Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 50

Appendix B: Representing H.R. 2454 in the National Energy Modeling 

System
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 51

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.17 The 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 capand-trade system on certain hydrofluorocarbons (HFCs) used primarily as substitutes for ozone-

 17 Energy Information Administration, Annual Energy Outlook 2009, DOE/EIA-0383(2009)(Washington, DC, 

February 2009), web site www.eia.doe.gov/oiaf/aeo/index.html, and An Updated AEO2009 Reference Case 

Reflecting Provisions of the American Recovery and Reinvestment Act and Recent Changes in the Economic 

Outlook, DOE/EIA-SR-OIAF/2009-03 (Washington, DC, April 2009).
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 52

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.

Table B1. Revisions to the GHG Cap for Emissions Accounting and Limitations in 

Modeling Detail

 (million metric tons CO2-equivalent)

Emission 

Level

Percentage 

of Total

Emission 

Level

Percentage of 

Total

2005 Total Emissions 7206 100.0 7303 100.0

2005 Covered emissions, 2012 coverage 4770 66.2 4975 68.1

2005 Covered emissions, 2014 coverage 5455 75.7 5589 76.5

2005 Covered emissions, 2016 coverage 6089 84.5 6128 83.9

Year 

Specified 

Cap

Percentage 

of 2005 

Covered 

Emissions

Revised Cap 

as Modeled

Percentage of 

2005 Covered 

Emissions

2012 4627 97.0 4826 97.0

2013 4544 95.3 4739 95.3

2014 5099 93.5 5225 93.5

2015 5003 91.7 5128 91.8

2016 5482 90.0 5515 90.0

2017 5375 88.3 5408 88.3

2018 5269 86.5 5301 86.5

2019 5162 84.8 5194 84.8

2020 5056 83.0 5086 83.0

2021 4903 80.5 4933 80.5

2022 4751 78.0 4780 78.0

2023 4599 75.5 4627 75.5

2024 4446 73.0 4474 73.0

2025 4294 70.5 4320 70.5

2026 4142 68.0 4167 68.0

2027 3990 65.5 4014 65.5

2028 3837 63.0 3861 63.0

2029 3685 60.5 3708 60.5

2030 3533 58.0 3554 58.0

2050 1035 17.0 1042 17.0

Assumed in Bill As Modeled

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 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 53

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 energyrelated 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 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 54

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 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 55

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. 

Table B2. Assumed International Abatement Demand, Excluding the United States

 (million metric tons carbon dioxide equivalent)

Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Group 1 Group 2 Total

1990 8188 16268 Reference Reference 8188 16268 0 0 0

1995 8403 18002 Reference Reference 8403 18002 0 0 0

2000 8619 19736 Reference Reference 8619 19736 0 0 0

2005 8848 21535 Reference Reference 8848 21535 0 0 0

2010 8697 24778 5.0% below 1990 No Policy 7778 24778 919 0 919

2015 8851 27069 8.3% below 1990 No Policy 7508 27069 1343 0 1343

2020 9051 29503 16.6% below 1990 No Policy 6828 29503 2223 0 2223

2025 9089 31942 16.6% below 1990 2020 levels 6828 29503 2260 2439 4699

2030 9118 34303 26.6% below 1990 2020 levels 6010 29503 3108 4799 7908

2035 9214 36720 26.6% below 1990 2020 levels 6010 29503 3204 7217 10421

2040 9340 39196 36.6% below 1990 2020 levels 5191 29503 4149 9693 13842

2045 9471 41470 36.6% below 1990 2020 levels 5191 29503 4280 11967 16246

2050 9601 43743 46.6% below 1990 2020 levels 4372 29503 5229 14240 19470

Reference Emissions Policy Assumption Cap Abatement
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 56

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 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 57

were assumed to rise to 20 BMT, approximating the highest level observed in EPA’s ACESA 

cases. 

Table B3. Assumed Gross and Net Supply Schedule of International Offsets from 

Developing Countries 

 (million metric tons CO2-equivalent)

Price (2000 dollars per tonne CO2) 2010 2015 2020 2025 2030

$0.0 0 0 0 0 0

$0.3 71 41 151 264 327

$3 131 97 294 684 992

$5 185 156 454 1106 1611

$8 229 234 622 1762 2630

$11 273 335 855 2578 3932

$14 322 459 1160 3578 5320

$20 388 727 1955 6120 8232

$27 455 1083 3062 9384 11361

$34 527 1507 4270 12248 14244

$41 603 2036 5602 14782 16206

$48 685 2680 6951 16922 17760

$55 772 3444 8248 18881 19263

$61 861 4208 9322 20521 20584

International Floor Price (2000 dollars per 

tonne CO2) $13.15 $12.68 $11.81 $10.80 $15.81

International Abatement Demand at floor price 

(million metric tons CO2 equivalent) 308.3 404.2 937.1 2523.3 6200.3

Price (2000 dollars per tonne CO2) 2010 2015 2020 2025 2030

$0.0 0 0 0 0 0

$0.3 0 0 0 0 0

$3 0 0 0 0 0

$5 0 0 0 0 0

$8 0 0 0 0 0

$11 0 0 0 55 0

$14 14 54 223 1054 0

$20 80 323 1017 3596 2032

$27 147 679 2125 6861 5161

$34 218 1103 3333 9725 8044

$41 295 1632 4665 12259 10005

$48 376 2276 6014 14399 11560

$55 464 3040 7311 16358 13062

$61 553 3803 8385 17998 14384

(millon metric tons CO2 equivalent)

Offset Supply, Net of International Abatement Demand

Gross Group 2 Offset Supply

Potental Gross Quantity of Offsets Supplied 

Potental Net Quantity of Offsets Supplied 

(millon metric tons CO2 equivalent)

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-gasrelated CO2 emissions is an incremental opportunity cost of using coal. For modeling 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 58

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 fuelrelated 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.
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 59

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 2012

The 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. 

 18 Each State was given a “score” from 1 to 5 and weighted by housing permits to calculate a Census division 

average. The relative score for each State was derived from American Council for an Energy-Efficient Economy 

(ACEEE), The State Energy Efficiency Scorecard for 2006, June 2007.

19 For more detail on the assumptions, see http://www.eia.doe.gov/oiaf/servicerpt/stimulus/index.html. 20 Navigant Consulting Incorporated, U.S. Lighting Market Characterization, Volume I: National Lighting 

Inventory and Energy Consumption Estimate, September 2002.
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 60

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 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 61

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 heavyduty 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. 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 62

 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
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 63

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 nondefense 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.
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 64

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. 
Energy Information Administration / Energy Market and Economic Impacts of H.R. 2454, the ACESA of 2009 65

Peak Demand Reductions (Section 143)

This section requires States to determine and publish peak demand reduction goals for loadserving 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.