities and other stakeholders in carbon

‐ intensive

industries to use a reasonable estimate of the future price of carbon dioxide (CO

2 ) emissions when

evaluating resource investment decisions with multi

‐ decade lifetimes. However, forecasting a CO 2 price

can be difficult. The federal government is moving forward with regulations to limit CO 2 emissions from

new and existing power plants, but a regulation is not yet finalized. To make sound investment

decisions, utilities must consider existing, proposed, and expected future regulations.

Although the lack of a defined policy setting a price on carbon poses a challenge in CO 2 price forecasting,

an assumption that there will be no CO 2 price in the long run is not, in our view, reasonable. The

scientific basis for attributing climatic changes to human

‐ driven greenhouse gas emissions is irrefutable,

as are the type and scale of damages expected to both infrastructure and ecosystems. The need for a

comprehensive U.S. effort to reduce greenhouse gas emissions is clear. While the Clean Power Plan

proposed by the U.S. Environmental Protection Agency (EPA) in June 2014 does not specify a price on

carbon, any policy requiring or leading to greenhouse gas emission reductions in the electric sector will

result in higher costs to the generating resources that emit CO 2

.

This 2015 report updates Synapse’s Spring 2014 CO 2 Price Report with the most recent information on

federal regulatory measures, state and regional climate policies, and utility CO 2 price forecasts, and

provides an updated CO 2 price forecast. 1 The Synapse CO 2 price forecast is designed to provide a

reasonable range of price estimates for use in utility integrated resource planning (IRP) and other

electricity resource planning analyses. We have reviewed and updated our summary of the key

regulatory developments and data from utility IRPs, which are frequently changing and crucial to

understanding the impetus for a carbon price forecast and the number of utilities that have adopted one

for planning purposes.



## 1.1. Key Assumptions

This report includes updated information on federal regulations, state and regional climate policies, and

utility CO 2 price forecasts, as well as our own analysis of the proposed Clean Power Plan, EPA’s proposed

rule to regulate CO 2 emissions under Section 111(d) of the Clean Air Act. The Low, Mid, and High

Synapse CO 2 price forecasts presented here are similar to those in our Spring 2014 report. This is the

first Synapse CO 2 price forecast that we extend to 2050, to reflect long

‐ term climate targets. Synapse’s

CO 2 price forecast reflects our expert judgment that near

‐ term regulatory measures to reduce

1 Luckow P., E. Stanton, B. Biewald, S. Fields, J. Fisher, F. Ackerman. 2014. CO 2 Price Report, Spring 2014

. Synapse Energy

Economics.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 2 greenhouse gas emissions, coupled with longer

‐ term cap

‐ and

‐ trade or carbon tax legislation passed by

Congress, will result in significant pressure to decarbonize the electric power sector. Key assumptions of

our forecast include:

 Near

‐ term climate policy actions reflect a regulatory approach; for example, under

Section 111(d) of the Clean Air Act.

 A federal program establishing a price for greenhouse gases is probable in the long run

as it provides an efficient, least

‐ cost path to emissions reduction.

 Future federal legislation setting a price on emissions through a cap

‐ and

‐ trade policy or

a carbon tax will likely be prompted by one or more of the following factors:

o New technological opportunities that lower the cost of carbon mitigation;

o A series of executive actions taken by the President that spur demand for

congressional action;

o The inability of executive actions to meet long

‐ term emissions goals;

o A Supreme Court decision making it possible for states to sue companies within

their boundaries that own high

‐ carbon

‐ emitting resources, and creating a

financial incentive for energy companies to act; and

o Mounting public outcry in response to increasingly compelling evidence of

human

‐ driven climate change.

Given the growing interest in reducing greenhouse gas emissions by states and municipalities

throughout the nation, a lack of timely, substantive federal action will result in the enactment of diverse

state and local policies. Heterogeneous—and potentially incompatible—sub

‐ national climate policies

would present a challenge to any company seeking to invest in CO 2 ‐ emitting power plants, both existing

and new. Historically, there has been a pattern of states and regions leading with energy and

environmental initiatives that have in time been superseded at the national level. It seems likely that

this will be the dynamic going forward: a combination of state and regional actions, together with

federal regulations, that are eventually eclipsed by a comprehensive federal carbon price.

We expect that federal regulatory measures together with regional and state policies will lead to the

existence of a cost associated with greenhouse gas reductions in the near term. Prudent and reasonable

utility planning requires that utilities take this cost into account when engaging in resource planning,

even before a federal carbon price is enacted.



## 1.2. Study Approach

In this report, Synapse reviews several key developments that have occurred over the past 12 months.

These include:Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 3  Proposed federal regulatory measures to limit CO 2 emissions from existing power plants

and an updated proposal for new power plants;

 Continuation of the Northeast’s Regional Greenhouse Gas Initiative (RGGI) CO 2 policy

and the most recent auctions under both RGGI and California’s AB 32 Cap

‐ and

‐ Trade

program; and

 Synapse’s collection and analysis of carbon price forecasts from 115 recent utility filings.



## 1.3. Synapse’s 2015 CO 2 

## Price Forecast

Based on analyses of the sources described in this report, and relying on our own judgment and

experience, Synapse developed Low, Mid, and High case forecasts for CO 2 prices from 2015 to 2050. In

these forecasts, the proposed Clean Power Plan together with other existing and proposed federal

regulatory measures place economic pressure on CO 2 ‐ emitting resources in the next several years, such

that it is relatively more expensive to operate a high

‐ carbon

‐ emitting power plant. These pressures are

followed later by a broader federal policy, such as cap and trade. In any state other than the RGGI region

and California, we assume a zero carbon price through 2019; beginning in 2020, we expect Clean Power

Plan compliance will put economic pressure on carbon

‐ emitting power plants throughout the United

States. All annual allowance prices and levelized values are reported in 2014 dollars per short ton of CO 2

.

 The Low case forecasts a CO 2 price that begins in 2020 at $15 per ton, and increases to $25 in

2030 and $45 in 2050, representing a $26 per ton levelized price over the period 2020

‐ 2050.

This forecast represents a scenario in which the final version of the Clean Power Plan is relatively

lenient and readily achieved, and a similar level of stringency is assumed after 2030.

 The Mid case forecasts a CO 2 price that begins in 2020 at $20 per ton, and increases to $35 in

2030 and $85 in 2050, representing a $41 per ton levelized price over the period 2020

‐ 2050.

This forecast represents a scenario in which federal policies are implemented with significant

but reasonably achievable goals. The stated goals of the Clean Power Plan are achieved and

science

‐ based climate targets are enacted mandating at least an 80 percent reduction in electric

section emissions from 2005 levels by 2050.

 The High case forecasts a CO 2 price that begins in 2020 at $25 per ton, and increases to

approximately $53 in 2030 and $120 in 2050, representing a $52 per ton levelized price over the

period 2020

‐ 2050. This forecast is consistent, in the short term, with a more stringent version of

the Clean Power Plan, as well as a recognition that achieving science

‐ based emissions goals by

2050 requires significant near

‐ term reductions. In recognition of this difficulty, implementation

of standards more aggressive than the Clean Power Plan may begin as early as 2025. New

regulations may mandate that electric

‐ sector emissions are reduced to 90 percent or more

below 2005 levels by 2050, in recognition of lower

‐ cost emission reduction measures expected

to be available in this sector. Other factors that may increase the cost of achieving emissions

goals include: greater restrictions on the use of offsets; restricted availability or high cost of

technology alternatives such as nuclear, biomass, and carbon capture and sequestration; and

more aggressive international actions (thereby resulting in fewer inexpensive international

offsets available for purchase by U.S. emitters).Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 4 Figure ES

‐ 1: Synapse 2015 CO 2 Price Trajectories



# 2. S TRUCTURE OF THIS 

# R EPORT

This report presents Synapse’s 2015 Low, Mid and High CO 2 price forecasts, along with the evidence

assembled to inform these forecasts, including developments from the past 12 months:

 Section 3 discusses broader concepts of CO 2 pricing.

 Section 4 provides an overview of existing state and federal legislation, including EPA’s

proposed Clean Power Plan.

 Section 5 discusses our recommendations for planning for the Clean Power Plan, a

review of existing studies of compliance cost, and Synapse’s modeling of compliance

with the Plan.

 Section 6 provides a range of current CO 2 price forecasts used by utilities.

 Section 7 gives a summary of the evidence that has guided the development of the

Synapse forecasts.

 Section 8 presents Synapse’s 2015 Low, Mid, and High CO 2 price forecast, along with a

comparison to recent utility forecasts.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 5  Appendix A presents additional graphs comparing the 2015 forecast with past Synapse

forecasts and utility forecasts.

Unless otherwise indicated, all prices are in 2014 dollars and CO 2 emissions are given in short tons.



# 3. W HAT IS A CARBON PRICE 

# ?

There are several co

‐ existing meanings for the term “carbon price” or “CO

2 price”: each of these

meanings is appropriate in its own context. Here we give a brief introduction to five common types of

carbon prices, along with a quick guide to which of the carbon price estimates reviewed in this report

are based on which of these meanings. (Note that the definition of an additional term—the “price of

carbon”—is ambiguous because it can at times mean several of the following.)

Carbon allowances (sometimes called credits or certificates, and best known for their use in policies

called “cap and trade”): Allowances are certificates that give their holder the right to emit a unit of a

particular pollutant. A fixed number of carbon allowances are issued by a government, some sold and,

perhaps, some given away. 2 Subsequent trade of allowances in a secondary market is common to this

policy design. The price that firms must pay to obtain allowances increases their cost of doing business,

thereby giving an advantage to firms with cleaner, greener operations, and creating an incentive to

lower emissions whenever it can be done for less than the price of allowances. The number of

allowances—the “cap” in the cap

‐ and

‐ trade system—reflects the required society

‐ wide emission

reduction target. A greater reduction target results in a lower cap and a higher price for allowances. In

the field of economics, pricing emissions is called “internalizing an externality”: the external (not borne

by the polluting enterprise) cost of pollution damages is assigned a market price (thus making it internal

to the enterprise).

In this report: The Northeast’s RGGI and California’s Cap

‐ and

‐ Trade Program are both carbon allowance

trading systems. In addition, the Kerry

‐ Lieberman, Waxman

‐ Markey, and Cantwell

‐ Collins bills all

proposed policy measures that included carbon allowance trading.

Carbon tax : A carbon tax also internalizes the externality of carbon pollution, but instead of selling or

giving away rights to pollute (the allowance approach), a carbon tax creates an obligation for firms to

pay a fee for each unit of carbon that they emit. In theory, if the value of damages were known with

certainty, a tax could internalize the damages more accurately, by setting the tax rate equal to the

damages; in practice, the valuation of damages is typically uncertain. In contrast to the government

issuance of allowances, with a carbon tax there is no fixed amount of possible emissions (no “cap”). A

2 Regardless of whether allowances are initially given away for free or sold, they represent an opportunity cost of emissions to

the holder.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 6 cap

‐ and

‐ trade system specifies the amount of emission reduction, allowing variation in the price; a tax

specifies the price on emissions, allowing variation in the resulting reductions. In both cases there is an

incentive to reduce emissions whenever it can be done for less than the prevailing price. In both cases

there is the option to continue emitting pollution, at the cost of either buying allowances or paying the

tax. While some advocates have claimed that a tax is administratively simpler and reduces bureaucratic,

regulatory, and compliance costs, a general aversion to new taxes has meant that no carbon tax

proposals have received substantial support in recent policy debate.

Effective price of carbon (sometimes called the notional, hypothetical, or voluntary price): Carbon

allowances and carbon taxes internalize the climate change externality by making polluters pay.

However, many other types of climate policies work not by making polluting more expensive per se

, but

instead by requiring firms to use one technology instead of another, or to maintain particular emission

limitations in order to avoid legal repercussions. Non

‐ market

‐ based emission control regulatory policies

are called “command and control.” For any such non

‐ market policy there is an “effective” price: a

market price that—if instituted as an allowance or tax—would result in the identical emission reduction

as the non

‐ market policy. An effective price may be used internally within a firm, government agency, or

other entity to represent the effects of command and control policies for the purpose of improved

decision making. Renewable Portfolio Standards, energy efficiency measures, and other policies

designed to mitigate CO 2 emissions impose an effective price on carbon.

In this report: Utility carbon price forecasts are effective prices used for state

‐ required IRPs and internal

planning purposes. EPA’s proposed carbon pollution standard for new sources of electric generation is a

non

‐ market

‐ based policy that would result in an effective price of carbon; similarly, building blocks 1, 3,

and 4 of the Clean Power Plan (coal plant efficiency improvements, renewable energy, and demand

‐ side

management) are also fundamentally non

‐ market policies that result in an imputed cost of mitigation.

Marginal abatement cost of carbon : An abatement cost refers to an estimate of the expected cost of

reducing emissions of a particular pollutant. Estimation of a marginal abatement cost requires the

construction of a “supply curve”: all of the possible solutions to controlling emissions (these may be

technologies or policies) are lined up in order of their cost per unit of pollution reduction. Then, starting

from the least expensive option, one tallies up the pollution reduction from various solutions until the

desired total reduction is achieved, and then asks: What would it cost to reduce emissions by the last

unit needed to achieve the target? The answer is the “marginal” cost of that level of pollution reduction;

a greater reduction target would have a higher marginal cost. The marginal abatement cost of carbon is

not a market price used to internalize an externality. Rather, it is a method for estimating the price that,

if it were applied as a market price, would have the effect of achieving a given emission reduction target.

In a well

‐ functioning cap

‐ and

‐ trade system, the allowance price would tend towards the marginal

abatement cost of carbon.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 7 In this report: We do not analyze any marginal abatement costs in this report—see the 2012 Synapse

Carbon Dioxide Price Forecast for further information. 3 McKinsey & Company has been a consistent

producer of this type of analysis (see, for example, its 2010 report Impact of the Financial Crisis on

Carbon Economics: Version 2.1 of the Global Greenhouse Gas Abatement Cost Curve)

. 4

Average policy cost versus marginal abatement cost : Many policy analyses compare the total benefits

of a policy to the total costs—this represents the net cost (or benefit) of the policy. The average cost of

the policy is the net cost divided by the expected tons of emissions abated. This value is fundamentally

different than the marginal cost of compliance, which is the cost to reduce the last ton of emissions (i.e.,

the most expensive ton actually abated). For example, a policy may result in total net benefits, but

require reductions through a trading mechanism wherein the market price is set by the marginal cost of

emissions. In this case, the net (and average) policy cost are negative, but the marginal cost of

abatement is positive.

In this report: Most prices in this report, including are CO 2 price forecast, are expressed in terms of

marginal abatement costs.

Social cost of carbon : Whereas the marginal abatement cost estimates the price of stopping pollution,

the social cost of carbon estimates the cost, per unit of emissions, of allowing pollution to continue. The

social cost of carbon is the societal cost of current and future damages related to climate change

resulting from the emission of one additional unit of pollutant. Estimating the uncertain costs of

uncertain future damages from uncertain future climatic events is, of course, a tricky business. If enough

information were available, a marginal abatement cost for each level of future emissions (the supply of

emission reductions) could be compared to a social cost of carbon for each level of future emissions (the

demand for emission reductions) to determine an “optimal” level of pollution (such that the next higher

unit of emission reduction would cost more to achieve than its value in reduced damages). More

commonly, the social cost of carbon is used as part of the calculation of benefits of emission

‐ reducing

measures.

In this report: The U.S. federal government’s internal carbon price for use in policy making is intended to

be an estimate of the social cost of carbon.

3 Wilson et al. 2012. 2012 Carbon Dioxide Price Forecast. Synapse Energy Economics. Available at: http://www.synapse

‐

energy.com/project/synapse

‐ carbon

‐ dioxide

‐ price

‐ forecast.

4 McKinsey & Company. 2010. Impact of the Financial Crisis on Carbon Economics: Version 2.1 of the Global Greenhouse Gas

Abatement Cost Curve

. Page 8.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 8 

# 4. F EDERAL 

# C LIMATE 

# A CTION IS 

# E XTREMELY 

# L IKELY

In the near term, comprehensive federal climate legislation appears unlikely to come out of a

Republican

‐ controlled Congress. The Executive Branch, however, is moving forward with regulatory

actions to limit greenhouse gas emissions. Following a directive issued by President Obama, 5 EPA

released revised CO 2 performance standards for new power plants on September 20, 2013, 6 and on June

2, 2014, used its Clean Air Act authority to propose CO 2 standards for existing power plants. 7 Beyond the

realm of electric

‐ sector CO 2 policies (which are the focus of this report), similar regulatory measures

have been proposed for the transportation, buildings, and industrial sectors; policies enacted in other

sectors include vehicle efficiency standards set to rise to 54.5 miles per gallon by 2025 for new cars and

light

‐ duty trucks, and new energy efficiency standards for federal buildings set to reduce energy

consumption by nearly 20 percent below the previous standard. 8

, 9 Still other rules aimed at reducing

methane emissions from oil and gas production and CO 2 from aircrafts are currently under

development. 10,11

We continue to expect that a federal cap

‐ and

‐ trade program for greenhouse gases is the most likely

policy outcome in the long term, because it enables participants to find the most cost

‐ effective method

of emissions abatement among many alternatives, rather than regulating a limited subset of

alternatives. While state and regional policies combined with federal regulatory actions appear to be

more likely than a federal cap

‐ and

‐ trade policy in the near term, according to a World Resources

Institute (WRI) analysis, these local measures are unlikely to be able to meet long

‐ term goals of reducing

5 Memorandum from President Obama to Administrator of the Environmental Protection Agency, Power Sector Carbon

Pollution Standards (June 25, 2013). Available at: http://www.whitehouse.gov/the

‐ press

‐ office/2013/06/25/presidential

‐

memorandum

‐ power

‐ sector

‐ carbon

‐ pollution

‐ standards.

6 EPA. 2013. “2013 Proposed Carbon Pollution Standard for New Power Plants.” Carbon Pollution Standards. Available at:

http://www2.epa.gov/carbon

‐ pollution

‐ standards/2013

‐ proposed

‐ carbon

‐ pollution

‐ standard

‐ new

‐ power

‐ plants.

7 EPA. “Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units.” Carbon Pollution

Standards. Available at: http://www2.epa.gov/carbon

‐ pollution

‐ standards/clean

‐ power

‐ plan

‐ proposed

‐ rule.

8 Vlasic, Bill. August 28th, 2012. “US Sets Higher Fuel Efficiency Standards.” The New York Times

. Available at:

http://www.nytimes.com/2012/08/29/business/energy

‐ environment/obama

‐ unveils

‐ tighter

‐ fuel

‐ efficiency

‐ standards.html.

9 U.S. Department of Energy. 2013. “Energy Efficiency Design Standards for New Federal Commercial and Multi

‐ Family High

‐

Rise Residential Buildings.” A Rule by the Department of Energy. July 9th, 2013. Available at:

https://www.federalregister.gov/articles/2013/07/09/2013

‐ 16297/energy

‐ efficiency

‐ design

‐ standards

‐ for

‐ new

‐ federal

‐

commercial

‐ and

‐ multi

‐ family

‐ high

‐ rise

‐ residential#h

‐ 9.

10 See “Fact Sheet: EPA’s Strategy for Reducing Methane and Ozone

‐ Forming Pollution from the Oil and Natural Gas Industry.”

Available at: http://www.epa.gov/airquality/oilandgas/pdfs/20150114fs.pdf.

11 See “U.S. Aircraft Greenhouse Gas Rulemaking Process.” Available at: http://www.epa.gov/otaq/documents/aviation/us

‐

ghg

‐ endangerment

‐ ip

‐ 9

‐ 3

‐ 14.pdf.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 9 total greenhouse gas emissions to 83 percent below 2005 levels by 2050, even in the most aggressive of

scenarios. 12



## 4.1. Regulatory Measures for Reducing Greenhouse Gas Emissions

There are a number of federal regulations that directly and indirectly mandate a reduction in

greenhouse gas emissions in the power sector. These are summarized in Table 1 and described in detail

below.

12 See WRI’s analysis of these scenarios in the 2013 report “Can the U.S. Get There From Here?: Using Existing Federal Laws and

State Action to Reduce Greenhouse Gas Emissions.” Available at: http://www.wri.org/publication/can

‐ us

‐ get

‐ there

‐ here.SynapseEnergyEconomics,Inc.2015CarbonDioxidePriceForecast10Table1:SummaryofpowersectorregulatorymeasuresthatmayresultinreducedgreenhousegasemissionsRuleCurrent Status as of ReleaseNext Deadline(s)Pollutants CoveredFederal RegulationsClean Air Act,Section 111EPA released a revised 111(b) rule, NewSource Performance Standards for GHGsfrom new sources, in September 2013Awaiting final rule; expected before or in conjunction with release of final111(d) ruleCO2and othergreenhouse gasesEPA released a draft 111(d) rule controllingGHGs from existing sources on June 2, 2014June 2015: EPA must finalize standards for existing power plantsJune 2016: States must submit state complianceplans to EPANational AmbientAir QualityStandards(NAAQS)1-Hour SO2NAAQS was finalized in June2010Initial designations based on monitoring data were made in June 2013;additional designations expected by or before 2017Sulfur dioxide; nitrogendioxide; carbonmonoxide; ozone;particulate matter; andleadPM2.5 annual NAAQS was finalized onDecember 2012Final designations announcedDecember 18, 2014; SIPs due in April 2018with attainment required by 2020EPA proposed to strengthen the 8-HourOzone NAAQS on November 24, 2014SIPsfor the existing (2008) standard are due in spring of 2015Revisions to the 2008 standard must be finalized by October 1, 2015Cross State AirPollution Rule(CSAPR)The U.S. Supreme Court reinstated CSAPRin April 2014, finding that EPA had notexceeded its authority in crafting the ruleCourt lifted stay of CSAPR on October 23, 2014; on November 21,2014, EPA published rules tolling CSAPR deadlines three years – Phase 1began January 1, 2015 and Phase II begins January 1, 2017Nitrogen oxides andsulfur dioxideMercury and AirToxics Standards(MATS)Finalized in December 2011April 16, 2015: Compliance deadline (rule allows for a one-yearextension if certain conditions are met)Mercury, metal toxins,organic and inorganichazardous air pollutants,and acid gasesCoal CombustionResiduals (CCR)Disposal RuleEPA issued final rule regulating CCR onDecember 19, 2014Compliance timeline is structured to take into account overlap with yetto-be-determined ELG compliance obligationsCoal combustionresiduals (ash)Steam ElectricEffluent Guidelines(ELGs)EPA released a proposed rule with eightregulatory options in June 2013Final rule for release of toxins into waterways must be finalized bySeptember 30, 2015Toxins enteringwaterwaysCooling WaterIntake Structure(316(b)) RuleEPA released a final rule for implementationof Section 316(b) of the Clean Water Act onMay 19, 2014Final rule became effective October 14, 2014 and requirements will beimplemented in NPDES permits as they are renewedCooling waterRegional Haze RuleRegional Haze Rule issued in July 1999States must file SIPs and install the Best Available Retrofit Technology(BART) controls within 5 years of SIP approvalSulfur oxides, nitrogenoxides, and particulatematterSynapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 11 

### The Clean Air Act

As a result of the 2007 Supreme Court finding in Massachusetts v. EPA

, greenhouse gas emissions were

determined to be subject to the Clean Air Act and (in a later ruling) to contribute to air pollution

anticipated to endanger public health and welfare. In 2009, EPA issued an “endangerment finding,”

obligating the agency to regulate emissions of greenhouse gases from stationary sources such as power

plants. 13 In compliance with Section 111(b) of the Clean Air Act, EPA released draft New Source

Performance Standards (NSPS) for the electric sector in April 2012 and revised NSPS standards in

September 2013. The revised standards limit CO 2 emissions from new fossil

‐ fuel power plants to 1,000

‐

1,100 pounds of CO 2 per MWh (lbs/MWh)—a level achievable by a new natural gas combined

‐ cycle

plant. The exact limit of CO 2 emissions within that range depends on the type of plant and period over

which the emission rate would be averaged. 14

Under Section 111(d) of the Clean Air Act, once EPA has set standards under Section 111(b) for new

sources of a pollutant that is not covered by another section of the Act (in this case, CO 2 ), EPA must

propose standards for existing sources of that pollutant as well. On June 2, 2014, EPA proposed what it

is calling the Clean Power Plan under Section 111(d) of the Clean Air Act. The Clean Power Plan aims to

regulate emissions of CO 2 from existing fossil fuel

‐ fired power plants by setting binding, state

‐ specific

carbon emission reduction goals for all affected electric generating units. These emissions reduction

goals reflect the degree of emissions reductions achievable through the application of the “best system

of emission reduction.” States will be required to reduce their average CO 2 emission rate for affected

generating units from a 2012 baseline rate to a lower target rate by 2030. Overall, EPA expects the Clean

Power Plan will yield CO 2 reductions of approximately 30 percent below 2005 levels by 2030.

The Clean Power Plan’s reach is broad and seeks to explicitly impact electric power planning, dispatch,

and procurement, with provisions that encourage switching from high

‐ emitting coal to lower

‐ emitting

gas, renewable energy procurement, and increased energy efficiency. The proposed rule provides for

flexibility in state compliance, including options for states to meet fleet

‐ wide emission rate limits (in

tons of CO 2 per MWh) or mass

‐ based emissions targets (in tons) through heat rate improvements at

coal

‐ fired generators, increased dispatch of more efficient combined cycle natural gas generating

resources, renewable energy programs, energy efficiency, and/or cap

‐ and

‐ trade programs. States can

act independently, or enter into regional agreements with other states to achieve compliance.

EPA is currently reviewing the nearly 4 million comments it received on the proposed Clean Power Plan,

and the final rule is anticipated in mid

‐ summer of this year. The exact requirements of the final rule are

13 EPA. 2013. “Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air

Act.” Climate Change. Available at: http://www.epa.gov/climatechange/endangerment/.

14 EPA. “Standards of Performance for Greenhouse Gas Emissions from New Stationary Sources: Electric Utility Generating

Units.” Available at: http://www2.epa.gov/carbon

‐ pollution

‐ standards/2013

‐ proposed

‐ carbon

‐ pollution

‐ standard

‐ new

‐

power

‐ plants

.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 12 still uncertain at this time, but it is very likely that renewable energy and end

‐ use energy efficiency will

be an important part of a comprehensive compliance strategy. Many states will be able to achieve

compliance at a lower cost through the structures of their existing renewable portfolio and energy

efficiency resource standards.

The precise means of demonstrating compliance with the final rule is also still being determined, but

EPA’s proposal involves a process similar to Section 110 of the Clean Air Act, under which states will be

required to submit plans that specify how they intend to comply with the Clean Power Plan. States can

develop individual plans or create a multi

‐ state compliance strategy. EPA will then decide whether a

proposed plan meets the terms of the regulation. If a state fails to submit a plan, or the submitted plan

does not meet the requirements of the rule, then EPA can impose a federal compliance plan.

Under the schedule proposed by EPA, both new source performance standards under Section 111(b)

and existing source performance standards under Section 111(d) will be finalized by mid

‐ summer 2015.

Under Section 111(d), states would then be required to submit compliance plans to EPA within one year,

with the possibility of an extension for an additional year. States that collaborate on a multi

‐ state plan

would get an additional two years to submit their plan.

These pending performance standards for new and existing sources will affect decisions made by

utilities regarding operation, expansion, and retirements. Enforcement of the Clean Air Act creates an

opportunity cost of greenhouse gas abatement: prudent utilities will take Clean Air Act compliance into

consideration in their planning, either explicitly as a maximum allowable emissions rate, or implicitly as

an effective CO 2 price. Section 5 of this report discusses several independent analyses of the compliance

cost of the Clean Power Plan. While costs vary depending on the assumptions used by the modeling

teams, 2030 compliances costs tend to hover around $30 per short ton.



### Other regulatory measures put economic pressure on carbon

‐ intensive power plants

A suite of current and proposed EPA regulations require pollution

‐ intensive power plants to install

environmental controls for compliance. The cost of complying with environmental regulations reduces

the profitability of the worst polluters, sometimes rendering them uneconomic. These policies

demonstrate momentum towards appropriately regulating or pricing environmentally harmful activities

in the electric sector. To the extent that plants with high emissions of other pollutants also have high

carbon emissions, these policies would tend to lower the future CO 2 price necessary to achieve a given

reduction; as more pollution

‐ intensive plants retire in response to other EPA regulations, the necessary

carbon price is reduced. Specific regulatory measures include:

 National Ambient Air Quality Standards (NAAQS) set maximum health

‐ based air quality

limitations that must be met at all locations across the nation. EPA has established

NAAQS for six pollutants: sulfur dioxide (SO

2 ), nitrogen dioxides (NO

2 ), carbon monoxide

(CO), ozone, particulate matter—measured as particulate matter less than or equal to

10 micrometers in diameter (PM10) and particulate matter less than or equal to 2.5

micrometers in diameter (PM2.5)—and lead.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 13  The Cross State Air Pollution Rule (CSAPR) establishes the obligations of each affected

state to reduce emissions of NO X and SO 2 that significantly contribute to another state’s

PM2.5 and ozone non

‐ attainment problems. Implementation of CSAPR was delayed

when the rule was vacated by the U.S. Court of Appeals for the District of Columbia in

August 2012; it was then reinstated by the Supreme Court on April 29, 2014.

Significantly, the Supreme Court found that EPA had not exceeded its authority in

crafting an emission control program that utilized cap and trade and considered cost as

a factor where the language of the Clean Air Act was ambiguous in addressing the

complex problem of interstate transport of pollution.

 Mercury and Air Toxics Standards (MATS) : The final MATS rule, approved in December

2011, sets stack emissions limits for mercury and other metal toxins, organic and

inorganic hazardous air pollutants, and acid gases. Compliance with MATS is required by

2015, with a potential extension to 2016. Many utilities have already committed to

capital improvements at their coal plants to comply with the standard. In fact, the U.S.

Energy Information Administration (EIA) recently found that approximately 70 percent

of U.S. coal

‐ fired power plants already comply with MATS. 15

 Coal Combustion Residuals (CCR) Disposal Rule: On December 19, 2014, EPA issued a

final rule regulating CCR under Subtitle D of the Resource Conservation and Recovery

Act. In the final rule, EPA designates coal ash as municipal solid waste, rather than

hazardous waste, which allows its continued “beneficial reuse” in products such as

cement, wallboard, and agricultural amendments. The rule applies to new and existing

landfills and ash ponds and establishes minimum siting and construction standards for

new CCR facilities, requires existing ash ponds at operating coal plants to either install

liners and ground water monitoring or permanently retire, and sets standards for long

‐

term stability and closure care. The rule also establishes a number of requirements for

facilities to make monitoring data and compliance information available to the public

online, which is significant as the Subtitle D designation makes the CCR regulations “self

‐ implementing,” meaning EPA has no formal role in implementing or enforcing the

regulations. Instead, enforcement is expected to be achieved through citizen suits under

the Solid Waste Disposal Act. States may—but are not required to—incorporate the

federal CCR requirements into their own solid waste management plans.

 Steam Electric Effluent Limitation Guidelines (ELGs): On June 7, 2013, EPA released eight

regulatory options for new, proposed steam

‐ electric ELGs to reduce or eliminate the

release of toxins into U.S. waterways. A final rule is required by September 30, 2015. 16

15 See U.S. Energy Information Administration website. Accessed February 4, 2015. Available at:

http://www.eia.gov/todayi nenergy/detail.cfm?id=15611.

16 See U.S. Environmental Protection Agency website. Accessed February 4, 2014. Available at:

http://water.epa.gov/scite ch/wastetech/guide/steam

‐ electric/amendment.cfm.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 14 New requirements will be implemented in 2015 to 2020 through the five

‐ year National

Pollutant Discharge Elimination System permit cycle. 17

 Cooling Water Intake Structure (§316(b)) Rule: In March 2011, EPA proposed a long

‐ expected rule implementing the requirements of Section 316(b) of the Clean Water Act

at existing power plants that withdraw large volumes of water from nearby water

bodies. Under this rule, EPA would set new standards to reduce the impingement and

entrainment of fish and other aquatic organisms from cooling water intake structures at

electric generating facilities. The final rule was released on May 19, 2014. The

requirements of the rule will be implemented through renewal of a facility’s NPDES

permit, which must be renewed every five years, and will be determined on a case

‐ by

‐

case basis. 18

 Regional Haze Rule: The Regional Haze Rule, released in July 1999, requires states to

develop state implementation plans (SIPs) for reducing emissions that impair visibility at

pristine areas such as national parks. The rule also requires periodic SIP updates to

ensure progress is being made toward improving visibility. The initial development of

SIPs, which is just now being completed, requires Best Available Retrofit Technology

(BART) controls for SO X , NO X , and PM emissions on large emission sources built between

1962 and 1977 that are found to be contributing to visibility impairment. BART controls

must be installed within five years of SIP approval.



## 4.2. Proposed Cap

‐ and

‐ Trade Legislation

Over the past decade, there have been several congressional proposals to legislate cap

‐ and

‐ trade

programs, with the goal of reducing greenhouse gas emissions by more than 80 percent below recent

levels by 2050 through a federal cap. Such programs would allow trading of allowances to promote

least

‐ cost reductions in greenhouse gas emissions.

Comprehensive climate legislation was passed by the House in 2009: the American Clean Energy and

Security Act, also known as Waxman

‐ Markey or H.R. 2454. However, the Senate did not vote on either

of the two climate bills before it in the 2009

‐ 2010 session (Kerry

‐ Lieberman APA 2010 and Cantwell

‐

Collins S. 2877). Waxman

‐ Markey was a cap

‐ and

‐ trade program that would have required a 17 percent

17 See U.S. Environmental Protection Agency. Steam Electric ELG Rulemaking. UMRA and Federalism Implications: Consultation

Meeting. October 11, 2011. Available at: http://water.epa.gov/scitech/ wastetech/guide/upload/Steam

‐ Electric

‐ ELG

‐ Rulemaking

‐ UMRA

‐ and

‐ Federalism

‐ Implications

‐ Consultation

‐ Meeting

‐ Presentation.pdf.

18 See U.S. Environmental Protection Agency website. Accessed May 21, 2014. Available at:

http://water.epa.gov/lawsregs/ lawsguidance/cwa/316b/index.cfm.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 15 reduction in emissions from 2005 levels by 2020, and an 83 percent reduction by 2050. 19 Further

analysis of these proposals is provided in Synapse’s 2012 Carbon Dioxide Price Forecast

. 20

Congressional interest in climate policy has been ongoing. In March 2012, Senator Bingaman introduced

the Clean Energy Standard Act of 2012 (S. 2146), which would have required larger utilities to meet a

percentage of their sales with electric generation from sources that produce fewer greenhouse gas

emissions than a conventional coal

‐ fired power plant. Credits generated by these clean technologies

would have been tradable with a market price. In February 2013, Senators Sanders and Boxer

introduced new comprehensive climate change legislation, the Climate Protection Act of 2013. This bill

proposed a fee of $20 per ton of CO 2 or CO 2 ‐ equivalent content of methane, rising at 5.6 percent per

year over a ten

‐ year period. Finally, in November 2014, Senators Whitehouse and Schatz introduced the

American Opportunity Carbon Fee Act, which would assess a fee for every ton of CO 2 pollution emitted

by all coal, oil, and natural gas produced in or imported to the United States. The bill would also cover

large emitters of non

‐ carbon greenhouse gases (such as methane) and CO 2 from non

‐ fossil

‐ fuel sources.

The fee would start at $38 per short ton in 2015 and increase annually by an inflation

‐ adjusted 2

percent, following the Obama Administration’s estimate of the social cost of carbon. All revenue

generated by the bill would be returned to the American people through an as

‐ yet undetermined

mechanism. The bill has not yet been brought to a vote. 21

As discussed earlier, we expect that federal cap

‐ and

‐ trade legislation will eventually be enacted but that

it is unlikely to happen in the near term. Federal carbon regulations are in effect or under development

today, and the economic pressure—or opportunity cost—that they create may be represented as an

effective price of greenhouse gas emissions. Regulatory measures are unlikely to meet long

‐ term goals

of reducing total greenhouse gas emissions to approximately 80 percent below 2005 levels by 2050, and

a broader approach will be increasingly attractive in order to meet these goals at lower costs. Our

judgment indicates this is most likely to take the form of a federal cap

‐ and

‐ trade system.



## 4.3. State and Regional Policies

There are two regional and state cap

‐ and

‐ trade programs in the United States today: the Northeast’s

Regional Greenhouse Gas Initiative (RGGI) and California’s Cap

‐ and

‐ Trade Program under the state’s

19 U.S. Energy Information Administration (EIA); Energy Market and Economic Impacts of the American Power Act of 2010 (July

2010). Available at http://www.eia.gov/oiaf/servicerpt/kgl/index.html. EIA; Energy Market and Economic Impacts of H.R.

2454, the American Clean Energy and Security Act of 2009 (August 2009). Available at

http://www.eia.doe.gov/oiaf/s ervicerpt/hr2454/index.html.

20 Wilson et al. 2012. 2012 Carbon Dioxide Price Forecast

. Synapse Energy Economics. Available at: http://www.synapse

‐ energy.com/project/synapse

‐ carbon

‐ dioxide

‐ price

‐ forecast.

21

“ Introducing the American Opportunity Carbon Fee Act” (November 2014). Available at:

http://www.whitehouse.senate. gov/news/release/introducing

‐ the

‐ american

‐ opportunity

‐ carbon

‐ fee

‐ act.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 16 Global Warming Solutions Act (Assembly Bill 32). In addition, a total of 20 states plus the District of

Columbia have set greenhouse gas emissions targets as low as 80 percent below 1990 levels by 2050. 22



### Regional Greenhouse Gas Initiative

RGGI is a cap

‐ and

‐ trade greenhouse gas program for power plants in the northeastern United States.

Current participant states are Connecticut, Delaware, Maine, Maryland, Massachusetts, New

Hampshire, New York, Rhode Island, and Vermont. RGGI has had more than six years of successful CO 2

allowance auctions, with Auction 26 in December 2014 resulting in a clearing price of $5.21 per ton. 23

RGGI is designed to reduce electricity sector CO 2 emissions to at least 45 percent below 2005 levels by

2020. 24 RGGI is also a potential avenue for Clean Power Plan compliance for these states.

When RGGI was established in 2007, the expectation was that the CO 2 emissions allowance auction

would generate revenues for consumer benefit programs such as energy efficiency, renewable energy,

and clean energy technologies. While RGGI has provided significant revenues for consumer benefit, its

allowance prices have generally remained near the statutory minimum price until recently. External

influences, including changes to fuel prices, caused a shift from coal and oil to lower

‐ carbon natural gas

generation. Compared to those external factors, the effect of the original RGGI cap requirements were

relatively minor in meeting the goals of reducing CO 2 emissions in the power sector. 25

In 2012 and 2013, the RGGI states evaluated a number of plans for tighter emissions caps with the goal

of raising allowance prices. In February of 2013, participating states agreed to lower the CO 2 cap from

165 million to 91 million short tons in 2014, to be reduced by 2.5 percent each year from 2015 to 2020.

RGGI analysis indicated that with these lower caps, allowance prices will rise to $10.60 per short ton by

2020. 26

In March 2014, the first auction under the new cap cleared at $4 per short ton. This auction used all

available “cost containment reserve” allowances for the year—a fixed additional supply of allowances

(above the cap) at a fixed price ($4 in 2014, rising to $10 in 2017) used to prevent rapid increases in the

allowance price when auction prices rise above a set trigger. No more cost containment reserve

22 Center for Climate and Energy Solutions. “Greenhouse Gas Emissions Targets.” U.S. Climate Policy Maps. Accessed

September 13, 2013. Available at: http://www.c2es.org/us

‐ states

‐ regions/policy

‐ maps/emissions

‐ targets.

23 RGGI Auction 23 results available at: http://rggi.org/market/co2_ auctions/results/Auction

‐ 23.

24 RGGI. 2013. “RGGI States Propose Lowering Regional CO 2 Emission Cap 45%, Implementing a More Flexible Cost

‐ Control

Mechanism.” Press Release. Available at: http://www.rggi.org/docs/Pre ssReleases/PR130207_ModelRule.pdf.

25 Environment Northeast. 2010. “RGGI at One Year: An Evaluation of the Design and Implementation of the Regional

Greenhouse Gas Initiative.” Available at: http://www.usclimatenetwork.org/resource

‐ database/rggi

‐ at

‐ one

‐ year

‐ an

‐

evaluation

‐ of

‐ the

‐ design

‐ and

‐ implementation

‐ of

‐ the

‐ regional

‐ greenhouse

‐ gas

‐ initiative/.http://www.env

‐ ne.org/public/resources/pdf/ENE_ 2009_RGGI_Evaluation_20100223_FINAL.pdf.

26 RGGI. 2013. “RGGI States Propose Lowering Regional CO2 Emission Cap 45%, Implementing a More Flexible Cost

‐ Control

Mechanism.” Press Release. Available at: http://www.rggi.org/docs/Pre ssReleases/PR130207_ModelRule.pdf.

Allowances prices have been converted to 2014 dollars.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 17 allowances were available for the remaining three auctions in 2014, and prices rose to $5.21 per short

ton by the end of the year.

The December 2014 clearing price was the highest

‐ ever clearing price at a RGGI auction. In 2015, the

number of cost containment reserve allowances will rise from 5 million to 10 million, alongside an

increase in the trigger price from $4 to $6 per short ton. We expect this to result in a continuation of the

slow but steady rise in RGGI allowance prices.



### California’s Cap

‐ and

‐ Trade

‐ Program under AB32

With the goal of reducing the state’s emissions to 1990 levels by 2020, California’s Global Warming

Solutions Act (AB32) has created the world’s second largest carbon market, after the European Union’s

Emissions Trading System. The first compliance period for California’s Cap

‐ and

‐ Trade Program began on

January 1, 2013 and covers electricity generators, CO 2 suppliers, large industrial sources, and petroleum

and natural gas facilities emitting at least 27,600 short tons of CO 2 equivalents per year. 27 This first

phase of the program included electricity generators and large industrials. Phase II began in 2015, and

also includes transportation fuels, natural gas suppliers, and smaller industrial sources. In 2015 the

annual allowance budget rises to 434 million short tons, from 176 million short tons, due to the

increasing scope of the policy. 28

On January 1, 2014, California and Québec formally linked their carbon markets. The first joint auction

was held in November 2014 and cleared at $10.98 per short ton. 29 The second joint auction was held on

February 18, 2015, and cleared at $11.08. This was the first auction to include transportation fuels, and

sold 73.6 million allowances, as compared to only 23 million allowances in the prior November 2014

auction. 30

While the current cap

‐ and

‐ trade program in California only runs through 2020, several bills were

introduced in 2014 suggesting direction through 2030. While none were taken to a final vote, there is an

27 California Air Resources Board. 2013. “California Cap on Greenhouse Gas Emissions and Market

‐ Based Compliance

Mechanisms to Allow for the Use of Compliance Instruments by Linked Jurisdictions.” Available at:

http://www.arb.ca.gov/cc/ capandtrade/ctlinkqc.pdf. Legislated value is 25,000 metric tons, converted here to short tons.

28 CARB AB 32 Final Regulation Order. Available at:

http://www.arb.ca.gov/cc/capandtrade /capandtrade/unofficial_c&t_012015.pdf.

29 California Air Resources Board. 2015. California Cap and Trade Program Summary of Auction Results. Updated 1/12/2015.

Available at: http://www.arb.ca.gov/cc/capandtra de/auction/resul ts_summary.pdf.

30 California Air Resources Board. 2015. California Cap and Trade Program and Quebec Cap and Trade System February 2015

Joint Auction #2 Summary Results Report

. Available at: http://www.arb.ca.gov/cc/capandtrade/auction/feb

‐ 2015/summary_results_report.pdf.

Auctions clear in dollars per metric tons

– values here have been converted to short tons.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 18 expectation that they will be reconsidered in 2015. 31 ICIS industries forecasts California CO 2 allowance

prices to hit $45 per short ton by 2030. 32



## 4.4. Assessment of CO 2 

## Price for Federal Rulemaking

In 2010, the U.S. federal government began including a carbon cost in regulatory rulemakings to account

for the climate damages resulting from each additional ton of greenhouse gas emissions; 33 updated

values were released in 2013. 34 The 2013 Economic Report of the President acknowledges that these

values will continue to be updated as scientific understanding improves. 35

An Interagency Working Group on the Social Cost of Carbon—composed of members of the Department

of Agriculture, Department of Commerce, Department of Energy, Environmental Protection Agency,

Department of Transportation, and Office of Management and Budget, among others—was tasked with

developing a consistent value for the social benefits of climate change abatement. Four values were

developed (see Section 3 for more explanation of the “social cost of carbon” methodology). These

values—$11, $36, $57, and $103 per short ton of CO 2 in 2013, and rising over time—represent average

(most likely) damages at three discount rates, along with one estimate at the 95 th percentile of the

assumed distribution of climate impacts. 36 While subject to significant uncertainty, this multi

‐ agency

31 Environmental Defense Fund. “Carbon Market California

– Year Two: 2014.” Available at:

http://www.edf.org/sites/default/files/content/carbon

‐ market

‐ california

‐ year_two.pdfhttp://www.edf.org/si tes/default/files/content/carbon

‐ market

‐ california

‐ year_two.pdf.

32 ICIS. 2015. “ICIS launches 2030 Forecast for California Carbon Allowances.” Press Release. January 2015. Available at:

http://www.icis.com/press

‐ releases/icis

‐ launches

‐ 2030

‐ forecast

‐ for

‐ california

‐ carbon

‐ allowances/.

Forecast in metric tons, value here converted to short tons.

33 Interagency Working Group on the Social Cost of Carbon, U. S. G. 2010. “Appendix 15a. Social cost of carbon for regulatory

impact analysis under Executive Order 12866.” In Final Rule Technical Support Document (TSD): Energy Efficiency Program

for Commercial and Industrial Equipment: Small Electric Motors

. U.S. Department of Energy. Available at:

http://go.usa.gov/3fH.

34 Interagency Working Group on the Social Cost of Carbon. 2013. Technical Support Document

– Technical Update of the Social

Cost of Carbon for Regulatory Impact Analysis

– Under Executive Order 12866

. Available at:

http://www.whitehouse.gov/sites/def ault/files/omb/inforeg/social_cost _of_carbon_for_ria_2013_update.pdf.

Reported values have been converted to 2014 dollars per short ton.

35 The White House. 2013.“Climate Change and the Path Toward Sustainable Energy Sources.” 2013 Economic Report of the

President

. Available at: http://www.whitehouse.gov/sites/default /files/docs/erp2013/ERP2013_Chapter_6.pdf.

36 In a 2012 paper, Ackerman and Stanton modified the Interagency Working Group’s assumptions regarding uncertainty in the

sensitivity of temperature change to emissions, the expected level of damages at low and high greenhouse gas

concentrations, and the assumed discount rate, and found values for the social cost of carbon ranging from the Working

Group’s level up to more than an order of magnitude greater [Frank Ackerman and Elizabeth A. Stanton. 2012. “Climate Risks

and Carbon Prices: Revising the Social Cost of Carbon.” Economics: The Open

‐ Access, Open

‐ Assessment E

‐ Journal

, Vol. 6,

2012

‐ 10. http://dx.doi.org/10.5018/economics

‐ ejournal.ja.2012

‐ 10]. Similarly, Laurie Johnson and Chris Hope modified

discount rates and methodologies and found results up to 12 times larger than the Working Group’s central estimate [Laurie

T. Johnson, Chris Hope. 2012. “The social cost of carbon in U.S. regulatory impact analyses: an introduction and critique.”

Journal of Environmental Studies and Sciences ; DOI: 10.1007/s13412

‐ 012

‐ 0087

‐ 7].Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 19 effort represents an initial attempt at incorporating the benefits associated with CO 2 abatement into

federal policy. These values are presented in Figure 1.

These estimates continue to be used in federal government rulemakings for the purpose of calculating

costs and benefits of new and updated policies. While a CO 2 price for federal rulemaking assessments is

a fundamentally different kind of cost metric than the others discussed in this report, it nonetheless

represents a dollar value for greenhouse gas emissions currently in use by the U.S. federal government.

Figure 1: Range of Federal CO 2 Prices for Rulemakings, by discount rate



# 5. T HE 

# C OST OF 

# I MPLEMENTING 

# EPA’ S 

# C LEAN 

# P OWER 

# P LAN

In Section 4, we discuss the EPA’s Clean Power Plan in the context of federal climate legislation that may

result in reduced greenhouse gas emissions. As the proposal aims to regulate CO 2 emissions directly and

represents a significant change in near

‐ term climate policy certainty as compared to our previous CO 2

price forecast, we examine it more fully in this section. We discuss factors that will affect states’

implementation methods, as well as the expected costs of compliance as modeled by EPA, Synapse, and

third

‐ party analysts.



## 5.1. Issues in Implementing the Clean Power Plan for Utility Planning

The Clean Power Plan is EPA’s proposal to meet CO 2 emissions limitations from existing sources using a

Best System of Emissions Reductions (“BSER”). EPA has structured the Clean Power Plan around four

fundamental “building blocks” that represent possible means for achieving the established emissions

standard: (1) increasing existing coal plant efficiency, (2) displacing coal generation with existing natural

gas, (3) increasing renewable energy acquisitions, and (4) implementing energy efficiency programs. $0 $50 $100 $150 $200 $250

2005 2010 2015 2020 2025 2030 2035 2040 2045 20502014$/short ton 5.00%

3.00%

2.50%

3% (95th percentile)Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 20 Taken together, EPA estimates that these programs will reduce emissions by a certain amount in each

state. EPA’s targets for each state are set as a rate, measured in pounds of CO 2 per megawatt

‐ hour

(lbs/MWh). The rate has been a source of confusion to many parties: it represents both projected

emissions from existing sources, as well as generation from new renewable energy and energy efficiency

programs.

EPA’s proposal allows states to choose the metric by which they measure compliance: states can either

meet the rate

‐ based target using a combination of the building blocks or other programs, or meet an

alternate mass

‐ based target, measured in total tons of CO 2

.

The mass

‐ based compliance route is fundamentally a cap on sectoral emissions on a state

‐ by

‐ state basis.

It is not unreasonable to assume that implementing states might choose to use a cap

‐ and

‐ trade scheme,

such as is currently employed for national SO 2 emissions under the Acid Rain Program, regionally for NO X

budget trading program, and for CO 2 in California and RGGI states. Planning and modeling under a mass

‐

based cap is fairly well understood; it involves a marginal abatement cost applied to electric sector

emissions reduces emissions. The price is adjusted either by the market or an administrative body such

that total emissions hit the required target. Modeling mass

‐ based compliance effectively requires

finding a price (either real or shadow) for CO 2 that maintains emissions under the cap. Utilities may elect

to either review their pro

‐ rata share of mass

‐ based emissions reductions under the cap, or model the

impact of mass compliance on the state fleet to determine an effective CO 2 price. For utilities that trade

electricity bilaterally or on the open market, the market price of electricity should also account for the

CO 2 price impacts.

The rate

‐ based compliance mechanism sets a rate target for individual states based on an (outwardly)

simple formula, in which emissions from existing generators are divided by generation from existing

generators plus generation from renewable energy and energy efficiency (EERE). States or utilities

seeking to model the impact of the Clean Power Plan under a rate

‐ based compliance scheme need to

find a least

‐ cost solution that reduces the emissions rate of existing fossil generators while including the

amount of EERE as an additional factor in that emissions rate. Effectively, modeling a rate

‐ based

compliance mechanism requires utilities (and states) to simultaneously optimize power plant operations

and EERE, while also accounting for how compliance in neighboring utilities (and states) impacts

generators and the price for market electricity. States with different rate targets (or different rate

‐ based

mechanisms) may impose different restrictions on fossil generators, and thus significantly impact

market electricity prices.



## 5.2. Expected Pricing and Stringency of EPA’s Clean Power Plan

As of the date of publication of this report, the Clean Power Plan is still a proposal and leaves numerous

open questions and ambiguities. While it is expected that many of these ambiguities will be resolved by

the time the final rule is published, the exact implications of the rule are still difficult to fully resolve.

Depending on interpretations of various open questions, including the role of new gas and the

treatment of EERE, the rule may prove to be fairly low

‐ cost, or higher cost. It is possible to envision high

‐Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 21 and low

‐ cost scenarios for both high and low efficacy rule implementations. All estimates in this section

have been converted to 2014 dollars per short ton.



### EPA’s Estimates

Several studies have attempted to quantify the costs and benefits of implementing the proposed Clean

Power Plan. 37 In developing the proposed rule, EPA estimated the average compliance cost for each of

the building blocks. 38 EPA found that:

 Heat rate improvements at existing coal

‐ fire units (Building Block 1) would have net

costs between $6 and $11 per short ton

 Substituting generation from existing natural gas plants for generation from existing

coal plans (Building Block 2) would have net costs of about $283 per short ton

 Encouraging new renewable energy and discouraging the retirement of existing nuclear

power plants (Building Block 3) would have costs between $9 and $38 per short ton

 Demand

‐ side energy efficiency (Building Block 4) would range from $15 to $23 per short

ton

EPA also used the IPM electricity capacity expansion model to analyze compliance in a more integrated

framework, finding average compliance costs of $28 per short ton in 2030 (ranging from zero to $106

per ton depending on the state). They also modeled a regional compliance approach, where nearby

states could work together to reduce costs. This approach resulted in average costs of $29 per short ton

in 2030 (ranging from $26 to $34 per ton depending on the region).



### Independent Analyses

The Rhodium Group and CSIS Energy used the EIA’s NEMS model to project the effects of the proposed

Clean Power Plan. NEMS is a model that considers not only the electricity sector, but other elements of

the energy economy, including transportation, industrial, commercial, and residential uses. They found

simple state

‐ by

‐ state compliance to be highly unlikely, and as a result compared a national compliance

approach (with a single rate

‐ or mass

‐ based standard) to a more fragmented 22

‐ region approach. With

the inclusion of energy efficiency, they found expenditures on electricity decreased by 2.4 percent under

a national compliance approach relative to a base case without the Clean Power Plan. Under regional

37 Results from public modeling analyses were converted to 2014 dollars using price deflators taken from the U.S. Bureau of

Economic Analysis, and are available at: http://www.bea.gov/national/nipaweb/SelectTable.asp.

38 EPA. 2014. Clean Power Plan Proposed Rule (June 2014 release)

. Available at: http://www2.epa.gov/carbon

‐ pollution

‐

standards/clean

‐ power

‐ plan

‐ proposed

‐ rule.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 22 compliance, electricity expenditures increased 0.6 percent. 39 This small change in expenditures indicates

that Clean Power Plan compliance can be implemented at a relatively modest cost. The use of an

economy

‐ wide energy model also allowed this study to demonstrate the impacts on national gas

demand; Rhodium Group and CSIS Energy projected total national gas demand to increase 10.9 billion

cubic feet per day by 2030, as compared to a no policy case. This higher gas demand resulted in an

increase in Henry Hub gas prices of $0.48 per MMBtu.

SNL Energy completed modeling of the proposed rule using AuroraXMP, a high

‐ resolution electric sector

model incorporating both capacity expansion and dispatch. They modeled the policy as a mass

‐ based

target, including emissions from new builds, with regional compliance across five regions in the Eastern

Interconnect. SNL imposed a CO 2 constraint, and reported the resulting shadow prices. Their values

ranged from $13 to $29 per short ton for the 2020

‐ 2029 average targets, rising to $21 to $33 per short

ton in 2030. This analysis implied that the RGGI states could largely meet their target under the existing

RGGI system, PJM could comply at a cost of $21 per ton (well below the prices implied in the EPA IPM

analysis), and other regions could comply at costs quite similar to those assumed by EPA under regional

cooperation. 40

Energy Ventures Analysis conducted a similar study for the National Mining Association, using the same

model as SNL but focusing on state, rather than regional, compliance. They found average CO 2 prices

over the 2020

‐ 2030 period ranging from $10 to $31 per short ton for most states, although prices in

Arizona, Nevada, Oregon, and Washington were much higher: $55 per ton, $83 per ton, $54 per ton, and

$70 per ton, respectively. 41

Several independent system operators (ISOs) are in the process of conducting their own analyses. MISO

used the EGEAS electricity capacity expansion model to consider compliance approaches directly

following EPA’s building blocks, as well as a generic CO 2 constraint based on EPA’s mass

‐ based targets. 42

The building block approach resulted in an overall CO 2 cost of $60 per ton reduced, while the more

flexible mass

‐ based approach cost $38 per ton reduced. The MISO analysis only focused on existing

‐

source CO 2 emissions—any emissions from new gas plants to be regulated under 111(b) are not

counted. As a result, the mass

‐ based approach above may create a loophole in the proposed policy

design whereby new gas combined

‐ cycle plants could replace generation from old gas combined

‐ cycle

39 Larsen et al. 2014. Remaking American Power: Potential Energy Market Impacts of EPA’s Proposed GHGH Emission

Performance Standards for Existing Electric Power Plants

. CSIS and Rhodium Group. Available at:

http://csis.org/publication/remaking

‐ american

‐ power.

40 Gelbaugh et al. 2014. Critical Mass: An SNL Energy Evaluation of Mass

‐ based compliance under the EPA Clean Power Plan

.

Available at: http://center.snl.com/Resour ces/Whitepaper.aspx?id=4294973757.

41 Energy Ventures Analysis. 2014. EPA Clean Power Plan: Costs and Impacts on US Energy Mark ets. Energy Ventures Analysis

for National Mining Association. Available at: http://www.countoncoal.org/assets/Executive

‐ Summary

‐ EPA

‐ Clean

‐ Power

‐

Plan

‐ Costs

‐ Impacts.pdf.

42 MISO. 2014. “GHG Regulation Impact Analysis

– Initial Study Results.” September 17, 2014. Available at:

http://www.eenews.net/assets/2014/09/18/document_ew_01.pdf.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 23 plants to reduce emissions under the 111(d) umbrella without actually reducing overall system

emissions. It is likely that EPA will address such potential limitations in the final rule.

PJM used the PROMOD hourly production cost model to review the cost of compliance under mass

‐

based targets, assuming that new gas units are regulated under Clean Air Act section 111(b). 43 PJM

analyzed a number of different scenarios of renewable energy and energy efficiency implementation

and gas prices. Required CO 2 prices ranged from $5 to $30 per short ton in 2030, except for scenarios

with high natural gas prices which ranged from $35 to $55 per short ton.

Other studies have focused on modeling the rate

‐ based provisions of the Clean Power Plan and reported

changes in total system costs and electricity prices, but not CO 2 prices. The Missouri utility Ameren

found an incremental cost of $4 billion to achieve the Clean Power Plan goals, as compared to its latest

IRP that would achieve the same goals by 2035. 44 A NERA Economic Consulting report found

incremental costs of $366 billion (in $2013 present value) nationwide, or $479 billion without the

availability of energy efficiency and renewable energy. 45 The PJM study cited above found incremental

costs in 2029 of $0.1 billion to $3.5 billion in the high natural gas price case for the PJM system as a

whole.



### Synapse Analysis: What Would the Cost Be with Nationwide Cooperation?

Synapse used the ReEDS (Regional Energy Deployment System) model, built by the National Renewable

Energy Lab, to estimate expected allowance prices under two scenarios of full national cooperation in

meeting the Clean Power Plan. ReEDS selects the types of power generation to build and operate in

different parts of the country with the goal of achieving the least total cost; it draws many of its

assumptions from the EIA’s 2014 Annual Energy Outlook. Our Clean Power Plan scenarios included a cap

on CO 2 emissions consistent with EPA’s mass

‐ based targets. 46 Modeling results were produced using

both “annual” and “average” assumed targets. The annual approach matches the EPA mass

‐ based

targets in each year beginning in 2020, while the average approach matches the 2020

‐ 2029 average

mass. Figure 2 reports yearly emissions for both types of targets. As shown in Figure 3, allowance prices

typically range from $16 to $25 per short ton (in 2012 dollars) throughout the 2020

‐ 2030 timeframe.

43 Sotkiewics, Paul and Abdur

‐ Rahman, Muhsin. 2014. “EPA’s Clean Power Plan Proposal Review of PJM Analyses Preliminary

Results.” PJM Members Committee Webinar November 17, 2014. Available at:

http://www.pjm.com/~/media/documents/reports/20141117

‐ epas

‐ clean

‐ power

‐ plan

‐ proposal

‐ review

‐ of

‐ pjm

‐ analyses

‐ preliminary

‐ results.ashx.

44 Ameren. 2015. Ameren’s Alternative to the EPA’s proposed Greenhouse Gas Rules

. Available at: https://www.ameren.com/

‐ /media/Corporate

‐ Site/Files/aboutameren/amerens

‐ alternative

‐ ghg

‐ white

‐ paper.pdf?la=en.

45 NERA Economic Consulting. 2014. Potential Energy Impacts of the EPA Proposed Clean Power Plan

. Available at:

http://americaspower.org/sites/default/f iles/NERA_CPP%20Report_Final_Oct%202014.pdf.

46 EPA. 2014. “Clean Power Plan Proposed Rule: Translation of State

‐ Specific Rate

‐ Based CO2 Goals to Mass

‐ Based

Equivalents.” November 6, 2014. Available at: http://www2.epa.gov/carbon

‐ pollution

‐ standards/clean

‐ power

‐ plan

‐ proposed

‐ rule

‐ translation

‐ state

‐ specific

‐ rate

‐ based

‐ co2.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 24 Using the average targets, prices start lower in 2020 before gradually rising as the policy becomes more

stringent. These two cases can be seen as a low

‐ end estimate for the cost of compliance with the Clean

Power Plan. Less cooperation between states would result in higher costs by reducing the number of

low

‐ cost compliance options available to each state.

Figure 2: U.S. CO 2 emissions under two ReEDS Clean Power

Plan scenarios (million short tons) Figure 3: U.S. CO 2 allowance prices under two ReEDS Clean

Power Plan scenarios ($/short ton)



### Comparison of Price Estimates

Figure 4 below compares Synapse’s nationwide analysis (referred to as Synapse/ReEDS) to the range of

other analyses discussed in this section. The Synapse analysis falls well within this range. Modeled

compliance costs depend on a number of factors, including assumptions about cooperation, fuel prices,

renewable and energy efficiency costs, and retirements.

Figure 4: Summary of Clean Power Plan study CO 2 price estimates (2014 dollars per short ton) 0 500 1,000 1,500 2,000 2,500

2014 2018 2022 2026 2030Million Short Tons Annual

Average

$0 $20 $40 $60 $80 $100 $120CO2Price Range (2014$/short ton)Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 25 

# 6. CO 2 

# P RICE 

# F ORECASTS IN 

# U TILITY 

# IRP S

A growing number of electric utilities include projections of the expected costs associated with

greenhouse gas emissions in their resource planning. In addition to the pool of recent IRPs reviewed for

this forecast, which are characterized below, Synapse has previously conducted an extensive study of

resource plans dating back to 2003:

 None of the 15 IRPs published from 2003

‐ 2007 that we reviewed included a CO 2 price

forecast.

 Of the 56 IRPs from 2008

‐ 2011 that we reviewed, 23 included a CO 2 price forecast. This

jump in the inclusion of carbon price projections in IRPs from 2008 onwards coincided

with the introduction of the Waxman

‐ Markey bill in Congress, which sought to legislate

a cap

‐ and

‐ trade system. As a result of this bill, the inclusion of carbon pricing

sensitivities in IRPs became paramount to prudent planning beginning in 2008; a

majority of the IRPs in our 2015 review reflect an understanding that inclusion of a

methodology to reflect future environmental regulations is prudent planning.

 Of the 115 IRPs released in 2012

‐ 2015 reviewed by Synapse (referred to below as our

“current sample”), 66 include a CO 2 price in at least one scenario, including 61 with a

CO 2 price in their reference case scenario (53 percent).

 Moreover, of the 24 IRPs released in 2014

‐ 2015 reviewed by Synapse, 20 include a CO 2

price in at least one scenario, of which 19 include a CO 2 price in their reference case

scenario (79 percent).

These data show that the resource plans in the current sample includes a similar fraction of IRPs with a

CO 2 price forecast as the 2008

‐ 2011 sample, when major climate bills were actively under consideration

(57 percent in 2012

‐ 2015 as compared to 50 percent in 2008

‐ 2011).

Table 2: IRP database summary statistics

Number of

IRP Reviewed Number of IRPs

with CO 2 considered

2003

‐ 2007 15 0

2008

‐ 2011 56 23

2012

‐ 2015 115 66

2012

‐ 2013 91 46

2014

‐ 2015 24 20

How well does our current sample represent utility planning across the United States? A total of 3,412

utilities operated in the United States in 2012. 47 In terms of generation, the top 5 percent—170

47 EIA Form 860, 2012 (Released Oct. 10, 2013).Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 26 utilities—accounted for 77 percent of total U.S. generation in 2012. Our sample includes IRPs from 33

utilities within this largest 5 percent. Of those 33, 29 utilities have IRPs with non

‐ zero CO 2 prices. This

means that almost all of the IRPs we reviewed from the largest utilities in the country include a non

‐ zero

CO 2 price in their planning process.

Not all utilities produce IRPs. In fact, 11 states have no filing requirements for long

‐ term planning, while

10 other states require long

‐ term plans, but not IRPs. 48 While long

‐ term planning is an important part of

the procurement process in regions with wholesale energy markets, traditional utility

‐ centric IRPs are

less common. As a result, regions with wholesale markets are not well represented in our sample.

Figure 5 below displays non

‐ zero reference case CO 2 price forecasts from 46 utility IRPs over the period

of 2014

‐ 2044. 49 Although we refer above to 61 non

‐ zero CO 2 price reference case forecasts in the

current sample, fifteen of these forecasts are excluded from this chart for various reasons. In some

cases, our sample includes IRPs from companies in 2012 and 2014, in which case we only include the

most recent forecast. The remaining non

‐ zero forecasts that are not included in the figure below are

from companies that operate in multiple states but produce the same CO 2 forecast, are confidential, or

forecast a price that begins following the end of the IRP planning period.

48 See: Wilson, R. and B. Biewald. Best Practices in Electric Utility Integrated Resource Planning

. June 1, 2013. Synapse Energy

Economics. Available at: http://www.synapse

‐ energy.com/Downloads/SynapseReport.2013

‐ 06.RAP.Best

‐ Practices

‐ in

‐ IRP.13

‐ 038.pdf.

49 We also provide a figure showing only forecasts produced in 2014 and 2015 in Appendix A. These forecasts do not appear

materially different than the range of 2012 to 2015 forecasts shown below.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 27 Figure 5: Utility non

‐ zero and non

‐ confidential reference case forecasts from 2012

‐ 2015 50

50 A number of non

‐ zero, non

‐ confidential reference case forecasts are excluded, discussed further on page 24. $

‐ $10 $20 $30 $40 $50 $60 $702014201520162017201820192020202120222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044CO2Price(2014$pershorttonCO2)

NV Nevada Power (2012) Mid

‐ Carbon Case UT PacifiCorp 2012 Base Case ($16 CO2) (Dec 2011)

WA Seattle City Light (2012) NM Southwestern PS (2012)

NM/TX El Paso Elec. (2012) OR Pacificorp (2013) Base

OR Portland G&E (2012) CA LADWP (2012)

CA PWP (2012) WA/OR CascadeNW (2012)

OK Public Service Co of OK (2012) Fleet Transition: CSAPR WA Cowlitz PUD (2012)

WA Tacoma Electric (2012) NE NPPD (2013)

ID Idaho Power (2013) HI HECO (2013)

IN Duke Energy Indiana (2013) IN/MI IN

‐ MI Power (2013)

AK Alaska Energy Authority (2012) Medium CO Colorado Springs Utilities (2012) Low

IN Indiana Municipal Power Agency (2013) Reference MN

‐ WI Great River Energy (2012) Mid

WA Puget Sound Energy (2013) Base WA Snohomish County PUD (2013) Base Carbon Price

WA Grays Harbor PUD (2012) NY ConEd (2012) RGGI

MT NorthWestern Energy (2013) LA CLECO (2013)

SC SCEG (2012) Base NC/SC Duke Energy Carolinas (2014) Base

OK OG&E (2014) Reference NC/VA Dominion 2014 Carbon (2014)

MO Ameren MO (2014) Mid Case VT Green Mountain Power (2014) LaCapra RGGI Forecast

IN Vectren (2014) IRP Base Case AZ APS (2014) Base Case

CT CT DEEP (2014) RGGI NM PNM (2014) Reference

AZ UniSource Energy (2014) WA Benton PUD (2014) Federal

WA Cowlitz PUD (2014) Federal LA SWEPCO (prelim) (2015) Base

NC

‐ SC Duke Energy Progress (2014) With CO2 AZ Tucson Electric Power (2014)

LA Entergy LA Draft (2015) Reference Case KS Kansas City BPU (2014) Base CO2Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 28 Four of the utility forecasts displayed in Figure 5 are particularly low in the context of the other

forecasts. Two IRPs from the Northeast—Commonwealth Edison of New York and the Connecticut

Department of Energy and Environmental Protection—base their reference case forecasts on RGGI

prices before the recent RGGI revisions discussed in Section 4, resulting in prices just under $2 per short

ton. Two other IRPs—Puget Sound Energy and Snohomish County PUD—use a Washington State

mandated CO 2 price of $0.32 per short ton for their base case analyses.

The five utilities that assume a $0 CO 2 price in their reference cases also consider several additional non

‐

zero scenarios. These are provided in Appendix A. 51

Table 3 summarizes the range of CO 2 prices forecasted for 2020 and 2030. Not all forecasts start by

2020, and those that do are generally below $20 per ton. Of the utilities with a non

‐ zero CO 2 price, all

but four assume a price in 2025.

Table 3: Number of utility CO 2 Forecasts from 2012

‐ 2015 in several price ranges in 2020 and 2030

Compliance Year

2020 2030

>$0

‐ <$10 14 5

$10

‐ $20 17 18

$20

‐ $30 6 11

$30

‐ $40 2 2

>$40 0 4



# 7. O VERVIEW OF THE 

# E VIDENCE FOR A 

# F UTURE 

# CO 2 

# P RICE

Our CO 2 price forecasts are developed based on the data sources and information presented above and

reflect a reasonable range of expectations regarding future efforts to limit greenhouse gas emissions.

The following evidence has guided the development of the Synapse forecasts:

 Regulatory measures limiting CO 2 emissions from power plants will be finalized in the

near term

. The EPA has proposed emissions standards for new and existing power

plants under Section 111(d) of the Clean Air Act, to be finalized by mid

‐ summer 2015.

These actions represent an effective price that will affect utility planning and

operational decisions.

 Environmental regulation can, and often does, evolve incrementally over time

. Initial

awareness of environmental damages, followed successively by measurement and study

51 Indianapolis Power & Light’s “Environmental Case” CO 2 forecast is provided only as a trajectory with no values on its axes,

and is excluded from Appendix A.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 29 of the damages and initial attempts to regulate the responsible sources (and associated

debate and legal challenges), are eventually followed by more detailed or nuanced

regulations. For climate change and greenhouse gas emissions from the electric power

sector in the United States, this process has been in progress for several decades, and in

our view the trends are likely to continue, as risks are increasingly apparent and

regulatory and policy response to address the risks is demanded.

 State and regional action limiting CO 2 emissions is ongoing and growing more

stringent

. In the Northeast, the RGGI CO 2 cap has been tightened, and recent auctions

have used all available cost

‐ containment reserves, resulting in higher CO 2 prices for

electric generators in the region. California’s Cap

‐ and

‐ Trade Program, which represents

an even larger carbon market than RGGI, has held many successful allowance auctions,

has been successfully defended against numerous legal challenges, and was expanded

to include natural gas and transportation fuels in 2015.

 A price for CO 2 is already being factored into federal rulemakings. The federal

government has demonstrated a commitment to considering the benefits of CO 2

abatement in rulemakings such as fuel economy and appliance standards.

 Ongoing analysis of the Clean Power Plan proposal suggests a wide range of possible

prices. Important factors include the level of regional cooperation, the availability of

renewable energy and energy efficiency, and natural gas prices.

 Electric suppliers continue to account for the opportunity cost of CO 2 abatement in

their resource planning. Prudent planning requires utilities to consider adequately the

potential for future policies. The range of CO 2 prices reported in Section 6 indicates that

many utilities believe that by 2020 there will likely be significant economic pressure

towards low

‐ carbon electric generation.



# 8. S YNAPSE 

# 2015 CO 2 

# P RICE 

# F ORECAST

Based on the evidence discussed in this report, Synapse has developed Low, Mid, and High case

forecasts for CO 2 prices from 2015 to 2050. These forecasts reflect our best understanding of Clean

Power Plan compliance costs, as well as future expected costs after 2030 to meet science

‐ based

emissions targets. We believe it is highly likely that neighboring states with large disparities in mitigation

costs will work together to their mutual benefit to reduce overall compliance costs. EPA has indicated it

is open to such cooperation. As a result, we provide a single national

‐ level CO 2 price and do not attemptSynapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 30 to provide state

‐ level forecasts. Figure 6 and Table 4 show the Synapse forecasts over the 2015

‐ 2050

period. 52

Figure 6: Synapse 2015 CO 2 Price Trajectories

52 Figure 11 in Appendix A also provides a comparison of this updated Synapse CO 2 forecast to the 2013 Synapse forecast.

These forecasts do not differ substantially. Two key differences are a tighter range of prices in 2020 resulting from greater

policy certainty, as well as higher 2015 forecasts for the mid and high cases, resulting from the indicated stringency of the

Clean Power Plan. The 2015 forecast is also the first Synapse forecast to extend to 2050.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 31 Table 4: Synapse 2015 CO 2 price projections (2014 dollars per short ton CO 2 )

In these forecasts, the Clean Power Plan, together with other federal regulatory measures, place

economic pressure on CO 2 ‐ emitting resources in the next several years, such that it is relatively more

expensive to operate a high

‐ carbon

‐ emitting power plant. These pressures are followed later by a

broader federal policy, such as cap and trade. In any state other than the RGGI region and California, we

assume a zero carbon price through 2019; beginning in 2020, we expect Clean Power Plan compliance

will put economic pressure on carbon

‐ emitting power plants throughout the United States. All annual

allowance prices and levelized values are reported in 2014 dollars per short ton of CO 2

.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 32  The Low case forecasts a CO 2 price that begins in 2020 at $15 per ton, and increases to

$25 in 2030 and $45 in 2050, representing a $26 per ton levelized price over the period

2020

‐ 2050. This forecast represents a scenario in which Clean Power Plan compliance is

relatively easy, and a similar level of stringency is assumed after 2030. Low case prices

are also representative of the incremental cost to produce electricity with gas over coal,

as indicated in the EIA’s 2014 Annual Energy Outlook.

 The Mid case forecasts a CO 2 price that begins in 2020 at $20 per ton, and increases to

$35 in 2030 and $88 in 2050, representing a $42 per ton levelized price over the period

2020

‐ 2050. This forecast represents a scenario in which federal policies are

implemented with significant but reasonably achievable goals. Clean Power Plan

compliance is achieved and science

‐ based climate targets are enacted mandating at

least an 80 percent reduction in electric section emissions from 2005 levels by 2050.

 The High case forecasts a CO 2 price that begins in 2020 at $25 per ton, and increases to

approximately $54 in 2030 and $120 in 2050, representing a $59 per ton levelized price

over the period 2020

‐ 2050. This forecast is consistent with a stringent level of Clean

Power Plan targets that recognizes that achieving science

‐ based emissions goals by 2050

will be difficult. In recognition of this difficulty, implementation of standards more

aggressive than the Clean Power Plan may begin as early as 2025. New regulations may

mandate that electric

‐ sector emissions are reduced to 90 percent or more below 2005

levels by 2050, in recognition of lower

‐ cost emission reduction measures expected to be

available in this sector. Other factors that may increase the cost of achieving emissions

goals include: greater restrictions on the use of offsets; restricted availability or high

cost of technology alternatives such as nuclear, biomass, and carbon capture and

sequestration; and more aggressive international actions (thereby resulting in fewer

inexpensive international offsets available for purchase by U.S. emitters).

These price trajectories are designed for planning purposes, so that a reasonable range of emissions

costs can be used to investigate the likely costs of alternative resource plans. We expect an actual CO 2

price incurred by utilities in all states to fall somewhere between the low and high estimates throughout

the forecast period.

In Figure 7, the Synapse forecasts are shown in comparison to the reference case utility forecasts

presented earlier. In Figure 8, the Synapse forecasts are compared to a summary of the other evidence

presented in this report, including the federal CO 2 price for rulemakings; existing Clean Power Plan

studies; and utility reference, low

, and high scenarios. The forecasts are also compared to the Synapse

2013 forecasts and the federal CO 2 price for rulemakings in Appendix A.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 33 Figure 7: Synapse forecast compared to recent utility reference case forecasts

$

‐ $20 $40 $60 $80 $100 $1202014201520162017201820192020202120222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044204520462047204820492050CO2Price(2014$pershorttonCO2)

NV Nevada Power (2012) Mid

‐ Carbon Case UT PacifiCorp 2012 Base Case ($16 CO2) (Dec 2011)

WA Seattle City Light (2012) NM Southwestern PS (2012)

NM/TX El Paso Elec. (2012) OR Pacificorp (2013) Base

OR Portland G&E (2012) CA LADWP (2012)

CA PWP (2012) WA/OR CascadeNW (2012)

OK Public Service Co of OK (2012) Fleet Transition: CSAPR WA Cowlitz PUD (2012)

WA Tacoma Electric (2012) NE NPPD (2013)

ID Idaho Power (2013) HI HECO (2013)

IN Duke Energy Indiana (2013) IN/MI IN

‐ MI Power (2013)

AK Alaska Energy Authority (2012) Medium CO Colorado Springs Utilities (2012) Low

IN Indiana Municipal Power Agency (2013) Reference MN

‐ WI Great River Energy (2012) Mid

WA Puget Sound Energy (2013) Base WA Snohomish County PUD (2013) Base Carbon Price

WA Grays Harbor PUD (2012) NY ConEd (2012) RGGI

MT NorthWestern Energy (2013) LA CLECO (2013)

SC SCEG (2012) Base NC/SC Duke Energy Carolinas (2014) Base

OK OG&E (2014) Reference NC/VA Dominion 2014 Carbon (2014)

MO Ameren MO (2014) Mid Case VT Green Mountain Power (2014) LaCapra RGGI Forecast

IN Vectren (2014) IRP Base Case AZ APS (2014) Base Case

CT CT DEEP (2014) RGGI NM PNM (2014) Reference

AZ UniSource Energy (2014) WA Benton PUD (2014) Federal

WA Cowlitz PUD (2014) Federal LA SWEPCO (prelim) (2015) Base

NC

‐ SC Duke Energy Progress (2014) With CO2 AZ Tucson Electric Power (2014)

LA Entergy LA Draft (2015) Reference Case KS Kansas City BPU (2014) Base CO2

Synapse

‐ Low Synapse

‐ Med

Synapse

‐ HighSynapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 34 Figure 8: Synapse CO 2 forecasts for 2020 compared to other sources

$0 $20 $40 $60 $80 $100 $120 $140

Federal Carbon

Price for

Rulemakings CPP studies Utility Low

Cases Utility

Reference

Cases Utility High

Cases Synapse2012$/shorttonSynapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 35 

# 9. A PPENDIX 

# A: S YNAPSE 

# F ORECASTS 

# C OMPARED TO 

# U TILITY



# F ORECASTS AND 

# P AST 

# S YNAPSE 

# F ORECASTS

Figure 9: Range of CO 2 price scenarios for utilities with $0 reference cases (2014$/short ton)

Note: Reference forecasts are presented in blue. All other sensitivities are in grey.Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 36 Figure 10: 2014 and 2015 utility reference case forecasts

$

‐ $10 $20 $30 $40 $50 $602014201520162017201820192020202120222023202420252026202720282029203020312032203320342035203620372038203920402041204220432044CO2Price(2014$pershorttonCO2)

OK OG&E (2014) Reference NC/VA Dominion 2014 Carbon (2014)

MO Ameren MO (2014) Mid Case VT Green Mountain Power (2014) LaCapra RGGI Forecast

IN Vectren (2014) IRP Base Case AZ APS (2014) Base Case

CT CT DEEP (2014) RGGI NM PNM (2014) Reference

AZ UniSource Energy (2014) WA Benton PUD (2014) Federal

WA Cowlitz PUD (2014) Federal LA SWEPCO (prelim) (2015) Base

NC

‐ SC Duke Energy Progress (2014) With CO2 AZ Tucson Electric Power (2014)

LA Entergy LA Draft (2015) Reference Case KS Kansas City BPU (2014) Base CO2Synapse Energy Economics, Inc. 2015 Carbon Dioxide Price Forecast 37 Figure 11: Comparison of 2013 and 2015 Synapse CO 2 price forecasts

Figure 12: Synapse Mid case compared to federal CO 2 price for rulemakings (3% discount rate) 0 20 40 60 80 100 120

2010 2015 2020 2025 2030 2035 2040 2045 2050AllowancePrice(2014$pershortton) Low

‐ 2015 Low

‐ 2013

Mid

‐ 2015 Mid

‐ 2013

High

‐ 2015 High

‐ 2013

$0 $20 $40 $60 $80 $100 $120

2015 2020 2025 2030 2035 2040 2045 20502014$/shortton Synapse Mid Case

Federal Carbon Price for Rulemakings