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|Energy Market and Economic Impacts of H.R. 2454, the American Clean Energy and Security Act of 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    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|Appendix B: Representing H.R. 2454 in the National Energy Modeling System
                      Emissions  Modeling
                      The analysis of energy sector and economic impacts of the  various greenhouse gas (GHG) emission reduction measures in the American Clean  Energy and Security Act of 2009 (ACESA) is based on the Energy Information  Administration’s (EIA) National Energy Modeling System (NEMS) which is used for  projections in the *Annual Energy Outlook  2009* (*AEO2009*), including an  updated Reference Case that reflects provisions of the American Recovery and  Reinvestment Act (ARRA) and recent changes in the economic outlook.17The updated *AEO2009* Reference Case is used as the baseline for the analysis in  this report.
                      The projection horizon for NEMS extends to 2030, while the  emissions policies in the bill extend to 2050 and beyond.  As a result, this analysis is limited to  addressing the bill’s impacts through 2030; however, some expectations of  post-2030 changes affect the modeling, such as assumed allowance banking  behavior through 2030 and an assumed continuance of allowance price trends  beyond 2030 when simulating electric power capacity decisions through 2030.
                      NEMS endogenously calculates changes in energy-related  carbon dioxide (CO2) emissions in the analysis cases. The cost of  using each fossil fuel includes the costs associated with the GHG allowances  needed to cover the emissions produced when they are used. These adjustments influence energy demand and  energy-related CO2 emissions.   The GHG allowance price also determines the reductions from projected  baseline emissions of other covered GHGs based on assumed abatement cost  relationships, as well as the potential supplies of domestic and international  offsets.  With emission allowance  banking, NEMS solves for a starting allowance price and trend such that  cumulative emissions match the cumulative emissions target, including  cumulative bank allowances, with a constant-growth trend in allowance prices  consistent with the average cost of capital to the electric power sector.
                      The NEMS Macroeconomic Activity Module (MAM), which is based  on the IHS Global Insight U.S. Model, interacts with the energy supply, demand,  and conversion modules of NEMS to solve for an energy and economy-wide  equilibrium. In an iterative process  within NEMS, MAM reacts to changes in energy prices, energy consumption, and  allowance revenues, solving for the effect on macroeconomic and industry level  variables such as real gross domestic product (GDP),  the unemployment rate, inflation, and real industrial output.
                      Title III Cap–and-Trade Provisions
                      Title III of  ACESA modifies the Clean Air Act by adding Titles VII  and VIII to limit emissions of most GHGs through an allowance cap-and-trade  system (Title VII) and to impose  and modify emissions standards affecting other GHGs (Title VIII). Title III  of ACESA also establishes various financial regulations on allowance  markets. EIA’s modeling of Title III provisions was limited to the allowance  cap-and-trade system. EIA’s analysis  does not reflect a separate cap-and-trade system on certain hydrofluorocarbons (HFCs)  used primarily as substitutes for ozone-depleting substances. Nor does it address the emission standards on  other GHG sources not covered by the cap-and-trade system, such as methane  emissions for landfills and coal mines.
                      Establishing the Cap  and Coverage Assumptions
                      Sec. 721 establishes the overall cap on GHGs by specifying  the number of allowances to be created each year under certain assumptions  about overall 2005 emissions and the coverage fractions in 2012, 2014, and 2016  as additional coverage is phased in.  The  yearly allowance quantities are based on specific percentage reductions in  2012, 2020, 2030, and 2050 relative to the applicable emissions from covered  sources in 2005.  The bill sets the  reductions targets at 3 percent in 2012, 17 percent in 2020, 42 percent in  2030, and 83 percent in 2050.  See Table  B1.
                      The bill establishes a procedure for revising the cap based  on any changes in the emissions accounting affecting the relative emissions by  covered entities or the total 2005 emissions.    Accordingly, EIA has revised the assumed cap slightly to conform to EIA  GHG accounting practices and the level of emissions accounting incorporated  into NEMS, while adhering to the percentage targets for 2012, 2020, and 2030  set forth in the bill.  Targets for  intervening years are established by using a uniform annual decline in the  amount of emissions between the years specified.  Table B1 presents the original and revised  caps as assumed in this analysis through 2030.
                      The bill phases in the allowance requirements for some  emission sources.  Emissions from  petroleum combustion and electric power companies are covered at the onset of  the program starting in 2012. In 2014  and 2015, it is estimated that approximately 72 percent of the natural gas used  in the industrial sector is subject to the allowance holding requirement. The  allowance obligation for local distribution companies (LDCs) supplying natural  gas to non-covered entities begins in 2016.   It was assumed that CO2 emissions from natural gas that is not  consumed by covered industrial and electric power companies will be supplied by  LDCs. Therefore all CO2 emissions  from natural gas are assumed to be covered beginning in 2016.  By 2016, all energy-related CO2  emissions, other than those attributed to a small amount of residential and  commercial sector coal usage, are assumed to be covered.
                      A small amount of emissions from other industrial emissions are  also subject to the allowance holding requirement. These gases include nitrous oxide from adipic  acid and nitric acid production, non-energy process emissions of carbon dioxide,  and emissions of fluorinated gases other than those HFCs used as substitutes  for ozone-depleting substances (a separate cap on the latter group of gases is  established in the bill but is not treated in the modeling conducted for this  report). Due to model limitations, the  coverage of emissions of these gases is programmed to begin in 2012, rather  than in 2014 as required in the bill.
                      Limits on Offset  Credits
                      H.R. 2454 establishes an overall limit on international and  domestic offset credits of 2 billion metric tons (BMT) of the allowance  requirements, with each source limited to half the total.The domestic and international offset limits  are applied on a pro-rata basis on individual covered entities. The pro-rata limit is a maximum percentage of  the allowance obligation that can be met using offsets. The pro-rata limit can therefore restrict  offset usage independently of the overall 2-BMT limit. The pro-rata limit is calculated as follows:
                      MaxOffSetPcty = 100 *  (2000 / (2000 + CAPy)), where
                        MaxOffSetPcty  is the maximum percentage of the allowance obligation that can be met through  offsets in year y, and
                        CAPy is the emissions  cap, or number of allowances issued, for year y, in million metric tons CO2-equivalent.
                      The pro-rata limit would restrict the aggregate use of  offsets below the overall 2-BMT limit unless covered emissions exceeded the cap  by 2 BMT, assuming all covered entities used the maximum allowable  percentage.  As with the overall limit, domestic  and international offsets under the pro-rata limit can each be no more than  half the total, with one exception which can be triggered by the Environmental  Protection Agency (EPA) Administrator.   If the EPA Administrator expects the availability of domestic offset  credits to be less than 900 million metric tons (MMT) in any year given  expected allowance prices, the maximum percentage of international offsets is  increased, and the domestic offset percentage decreased.  The maximum offset percentage is changed to  reflect an increase in the international offsets by an amount equal to 1,000 MMT  less the expected domestic offset availability, up to an increase of 500 MMT of  additional international offsets.
                      Domestic offset credits substitute for allowances on a  1-for-1 basis.  International offset  credits are exchanged for allowance requirements on a 1-for-1 basis through  2017.  Beginning in 2018, 1.25  international offset credits are required to substitute for one allowance.
                      Assumptions for  Non-CO2 Emissions Abatement and Offset Supplies
                      Assessing ACESA requires an analysis of energy-related CO2  emissions and non-CO2 GHG emissions.   NEMS represents U.S.  energy markets and the associated CO2 emissions and abatement  opportunities endogenously.  Non-CO2  GHG emissions and international offsets are represented using exogenous  baseline emissions projections and schedules of abatement opportunities over  time and by price.  To reflect the  reduction in non-energy-related GHG emissions, EIA relies on these assumed  economic relationships to quantify the potential emissions abatement and offset  supplies that would occur over a range of allowance or offset prices.
                      To a great extent, EIA bases abatement and offset supply  assumptions on research and analysis by EPA.   EPA has provided EIA with estimates of baselines and domestic and  international “marginal abatement cost curves,” or MACs, for various sources of  GHG emissions and biogenic carbon sequestration.  The MACs reflect the estimated economic GHG abatements  that could be achieved from emission reduction projects, given a price or value  on GHG emissions reductions.  Such  estimates tend to reflect the technical potential for emissions reductions with  positive rates of return and do not reflect institutional and market factors  affecting adoption of abatement and offset options.  As a result, EIA has incorporated discounting  and market penetration assumptions to reflect these factors.   Such estimates are naturally subject to a  great deal of uncertainty, particularly with regard to international offsets.
                      The availability and price of international offsets from  energy- and non-energy-related projects will depend on the global supply of and  demand for emission reductions.   The U.S. demand for offsets will compete with the  demand for emissions abatement outside the United States, which, in turn, will  depend on the emissions reduction commitments undertaken by other  countries.   Under ACESA, covered  entities can submit project-level or sector-level offsets from developing  countries that have established agreements with the United States to ensure that  requirements for monitoring and verification are fulfilled.  Under Sec. 728, covered entities may also  submit allowances from approved countries that have established cap-and-trade  systems of comparable stringency and scope.   Allowances supplied under Sec. 728 do not count against offset limits  and are not subject to any quantitative limits initially.
                      The potential supply of offset credits and allowances to the  United States  is derived based on the excess supply of potential abatement for the world,  relative to the assumed demands for abatement based on stated or assumed  emissions reduction commitments.  Given  that the capped sources of emissions under ACESA are primarily energy-related  CO2, the supply of CO2 abatement from the Group 1  developed countries would potentially qualify as a source of comparable  allowances.  However, countries having  equally stringent caps could face similar compliance costs at the margin, possibly  limiting the potential for international allowance trading.  Therefore, no net trade in international  allowances was assumed.
                      International abatement supply is based on EPA-provided MACs  for CO2, other GHGs, and forestry/agriculture.  In processing the MACs to obtain offset  supply, EIA applies discounts and market penetration assumptions to reflect the  market response to the technical abatement potential.  EPA has disaggregated GHG abatements into two  regional categories:  Group 1 nations  (Europe, Canada, Japan, Australia,  and New Zealand) and Group 2  nations (the rest of world, excluding United States).
                      To reflect world competition for offset supplies, the  international abatement market is assumed to establish a floor price, above  which excess abatement supplies can penetrate the U.S. market in the form of offset  credits from developing countries and, potentially, allowances from countries  assumed to have comparable caps in place.   A floor price, or international GHG abatement price excluding the United States,  is estimated by combining annualized abatement supplies and abatement demand  and solving for the market price each year.   This approach allows the U.S.  market for allowances to be treated somewhat independently from the world  market and allows offset supplies to the United States to be restricted to  developing countries, as specified in the bill.
                      The assumed international abatement demand is defined  as international baseline emissions minus stated or hypothetical commitments to  various emissions levels (Table B2).  The  reference emissions baseline shown is based on estimates originally provided by  EPA and used in several previous EIA studies, but the non-U.S. energy-related  CO2 growth rates through 2030 have been updated to reflect the CO2  projections in the EIA *International  Energy Outlook 2009* (*IEO2009*)  Reference Case, which does not reflect any international commitments to cap GHGs.
                      Under ACESA, allowable sources of international offset  credits are from developing countries that have established bilateral or  multilateral agreements with the United States to ensure the offset  requirements of the bill are fulfilled.   For this analysis, it is assumed that the Group 2 countries will be  deemed developing countries and that their participation will increase  gradually over time as reflected by imposing a gradual market penetration  function to their offset supplies.  In  the case of offsets from reduced deforestation, the bill specifies substantial  additional regulatory requirements, such as agreements on national baselines,  technical capacity to monitor, measure, report, and verify forest carbon  fluxes, and institutional capacity to reduce deforestation, such as strong  forest governance.  These requirements  will likely reduce the potential sources of forestry offsets to a subset of  Group 2 countries.  As a result, the  technical potential of forestry-related abatement from Group 2 countries as  provided by EPA has been discounted by 50 percent and a slower rate of market  penetration has been applied than with other offset abatement supply sources.
                      Table B3 displays the assumed supply schedule of  international offset credits, given these considerations.  Both the gross Group 2 offset supply and the  supply net of international abatement demand are shown, given the estimated  international floor price for GHG abatement.   The latter schedule (net supply) represents the supplies assumed to be  available to the United    States.
                      Depending on how international offsets are regulated and how  fast the requisite international agreements or arrangements are formed, the  potential availability of low-cost international offsets could be substantially  different (greater or smaller) than assumed.   In the ACESA High Offsets Case, the maximum allowable quantity of  international offsets was assumed to be available in every projection year at  the allowance price of that year.
                      Allowance  Banking and Borrowing
                      To reflect banking incentives and trading arbitrage,  allowance prices escalate at a rate no higher than 7.4 percent per year in real  terms during intervals when allowance balances are held.  This rate reflects the average cost of  capital in the electric power sector, where a significant share of emissions  reduction investments is expected to occur.
                      ACESA calls for increasingly stringent emissions caps beyond  2030, the forecast horizon for NEMS.   Meeting these post-2030 caps will require significant emission  reductions outside the electricity sector, the predominant source of early  emissions reductions, and increase future price pressure, absent significant  technological breakthrough in transportation and other uses that are dependent  on fossil fuels.  As a result, EIA  assumes that covered entities and traders will amass a substantial allowance bank balance by the end of  2030.  Based on recent modeling work by  the EPA to evaluate ACESA impacts, an approximate average allowance balance of  13 BMT in 2030 was estimated across various scenarios they considered, an  increase of cumulative abatement of roughly 50 percent above the minimum  required under ACESA through 2030.  This  level of allowance banking is consistent with the greater difficulty of  complying with the increasingly stringent post-2030 caps under continued growth  in population and the economy.  While the  level of banking would also depend on other economic assumptions, such as the  availability and cost of international offsets, the 13-BMT-balance assumption  was applied in all but one of the cases analyzed.  In the ACESA High Banking Case, where banked  allowances were assumed to rise to 20 BMT, approximating the highest level  observed in EPA’s ACESA cases.
                      Treatment of  Allowance Prices in Energy Prices
                      Under ACESA, the allowance obligations are imposed on an  upstream basis, on producers and importers rather than end users, for all  emissions from petroleum and a portion of natural gas sold by LDCs to uncovered  entities.  Allowance obligations for coal  and natural gas covered entities in the industrial and electric power sectors  are imposed on a downstream basis.  This  mixed regulatory approach has implications for how allowance costs are  reflected in the modeling of delivered energy prices.
                      The allowance holding requirement on covered  entities for their coal-related and natural-gas-related CO2  emissions is an incremental opportunity cost of using coal.  For modeling purposes, the allowance cost was  added to the delivered price of coal and natural gas to reflect the opportunity  cost faced by these covered entities.For petroleum and uncovered natural gas  regulated upstream, it is assumed that the allowance costs associated with the  related CO2 emissions are passed through in the delivered prices,  with some exceptions.CO2 emissions from refineries’ direct  fuel combustion of petroleum-based fuels would be subject to the allowance  requirement.  However, the incremental  cost of these allowances is not explicitly reflected in delivered petroleum  prices, as the Petroleum Market Module of NEMS is not structured to represent  such costs explicitly.To reflect the bill’s allowance allocations to  electricity and natural gas LDCs for rebates to end users, average delivered  prices are adjusted to reflect the rebates.   Consumers receiving such rebates are assumed to treat their net average  energy cost as the price basis for fuel-related decisions.Additional details on modeling treatment of specific  elements of the cap-and-trade provisions and other bill provisions are  presented below for each modeling area.
                      Buildings  Sector
                      The ACESA legislation contains several provisions designed  to reduce energy use in buildings and to provide credit for buildings-related  renewable electricity generation.  The  programs include codes and standards as well as direct funding from the sale of  allowance aimed at increasing the energy efficiency in buildings.  The buildings sector energy efficiency  provisions directly modeled in NEMS include the following:
                      Building Codes  (Section 201)
                      Section 201 establishes Federal building codes for both  residential and commercial buildings, with provisions to improve the code every  several years.  This provision is funded  with 0.5 percent of the total emissions allowances and is implemented in both  the NEMS residential and commercial demand modules.
                      All of the improvements in commercial building codes are  relative to the American Society of Heating, Refrigeration and Air Conditioning  Engineers (ASHRAE) code 90.1-2004 and are assumed to be feasible.  The building code efficiency improves by 30  percent upon enactment of the bill and by 50 percent in 2015, with 5-percent  incremental improvements to the 2015 code every 3 years thereafter.  It is assumed that the codes are phased in  over 5 years following State adoption, reflecting the time it takes States to fully comply with each  revision of the building code.
                      The improvements in residential building codes are relative  to the International Energy Conservation Code (IECC) 2006.  Similar to the commercial sector  implementation, a 30-percent improvement in the code occurs with the enactment  of the bill, with subsequent increments identical to those for commercial  buildings over the projection period.   Each code improvement, following State adoption, is assumed to require 5  years for all the States to fully comply; however, each of the nine Census  divisions complies consistent with the historical level of building code  compliance in each State.18
                      Existing Building  Retrofit Program (Section 202)
                      Section 202 establishes the Retrofit for Energy and  Environmental Performance (REEP) program which is funded by allowance  allocation revenues as specified in section 782(g).  Because individual States determine the  amount of money to spend on various sectors of the economy (buildings,  transportation, industry, etc) and the fact that allowance revenue streams and  allocations for this provision change over the projection period, the energy  savings impacts of this provision are subject to great uncertainty.  For this analysis, it is assumed that $2  billion per year is available to retrofit residential buildings and that the  investment and energy savings per house are comparable to EIA’s previous  analysis of the impact of weatherization funding included in ARRA.19  For commercial buildings, it is assumed that  funding is available to improve the shell efficiency of existing buildings by  an additional 1 percent relative to the Reference Case by 2030.
                      Standards (Sections  211 and 212*)*
                      Outdoor       lighting standards effective 2011 to 2015
                        Hot       and cold water dispensers effective 2012
                        Hot       food holding cabinets effective 2012The impact of the above standards is relatively modest.  In the residential sector, the preponderance  of lighting fixtures are located inside the house and many outdoor fixtures use  traditional incandescent bulbs, which are already covered by aggressive  efficiency standards under the Energy Independence and Security Act of 2007.  The commercial sector accounts for outdoor  stationary lighting such as roadway lighting, parking lots, billboards, airport  runways, etc., which account for only about 8 percent of all lighting use in  the United States.20
                      Rebates for Natural  Gas and Oil Customers (Sections 782b and 782c)
                      Sections 782b and 782c allocate a relatively small portion  of the overall emission allowances to oil and natural gas customers  specifically for energy efficiency programs.   In the buildings sector, these provisions are assumed to take the form  of rebate programs for the purchase of energy-efficient furnaces and  boilers.
                      Buildings sector participation in the Renewable Electricity  Credit program that is part of the ACESA Clean Energy Title is directly modeled  as discussed below.
                      Industrial  Sector
                      Title I, Subtitle B,  Section 115 promotes the commercial deployment of carbon capture and storage  (CCS) technologies. After review  of the state of the current technology, it was determined that the industrial CCS provision in the proposal would not be readily  adopted by industry.  This technology as  it applies under the stipulations of the provision would require very large  investments to retrofit existing facilities (or add new ones) and substantial  land areas at an industrial site to capture the CO2.  Space is always limited at industrial  facilities and the addition of new land would ultimately add a high  “real-estate premium” to adoption of these systems.  Many industries already producing pure CO2  streams that could be supplied for CCS  but these streams are already sold as a valued-added secondary product in the  food industries and for enhanced oil recovery, among others.  Consequently, it is assumed that industrial  non-refining CCS would not  penetrate that market through the projection period.
                      Title I, Subtitle C,  Sections 123 and 125 provide financial assistance to automobile  manufacturers to facilitate the manufacture of plug-in and other advanced  technology vehicles. In the manufacture of vehicles, the platforms used and  designed to manufacture standard vehicles are the same as those to manufacture  plug-in and other advance technology vehicles. As such, the energy efficiency  trends for the transportation equipment industry (NAICS 336) are assumed to be  unchanged relative to the *AEO2009* Reference Case.
                      Title I, Subtitle H,  Section 173, establishes several Centers for Energy and Environmental  Knowledge and Outreach. Each center is to provide technical assistance,  including energy savings assessments for industrial establishments. The  proposed increased funding for energy savings assessments programs is expected  to accelerate the penetration of energy efficiency measures and options in  industries. To model this, the industrial demand module (IDM) of NEMS used the industrial  sector high technology assumptions of *AEO2009*.
                      Title II, Subtitle D establishes various energy efficiency standards and programs for industries.  The design and implementation of these standards and programs are yet to be  decided. Due to this lack of information, no model changes were made to  accommodate this part of the bill.  Title  II, Subtitle D, Sections 244 and 245 establishes a rebate and incentive  programs designed to increase industrial motor efficiency. These were not adequately  defined in the proposal and therefore no changes pertaining to the rebate and  programs were made in the IDM.   Nevertheless, the motor model remains an economic and technology choice  system, and as such, any changes in industrial production and energy prices  will impact the projected energy use in motors in industry.
                      The allocation of carbon allowances in the IDM has been  applied as prescribed by the bill.  These  allowances are allocated to energy-intensive industries only, as indirect  emissions allowances in 2012 and 2013 and full emissions allowances (direct and  indirect) for the remaining timeframe.   This allocation is, however, phased out beginning in 2025 as mandated in  the proposal.  To accurately reflect the  lack of CO2 emissions coverage for small industrial emitters in the  early years of the cap-and-trade regime, a bifurcation of natural gas  consumption was applied to the IDM for calendar years 2014 and 2015.
                      Transportation  Sector
                      ACESA includes several provisions that are related to  transportation, specifically, Sections 121-130 and Sections 221-224.  However, none of these provisions have been  incorporated into NEMS because they call for (a) analysis and not action, (b)  the creation of programs without any specific measures that can be modeled in  NEMS, or (c) are of such limited nature that they are not deemed large enough  to impact transportation trends significantly.
                      Section       121 mandates utilities to complete studies assessing the future       electrification of the U.S.       transportation fleet.Section       122 calls for the establishment of a program by which the Secretary of       Energy can provide financial assistance to State or local governments for       the demonstration of plug-in hybrid electric vehicles.Section       123 establishes a program by which the Secretary of Energy can provide       financial assistance to automobile manufacturers to facilitate the       manufacture of plug-in electric drive vehicles.Section       124 grants various emissions credits to the manufacture of       alternatively-fueled vehicles.Section       125 provides loans to manufacturers of advanced vehicle technology.Section       126 amends the term ”renewable biomass.”Section       127 calls for the promotion of an open fuel standard and allows       regulations to require each light-duty automobile manufacturer to produce       a minimum percentage of fuel-choice-enabling automobiles.Section       128 amends diesel emissions regulations.Section       129 provides loan guarantees for the construction of renewable fuel       pipelines.Section       221 calls for studies to propose changes to the emissions standards for       heavy-duty vehicles, non-road vehicles, and aircraft engines.Section       222 calls for States to produce plans and create goals for the reduction       of GHG emissions from transportation.Section       223 establishes within EPA a SmartWay Transport program to quantify,       demonstrate, and promote transportation efficiency programs.Section       224 allows the Secretary of Energy to change State vehicle fleet       requirements.New Fuel Economy and  Tailpipe Emissions Standards for Light-Duty Vehicles
                      President  Obama unveiled a plan for tougher vehicle fuel economy standards that would  require passenger cars to reach a fleet average of 39 miles per gallon and  light trucks to reach a fleet average of 30 miles per gallon in model year  2016.  The President has called for EPA  and the National Highway Traffic Safety Administration to jointly produce these  new standards as both a footprint based Corporate Average Fuel Economy and a  tailpipe emissions standard.  Since the  policy change was only recently announced by the President and has not been  formally implemented, the new fuel economy standards are only included in a  sensitivity case for ACESA.
In the  sensitivity case, the new fuel efficiency standards have been incorporated into  NEMS that meet and slightly exceed the President’s targets for model year  2016.  The revised standards do not start  in NEMS until 2012, as fuel economy standards for model year 2011 have already  been promulgated by the National Highway Traffic Safety Administration.  Standards are assumed to remain the same  after model year 2016.

Macroeconomic
In all cases, MAM assumes exchange rates remain at the Reference  Case levels.  EIA assumes, as has been  customary in several historical responses by the Federal Reserve, that the  Federal Reserve will use a modified Taylor  rule which will decrease interest rates in the face of rising unemployment.  MAM takes all appropriate energy price and  quantity variables from NEMS and converts them into IHS Global Insight aggregate  energy measures.
Specific to the ACESA analysis, MAM implemented two major  modeling changes:  one pertaining to  energy-intensive industries and the other to redistributing carbon allowance  revenues back to the economy.  As part of  the H.R. 2454 bill, section 782 (e) allocates shares of allowances to trade-  and energy-vulnerable industries.  In MAM,  these industries are impacted by various industrial fuel prices as well as  overall changes in final demands.  In the  ACESA analysis, the energy-intensive industries react to pre-tax industry fuel  prices, rather than post-tax prices under the assumption that when the  industries receive the allocated allowances, the revenue will enable them to  restructure their production processes to ameliorate the impact of rapidly  rising energy prices.
MAM redistributes a certain portion of total  allowance revenue.  The following list includes the revenues being  collected and redistributed by the model:  Section 726 Strategic Reserve,  Section 781, Supplemental Reserves, Section 782 (d) Low Income Allocation;  Section 782 (g) Investment in Energy Efficiency and Renewable Energy; Section  782 (g) 1 f Investment in Energy Efficiency and Renewable Energy; Section 782  (g) Investment in Energy Efficiency and Renewable Energy (2) building codes;  Section 782(h) Clean Energy Innovation Centers; Section 782(i) Clean Vehicle  Technology; Section 782(k) Investment in workers; Section 782 (l) Domestic  Adaptation; Section 782 (m) Wildlife and Natural Resource; Section 782 (m)  Wildlife and Natural Resource; Section 782 (n) International Adaptation;  Section 782 (o) International Clean Technology; and Section 782 (r) Consumer  Climate Change Refund.  MAM treated Section 782 (d) low income allocations  as transfer payments, Section 782 (n) and (o) (international transfer of  allocations) as other Federal government transfers to the rest of the  world.  Sections 782 (g) (h) (i) (k) (l) (m), Section 726 and Section 781  were treated as Federal government non-defense spending.  Section 782 (r)  which distributed funds post-2025 were treated as lump-sum personal tax  rebates.  All of the other allowances specified in H.R. 2454 went to  energy-producing or -distributing entities or were given to energy-intensive  industries and were not collected or redistributed by MAM.  Changing the  level of non-defense government expenditures insured that the Federal deficit  at full employment was unchanged from the Reference Case across all ACESA  cases.  The uses of the carbon allowance revenues as stipulated by H.R.  2454 were modeled; however to the extent that the resulting change in  government expenditures were lower than the actual amounts specified by the  bill, other non-defense government expenditures would have to be reduced to  insure unchanged Federal deficits over time.
Electric  Power and Coal
Renewable Electricity  Credits
Section 101 establishes a program requiring retail electric  suppliers to submit renewable energy credits and electricity savings equal to a  percentage of their annual electricity sales beginning in 2012.  Distributed renewable generation facilities  are issued 3 Federal renewable electricity credits for each megawatthour of  renewable electricity generated with the granting of triple credits to be  reviewed for adjustment in 2014 and every 4 years thereafter.  It is assumed that the adjustment reviews  result in an adjustment to 1 Federal renewable electricity credit per megawatt  hour issued to distributed generation facilities starting in 2014.  However, distributed renewable generators  placed in service during a year when triple credit is granted continue to  receive triple credit for 10 years.  This  provision is directly modeled in the buildings sector but is expected to have  minimal impact on buildings sector renewable generation because the  requirements of the cap-and-trade program in ACESA lead to sufficient renewable  generation capacity in the power sector to meet the renewable electricity standard  targets.
Carbon Capture and  Sequestration
Section 114 outlines a CCS  demonstration program that is to be run by the private sector, under the lead  of the Electric Power Research Institute and funded by small fees on the  distribution of fossil-fired electricity. The fees range from 0.22 mills per  kilowatthour for natural-gas-fired electricity to 0.43 mills per kilowatthour  for coal-fired electricity. The goal of this 10-year, $10-billion program is to  support 5 commercial-scale CCS or  conversion technology projects. The small fees on fossil-fired electricity  distribution specified in this section are accounted for in the cases analyzed  for this report and are assessed for the years 2010 through 2019.
Section 115 adds Section 786 “Commercial Deployment of  Carbon Capture and Sequestration Technologies” to Section H of Title VII of the Clean Air Act. This section establishes  a program to distribute bonus GHG emission allowances to new projects in the  electricity and industrial sectors to help defray the costs associated with  equipment and infrastructure needed to capture and sequester CO2  emissions produced from the combustion of fossil fuels at these facilities. To  be eligible for the bonus allowances allocated for this program, the project  must derive at least 50 percent of its energy input from coal and/or petroleum  coke. The first 6 gigawatts of approved capacity under this program are  eligible to receive a $90 bonus allowance for each metric ton of CO2  captured and sequestered. Beyond the initial 6 gigawatts of capacity with CCS, an additional 66 gigawatts are eligible for  bonus allowances on the basis of a reverse auction administered by EPA or, at  EPA’s discretion, an alternative program for distributing the program’s  remaining bonus allowances. Only 1 gigawatt of retrofitted CCS capacity at existing plants is eligible for  bonus allowances allocated under this section. Qualified CCS projects are eligible for 1.75 percent of  allowances established according to section 721(a) for the years 2014 though 2017,  4.75 percent of allowances for the years 2018 and 2019, and 5.0 percent of  allowances for the years 2020 through 2050.
This program is represented within the analysis for this  report by reducing the estimated costs of new coal-fired generating capacity by  the value of the bonus allowances that the plant would be eligible to receive.  The amount of new coal-fired generating capacity projected within a given  forecast scenario is determined by a number of factors such as the costs and  availability of electricity from other generating technologies, the  availability of international and domestic offsets, and the projected levels of  electricity demand.
Section 116 adds a new Section 812 “Performance Standards  For New Coal-Fired Power Plants” to Title VIII of the Clean Air Act, which  specifies that new power plants authorized under State or Federal law to derive  at least 30 percent of their energy input from coal and/or petroleum coke will  initially be required to capture and sequester a minimum of 50 percent of their  potential CO2 emissions. The CCS  requirement rises to 65 percent for plants built in 2020 or later.  Additionally, based on reviews of the standards to be completed by the EPA  Administrator at 5-year intervals, and beginning no later than 2025, CCS requirements would be increased to levels  higher than 65 percent if higher capture and storage rates are determined to be  reasonably achievable. In the analysis completed for this report, new  coal-fired power plants with CCS  are assumed to capture and sequester 90 percent of their potential CO2  emissions.
Peak  Demand Reductions (Section 143)
This section requires States to determine and  publish peak demand reduction goals for load-serving entities with a baseline  above 250 megawatts. The Secretary, with the Federal Energy Regulatory  Commission (FERC) and the North American Electricity Reliability Council, will  develop a methodology for measurement and verification of demand response. The  FERC report 2009 National Demand Response Potential Assessment should be used  to help determine peak reduction goals. The load-serving entities must reduce  peak load by 2012 and further by 2015, by amounts determined by each State.
This program is represented in the analysis  by assuming that peak demand will be reduced by 3 percent by 2020, instead of  the 1 percent assumed in the Reference Case due to ARRA.
Allocation  of Emission Allowances (Sec. 782)
Section 782 (a)(1) allocates allowances for  the benefit of electricity consumers, starting at 44 percent of total  allowances in 2012 and falling over time through 2029, after which no further  allowances are given out. Section 782 (a)(2) allocates a separate 0.5 percent  specifically to small load distribution centers.  For modeling purposes, these allowances are  added together and treated as one allocation. Section 783 describes the method  of distributing the allowances, with the majority going to LDCs to be used  exclusively for the benefit of retail ratepayers.  Up to 10 percent of the allowances under this  section can be given to merchant coal generators, based on their qualifying  emissions through a base historical period.
These allocations are  accounted for in the electricity pricing calculations.  The allowances given to merchant coal  generators are calculated based on historic emissions, and the value of the  allowances in each year would offset the rising fuel costs in the affected  regions.  The remaining allowances are  shared to the regions based on a combination of historic emissions and overall  electricity sales, as described in Section 783(b)(2) and Section 783(b)(3).  The revenue from this allowance allocation is  assumed to go to reduced distribution costs, lowering the distribution  component of electricity price to all consumers.


Notes
|Appendix B: Representing H.R. 2454 in the National Energy Modeling System
                      Emissions  Modeling
                      The analysis of energy sector and economic impacts of the  various greenhouse gas (GHG) emission reduction measures in the American Clean  Energy and Security Act of 2009 (ACESA) is based on the Energy Information  Administration’s (EIA) National Energy Modeling System (NEMS) which is used for  projections in the *Annual Energy Outlook  2009* (*AEO2009*), including an  updated Reference Case that reflects provisions of the American Recovery and  Reinvestment Act (ARRA) and recent changes in the economic outlook.17The updated *AEO2009* Reference Case is used as the baseline for the analysis in  this report.
                      The projection horizon for NEMS extends to 2030, while the  emissions policies in the bill extend to 2050 and beyond.  As a result, this analysis is limited to  addressing the bill’s impacts through 2030; however, some expectations of  post-2030 changes affect the modeling, such as assumed allowance banking  behavior through 2030 and an assumed continuance of allowance price trends  beyond 2030 when simulating electric power capacity decisions through 2030.
                      NEMS endogenously calculates changes in energy-related  carbon dioxide (CO2) emissions in the analysis cases. The cost of  using each fossil fuel includes the costs associated with the GHG allowances  needed to cover the emissions produced when they are used. These adjustments influence energy demand and  energy-related CO2 emissions.   The GHG allowance price also determines the reductions from projected  baseline emissions of other covered GHGs based on assumed abatement cost  relationships, as well as the potential supplies of domestic and international  offsets.  With emission allowance  banking, NEMS solves for a starting allowance price and trend such that  cumulative emissions match the cumulative emissions target, including  cumulative bank allowances, with a constant-growth trend in allowance prices  consistent with the average cost of capital to the electric power sector.
                      The NEMS Macroeconomic Activity Module (MAM), which is based  on the IHS Global Insight U.S. Model, interacts with the energy supply, demand,  and conversion modules of NEMS to solve for an energy and economy-wide  equilibrium. In an iterative process  within NEMS, MAM reacts to changes in energy prices, energy consumption, and  allowance revenues, solving for the effect on macroeconomic and industry level  variables such as real gross domestic product (GDP),  the unemployment rate, inflation, and real industrial output.
                      Title III Cap–and-Trade Provisions
                      Title III of  ACESA modifies the Clean Air Act by adding Titles VII  and VIII to limit emissions of most GHGs through an allowance cap-and-trade  system (Title VII) and to impose  and modify emissions standards affecting other GHGs (Title VIII). Title III  of ACESA also establishes various financial regulations on allowance  markets. EIA’s modeling of Title III provisions was limited to the allowance  cap-and-trade system. EIA’s analysis  does not reflect a separate cap-and-trade system on certain hydrofluorocarbons (HFCs)  used primarily as substitutes for ozone-depleting substances. Nor does it address the emission standards on  other GHG sources not covered by the cap-and-trade system, such as methane  emissions for landfills and coal mines.
                      Establishing the Cap  and Coverage Assumptions
                      Sec. 721 establishes the overall cap on GHGs by specifying  the number of allowances to be created each year under certain assumptions  about overall 2005 emissions and the coverage fractions in 2012, 2014, and 2016  as additional coverage is phased in.  The  yearly allowance quantities are based on specific percentage reductions in  2012, 2020, 2030, and 2050 relative to the applicable emissions from covered  sources in 2005.  The bill sets the  reductions targets at 3 percent in 2012, 17 percent in 2020, 42 percent in  2030, and 83 percent in 2050.  See Table  B1.
                      The bill establishes a procedure for revising the cap based  on any changes in the emissions accounting affecting the relative emissions by  covered entities or the total 2005 emissions.    Accordingly, EIA has revised the assumed cap slightly to conform to EIA  GHG accounting practices and the level of emissions accounting incorporated  into NEMS, while adhering to the percentage targets for 2012, 2020, and 2030  set forth in the bill.  Targets for  intervening years are established by using a uniform annual decline in the  amount of emissions between the years specified.  Table B1 presents the original and revised  caps as assumed in this analysis through 2030.
                      The bill phases in the allowance requirements for some  emission sources.  Emissions from  petroleum combustion and electric power companies are covered at the onset of  the program starting in 2012. In 2014  and 2015, it is estimated that approximately 72 percent of the natural gas used  in the industrial sector is subject to the allowance holding requirement. The  allowance obligation for local distribution companies (LDCs) supplying natural  gas to non-covered entities begins in 2016.   It was assumed that CO2 emissions from natural gas that is not  consumed by covered industrial and electric power companies will be supplied by  LDCs. Therefore all CO2 emissions  from natural gas are assumed to be covered beginning in 2016.  By 2016, all energy-related CO2  emissions, other than those attributed to a small amount of residential and  commercial sector coal usage, are assumed to be covered.
                      A small amount of emissions from other industrial emissions are  also subject to the allowance holding requirement. These gases include nitrous oxide from adipic  acid and nitric acid production, non-energy process emissions of carbon dioxide,  and emissions of fluorinated gases other than those HFCs used as substitutes  for ozone-depleting substances (a separate cap on the latter group of gases is  established in the bill but is not treated in the modeling conducted for this  report). Due to model limitations, the  coverage of emissions of these gases is programmed to begin in 2012, rather  than in 2014 as required in the bill.
                      Limits on Offset  Credits
                      H.R. 2454 establishes an overall limit on international and  domestic offset credits of 2 billion metric tons (BMT) of the allowance  requirements, with each source limited to half the total.The domestic and international offset limits  are applied on a pro-rata basis on individual covered entities. The pro-rata limit is a maximum percentage of  the allowance obligation that can be met using offsets. The pro-rata limit can therefore restrict  offset usage independently of the overall 2-BMT limit. The pro-rata limit is calculated as follows:
                      MaxOffSetPcty = 100 *  (2000 / (2000 + CAPy)), where
                        MaxOffSetPcty  is the maximum percentage of the allowance obligation that can be met through  offsets in year y, and
                        CAPy is the emissions  cap, or number of allowances issued, for year y, in million metric tons CO2-equivalent.
                      The pro-rata limit would restrict the aggregate use of  offsets below the overall 2-BMT limit unless covered emissions exceeded the cap  by 2 BMT, assuming all covered entities used the maximum allowable  percentage.  As with the overall limit, domestic  and international offsets under the pro-rata limit can each be no more than  half the total, with one exception which can be triggered by the Environmental  Protection Agency (EPA) Administrator.   If the EPA Administrator expects the availability of domestic offset  credits to be less than 900 million metric tons (MMT) in any year given  expected allowance prices, the maximum percentage of international offsets is  increased, and the domestic offset percentage decreased.  The maximum offset percentage is changed to  reflect an increase in the international offsets by an amount equal to 1,000 MMT  less the expected domestic offset availability, up to an increase of 500 MMT of  additional international offsets.
                      Domestic offset credits substitute for allowances on a  1-for-1 basis.  International offset  credits are exchanged for allowance requirements on a 1-for-1 basis through  2017.  Beginning in 2018, 1.25  international offset credits are required to substitute for one allowance.
                      Assumptions for  Non-CO2 Emissions Abatement and Offset Supplies
                      Assessing ACESA requires an analysis of energy-related CO2  emissions and non-CO2 GHG emissions.   NEMS represents U.S.  energy markets and the associated CO2 emissions and abatement  opportunities endogenously.  Non-CO2  GHG emissions and international offsets are represented using exogenous  baseline emissions projections and schedules of abatement opportunities over  time and by price.  To reflect the  reduction in non-energy-related GHG emissions, EIA relies on these assumed  economic relationships to quantify the potential emissions abatement and offset  supplies that would occur over a range of allowance or offset prices.
                      To a great extent, EIA bases abatement and offset supply  assumptions on research and analysis by EPA.   EPA has provided EIA with estimates of baselines and domestic and  international “marginal abatement cost curves,” or MACs, for various sources of  GHG emissions and biogenic carbon sequestration.  The MACs reflect the estimated economic GHG abatements  that could be achieved from emission reduction projects, given a price or value  on GHG emissions reductions.  Such  estimates tend to reflect the technical potential for emissions reductions with  positive rates of return and do not reflect institutional and market factors  affecting adoption of abatement and offset options.  As a result, EIA has incorporated discounting  and market penetration assumptions to reflect these factors.   Such estimates are naturally subject to a  great deal of uncertainty, particularly with regard to international offsets.
                      The availability and price of international offsets from  energy- and non-energy-related projects will depend on the global supply of and  demand for emission reductions.   The U.S. demand for offsets will compete with the  demand for emissions abatement outside the United States, which, in turn, will  depend on the emissions reduction commitments undertaken by other  countries.   Under ACESA, covered  entities can submit project-level or sector-level offsets from developing  countries that have established agreements with the United States to ensure that  requirements for monitoring and verification are fulfilled.  Under Sec. 728, covered entities may also  submit allowances from approved countries that have established cap-and-trade  systems of comparable stringency and scope.   Allowances supplied under Sec. 728 do not count against offset limits  and are not subject to any quantitative limits initially.
                      The potential supply of offset credits and allowances to the  United States  is derived based on the excess supply of potential abatement for the world,  relative to the assumed demands for abatement based on stated or assumed  emissions reduction commitments.  Given  that the capped sources of emissions under ACESA are primarily energy-related  CO2, the supply of CO2 abatement from the Group 1  developed countries would potentially qualify as a source of comparable  allowances.  However, countries having  equally stringent caps could face similar compliance costs at the margin, possibly  limiting the potential for international allowance trading.  Therefore, no net trade in international  allowances was assumed.
                      International abatement supply is based on EPA-provided MACs  for CO2, other GHGs, and forestry/agriculture.  In processing the MACs to obtain offset  supply, EIA applies discounts and market penetration assumptions to reflect the  market response to the technical abatement potential.  EPA has disaggregated GHG abatements into two  regional categories:  Group 1 nations  (Europe, Canada, Japan, Australia,  and New Zealand) and Group 2  nations (the rest of world, excluding United States).
                      To reflect world competition for offset supplies, the  international abatement market is assumed to establish a floor price, above  which excess abatement supplies can penetrate the U.S. market in the form of offset  credits from developing countries and, potentially, allowances from countries  assumed to have comparable caps in place.   A floor price, or international GHG abatement price excluding the United States,  is estimated by combining annualized abatement supplies and abatement demand  and solving for the market price each year.   This approach allows the U.S.  market for allowances to be treated somewhat independently from the world  market and allows offset supplies to the United States to be restricted to  developing countries, as specified in the bill.
                      The assumed international abatement demand is defined  as international baseline emissions minus stated or hypothetical commitments to  various emissions levels (Table B2).  The  reference emissions baseline shown is based on estimates originally provided by  EPA and used in several previous EIA studies, but the non-U.S. energy-related  CO2 growth rates through 2030 have been updated to reflect the CO2  projections in the EIA *International  Energy Outlook 2009* (*IEO2009*)  Reference Case, which does not reflect any international commitments to cap GHGs.
                      Under ACESA, allowable sources of international offset  credits are from developing countries that have established bilateral or  multilateral agreements with the United States to ensure the offset  requirements of the bill are fulfilled.   For this analysis, it is assumed that the Group 2 countries will be  deemed developing countries and that their participation will increase  gradually over time as reflected by imposing a gradual market penetration  function to their offset supplies.  In  the case of offsets from reduced deforestation, the bill specifies substantial  additional regulatory requirements, such as agreements on national baselines,  technical capacity to monitor, measure, report, and verify forest carbon  fluxes, and institutional capacity to reduce deforestation, such as strong  forest governance.  These requirements  will likely reduce the potential sources of forestry offsets to a subset of  Group 2 countries.  As a result, the  technical potential of forestry-related abatement from Group 2 countries as  provided by EPA has been discounted by 50 percent and a slower rate of market  penetration has been applied than with other offset abatement supply sources.
                      Table B3 displays the assumed supply schedule of  international offset credits, given these considerations.  Both the gross Group 2 offset supply and the  supply net of international abatement demand are shown, given the estimated  international floor price for GHG abatement.   The latter schedule (net supply) represents the supplies assumed to be  available to the United    States.
                      Depending on how international offsets are regulated and how  fast the requisite international agreements or arrangements are formed, the  potential availability of low-cost international offsets could be substantially  different (greater or smaller) than assumed.   In the ACESA High Offsets Case, the maximum allowable quantity of  international offsets was assumed to be available in every projection year at  the allowance price of that year.
                      Allowance  Banking and Borrowing
                      To reflect banking incentives and trading arbitrage,  allowance prices escalate at a rate no higher than 7.4 percent per year in real  terms during intervals when allowance balances are held.  This rate reflects the average cost of  capital in the electric power sector, where a significant share of emissions  reduction investments is expected to occur.
                      ACESA calls for increasingly stringent emissions caps beyond  2030, the forecast horizon for NEMS.   Meeting these post-2030 caps will require significant emission  reductions outside the electricity sector, the predominant source of early  emissions reductions, and increase future price pressure, absent significant  technological breakthrough in transportation and other uses that are dependent  on fossil fuels.  As a result, EIA  assumes that covered entities and traders will amass a substantial allowance bank balance by the end of  2030.  Based on recent modeling work by  the EPA to evaluate ACESA impacts, an approximate average allowance balance of  13 BMT in 2030 was estimated across various scenarios they considered, an  increase of cumulative abatement of roughly 50 percent above the minimum  required under ACESA through 2030.  This  level of allowance banking is consistent with the greater difficulty of  complying with the increasingly stringent post-2030 caps under continued growth  in population and the economy.  While the  level of banking would also depend on other economic assumptions, such as the  availability and cost of international offsets, the 13-BMT-balance assumption  was applied in all but one of the cases analyzed.  In the ACESA High Banking Case, where banked  allowances were assumed to rise to 20 BMT, approximating the highest level  observed in EPA’s ACESA cases.
                      Treatment of  Allowance Prices in Energy Prices
                      Under ACESA, the allowance obligations are imposed on an  upstream basis, on producers and importers rather than end users, for all  emissions from petroleum and a portion of natural gas sold by LDCs to uncovered  entities.  Allowance obligations for coal  and natural gas covered entities in the industrial and electric power sectors  are imposed on a downstream basis.  This  mixed regulatory approach has implications for how allowance costs are  reflected in the modeling of delivered energy prices.
                      The allowance holding requirement on covered  entities for their coal-related and natural-gas-related CO2  emissions is an incremental opportunity cost of using coal.  For modeling purposes, the allowance cost was  added to the delivered price of coal and natural gas to reflect the opportunity  cost faced by these covered entities.For petroleum and uncovered natural gas  regulated upstream, it is assumed that the allowance costs associated with the  related CO2 emissions are passed through in the delivered prices,  with some exceptions.CO2 emissions from refineries’ direct  fuel combustion of petroleum-based fuels would be subject to the allowance  requirement.  However, the incremental  cost of these allowances is not explicitly reflected in delivered petroleum  prices, as the Petroleum Market Module of NEMS is not structured to represent  such costs explicitly.To reflect the bill’s allowance allocations to  electricity and natural gas LDCs for rebates to end users, average delivered  prices are adjusted to reflect the rebates.   Consumers receiving such rebates are assumed to treat their net average  energy cost as the price basis for fuel-related decisions.Additional details on modeling treatment of specific  elements of the cap-and-trade provisions and other bill provisions are  presented below for each modeling area.
                      Buildings  Sector
                      The ACESA legislation contains several provisions designed  to reduce energy use in buildings and to provide credit for buildings-related  renewable electricity generation.  The  programs include codes and standards as well as direct funding from the sale of  allowance aimed at increasing the energy efficiency in buildings.  The buildings sector energy efficiency  provisions directly modeled in NEMS include the following:
                      Building Codes  (Section 201)
                      Section 201 establishes Federal building codes for both  residential and commercial buildings, with provisions to improve the code every  several years.  This provision is funded  with 0.5 percent of the total emissions allowances and is implemented in both  the NEMS residential and commercial demand modules.
                      All of the improvements in commercial building codes are  relative to the American Society of Heating, Refrigeration and Air Conditioning  Engineers (ASHRAE) code 90.1-2004 and are assumed to be feasible.  The building code efficiency improves by 30  percent upon enactment of the bill and by 50 percent in 2015, with 5-percent  incremental improvements to the 2015 code every 3 years thereafter.  It is assumed that the codes are phased in  over 5 years following State adoption, reflecting the time it takes States to fully comply with each  revision of the building code.
                      The improvements in residential building codes are relative  to the International Energy Conservation Code (IECC) 2006.  Similar to the commercial sector  implementation, a 30-percent improvement in the code occurs with the enactment  of the bill, with subsequent increments identical to those for commercial  buildings over the projection period.   Each code improvement, following State adoption, is assumed to require 5  years for all the States to fully comply; however, each of the nine Census  divisions complies consistent with the historical level of building code  compliance in each State.18
                      Existing Building  Retrofit Program (Section 202)
                      Section 202 establishes the Retrofit for Energy and  Environmental Performance (REEP) program which is funded by allowance  allocation revenues as specified in section 782(g).  Because individual States determine the  amount of money to spend on various sectors of the economy (buildings,  transportation, industry, etc) and the fact that allowance revenue streams and  allocations for this provision change over the projection period, the energy  savings impacts of this provision are subject to great uncertainty.  For this analysis, it is assumed that $2  billion per year is available to retrofit residential buildings and that the  investment and energy savings per house are comparable to EIA’s previous  analysis of the impact of weatherization funding included in ARRA.19  For commercial buildings, it is assumed that  funding is available to improve the shell efficiency of existing buildings by  an additional 1 percent relative to the Reference Case by 2030.
                      Standards (Sections  211 and 212*)*
                      Outdoor       lighting standards effective 2011 to 2015
                        Hot       and cold water dispensers effective 2012
                        Hot       food holding cabinets effective 2012The impact of the above standards is relatively modest.  In the residential sector, the preponderance  of lighting fixtures are located inside the house and many outdoor fixtures use  traditional incandescent bulbs, which are already covered by aggressive  efficiency standards under the Energy Independence and Security Act of 2007.  The commercial sector accounts for outdoor  stationary lighting such as roadway lighting, parking lots, billboards, airport  runways, etc., which account for only about 8 percent of all lighting use in  the United States.20
                      Rebates for Natural  Gas and Oil Customers (Sections 782b and 782c)
                      Sections 782b and 782c allocate a relatively small portion  of the overall emission allowances to oil and natural gas customers  specifically for energy efficiency programs.   In the buildings sector, these provisions are assumed to take the form  of rebate programs for the purchase of energy-efficient furnaces and  boilers.
                      Buildings sector participation in the Renewable Electricity  Credit program that is part of the ACESA Clean Energy Title is directly modeled  as discussed below.
                      Industrial  Sector
                      Title I, Subtitle B,  Section 115 promotes the commercial deployment of carbon capture and storage  (CCS) technologies. After review  of the state of the current technology, it was determined that the industrial CCS provision in the proposal would not be readily  adopted by industry.  This technology as  it applies under the stipulations of the provision would require very large  investments to retrofit existing facilities (or add new ones) and substantial  land areas at an industrial site to capture the CO2.  Space is always limited at industrial  facilities and the addition of new land would ultimately add a high  “real-estate premium” to adoption of these systems.  Many industries already producing pure CO2  streams that could be supplied for CCS  but these streams are already sold as a valued-added secondary product in the  food industries and for enhanced oil recovery, among others.  Consequently, it is assumed that industrial  non-refining CCS would not  penetrate that market through the projection period.
                      Title I, Subtitle C,  Sections 123 and 125 provide financial assistance to automobile  manufacturers to facilitate the manufacture of plug-in and other advanced  technology vehicles. In the manufacture of vehicles, the platforms used and  designed to manufacture standard vehicles are the same as those to manufacture  plug-in and other advance technology vehicles. As such, the energy efficiency  trends for the transportation equipment industry (NAICS 336) are assumed to be  unchanged relative to the *AEO2009* Reference Case.
                      Title I, Subtitle H,  Section 173, establishes several Centers for Energy and Environmental  Knowledge and Outreach. Each center is to provide technical assistance,  including energy savings assessments for industrial establishments. The  proposed increased funding for energy savings assessments programs is expected  to accelerate the penetration of energy efficiency measures and options in  industries. To model this, the industrial demand module (IDM) of NEMS used the industrial  sector high technology assumptions of *AEO2009*.
                      Title II, Subtitle D establishes various energy efficiency standards and programs for industries.  The design and implementation of these standards and programs are yet to be  decided. Due to this lack of information, no model changes were made to  accommodate this part of the bill.  Title  II, Subtitle D, Sections 244 and 245 establishes a rebate and incentive  programs designed to increase industrial motor efficiency. These were not adequately  defined in the proposal and therefore no changes pertaining to the rebate and  programs were made in the IDM.   Nevertheless, the motor model remains an economic and technology choice  system, and as such, any changes in industrial production and energy prices  will impact the projected energy use in motors in industry.
                      The allocation of carbon allowances in the IDM has been  applied as prescribed by the bill.  These  allowances are allocated to energy-intensive industries only, as indirect  emissions allowances in 2012 and 2013 and full emissions allowances (direct and  indirect) for the remaining timeframe.   This allocation is, however, phased out beginning in 2025 as mandated in  the proposal.  To accurately reflect the  lack of CO2 emissions coverage for small industrial emitters in the  early years of the cap-and-trade regime, a bifurcation of natural gas  consumption was applied to the IDM for calendar years 2014 and 2015.
                      Transportation  Sector
                      ACESA includes several provisions that are related to  transportation, specifically, Sections 121-130 and Sections 221-224.  However, none of these provisions have been  incorporated into NEMS because they call for (a) analysis and not action, (b)  the creation of programs without any specific measures that can be modeled in  NEMS, or (c) are of such limited nature that they are not deemed large enough  to impact transportation trends significantly.
                      Section       121 mandates utilities to complete studies assessing the future       electrification of the U.S.       transportation fleet.Section       122 calls for the establishment of a program by which the Secretary of       Energy can provide financial assistance to State or local governments for       the demonstration of plug-in hybrid electric vehicles.Section       123 establishes a program by which the Secretary of Energy can provide       financial assistance to automobile manufacturers to facilitate the       manufacture of plug-in electric drive vehicles.Section       124 grants various emissions credits to the manufacture of       alternatively-fueled vehicles.Section       125 provides loans to manufacturers of advanced vehicle technology.Section       126 amends the term ”renewable biomass.”Section       127 calls for the promotion of an open fuel standard and allows       regulations to require each light-duty automobile manufacturer to produce       a minimum percentage of fuel-choice-enabling automobiles.Section       128 amends diesel emissions regulations.Section       129 provides loan guarantees for the construction of renewable fuel       pipelines.Section       221 calls for studies to propose changes to the emissions standards for       heavy-duty vehicles, non-road vehicles, and aircraft engines.Section       222 calls for States to produce plans and create goals for the reduction       of GHG emissions from transportation.Section       223 establishes within EPA a SmartWay Transport program to quantify,       demonstrate, and promote transportation efficiency programs.Section       224 allows the Secretary of Energy to change State vehicle fleet       requirements.New Fuel Economy and  Tailpipe Emissions Standards for Light-Duty Vehicles
                      President  Obama unveiled a plan for tougher vehicle fuel economy standards that would  require passenger cars to reach a fleet average of 39 miles per gallon and  light trucks to reach a fleet average of 30 miles per gallon in model year  2016.  The President has called for EPA  and the National Highway Traffic Safety Administration to jointly produce these  new standards as both a footprint based Corporate Average Fuel Economy and a  tailpipe emissions standard.  Since the  policy change was only recently announced by the President and has not been  formally implemented, the new fuel economy standards are only included in a  sensitivity case for ACESA.
In the  sensitivity case, the new fuel efficiency standards have been incorporated into  NEMS that meet and slightly exceed the President’s targets for model year  2016.  The revised standards do not start  in NEMS until 2012, as fuel economy standards for model year 2011 have already  been promulgated by the National Highway Traffic Safety Administration.  Standards are assumed to remain the same  after model year 2016.

Macroeconomic
In all cases, MAM assumes exchange rates remain at the Reference  Case levels.  EIA assumes, as has been  customary in several historical responses by the Federal Reserve, that the  Federal Reserve will use a modified Taylor  rule which will decrease interest rates in the face of rising unemployment.  MAM takes all appropriate energy price and  quantity variables from NEMS and converts them into IHS Global Insight aggregate  energy measures.
Specific to the ACESA analysis, MAM implemented two major  modeling changes:  one pertaining to  energy-intensive industries and the other to redistributing carbon allowance  revenues back to the economy.  As part of  the H.R. 2454 bill, section 782 (e) allocates shares of allowances to trade-  and energy-vulnerable industries.  In MAM,  these industries are impacted by various industrial fuel prices as well as  overall changes in final demands.  In the  ACESA analysis, the energy-intensive industries react to pre-tax industry fuel  prices, rather than post-tax prices under the assumption that when the  industries receive the allocated allowances, the revenue will enable them to  restructure their production processes to ameliorate the impact of rapidly  rising energy prices.
MAM redistributes a certain portion of total  allowance revenue.  The following list includes the revenues being  collected and redistributed by the model:  Section 726 Strategic Reserve,  Section 781, Supplemental Reserves, Section 782 (d) Low Income Allocation;  Section 782 (g) Investment in Energy Efficiency and Renewable Energy; Section  782 (g) 1 f Investment in Energy Efficiency and Renewable Energy; Section 782  (g) Investment in Energy Efficiency and Renewable Energy (2) building codes;  Section 782(h) Clean Energy Innovation Centers; Section 782(i) Clean Vehicle  Technology; Section 782(k) Investment in workers; Section 782 (l) Domestic  Adaptation; Section 782 (m) Wildlife and Natural Resource; Section 782 (m)  Wildlife and Natural Resource; Section 782 (n) International Adaptation;  Section 782 (o) International Clean Technology; and Section 782 (r) Consumer  Climate Change Refund.  MAM treated Section 782 (d) low income allocations  as transfer payments, Section 782 (n) and (o) (international transfer of  allocations) as other Federal government transfers to the rest of the  world.  Sections 782 (g) (h) (i) (k) (l) (m), Section 726 and Section 781  were treated as Federal government non-defense spending.  Section 782 (r)  which distributed funds post-2025 were treated as lump-sum personal tax  rebates.  All of the other allowances specified in H.R. 2454 went to  energy-producing or -distributing entities or were given to energy-intensive  industries and were not collected or redistributed by MAM.  Changing the  level of non-defense government expenditures insured that the Federal deficit  at full employment was unchanged from the Reference Case across all ACESA  cases.  The uses of the carbon allowance revenues as stipulated by H.R.  2454 were modeled; however to the extent that the resulting change in  government expenditures were lower than the actual amounts specified by the  bill, other non-defense government expenditures would have to be reduced to  insure unchanged Federal deficits over time.
Electric  Power and Coal
Renewable Electricity  Credits
Section 101 establishes a program requiring retail electric  suppliers to submit renewable energy credits and electricity savings equal to a  percentage of their annual electricity sales beginning in 2012.  Distributed renewable generation facilities  are issued 3 Federal renewable electricity credits for each megawatthour of  renewable electricity generated with the granting of triple credits to be  reviewed for adjustment in 2014 and every 4 years thereafter.  It is assumed that the adjustment reviews  result in an adjustment to 1 Federal renewable electricity credit per megawatt  hour issued to distributed generation facilities starting in 2014.  However, distributed renewable generators  placed in service during a year when triple credit is granted continue to  receive triple credit for 10 years.  This  provision is directly modeled in the buildings sector but is expected to have  minimal impact on buildings sector renewable generation because the  requirements of the cap-and-trade program in ACESA lead to sufficient renewable  generation capacity in the power sector to meet the renewable electricity standard  targets.
Carbon Capture and  Sequestration
Section 114 outlines a CCS  demonstration program that is to be run by the private sector, under the lead  of the Electric Power Research Institute and funded by small fees on the  distribution of fossil-fired electricity. The fees range from 0.22 mills per  kilowatthour for natural-gas-fired electricity to 0.43 mills per kilowatthour  for coal-fired electricity. The goal of this 10-year, $10-billion program is to  support 5 commercial-scale CCS or  conversion technology projects. The small fees on fossil-fired electricity  distribution specified in this section are accounted for in the cases analyzed  for this report and are assessed for the years 2010 through 2019.
Section 115 adds Section 786 “Commercial Deployment of  Carbon Capture and Sequestration Technologies” to Section H of Title VII of the Clean Air Act. This section establishes  a program to distribute bonus GHG emission allowances to new projects in the  electricity and industrial sectors to help defray the costs associated with  equipment and infrastructure needed to capture and sequester CO2  emissions produced from the combustion of fossil fuels at these facilities. To  be eligible for the bonus allowances allocated for this program, the project  must derive at least 50 percent of its energy input from coal and/or petroleum  coke. The first 6 gigawatts of approved capacity under this program are  eligible to receive a $90 bonus allowance for each metric ton of CO2  captured and sequestered. Beyond the initial 6 gigawatts of capacity with CCS, an additional 66 gigawatts are eligible for  bonus allowances on the basis of a reverse auction administered by EPA or, at  EPA’s discretion, an alternative program for distributing the program’s  remaining bonus allowances. Only 1 gigawatt of retrofitted CCS capacity at existing plants is eligible for  bonus allowances allocated under this section. Qualified CCS projects are eligible for 1.75 percent of  allowances established according to section 721(a) for the years 2014 though 2017,  4.75 percent of allowances for the years 2018 and 2019, and 5.0 percent of  allowances for the years 2020 through 2050.
This program is represented within the analysis for this  report by reducing the estimated costs of new coal-fired generating capacity by  the value of the bonus allowances that the plant would be eligible to receive.  The amount of new coal-fired generating capacity projected within a given  forecast scenario is determined by a number of factors such as the costs and  availability of electricity from other generating technologies, the  availability of international and domestic offsets, and the projected levels of  electricity demand.
Section 116 adds a new Section 812 “Performance Standards  For New Coal-Fired Power Plants” to Title VIII of the Clean Air Act, which  specifies that new power plants authorized under State or Federal law to derive  at least 30 percent of their energy input from coal and/or petroleum coke will  initially be required to capture and sequester a minimum of 50 percent of their  potential CO2 emissions. The CCS  requirement rises to 65 percent for plants built in 2020 or later.  Additionally, based on reviews of the standards to be completed by the EPA  Administrator at 5-year intervals, and beginning no later than 2025, CCS requirements would be increased to levels  higher than 65 percent if higher capture and storage rates are determined to be  reasonably achievable. In the analysis completed for this report, new  coal-fired power plants with CCS  are assumed to capture and sequester 90 percent of their potential CO2  emissions.
Peak  Demand Reductions (Section 143)
This section requires States to determine and  publish peak demand reduction goals for load-serving entities with a baseline  above 250 megawatts. The Secretary, with the Federal Energy Regulatory  Commission (FERC) and the North American Electricity Reliability Council, will  develop a methodology for measurement and verification of demand response. The  FERC report 2009 National Demand Response Potential Assessment should be used  to help determine peak reduction goals. The load-serving entities must reduce  peak load by 2012 and further by 2015, by amounts determined by each State.
This program is represented in the analysis  by assuming that peak demand will be reduced by 3 percent by 2020, instead of  the 1 percent assumed in the Reference Case due to ARRA.
Allocation  of Emission Allowances (Sec. 782)
Section 782 (a)(1) allocates allowances for  the benefit of electricity consumers, starting at 44 percent of total  allowances in 2012 and falling over time through 2029, after which no further  allowances are given out. Section 782 (a)(2) allocates a separate 0.5 percent  specifically to small load distribution centers.  For modeling purposes, these allowances are  added together and treated as one allocation. Section 783 describes the method  of distributing the allowances, with the majority going to LDCs to be used  exclusively for the benefit of retail ratepayers.  Up to 10 percent of the allowances under this  section can be given to merchant coal generators, based on their qualifying  emissions through a base historical period.
These allocations are  accounted for in the electricity pricing calculations.  The allowances given to merchant coal  generators are calculated based on historic emissions, and the value of the  allowances in each year would offset the rising fuel costs in the affected  regions.  The remaining allowances are  shared to the regions based on a combination of historic emissions and overall  electricity sales, as described in Section 783(b)(2) and Section 783(b)(3).  The revenue from this allowance allocation is  assumed to go to reduced distribution costs, lowering the distribution  component of electricity price to all consumers.


Notes