Environmental Valuation & Cost-Benefit News

Link: http://www.epa.gov/climatechange/economics/pdfs/EPA_S1733_Analysis.pdf

On September 30, 2009, Senators Kerry and Boxer introduced the Clean Energy Jobs and American Power Act of 2009 (S. 1733). The counterpart bill in the House of Representatives is the American Clean Energy and Security Act of 2009 (H.R. 2454), for which EPA developed cost estimates on June 23, 2009. This paper presents a discussion of how some of the key provisions in the Senate bill compare to the House bill, particularly with respect to the likely economic impacts of the bill. In order to produce this analysis, EPA synthesized the results of a significant volume of modeling analysis on economy-wide climate policy performed by the Agency. This effort drew from the nearly 50 modeling scenarios of five bills over the past two years, with particular focus on the two economic analyses of the Waxman-Markey bill this year. Through this effort, we carefully assessed the key differences and whether any would result in substantial changes to the modeled impacts.

The assessment in this paper draws upon existing modeling by EPA that used full computable general equilibrium models (ADAGE and IGEM), as well as modeling that used reduced form versions of EPA’s models. These models serve as stylized versions of the U.S. economy and climate change policy. In effectively simplifying the real-world in order for a modeling analysis to be computationally feasible, it is important to recognize that some minor differences between the policy designs in H.R. 2454 and S. 1733 are made irrelevant by the set-up of the models. This is not unique to the set of models employed by EPA, but common among the broader modeling community. Nonetheless, reviewing the breadth of the EPA modeling scenarios provides an opportunity to identify the most important, robust conclusions that models can illuminate about the design of climate policy.

EPA’s assessment of the two bills indicates that the full suite of EPA models would likely show that the impacts of S. 1733 would be similar to those estimated for H.R. 2454. Four key messages from the EPA analysis of H.R. 2454 would remain unchanged:
(1) the cap-and-trade policies outlined in these bills would transform the way the United States produces and uses energy; (2) the average loss in consumption per household will be relatively low, on the order of hundreds of dollars per year in the main policy case; (3) the impacts of climate policy are likely to vary comparatively little across geographic regions; and (4) what we assume about the actions of other countries has much greater implications for the overall impact of the policy than the modeled differences between the two bills.

That said, there are a few differences between S. 1733 and H.R. 2454 that could have a small impact on the modeled costs of the policy. First, the 2020 cap level in S. 1733 requires a 20% reduction from 2005 emissions levels instead of the 17% reduction required in H.R. 2454, although this is the same 2020 target as modeled in the April 2009 analysis of the Waxman-Markey discussion draft. Moving from a 17% to 20% target would raise costs slightly in the models. Second, S. 1733 allows landfill and coal mine CH4 as offset sources, whereas H.R. 2454 instead subjected them to performance standards. This will lower costs slightly and result in a small increase in overall
1 Note also that EPA’s analysis did not examine the costs of not acting to reduce greenhouse gases nor does it compare the costs of S. 1733 against other policy approaches to address GHG emissions.
EPA Analysis of S. 1733 emissions. Third, the market stability reserve allowance provisions in S. 1733 are changed to provide greater price certainty than the strategic reserve allowance provisions in H.R. 2454. S. 1733 also allocates more allowances to the market stability reserve than H.R. 2454 allocates to the strategic reserve. Assuming allowance prices remain low enough that covered entities do not purchase reserve allowances, this change will result in slightly higher costs in S. 1733 compared to H.R. 2454. For the most part the differences between the bills result in relatively small differences in estimated costs and may even cancel each other out on net.

There are many similarities between the bills. While the 2020 caps differ, the caps start out the same in 2012, and are identical between 2030 and 2050. Cumulatively, the caps differ by just one percent over four decades. Both of the bills cover the same sources of greenhouse gas emissions. Both bills place limits on offsets that are not expected to be binding. Both bills allow offsets from a broad array of agriculture and forestry sources. Both bills allow unlimited banking of allowances. Both bills have output-based rebate provisions designed to reduce emissions leakage and address competitiveness concerns for energy intensive and trade exposed industries. Because of these many similarities and the relatively small differences between the two bills, it is likely that a full analysis of S. 1733 would show economic impacts very similar to H.R. 2454.

EPA analysis mainly focuses on modeling the cap-and-trade policy outlined in proposed legislation. With time, EPA has also been able to incorporate a few additional provisions into its models, such as energy efficiency standards. EPA has not yet been able to adequately incorporate other standards within the modeling framework such as those that apply to the transportation or electricity sectors (e.g., fuel economy or performance standards). Likewise, while formal modeling can shed light on the key aspects of the cap-and-
trade policy, it cannot replicate every aspect of private decision-making and therefore will not capture the impact of certain details. For this reason, modeling results are instructive in highlighting the magnitude and direction of impacts and the way they may change under different conditions but should not be interpreted as precise estimates of what will occur once a policy has been implemented.

The paper is organized as follows. First, it evaluates key elements of the two bills that, in most cases, are informed by EPA modeling analyses: cap levels and coverage, offset limits and sources, banking and borrowing, reserve allowances, energy efficiency provisions, incentives for CCS, energy-intensive and trade-exposed output-based rebates, transportation provisions, and allocations. For each of these topics, the paper describes the purpose of the provision and how the bills differ, then assesses how these differences would be expected to impact allowance prices and costs. Second, the paper summarizes the economic impacts of H.R. 2454 and S. 1733. Third, it discusses the importance of modeling assumptions, particularly with regard to technology and international action. Fourth, distributional and temperature impacts are discussed. Finally, the appendix describes the recent EPA modeling analyses that inform this paper.

U.S. Environmental Protection Agency (EPA) Office of Atmospheric Programs
October 23, 2009