EMISSION REDUCTIONS UNDER CAP-AND-TRADE PROPOSALS IN

EMISSION REDUCTIONS UNDER CAP-AND-TRADE PROPOSALS IN THE 111 TH CONGRESS Jhn Larsen and Rbert Heilmayr June 25, 2009 This analysis prvides an assessment f reductins in greenhuse gas (GHG) emissins relative t ttal U.S. emissins that culd be achieved by cap-and-trade prpsals currently submitted in the 111 th Cngress. This assessment is an update t a previus analysis released n May 19, 2009 and includes an assessment f the substitute t H.R. 2454 1, the American Clean Energy and Security Act f 2009 (ACESA) and H.R. 1862, the Cap and Dividend Act f 2009 (CDA) spnsred by Cngressman Van Hllen. T accunt fr the effects f different cmpnents f these prpsals, reductin estimates are divided int three scenaris: Ttal emissin reductins under just the prpsed emissins caps. This scenari is applied t bth prpsals cnsidered in this analysis. The remaining tw scenaris are applied nly t the ACESA as the CDA des nt cntain cmplimentary plicies: Ttal emissin reductins under the caps and all ther cmplementary requirements, including emissin perfrmance standards fr uncapped surces and required cmpnents f the supplemental reductin prgram thrugh 2025. A range f ptential additinal reductins that culd be achieved thrugh the 1.25 ffset requirement fr internatinal ffsets and supplemental reductins beynd 2025. Key findings: The emissins caps in the ACESA and the CDA achieve reductins f 15 and 14 percent respectively relative t 2005 levels in 2020, rughly equal t 1990 levels. By 2050, the ACESA achieves reductins f 73 percent relative t 2005 levels and the CDA achieves reductins f 66 percent relative t 2005 levels. All f the emissin reductin cmpnents cntained in the recent substitute t the ACESA remain cnsistent with previus iteratins f the prpsal and in turn result in the same emissin reductin estimates as have been reprted previusly. Specifically: When all cmplementary requirements f the ACESA are cnsidered in additin t the caps, GHG emissins wuld be reduced 28 percent relative t 2005 levels by 2020 and 75 percent relative t 2005 levels by 2050. When additinal ptential emissin reductins are cnsidered, the ACESA culd achieve maximum reductins f up t 33 percent relative t 2005 levels by 2020 and up t 81 percent relative t 2005 levels by 2050. The actual amunt f reductins will depend n the quantity f internatinal ffsets used fr cmpliance. Emissin Reductins Under Cap-and-Trade Prpsals in the 111 th Cngress, 2005-2050 (see page 2) graphically presents ttal GHG reductins achieved by H.R.1862 and H.R.2454 relative t U.S. histric and prjected emissins under the three reductin scenaris. Estimates f Ttal GHG Emissins and Emissin Reductins Achieved by Cap-and-Trade Prpsals in the 111 th Cngress, 2005-2050 (see page 3) presents a table f ttal GHG reductins by these prpsals fr selected years. A full descriptin f the methds and assumptins behind this analysis can be fund beginning n page 4. 1 Released n June 22,2009

Emissin Reductins Under Cap-and-Trade Prpsals in the 111th Cngress, 2005-2050 June 25, 2009 Millin metric tns CO2e 9000 8000 7000 6000 5000 4000 3000 2000 1000 Van Hllen, H.R. 1862 Emissin caps Waxman-Markey, H.R. 2454 (June 22 substitute) Emissin caps nly Caps plus all cmplementary requirements Ptential range f additinal reductins Business as usual 2005 levels 1990 levels 0 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Fr a full discussin f underlying methdlgy, assumptins and references, please see http://www.wri.rg/usclimatetargets. 2

Table 1. Estimates f Ttal GHG Emissins and Emissin Reductins Achieved by Cap-and-Trade Prpsals in the 111th Cngress. Abslute Emissins (Millin Metric Tns CO 2 eq) 2012 2020 2030 2040 2050 Business as usual emissins 7,185 7,390 7,765 8,102 8,379 H.R.1862 emissins caps nly 7,531 6,162 4,963 3,718 2,459 H.R.2454 emissins caps nly 6,980 6,095 4,547 3,262 1,961 H.R.2454 caps plus all cmplementary 6,934 5,125 4,287 3,040 1,779 requirements H.R.2454 ptential range f additinal reductins 6,934 4,750 3,809 2,621 1,384 Percent change relative t 2005 emissins 2012 2020 2030 2040 2050 Business as usual emissins 1 4 9 14 18 H.R.1862 emissins caps nly 6-14 -30-48 -66 H.R.2454 emissins caps nly -2-15 -36-54 -73 H.R.2454 caps plus all cmplementary -3-28 -40-57 -75 requirements H.R.2454 ptential range f additinal reductins -3-33 -47-63 -81 Percent change relative t 1990 emissins 2012 2020 2030 2040 2050 Business as usual emissins 17 20 26 32 36 H.R.1862 emissins caps nly 22 0-19 -40-60 H.R.2454 emissins caps nly 14-1 -26-47 -68 H.R.2454 caps plus all cmplementary 13-17 -30-51 -71 requirements H.R.2454 ptential range f additinal reductins 13-23 -38-57 -77 Bills analyzed include the substitute t H.R.2454 released n June 22, 2009 and the H.R. 1862 as intrduced. Business as usual emissin prjectins are frm EPA's reference case fr its analysis f the Waxman Markey Discussin Draft. 3

ASSUMPTIONS AND METHODOLOGY Many assumptins have been made t simplify this analysis and shuld nt be taken as statements f fact. In many situatins, these assumptins highlight cntentius issues which must be reslved t ensure the envirnmental integrity f a market-based apprach t addressing the threat f climate change. WRI will update this analysis t reflect new legislatin as well as new analyses f emissins r ecnmic and technical cnsideratins published by the Envirnmental Prtectin Agency, the Department f Energy r ther relevant rganizatins. This is an analysis f all cap-and-trade prpsals submitted in the 111 th Cngress. Methds and assumptins that apply t the entire analysis are included belw fllwed by descriptins f specific infrmatin relevant t each prpsal. Fr this analysis, the fllwing general assumptins and methds apply: All prpsals are enacted in 2009. Where annual data are unavailable, years between targets r prjectins are interplated using a simple linear frmula. Caps will impact nly capped sectrs. Caps are calculated and applied accrding t the legislative language in each prpsal Bills that define which sectrs r entities will be capped are assumed t impact nly cvered sectrs. Estimates f emissins cverage fr each prpsal are generated based n legislative language and the EPA inventry. Emissins frm the rest f the ecnmy are assumed t increase at annual rates derived frm the EPA's ADAGE reference case prjectins f the Waxman-Markey prpsal as reprted, This analysis des nt take int accunt ptential leakage f emissins frm capped surces t uncapped surces either within sectrs r between sectrs. Sme cmplementary plicies may achieve emissin reductins in nn-cvered sectrs beynd what wuld result frm the cap. First, a scenari that cnsiders just the emissin caps withut cmplementary plicies is prvided and labeled as emissin caps nly. Plicies that have clear mandates fr additinal reductins are depicted in the slid, caps plus all cmplementary requirements scenari, while plicies with less clear requirements r less certain utcmes are depicted in the ptential range f additinal reductins. Cmplementary plicies aimed at reducing emissins frm capped sectrs and entities, such as increased fuel ecnmy standards r renewable electricity standards, may affect the price f emissins allwances but wuld nt lwer ecnmy-wide GHG emissins belw the mandated cap. Cmplementary plicies aimed at reducing emissins frm uncapped sectrs and entities, such as perfrmance standards fr landfills, are included where reasnable, rbust estimates can be calculated. Supplemental reductin prgrams funded thrugh allwance allcatins that require a specific amunt f emissin reductin be achieved are assumed t meet their requirements. Where n reductin requirements exist, we assume a tnne f GHG reductins is achieved fr every tnne allcated. Additinal ffset rules such as a requirement t turn in 5 ffsets fr every 4 tnnes f GHGs emitted are assumed t generate ptential additinal reductins. Offsets will be real, permanent and additinal. This representatin assumes ffsets represent a real reductin in ttal glbal GHG emissins. As a result, emissins under each bill are prtrayed as ttal emissins minus ffsets. If the envirnmental integrity f ffsets is nt cmpletely real, permanent and additinal then the emissin reductin estimates included in this analysis wuld be diminished prprtinately. Brrwing and banking will nt allw increases in cumulative GHG emissins. Annual emissins may stray abve r belw the cap, but cumulative GHG emissins ver the life f the prgram wuld be the same with r withut brrwing r banking. 4

Methdlgies fr Legislative Prpsals Business as Usual Prjectins f ttal U.S. emissins under n federal actin (referred t here as business as usual) are surced frm EPA s reference case prjectins frm the ADAGE mdel as published in its ecnmic analyses f H.R.2454. Substitute t H.R.2454, Waxman-Markey American Clean Energy and Security Act 2009 (ACESA) (released June 22,2009) Cap and cverage: The ACESA prpses the creatin f tw caps ne t phase dwn U.S. HFC cnsumptin and anther t reduce all ther GHG emissins. These tw caps cmbined represent the emissins caps nly scenari, Cverage f nn-hfc GHG emissins is phased in ver the first 4 years f the prgram. The initial 2012 cap, set at 4,627 millin tnnes f emissins, is estimated t cver apprximately 67 percent f ttal 2005 U.S. emissins. In 2014, the cap is expanded t include mst industrial emissins increasing cverage t an estimated 78 percent f 2005 U.S. emissins. In 2016, the cap is again expanded t include emissins frm natural gas sld by lcal distributin cmpanies increasing cverage t an estimated 85 percent f 2005 US emissins. The ACESA requires a ne-time small adjustment t the size f the cap in the event that the bill s assumed estimates f cverage d nt match EPA s final cverage estimates during implementatin. WRI s estimates f cverage differ slightly cmpared t the assumptins cntained in the bill and s this analysis incrprates the bill s prescribed cap adjustments. The HFC cap wuld g int effect in 2012, cvering the prductin f specifically identified HFCs. These HFCs were respnsible fr apprximately 2 percent f 2005 emissins. When cmbined with the HFC cap, the draft bill wuld cver up t 87 percent f 2005 U.S. emissins. The strategic reserve represents a fixed amunt f reductins that will take place in additin t reductins made t meet the cap. If the strategic reserve trigger price is nt reached, allwances in this reserve (2,692 millin) will nt be released in effect tightening the cap. Even if the trigger price is reached, frest tnnes are used t refill the reserve. We assume that these purchases are designed t maintain a cnstant level f credits that are fungible with nrmal allwances (either allwances r frest tnnes discunted at the rate utlined in the legislatin). We distribute these reductins depending n the years in which the allwances are withdrawn frm the cap t fill the reserve (we d nt credit the reductins until the allwance withdrawals frce abatement amng cvered sectrs). Additinal reductins culd ccur thrugh the frest tnne purchasing cmpnent f the reserve; these are nt taken int accunt in this analysis. Grwth f uncvered emissins: The remaining 13 percent f U.S. emissins nt cvered by the caps frm 2016 nward are increased in line with EPA prjectins f business as usual fr uncvered emissins under the prpsal. These annual grwth rates, while varying frm year t year, average -0.05 percent annually thrugh 2050. Adjustments are made t these rates between 2012 and 2014 t accunt fr varying degrees f emissins cverage as the cap is phased in, Mandatry prvisins: In additin t the tw caps utlined abve, the draft includes a variety f plicies that require additinal reductins frm uncapped surces. The cmbinatin f these prvisins and the caps represent the caps plus all cmplementary requirements scenari and include: Supplemental greenhuse gas reductin prgram: The ACESA requires the prgram administratr t use allwances frm the cap t fund internatinal frestry prjects t achieve 720 millin tnnes f additinal emissin reductins in 2020 and a ttal f 6,000 millin tnnes f reductins by 2025. T distribute these reductins amng individual years, we assume an acceleratin f the prgram between 2012 and 2020 t reach the required 720 millin tnnes in 2020. After 2020, we assume a leveling ff f reductins t achieve the required cumulative reductin between 2012 and 2025 f 6,000 millin. 5

New Surce Perfrmance Standards: The prpsal phases in industrial perfrmance standards between 2012 and 2019. EPA is instructed t cver 95 percent f ttal industrial emissins (including industrial prcess and F-gas emissins) with a cmbinatin f the cap and perfrmance standards. WRI estimates that 84 percent f these emissins are cvered under the cap leaving 11 percent subject t standards. Since the structure f these standards is t be designed by the administratr, it is unknwn precisely hw much mitigatin the standards wuld achieve. This analysis assumes emissins subject t perfrmance standards are reduced by 50 percent and then held cnstant frm the effective year nward. Perfrmance standards fr ther uncapped surces are assumed t achieve additinal reductins f apprximately 115 millin tnnes CO 2 e derived frm estimates cnducted by the EPA. These regulatins are assumed t take effect in 2013. This estimate may be cnservative as it des nt take int accunt imprvements in technlgy ver time. The vast majrity f mandatry energy efficiency prgrams wuld further regulate capped sectrs and thus nt achieve additinal reductins. Hwever, sme prgrams such as residential hme efficiency standards wuld achieve reductins in natural gas cnsumptin and resulting GHG emissins prir t the inclusin f residential natural gas usage in the cap in 2016. Due t a lack f data, these reductins were nt quantified. Based n ur analysis f the natural gas savings due t the EERS included in the Waxman-Markey Discussin Draft we are fairly certain that emissin reductins achieved by HR 2454 prir t 2016 wuld be negligible rughly 10 millin tnnes n average annually frm 2012 thrugh 2015. Ptential range f additinal reductins: The lwer bund f the range represents the range f ptential additinal reductins scenari and incrprates additinal emissin reductins that may be achieved thrugh the implementatin f the prpsal, but are nt mandated. Such plicies include: 1.25 ffset requirement fr internatinal ffsets: The ACESA requires 1.25 internatinal ffsets t be submitted fr cmpliance fr every tnne f regulated emissins beginning in 2018. This requirement wuld yield additinal reductins cntingent n the number ffsets used. In additin, under certain circumstances the internatinal ffset limit may be increased frm 1 billin tnnes t up t 1.5 billin tnnes. This extends the maximum ptential emissin reductins f the 1.25 ffset requirement if this limit is expanded. A range f additinal emissin reductins in uncvered internatinal emissins are included in this analysis t represent this prvisin. The range starts at zer and increases t 375 millin tnnes per year. Supplemental greenhuse gas reductin prgram: After 2025, the explicit reductin requirements as well as the authrity t increase the amunt f allcatins dedicated t the prgram are drpped frm the supplemental GHG reductin prgram. After this date, we assume that each tnne allcated has the ptential t generate up t ne tnne f frest reductins. H.R.1862, Van Hllen, Cap and Dividend Act f 2009 (CDA) Caps and cverage: The cap is applied t all entities that make the first sale f fssil fuel int the U.S. ecnmy based n the emissins that will ccur after that fuel is cmbusted. WRI calculates ttal emissins cverage t equal 81 percent f ttal U.S. emissins in 2005 r rughly 5,687 millin tnnes. The emissins cap is set in 2012 t equal ttal CO2 emissins in 2005. This is a greater amunt than cvered emissins due t the fact that nly CO2 emissins frm fssil fuel cmbustin (as ppsed t CO2 emissins frm all surces such as industrial prcesses) are cvered. Therefre, the cap is set at rughly 6,074 millin tnnes in 2012. The cap is reduced at the schedule specified in the legislative language resulting in 2050 emissins limits f 911 millin tnnes. Nte that ur analysis shws ttal U.S. emissins t be abve business as usual in the early years f this prpsal. This is a result f the analytical assumptin that n allwance banking takes place. In reality, entities wuld bank these excess allwances and use them fr cmpliance in future years thus actual emissins wuld be belw business as usual in 2012. Grwth f uncvered emissins: The remaining 19 percent f U.S. emissins nt cvered by the cap are increased in line with EPA prjectins f business as usual fr all nn-fssil fuel GHG emissins. These annual grwth rates, while varying frm year t year, average 0.3 percent annually thrugh 2050. Other cmplementary plicies: The CDA des include any additinal cmplementary plicies that may affect GHG emissins. 6

Acknwledgements: This analysis was cmpleted by Jhn Larsen and Rbert Heilmayr at the Wrld Resurces Institute. The authrs wuld like t thank staff in the ffices f Representatives Van Hllen, Markey, Waxman and the Huse Cmmittee n Energy and Cmmerce staff as well as analysts at the Wrld Resurces Institute, the United States Envirnmental Prtectin Agency, the United States Energy Infrmatin Administratin, the Stckhlm Envirnment Institute, the Nature Cnservancy and thers fr their help in reviewing earlier versins f this analysis. Please cntact Jhn Larsen (202-729-7661) r Rbert Heilmayr (202-729-7844) with any questins. Fr mre infrmatin, g t www.wri.rg/usclimatetargets. References: Energy Infrmatin Administratin, Manufacturing Energy Cnsumptin Survey 2002, (Washingtn, DC: March 2005) Envirnmental Prtectin Agency, U.S. Inventry f Greenhuse Gas Emissins and Sinks 1990-2006, (Washingtn, DC: April 2008). Envirnmental Prtectin Agency, EPA Analysis f the Waxman-Markey The American Clean Energy and Security Act f 2009 as Reprted, (Washingtn, DC: June 2009). Envirnmental Prtectin Agency, Emissins that Fall under the Cap under S.280, (Washingtn, DC: March 2007). 7