No economic harm from cap and trade systems

Washington, D.C., USA - The U.S. Energy Information Administration (EIA) has found that a proposed cap and trade system for greenhouse gases would achieve emissions reductions without harming the U.S. economy.

In response to a request from a bipartisan group of Senators, the government agency conducted an analysis of the impacts of cap and trade legislation proposed by Senator Jeff Bingaman of New Mexico. The resulting report includes detailed analysis of the economic impacts, changes in energy prices and supply mix, and forecasts of emissions reductions associated with the plan.

The proposed legislation would establish annual emissions caps based on targeted reductions in greenhouse gas intensity, defined as emissions per dollar of Gross Domestic Product (GDP). The targeted reduction in GHG intensity would be 2.6 percent annually between 2012 and 2021, then increase to 3.0 percent per year beginning in 2022.

Suppliers of fossil fuel and other sources of GHGs would be required to submit government-issued allowances (or ‘carbon credits’) based on the emissions of their respective products in order to meet these targets. The program also includes a “safety-valve” which allows companies to pay a pre-established emissions fee instead of submitting an allowance, initially set at $7 per tonne in 2012.

The EIA analysis contrasts a model of the cap and trade system with a reference case based on current trends. The report found significant impacts on energy markets and costs of fossil fuel generation, but overall economic growth was only marginally lower than the reference case.

Compared to the reference case, the EIA finds that under a cap and trade scheme:

  • Emissions are lowered by 5% in 2015, 11% in 2025, and 14% by 2030.

  • Total GDP over the period 2009-2030 is 0.10-0.19 percent lower, while consumer spending is 0.14 percent lower.

  • Electricity prices are 3.6-5.6% higher in 2020 and 11-13% higher in 2030.

  • Annual per household energy expenditures are $41-$58 higher in 2020 and $118-$136 higher in 2030.

  • Retail gasoline prices in 2030 are $0.11 per gallon higher.

The energy supply mix would also undergo changes compared to the reference case. Coal use would continue to grow, but at a much slower rate: 23% growth from 2004 to 2030 versus 53% in the reference case. Nuclear energy capacity would increase by 47 gigawatts, compared to only 9 gigawatts in the reference case.

Renewable energy would experience significant growth as well. In the reference case, renewable energy is projected to increase from 358 billion kilowatt hours (kWh) in 2004 to 559 billion kWh in 2030. Under the cap and trade scheme, renewable generation increases to 572 billion kWh by 2020 and 823 billion kWh by 2030, a 230% increase over the reference case.

Most of the increase in renewable generation is expected to be from non-hydroelectric renewable generators, mainly biomass and wind.

The report notes that while higher energy costs and lower consumption expenditures usually discourage investment, provisions in the bill support investment activity and in some cases will increase it. A portion of the allowances allocated to the private sector would generate funds to spur private investment in energy saving technologies.

The U.S. administration has thus far rejected legislated greenhouse gas constraints, citing the economic harm that would result from imposing a cap on emissions. However, in recent years support for climate change legislation has become stronger at the federal level, with many politicians and businesses declaring that greenhouse gas constraints are ‘inevitable’ for the United States, and with companies calling for long term certainty.

  • See: Industry giants support US climate plan

  • There have been recent media reports that suggest US President George W. Bush is contemplating emissions caps, a significant shift in White House policy which would have an immediate impact on global climate change negotiations.

    The establishment of a carbon credit trading system within the United States opens up the clear possibility for integration with a Canadian credit system. Given the level of energy and manufacturing trade between the two countries, cross-border emissions trading should be viewed as an imperative by policy makers.

    Read the full EIA report, Energy Market and Economic Impacts of a Proposal to Reduce Greenhouse Gas Intensity with a Cap and Trade System, here (PDF).

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