Environmental Valuation & Cost-Benefit News

Link: http://are.berkeley.edu/~dwrh/CERES_Web/Docs/ES_DRHFK091025.pdf

Executive Summary
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As a leader in energy technology development and history’s largest contributor of greenhouse gases, the United States has an essential leadership role to play in international efforts to mitigate climate change. Exemplifying this leadership, a detailed federal plan to reduce greenhouse gas emissions, the American Clean Energy Security Act (ACES), was introduced into the U.S. House of Representatives in March and passed in June 2009. This analysis provides ... [a] state-by-state examination of the economic implications of this kind of comprehensive federal climate policy.

Federal climate policy will have different implications for different states, and should ultimately be designed to account for and address these differences. ...Physical and historical differences contribute to broad spectrum of energy and carbon intensities among states, and these are important factors in determining the economic impacts of a federal climate policy on states.
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This ... economic assessment was conducted using EAGLE, a new ... forecasting model that projects the long term economic impacts of climate legislation on the U.S. economy. The model details economic interactions within and between each of the 50 states and compares the impacts of combining a limit on carbon pollution with complementary efficiency and renewable energy policies. In addition to many detailed findings for individual states, three overarching conclusions follow from the EAGLE analysis:

Main Findings
1. All 50 states can gain economically from strong federal energy and climate policy, despite the diversity of their economies and energy mixes. The states may differ on the supply side, but on the demand side they all have substantial opportunities to grow their economies by promoting energy saving and domestic renewable energy alternatives.
2. Contrary to what is commonly assumed, comprehensive national climate policy does not benefit the coasts at the expense of the heartland states. In fact, heartland states will gain more by reducing imported fossil fuel dependence because they are generally spending a higher proportion of their income on this low employment, high price risk supply chain. Demand side policies make a bigger difference for more carbon-dependent states, and carbon reduction opportunities represent riper and lower hanging fruit.
3. The country as a whole can gain 918,000 to 1.9 million jobs, and household income can grow by $488 to $1,176, by 2020 under comprehensive energy and climate policy. By aggressively promoting efficiency on the demand side of energy markets, alternative fuel and renewable technology development on the supply side can be combined with carbon pollution reduction to yield economic growth and net job creation. Indeed, a central finding of this research is that the stronger the federal climate policy, the greater the economic reward.

Every state can accelerate growth by adopting a complete national policy package that promotes three climate strategies in unison: Greenhouse Gas (GHG) mitigation via market oriented restrictions on total carbon pollution, energy efficiency, and renewable energy development. An important finding of this research is that more carbon dependent economies have more to gain from climate action, assuming they adopt balanced policies that combine all three approaches to energy efficiency and clean technology....

Aggregate Results
Policies as important as the new national climate agenda will have far reaching effects on the state and national economies. Measured as percentage variations in real Gross State Product (GSP), these results show changes in aggregate real value added (wages, salaries, and profits) in 2020, compared to the Baseline baseline. The results are variegated, but a few salient findings deserve emphasis.

First, implementing the right combination of a Cap and Trade system and complementary measures to promote lower carbon technologies can result in net economic stimulus, for every single state. We see in many states that when market-oriented GHG mitigation is combined with efficient demand and supply side energy policies, the result can be a potent catalyst for economic growth. Even in cases where growth is less than robust, we see nothing like the adverse impacts predicted by industry-commissioned estimates. This is because complementary policies like energy efficiency save enterprises and households money, and this money is spent on domestic and in-state goods and services with higher employment intensity than the import dependent carbon fuel supply chain.

Two energy efficiency trends are considered, one conforming exactly to ACES standards, and the other more aggressive. The result is higher employment and income for every state that makes significant rogress in reducing its energy dependence.
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Markets alone may not identify the climate change externality and markets for carbon may not provide adequate incentives for innovation and efficiency. To overcome hurdles that limit technology development, diffusion, and adoption, national climate policies include efficiency standards that will provide growth dividends for every state economy.
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U.S. federal climate policy has converged around the creation of a national cap and trade (C&T) system, with a substantial program of research, development and demonstration (RD&D) and a number of mandatory alternative energy, energy efficiency, and other measures to complement the GHG emission reductions achieved through the C&T system. A detailed plan to implement this system was introduced in March of 2009 by Representatives Henry Waxman and Ed Markey through the American Clean Energy and Security Act (ACES), and passed in June 2009.

In September 2009, Senators John Kerry and Barbara Boxer introduced a Senate version of climate legislation, the Clean Energy Jobs and
American Power Act (CEJAPA). This analysis takes ACES provisions as its starting point....
ACES includes the following four major provisions:
1. A cap and trade system (Title III) with a cap that steadily declines over time and a system to allocate allowances.
2. A requirement that electric utilities meet 20% of their sales through renewable energy by 2020, with utilities able to meet a certain portion of this obligation (25%) with efficiency (Title I).
3. Aggressive energy efficiency standards for new buildings, appliances, and vehicles (Title II).
4. A substantial program (in the hundreds of billions of dollars) to support RD&D in clean energy and energy efficient technologies, funded in part through CO2e allowances (Title IV).

The ACES cap is designed to be comprehensive, covering 84% of U.S. GHG emissions by 2016. Regulated entities must hold one allowance to emit one metric CO2e ton of any GHG included under the cap. Allowance obligations can be met by reducing emissions, through allowances saved (“banked”) from a previous period, by purchasing allowances, by purchasing international offsets, or by using allowances from countries that have comparable systems.

ACES places a ceiling on international offsets, but grants the EPA administrator the flexibility to adjust that ceiling.

The ACES cap has two primary targets: economy-wide GHG emissions must be reduced by 17% from 2005 levels by 2020 and by 83% from 2050 levels by 2050. Two intermediary targets require a 3% reduction in 2005 GHG emissions levels by 2012 and a 42% reduction from 2005 levels by 2030....

U.S. GHG emissions are and have historically been dominated by fossil fuel combustion, accounting for 80% of total GHG emissions in 2005. Reducing GHG emissions by 17% by 2020 will require significant changes in the way that the U.S. produces and consumes energy; reducing emissions by 83% by 2050 will require a fundamental transformation of the U.S. energy system.

Within fossil fuel combustion, GHG emission sources are more diffuse. The two largest emission sources — coal-fired electricit
generation (33%) and motor gasoline (20%) — accounted for roughly 53% of energy-related GHG emissions in 2005. The next largest sources of energy-related GHG emissions each account for less than 10% of total energy-related GHG emissions. In recognition of this distribution, ACES includes both a comprehensive cap and specific measures that target both the electricity and transportation sectors.

Policies Assessed ...
To improve visibility for public and private stakeholders regarding economic impacts of a comprehensive national climate policy like that currently being discussed, the EAGLE model assesses a package consisting of five generic policy types:

Carbon Emission Reductions that reflect market based measures to restrict total atmospheric emissions of CO2. In this analysis, we do not consider detailed design characteristics for such a mechanism, but only impose a national limit on total emissions and assume that a mechanism of trading pollution rights leads to a market premium that provides incentives for energy conservation and investments in more efficient technology. EAGLE is an economic forecasting model. To estimate patterns of technology adjustment in the underlying energy economy, we draw upon results from the MARKAL national energy simulation model. These provide inputs to EAGLE in the next four policy categories, each dealing with a different dimension of energy use.

Transportation includes changes in the energy requirements and fuel mix of the light duty vehicle (LDV) and heavy duty vehicle (HDV) fleets. Transportation adjustments include shifts in the fuel and fuel economy composition of the LDV and HDV fleets. For the LDV fleet, the primary shift captured in MARKAL is toward greater doption and use of hybrid electric vehicles (HEVs) and ultimately
plug-in hybrid electric vehicles (PHEVs).

Electricity Generation under a carbon cap will experience changes in the composition of the mix of electricity generation resources
including shifts toward low or zero carbon energy sources, including oal-fired generation with offsetting CCS.

Residential and Commercial Energy Efficiency includes changes in the energy requirements of residential and commercial buildings, appliances, and electronics. ... Residential and commercial energy efficiency gains in MARKAL result in the flattening out of electricity demand and absolute reductions in natural gas and oil use relative to Baseline. As a result, total residential and commercial energy use declines in absolute terms (by about 15%) from 2010 to 2030 in the Policy case, and total residential and commercial
energy use in the Policy case is about 30% lower than in the Baseline case.

Sequestration and Offsets include terrestrial carbon sequestration and landfill gas projects. Sequestration and offsets include four major categories: agricultural (mostly soil carbon sequestration), livestock (mostly manure management), forestry (mostly changes in forest management), and landfills (landfill gas capture and generation).

Economic Diversity
... Differences in economic structure contribute to differences in energy and carbon intensity among states. At an aggregate level, the most significant differences among state economies are in the shares of extractive industries, manufacturing, and services as a share of gross state product (GSP). More than 30% of Wyoming’s GSP in 2007, for instance, was generated by coal, natural gas, and oil extraction, whereas manufacturing (3%) and services (26%) played much smaller roles. Indiana had the highest GSP share of manufacturing (26%) in the U.S. in 2007 and a moderately large services industry (40%), but negligible resource extraction (0%). At the other end of the spectrum, services dominated the Florida economy (57%) in 2007, whereas manufacturing (5%) and extractive industries (0%) were not major activities.

These differences in economic structure will play an important role in how states adjust to the requirements of a federal climate policy. For instance, the economic impact on states that are more dependent on fossil fuel extraction will depend on the feasibility and cost-effectiveness of carbon capture and storage (CCS), the timing of shifts to alternative energy sources, and the effects of a range of energy and climate policies on fossil fuel prices.

Manufacturing is typically more energy intensive than services, and states where manufacturing is a larger share of GSP will have to give greater consideration to managing the impacts of a federal climate policy on retail energy prices.

Methodology
The primary tool for this economic assessment was the Environmental Assessment in GeneraL Equilibrium (EAGLE) model, a ... forecasting tool that details patters of demand, supply, energy/resource use, employment, income, and emissions across each of the 50 United States. Full technical documentation of the model is available from
the authors.

Data Sources
Economic Data
The primary economic data resource used to calibrate the EAGLE model is IMPLAN, a nationally consistent collection of economic data that detail patterns of supply, demand, and resource use for over 500 sectors of the economy in each of the 50 states. Based on a twenty-year data management initiative begun by the US Forest Service, IMPLAN offers the most up-to-date detailed data on economic
structure of the US economy.

Emissions Data
A large collection of the latest official statistics were used to calculate a state-by-state, sectoral greenhouse gas (GHG) emissions inventory for the EAGLE model. Basic GHG emissions inventories are not yet available at a state level, much less at a sectoral level, in the U.S. In constructing an emissions inventory for the model we use a number of data sources and assumptions, documented more fully in the overall project documentation.

The U.S. Energy Information Administration (EIA) maintains detailed data on fossil fuel CO2 emissions, with CO2 emissions estimated from both national and state-level fossil fuel use data. The U.S. Environmental Protection Agency (EPA) maintains a more comprehensive national inventory that covers all GHG emissions, but lacks detail at a state and sectoral level. In building the CO2 portion of the EAGLE GHG inventory we make use of both EIA and EPA data....

by David Roland-Holst 1 and Fredrich Kahr 1
in collaboration with Madhu Khanna 2 Jennifer Bakka
1. University of California, Berkeley College of Natural Resources, dwrh@are.berkeley.edu
2. University of Illinois, Urbana‐Champaign
3. Yale University
University of California, Berkeley College of Natural Resources
October 16, 2009