The Economic Risks of Reducing the U.S. Eectricity Suppy CO, Contro and the U.S. Eectricity Sector PRESENTED BY Resource Data Internationa, Inc. 1320 Pear Street, Suite 300 Bouder, Coorado 80302 Phone 303-444-778X Fax 303-444-1286 PRESENTEDTO Peabody Hoding Company 701 Market Street, Suite 825 St. Louis, MO 63101-1826 Phone 314-342-7579 Fax 314-342-7562 Juh 1997
I - Tabe of Contents The Economic Risks of Reducing the U.S. Eectric Suppy CO, Contro and the U.S. Eectricity Sector & Exccotive Summu) Introduction Defining the Eectricity Suppy Gap Natura Gas and Coa NUCG3f HydVXWtiC Emerging Renewabes The Generation Gap The GDP Gap Gambing with GDP: Identifying the Risks Efficiency Risk Generation Risk Tax Poicy Risk Aowance Trading Risk Compiance Cost Risk Regiona Risks: Focus on the Heartand ~eenhouse Perspectives: What Benefit U.S. COzReduction? Concusions Ex-Sum 1 1 2 3 4 4 4 5 7 8 8 8 9 10 11 14 17 23
Tabe of Contents Energy Choices, Greenhouse Options Suppemento The Economic Risks of Reducing the U.S. Eectricity Suppy Introduction Natura Gas Nucear Power Hydroeectric Wind Geothcnna Soar Technoogies Renewabes: La&i Gas Biomass CO, Reduction Measures CO, Reduction Technoogy co, offset Program COWIVZtiO Reforestation r!sfs S- S-4 S-8.- s-10 s-11 s-14 s-17 S-18 s-19 s-22 s-22 S-23 S-23 S-24
The Economic Risks of Reducing the U.S. Eectricity Suppy CO, Contro and the U.S. Eectricity Sector ~ EXECUTIVE SUMMARY In response to internationa efforts to address perceived goba cimate change impacts, the United States has expressed comn$nent to the goa of reducing carbon dio.ddc ccoz)-) emissions to 1990 eves, or ower. To that end, the Department of Energy and the Environmenta Protection Agency have formed an Interagency Anaytica Team ( ;AT ) to work with outside economists in determining the impacts associated with various proposas for emission reductions, timetabes, and mechanisms for attaining reductions.,. This study focuses on the U.S. eectricity sector and,identifies the risks that woud be posed to the ~_~ economy by reducing CO2 emissions to 1990 eves in that sector. These risks are quite great and woud provide no tangibe benefit, since the nations with the fastest growing CO2 emissions wi be exempt from any treaty that may be signed in Kyoto, Japan ater this year. Specific tindings incude: Cumnt CO* Contro Proposas wi put the U.S. Econonw at Risk Growth in the U.S. economy is tied to growth in eectricity suppy, with current eectxicity-to- Gross Domestic Product ( ;GDp :) ratios at 1.34% growth in eectricity associated with each 1% growth in GDP; Reducing CO, to 1990 eves wi imit the annua growth rate in the suppy of eecticity between 1995 to 2015 to 0.83%, down from 1.45% under the Deparhnent of Energy s projected business-as-usua scenario. Neither natura gas nor CO, neutm generating resouces wi be abe to offset this suppy restriction; Therefore, up to $1.314 hiion, or 14% of GDP, wi be at risk in 2010 and up to $16823 m cumuativey from 2005 to 2015.
Proposed CO> Emission Trading Proposas arc not a Panacea. The Cinton Administration is using the success of the acid rain sufu dioxide CSO;) trading program to suggest that CO, trading wi imit compiance costs. However, the two programs differ fimdamentay;. Whie the EPA distributes SO, emission aocations at no cost, the Administration proposes to auction CO? aocations. Such an auction woud mimic the effects of a carbon tax, with the federa government coecting at east $133 biion annuay from a sectors and $50 biion from the eectricity sector aone. The idea that recycing of these revenues wi counterbaance the economic consequences of both the tax and the costs of compiance is an unproven presumption;. The success of SO, trading ies in the abiity of power pants to switch from high wtiu to ow sufur coa sources. Because ow sufur coa is now generay cheaper than high sufur coa, over~ompiance with the acid rain program often comes as a windfa. There are no ow carbon coa sources, and natura gas is a higher cost fue aternative. CO> Stabiization wi Disproportionatey Impact the U.S. Interior The Eastern and Western Coasta regions of the country have greater BCC~SS to hydroeectric, nucear, natura gas, and renewabe energy resources than the Interior regions and therefore generate eectricity that is ess carbon-intensive than the interior. Where the Interior regions reied on coa for 72% of their eectricity generation in 1995, the Coasta regions reied on coa for ony 35%;. The economies of the Interior regions are more eectriciq-intensiw than the economies of the Coasta regions. In 1995, the Interior regions consumed 0.51 terrawatthours of eectricity per biion doars of Gross State Product (%%GSP ), compared to 0.38 twx/gsp for the Coasta regions; Therefore, because the Interior regions rey on more carbon-intensive energy resources for eectricity and require more of this carbon-intensive eectricity per unit of GSP than the Coasta regions, the Interior regions wi bear the brunt of any CO, stabiization effort. There are rishfdi erencer becee the carbon confenb ai bituminou and rub~bihiminour COO/I.nd ignite. butmere ore inrignificantin doho to dw differanfiir.
U.S. Efforts to Reduce COT wi have Diminish&z Returns The U.S. emitted 23% of goba CO, emissions in 1995, but is projected to emit ony 19% by 2015 under a business-as-usua scenario; China and other non-oecd Asian nations emitted 23% of goba CO, emissions in 1995, but are projected to emit 33% by 2015 under a business-as-usua scenario; Ony the Annex I nations (incuding the U.S. and OECD, as we as certain Eastern European counties) wi be required to contro CO? emissions under the Kyoto treaty. whie China and a other non-oecd nations wi be exempt. Thus, cwn if the OECD reduces its carbon emissions by 916 miion metric tonnes ( ;mmt ) by 2.015 to meet 1990 eves, the non-oecd nations w-i sti increase emissions by 2,360 mmt.