Hearings and Business Meetings

SD-366 Energy Committee Hearing Room 10:00 AM

Dr. Howard Gruenspecht

Acting Administrator, Energy Information Administration

Testimony of
Howard Gruenspecht, Deputy Administrator
Energy Information Administration
U.S. Department of Energy
before the
Committee on Energy and Natural Resources
United States Senate
September 20, 2005

Mr. Chairman and members of the committee, I appreciate the opportunity to appear
before you today to discuss the Energy Information Administration’s (EIA) recent
analyses of greenhouse gas reduction policies.
EIA is the independent statistical and analytical agency within the Department of Energy.
We are charged with providing objective, timely, and relevant data, analyses, and
projections for the use of Congress, the Administration, and the public. We do not take
positions on policy issues, but we do produce data, analyses, and forecasts that are meant
to assist policy makers in their energy policy deliberations. Because we have an element
of statutory independence with respect to this work, our views are strictly those of EIA
and should not be construed as representing those of the Department of Energy, the
Administration, or any other organization.
My testimony today will focus on EIA’s recent assessment of the impacts on energy
supply, demand, and the economy that would result from the recommendations proposed
in a December 2004 report entitled Ending the Energy Stalemate: A Bipartisan Strategy
to Meet America’s Energy Challenges, prepared by the National Commission on Energy
Policy (NCEP), a nongovernmental privately- funded entity. EIA’s report, Impacts of
Modeled Recommendations of the National Commission on Energy Policy, released in
April 2005, compares cases incorporating the NCEP recommendations to the projections
of domestic energy consumption, supply, prices, and energy-related carbon dioxide
emissions through 2025 in the reference case of the Annual Energy Outlook 2005
(AEO2005). AEO2005 is based on Federal and State laws and regulations in effect on
October 31, 2004. The potential impacts of pending or proposed legislation, regulations,
and standards—or of sections of legis lation that have been enacted but that require funds
or implementing regulations that have not been provided or specified—are not reflected
in the projections. AEO2005 explicitly includes the impact of the American Jobs
Creation Act of 2004, the Military Construction Appropriations Act for Fiscal Year 2005,
and the Working Families Tax Relief Act of 2004. AEO2005 does not include the
potential impact of energy legislation that is now being considered by the Congress or
regulations such as the Environmental Protection Agency’s (EPA) Clean Air Interstate
and Clean Air Mercury rules that were promulgated earlier this year.
The projections in the AEO2005 and our analysis of the impacts of the NCEP policy
recommendations are not meant to be exact predictions of the future but represent likely
energy futures, given technological and demographic trends, current laws and
regulations, and consumer behavior as derived from known data. EIA recognizes that
projections of energy markets are highly uncertain and subject to many random events
that cannot be foreseen such as weather, political disruptions, and technological
breakthroughs. In addition to these phenomena, long-term trends in technology
development, demographics, economic growth, and energy resources may evolve along a
different path than expected in the projections. Both the AEO2005 and our report on the
NCEP policy recommendations include a number of alternative cases intended to
examine these uncertainties.
Since EIA’s report has been provided to the committee and is available to the public on
EIA’s web site, my testimony presents only a summary of its key findings. My testimony
focuses on the NCEP case in our report, which includes all of the NCEP
recommendations that EIA was able to model. However, I will also discuss some results
for individual recommendations modeled separately, such as the proposed cap-and-trade
program (CAP-TRADE case) linked to an intensity target for greenhouse gas (GHG)
emissions, the proposed fuel economy standards (CAFE case), and the deployment
incentives (INCENT case). Then, I will turn to sensitivity cases that highlight the effect
of alternative technology assumptions on our results. Lastly, I will offer some
comparisons to findings from some previous EIA analyses of policies to limit GHG
Main Results of the EIA Analysis
The December 2004 NCEP report outlined a broad array of policy measures, not all of
which were amenable to analysis using the EIA model of U.S. energy markets, the
National Energy Modeling System (NEMS). Our analysis focused on the
recommendations that could be modeled and which were thought to have a significant
potential to affect energy consumption supply and prices. Where the NCEP
recommendations required further specification, specific assumptions were developed in
consultation with staff of the requesting committee.
Our results show that the largest projected impacts on emissions, energy production,
consumption, prices, and imports result from three of the NCEP recommendations: the
cap-and-trade program linked to an intensity target for GHG emissions beginning in
2010, a major increase in corporate average fuel economy (CAFE) standards for cars and
light trucks, and the new building and appliance efficiency standards. Other
recommended policies generally affect specific fuels or technologies but do not have
large overall market or emissions impacts.
The impacts of the modeled NCEP recommendations, analyzed together unless otherwise
noted, relative to the AEO2005 reference case, are discussed below.
Energy Consumption
Primary energy consumption is 2.26 quadrillion Btu (1.9 percent) lower in 2015 and 6.73
quadrillion Btu (5 percent) lower in 2025 as the combination of efficiency programs and
new CAFE standards reduces energy dema nd. Fossil fuel energy consumption is 2.5
quadrillion Btu (2.4 percent) lower in 2015 and 8.1 quadrillion Btu (6.9 percent) lower in
2025. In absolute terms, the use of all fossil fuels is projected to grow from 2003 levels
through 2025.
Figure 1 illustrates the impacts of the NCEP policies on oil consumption. Oil
consumption in the NCEP case is 0.83 million barrels per day (3.4 percent) lower in 2015
and 2.1 million barrels per day (7.4 percent) lower in 2025. The import share of
petroleum product supplied declines from 62.4 percent to 61.3 percent in 2015 and from
68.4 percent to 66.8 percent in 2025. As shown in Figure 1, almost all of the projected
reduction in oil consumption results from the recommendation to increase fuel economy
standards (CAFE case). More than two-thirds of oil consumption is currently used in the
transportation sector, and the transportation share of total oil use is projected to grow to
71 percent in 2025 in the reference case. Because of the GHG permit safety valve, which
caps the price of traded permits at $6.10 per metric ton of carbon dioxide (CO2) in 2010
rising to $8.50 per metric ton in 2025 (2003 dollars), the maximum direct effect of the
cap-and-trade policy on the delivered price of gasoline, diesel, or jet fuel is roughly 7
cents per gallon (2003 dollars). Taken alone, a 7-cent price increase is not expected to
spur either a switch to alternative fuels or prompt a significant increase in fuel efficiency
(CAP-TRADE case).
Figure 2 illustrates the impacts of the NCEP policies on natural gas consumption.
Natural gas consumption in the NCEP case is slightly lower (0.45 quadrillion Btu or 1. 6
percent) in 2015 and 1.1 quadrillion Btu (3.6 percent) lower in 2025, due mainly to lower
electricity demand from the building standards recommendation and the incentives
provided for deployment of renewable, coal- fired integrated gasification combined-cycle
(IGCC), and nuclear power plants that further reduce the size of the market for naturalgas-
fired electricity generation. In contrast, when the cap-and-trade program is
considered alone (CAP-TRADE case), projected natural gas consumption rises above the
reference case level as natural gas replaces coal in electricity generation.
Figure 3 illustrates the impacts of the NCEP policies on coal consumption. Coal
consumption in the NCEP case is slightly reduced (0.46 quadrillion Btu or 1.8 percent) in
2015 and more significantly reduced (3.0 quadrillion Btu or 9.8 percent) in 2025, due
mainly to the lower electricity demand and shifts in the generation fuel mix that are
caused by the cap-and-trade program. The technology incentives and building standards
packages have offsetting effects on coal use, by encouraging IGCC plants while reducing
electricity generation, so the net effect on coal use of the cap-and-trade program alone
(CAP-TRADE case) is similar to that of the combined NCEP policy case.
Figure 4 shows how the NCEP policies affect projected electric generation capacity
additions over the 2004 to 2025 period. Because of the early deployment incentives
(INCENT case) and the cap-and-trade proposal, projected IGCC capacity additions more
than double, and renewable generation increases by 23 percent relative to the reference
case. However, the projected capacity additions of conventional coal- fired technology
decline to less than 25 percent of the reference case level. The shift from conventional
coal-fired plants to more efficient IGCC plants results in an increase in the amount of
generation per ton of coal consumed.
Energy Prices
The NCEP policy recommendations generally reduce the demand for fossil fuels, which
tends to lower wellhead or minemouth prices. However, the cost of permits required
under the cap-and-trade program tends to increase the delivered price of fossil fuels.
When these effects are taken together, the cost of permits tends to dominate even with the
safety- valve limit on permit prices in place, so the energy prices paid by end users
generally rise.
The average petroleum price to all users (including the price of emissions permits) is 2.2
percent higher in 2015 and 1.4 percent higher in 2025 than in the reference case, with the
permit prices more than offsetting the lower crude oil prices resulting from the new
CAFE standard. When the cap-and-trade (CAP-TRADE) program is considered without
new fuel economy standards, the reduction in oil demand is much smaller, so the
expected impact on delivered petroleum prices is larger.
The average delivered natural gas price in our NCEP case is $0.17 per thousand cubic
feet (2.7 percent) lower in 2015, with the wellhead cost reduction partially offset by the
increased GHG permit price, and $0.52 per thousand cubic feet (7.6 percent) higher in
2025, largely because of the permit price which is added to the delivered fuel costs. The
2015 result reflects the impacts of building and appliance standards, which reduce
residential electricity demand, and incentives for IGCC, which favor coal- fired
generation relative to natural gas.
When the costs of emissions permits are included, the average delivered coal price is
$0.54 per million Btu (43 percent) higher in 2015 and $0.74 per million Btu (56 percent)
higher in 2025 than in the reference case because of the high carbon content of coal. The
much higher percentage change in delivered coal prices compared to the other fossil fuels
reflects both its high carbon content per unit of energy and its relatively low price in the
reference case.
The average delivered electricity price is projected to be unchanged in 2015 but is 0.4
cents per kilowatthour (5.8 percent) higher in 2025 because of the mandatory cap-andtrade
program. EIA’s electricity price estimates reflect the assumption that consumers
capture the economic benefits of the allocation of GHG permits to regulated utilities in
areas of the country where electricity rates are set under cost-of-service regulation.
Projected reductions in energy-related CO2 emissions, which are concentrated in the
electric power and transportation sectors, are 2.8 percent in 2015 and 7.7 percent in 2025.
These reductions are larger than the corresponding reductions in primary energy use (1.9
and 5.1 percent, respectively for 2015 and 2025), as the NCEP policy recommendations
promote a less CO2 –intensive energy mix.
Covered GHG emissions are 393 million metric tons equivalent (5.2 percent) lower in
2015 and 964 million metric tons CO2 equivalent (11 percent) lower in 2025. Covered
GHG emissions intensity decreases by 5.1 percent in 2015 and by 10.6 percent in 2025.
The absolute level of covered GHG emissions is projected to grow at an annual average
rate of 1.1 percent over the 2003 to 2025 period, compared to annual average growth of
1.5 percent in the reference case.
As shown in Figure 5, reductions in emissions of non-CO2 GHG emissions, which are
not represented in a detailed fashion in NEMS, account for over 50 percent of the covered
GHG emissions reductions in 2015 and 35 percent of the covered GHG emissions
reductions in 2025. Estimates for non-CO2 GHG emissions were developed using
emissions baselines and abatement cost curves based on engineering cost estimates that
were supplied by EPA. Real- world factors affecting the behavior of decisionmakers and
the use of incomplete cost information may result in an overstatement of the actual level
of non-CO2 abatement achieved at each level of the permit price. However, as discussed
below, due to the safety- valve feature of the proposed cap-and-trade program, the
projected energy sector and economic impacts of the NCEP policy recommendations
would not change significantly even if the assumptions used regarding the supply of
GHG abatement opportunities were too optimistic.
Because of the safety- valve price mechanism in the cap-and-trade program for GHGs, the
GHG intensity targets specified by the NCEP are not reached. EIA projects that total
emission reductions fall short of the emission target by 557 million metric tons CO2
equivalent in 2025.
Economic Impacts
Figure 6 shows the projected effect of the NCEP policy recommendations and the capand-
trade policy considered separately on the projected level of real gross domestic
product (GDP). By 2025, real GDP in the NCEP and CAP-TRADE cases are,
respectively, 0.4 percent ($79 billion dollars) and 0.13 percent ($27 billion dollars) below
the reference case levels. These changes do not materially affect average economic
growth rates for the 2003 to 2025 period. Real consumption is also reduced over the 2010
to 2025 period relative to the reference case, with the impact reaching about 0.55 percent
in 2025 ($74 billion in year 2000 dollars).
Cap and trade systems or emissions taxes are generally considered the most economically
efficient approach for reducing emissions, since they allow reductions to be made where
they can be achieved at the lowest cost. In a pure cap-and-trade program, the price of
emissions permits, which generally rises as the cap is made more stringent, is a good
indicator of economic impacts. However, in a program that combines a cap-and-trade
program with regulatory measures, a lower permit price does not imply lower economic
impacts. Although the regulatory measures included in the NCEP case result in a lower
projected price of emissions permits than would be expected if the cap-and-trade policy
was implemented alone, the projected economic impacts in the NCEP case are higher
than for the cap-and-trade only case in our analysis.
Technology Sensitivities
While the AEO2005 reference case used as the basis for comparisons in our analysis
incorporates significant improvements in technology cost and performance over time, it
may either overstate or understate the actual future pace of improvement, since the rate at
which the characteristics of energy-using and producing technologies will change is
highly uncertain. Relative to the reference case, EIA’s high technology case generally
assumes earlier availability, lower costs, and higher efficiencies for end- use technologies
and new fossil-fired, nuclear, and nonhydropower renewable generating technologies.
Although the NCEP recommends increases in the funding for research and development,
EIA, consistent with its established practice in other recent studies, did not attempt to
estimate how increased government spending might specifically impact technology
development. Instead, to illustrate the importance of technology characteristics in
assessing the impacts of the NCEP recommendations, EIA prepared a set of NCEP policy
cases using its high technology assumptions. Figure 7 shows how the use of high
technology assumptions tends to reduce projected energy use with or without the
recommended NCEP policies. Relative to the AEO2005 high technology case, the high
technology case combined with the NCEP recommendations reduces fossil fuel use by
1.46 quadrillion Btu (1.5 percent) in 2015 and 4.48 quadrillion Btu (4.1 percent) in 2025.
Under the high technology assumptions, the NCEP’s greenhouse gas intensity goals are
met, reducing covered GHG emissions intensity from 480 to 463 metric tons CO2
equivalent per million dollars of GDP in 2015 (3.5 percent) and from 405 to 373 metric
tons CO2 equivalent per million dollars in 2025 (7.9 percent). Attainment of the
emissions intensity goal depends heavily on estimated reductions of non-CO2 GHG
emissions, subject to the caveats above and on the use of banked GHG emissions permits
that are exhausted in 2025, at the end of the forecast horizon for this analysis.
Because energy consumption is already lower in the high technology case than in the
reference case, the NCEP recommendations have a smaller relative impact to the high
technology case. However, due the lower baseline consumption, the GHG intensity goals
are easier to attain.
Relationship to Previous EIA Greenhouse Gas Analyses
EIA has completed several other reports on policy proposals to limit or reduce GHG
emissions. EIA’s previous analyses of emission reduction proposals indicate that the
economic impacts are largely determined by the size of the energy market change
required to satisfy the policy and the speed with which the change must occur. In 2003,
EIA considered the original version of the Climate Stewardship Act (S.139), which
would cap GHG emissions at the 2000 level in 2010 and the 1990 level in 2016 and
beyond. In 2004, EIA considered an amended version of that bill (S.A.2028) that
removed a provision for a tightening of the emissions cap beginning in 2016. The NCEP
proposal, S.A.2028, and S.139 all have a 2010 start date for their cap-and-trade systems.
The NCEP proposal is less stringent than the others because it is expressed in terms of
GHG emission intensity, starts from the 2010 level, and includes a safety valve.
These earlier reports suggest that either version of the Climate Stewardship Act is
projected to provide larger reductions in emissions from the energy sector than the NCEP
policy recommendations. To achieve this, higher permit prices (Figure 8) and larger
energy system changes, particularly for electricity generation and demand, are required.
That is, S.A.2028 and S.139 would require more significant changes in the U.S. energy
system and larger increases in delivered energy prices than the NCEP recommendations,
resulting in larger estimated economic impacts. As permit prices increase, electricity
prices typically increase and reduce demand while electricity generation tends to shift
away from coal technologies because of the high carbon content of the fuel and toward
low or no-carbon emitting technologies like renewable, natural gas, and nuclear power
generation (Figure 9).
Finally, while all baseline and policy projections are inherently uncertain, differences in
policy design can affect the impacts on the energy system and the level of GHG
emissions. The safety-valve feature of the NCEP cap-and-trade proposal would allow
GHG emissions to rise above the level projected in our report in the event that emissions
reduction inside or outside the energy sector proves to be more costly than we expect,
while protecting against the prospect of larger energy system and economic impacts in
these circumstances. In contrast, policies that impose a “hard” cap on emissions without
a safety- valve price for GHG credits, would force the GHG emissions target to be met
through higher GHG prices, regardless of the cost to the econo my.
This concludes my testimony, Mr. Chairman and members of the Committee. I would be
pleased to answer any questions you may have.