CRS Report for Congress
Prepared for Members and Committees of Congress
Climate Change: Costs and Benefits of the
Cap- and- Trade Provisions of H. R. 2454
Larry Parker
Specialist in Energy and Environmental Policy
Brent D. Yacobucci
Specialist in Energy and Environmental Policy
September 14, 2009
Congressional Research Service
7- 5700
www. crs. gov
R40809
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service
Summary
This report examines seven studies that project the costs of H. R. 2454 to 2030 or beyond. It is
difficult ( and some would consider it unwise) to project costs up to the year 2030, much less
beyond. The already tenuous assumption that current regulatory standards will remain constant
becomes more unrealistic as time goes forward, and other unforeseen events ( such as
technological breakthroughs) loom as critical issues which cannot be modeled. Hence, long- term
cost projections are at best speculative, and should be viewed with attentive skepticism. The
finer and more detailed the estimate presented, the greater the skepticism should be. In the words
of the late Dr. Lincoln Moses, the first Administrator of the Energy Information Administration:
“ There are no facts about the future.”
But if models cannot reliably predict the future, they can indicate the sensitivity of a program’s
provisions to varying economic, technological, and behavioral assumptions that may assist
policymakers in designing a greenhouse gas reduction strategy. The various cases examined here
do provide some important insights on the costs and benefits of H. R. 2454 and its many
provisions.
• If enacted, the ultimate cost of H. R. 2454 would be determined by the response
of the economy to the technological challenges presented by the bill.
• The allocation of allowance value under H. R. 2454 will determine who
ultimately bears the cost of the program.
• The cases generally indicate that the availability of offsets ( particularly
international offsets) is potentially the key factor in determining the cost of H. R.
2454.
• The interplay between nuclear power, renewables, natural gas, and coal- fired
capacity with carbon capture and storage technology among the cases emphasizes
the need for a low- carbon source of electric generating capacity in the mid- to
long- term. A considerable amount of low- carbon generation will have to be built
under H. R. 2454 in order to meet the emission reduction requirement.
• Attempts to estimate household effects ( or other fine- grained analyses) are
fraught with numerous difficulties that reflect more on the philosophies and
assumptions of the cases reviewed than on any credible future effect.
Finally, H. R. 2454’ s climate- related environmental benefit should be considered in a global
context and the desire to engage the developing world in the reduction effort. When the United
States and other developed countries ratified the 1992 United Nations Framework Convention on
Climate Change ( UNFCCC), they agreed both to reduce their own emissions to help stabilize
atmospheric concentrations of greenhouse gases and to take the lead in reducing greenhouse
gases. This global scope raises two issues for H. R. 2454: ( 1) whether the bill’s greenhouse gas
reduction program and other provisions would be considered sufficiently credible by developing
countries so that schemes for including them in future international agreements become more
likely, and ( 2) whether the bill’s reductions meet U. S. commitments to stabilization of
atmospheric greenhouse gas concentrations under the UNFCCC, and whether those reductions
occur in a timely fashion so that global concentrations are stabilized at an acceptable level.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service
Contents
Background ............................................................................................................................... 1
Overview of the Major Cap- and- Trade Provisions of H. R. 2454 .................................................. 4
Emission Allowance Allocation............................................................................................. 5
Price Control........................................................................................................................ 7
Additional Provisions............................................................................................................ 8
Earlier Versions of the Bill .................................................................................................. 10
Introduction: Models Cannot Reliably Predict the Future Costs of a Climate Change
Program........................................................................................................................ ........ 11
Lessons from SO2 Cap and Trade Program.......................................................................... 11
An Illustrative Example from Analyses of H. R. 2454 .......................................................... 13
Likelihood for More Noise in Greenhouse Gas Reduction Cost Estimates ................................. 17
Complexity of the Problem ................................................................................................. 17
Flexibility of Cap- and- Trade Program................................................................................. 18
Importance of Technology to Future Results........................................................................ 18
Increasing Problems with Ceteris Paribus Analysis ............................................................. 19
Changing Reference Cases By Changing Laws.............................................................. 19
Changing Reference Cases By Changing Regulation ..................................................... 20
Measuring the Noise: A Web of Cost Measures ......................................................................... 22
Three Perspectives: Getting Out of the Noise ...................................................................... 25
Results for H. R. 2454................................................................................................................ 29
Impact on Greenhouse Gas Emissions ................................................................................. 29
Impact on Non- Greenhouse Gas Emissions ......................................................................... 32
Impact on GDP Per Capita .................................................................................................. 33
Allowance Price Estimates .................................................................................................. 39
Allowance Value Estimates ................................................................................................. 43
Effects of Key Design Elements in H. R. 2454 ..................................................................... 46
Availability of Offsets ................................................................................................... 46
Impact of Banking ........................................................................................................ 51
Impact of Strategic Reserve Auction.............................................................................. 51
Technology Issues ..................................................................................................................... 52
Availability of Electric Generating Technology ................................................................... 52
Current Technologies .................................................................................................... 53
Emerging Technologies ................................................................................................. 55
Future Technologies ...................................................................................................... 56
Effectiveness of Research, Development, Demonstration, and Deployment Efforts.............. 57
Developing Electricity Technologies ............................................................................. 58
Vehicle Technology....................................................................................................... 60
Effectiveness of Economic and Regulatory Incentives on Reducing Energy Demand........... 60
Economic Issues ....................................................................................................................... 64
Importance of Allowance Value Distribution ....................................................................... 64
Impact on Energy Prices and Expenditures .......................................................................... 68
Impact on Residential Electricity Bills: State- Level Attempts ........................................ 69
Impact on Energy Prices................................................................................................ 73
Impact on Households................................................................................................... 76
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service
Impact on Industry and Carbon Leakage........................................................................ 82
Ecological Issues................................................................................................................. 86
Climate Change Benefits............................................................................................... 86
Non- Climate Change Air Quality Benefits..................................................................... 93
Conclusion..................................................................................................................... .......... 93
Figures
Figure 1. Simplified Emission Allowance Distribution— 2016..................................................... 6
Figure 2. Simplified Emission Allowance Distribution— 2030..................................................... 6
Figure 3. Changes in EIA’s Annual Energy Outlook ( AEO) Reference Case Projections
for Major Economic Indicators............................................................................................... 16
Figure 4. Predicted Impacts of Carbon Abatement on the U. S. Economy ( 162 Estimates
from 16 Models) .................................................................................................................... 24
Figure 5. Total Estimated U. S. Greenhouse Gas Emissions Under H. R. 2454............................. 30
Figure 6. Total Estimated U. S. Greenhouse Gas Emissions Under H. R. 2454, by Case............... 31
Figure 7. GDP per Capita ( 2005$) Under H. R. 2454.................................................................. 34
Figure 8. GDP per Capita ( 2005$) Under H. R. 2454, by Case.................................................... 35
Figure 9. Percentage Change in GDP per Capita Under H. R. 2454 Relative to the
Reference Case ...................................................................................................................... 37
Figure 10. Percentage Change in GDP per Capita Under H. R. 2454 Relative to the
Reference Case, by Case ........................................................................................................ 38
Figure 11. Illustration of Different Discount Rates..................................................................... 40
Figure 12. Projected Allowance Prices Under H. R. 2454 ........................................................... 41
Figure 13. Projected Allowance Prices Under H. R. 2454, by Case ............................................. 42
Figure 14. Estimated Allowance Value Using the EPA/ IGEM Model ......................................... 46
Figure 15. Estimated Offset Usage Under H. R. 2454................................................................. 48
Figure 16. Estimated Offset Usage Under H. R. 2454, by Case................................................... 50
Figure 17. Fossil Energy Consumption Impacts from H. R. 2454................................................ 62
Figure 18. Emissions Impacts from Reduced Fossil Energy Use ................................................ 63
Figure 19. Compliance Cost vs. Value of Allowance Pool – EPA/ IGEM Model ......................... 66
Figure 20. Required Abatement vs. Total Allowable Emissions ( Cap) – EPA/ IGEM
Model ............................................................................................................................... .... 66
Figure 21. Estimated Increase ( or Decrease) in Monthly Residential Electric Bills..................... 72
Figure 22. Household Size ........................................................................................................ 79
Figure 23. Industrial Impacts in the H. R. 2454 Basic Case, 2012- 2030 ...................................... 85
Figure 24. Global Mean Surface Air- Temperature Increase in Six Scenarios Using the
MIT IGSM........................................................................................................................... . 92
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service
Tables
Table 1. Representative Sample of 1990 Estimates of Annual Compliance Cost for SO2
Cap- and- Trade Program......................................................................................................... 13
Table 2. Reference Case and H. R. 2454 Analyses for 2050 ........................................................ 14
Table 3. Influence of Climate Change Perspectives on Policy Parameters .................................. 26
Table 4. General Perspective of ACCF/ NAM- High Cost and EIA- High Technology
Assumptions .......................................................................................................................... 27
Table 5. Selected Results from EIA’s “ High Technology” and ACCF- NAM’s “ High Cost”
Cases ............................................................................................................................... ..... 28
Table 6. Estimated Emissions of Conventional Air Pollutants from Electric Utilities in
2025 ............................................................................................................................... ...... 33
Table 7. Allocation of Estimated Annual Allowance Value in Selected Years Under H. R.
2454 Using Allowance Prices from EPA/ IGEM Model ........................................................... 44
Table 8. Effect of Offset Limitations on Allowance Prices ......................................................... 47
Table 9. Projections of Construction of Generating Capacity to 2030......................................... 54
Table 10. Assumptions/ Results about the Availability of CCS.................................................... 56
Table 11. Estimated Incremental Annual Combined Public and Private Funding Needs to
Achieve EPRI’s Full Portfolio................................................................................................ 58
Table 12. Total Public Funding Needs for 2007 CURC- EPRI Clean Coal Technology
Roadmap over 18 Years ( 2008- 2025)...................................................................................... 59
Table 13. Electric Generating Impacts From H. R. 2454 ............................................................. 61
Table 14. Selected Estimates of Natural Gas Rate Impacts from H. R. 2454................................ 74
Table 15. Selected Estimates of Gasoline Price Impacts from H. R. 2454.................................... 75
Table 16. Selected Electricity Rate Impacts of H. R. 2454 .......................................................... 76
Table 17. Estimated 2020 Household Effects Under H. R. 2454.................................................. 81
Table 18. Estimated 2020 Household Effects Under H. R. 2454 ( Adjusted by CRS) ................... 82
Table 19. Matrix of Climate Risks ............................................................................................. 88
Table 20. The Stern Review Estimates of Social Cost of Carbon for Three Emissions
Paths.......................................................................................................................... ........... 89
Contacts
Author Contact Information ...................................................................................................... 95
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 1
Background
As Congress continues the debate on an appropriate response to the climate change issue,
multiple bills have been introduced that would require reductions in greenhouse gas ( GHG)
emissions. Of these, H. R. 2454, ( the American Clean Energy and Security Act of 2009) has
received particular attention. Introduced by Representatives Waxman and Markey, H. R. 2454
passed the House of Representatives on June 26, 2009. Several analyses have been done on the
impact of the cap- and- trade provisions, and as of September 2009, seven studies had been
released. They are presented below in no particular order.
Environmental Protection Agency: A comprehensive analysis has been conducted by the U. S.
Environmental Protection Agency ( EPA). The report is entitled: EPA Analysis of the American
Clean Energy and Security Act of 2009: H. R. 2454 in the 111th Congress ( June 23, 2009). 1
Beyond a “ core” analysis of H. R. 2454, the report employs a suite of models and reference cases,
along with some useful sensitivity analyses. This report will focus on cases from three of the
models.
• The first model is ADAGE: a computable general equilibrium ( CGE) model
developed by RTI International. 2 The “ core” analysis case employing the
ADAGE model is designated EPA/ ADAGE.
• The second model is IGEM: a CGE model developed by Dale Jorgenson
Associates. 3 The “ core” analysis case employing the IGEM model is designated
EPA/ IGEM.
• The third model is IPM: a dynamic, deterministic linear programming model of
the U. S. electric power sector developed by ICF Resources. The case employing
the IPM model is designated EPA/ IPM in this report. 4
Energy Information Administration: A second comprehensive analysis has been conducted by
the Energy Information Administration ( EIA). The report is entitled Energy Market and
Economic Impacts of H. R. 2454, the American Clean Energy and Security Act of 2009 ( August 4,
2009). 5 The analysis employs EIA’s NEMS model: a macroeconomic forecasting model with
extensive energy technology detail. 6 In addition to conducting a “ basic case” 7 analysis of H. R.
2454 using its updated 2009 Annual Energy Outlook ( AEO) Reference, EIA also conducts some
useful sensitivity analyses that focus on the upside risk of decreased offset supply ( and thus,
1 The EPA report and supporting model runs are available at http:// www. epa. gov/ climatechange/ economics/
economicanalyses. html.
2 For more information on the ADAGE model, see http:// www. rti. org/ adage.
3 For more information on the IGEM model, see http:// www. economics. harvard. edu/ faculty/ jorgenson/ files/
IGEM% 20Documentation. pdf.
4 For more information on the IPM model, see http:// www. epa. gov/ airmarkets/ progsregs/ epa- ipm/ index. html.
5 EIA’s report and supporting model runs are available at http:// www. eia. doe. gov/ oiaf/ servicept/ hr2454/ index. html?
featureclicked= 2&
6 For more on the NEMS model, see http:// www. eia. doe. gov/ oiaf/ aeo/ overview/ index. html.
7 The EIA “ Basic Case” should not be confused with the “ business- as- usual” projection ( i. e., the projection in the
absence of controls established by the bill). The “ business- as- usual” case is also referred to as the “ baseline,”
“ basecase” or “ reference case.” This report uses the term “ reference case.”
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 2
increased allowance prices) under H. R. 2454. The basic case H. R. 2454 analysis is designated
EIA/ NEMS in this report. 8
National Black Chamber of Commerce: A third analysis has been conducted for the National
Black Chamber of Commerce by Charles River Associates ( CRA) International. The report is
entitled Impact on the Economy of the American Clean Energy and Security Act of 2009 ( H. R.
2454) ( May 2009). 9 The analysis employs CRA’s MRN- NEEM macroeconomic model with
extensive electric power sector detail. 10 CRA conducted three scenarios: reference, 11 high, and
low. The “ reference” scenario analysis is designated NBCC/ CRA. In cases where the reference
scenario projections were not presented, the low or high case scenario figures ( designated
NBCC/ CRA/ LOW and NBCC/ CRA/ HIGH) are used instead.
Heritage Foundation: A fourth analysis has been conducted by The Heritage Foundation, based
on projections from the Global Insight model— a macroeconomic model with energy sector
modeling. Focused on the economic impacts of H. R. 2454, the results were first disseminated in a
series of “ WebMemos” as H. R. 2454 was developed, then released in a report. 12 The analysis is
limited to carbon dioxide emission reductions from the energy sector and is designed as HF/ GI in
this review.
Congressional Budget Office: A fifth series of legislative analyses have been conducted by the
Congressional Budget Office ( CBO) on various aspects of H. R. 2454 during its movement
through the House of Representatives. 13 These analyses address budgetary, household, and other
impacts of the bill, and are incorporated in this report.
American Council for Capital Formation/ National Association of Manufacturers: A sixth
analysis has been conducted for the American Council for Capital Formation ( ACCF) and
National Association of Manufacturers ( NAM) by Science Applications International
Corporation. The report is entitled Analysis of The Waxman- Markey Bill “ The American Clean
Energy and Security Act of 2009” ( H. R. 2454) Using The National Energy Modeling System
( NEMS). 14 The report states that it includes assumptions about renewable portfolio standards and
energy efficiency standards. 15 Employing EIA’s NEMS model, the ACCF/ NAM study presents a
8 EIA notes in its report that while it can place a probability on its various scenarios, “ both theory and common sense
suggest that cases that reflect an unbroken chain of either failures or successes in a series of independent factors are
inherently less likely than cases that do not assume that every thing goes either wrong or right.” ( p. ix).
9 CRA International, Impact on the Economy of the American Clean Energy and Security Act of 2009 ( H. R. 2454),
prepared for the National Black Chamber of Commerce ( May 2009).
10 For more information on the MRN- NEEM model, see http:// www. crai. com/ uploadedFiles/
RELATING_ MATERIALS/ Publications/ BC/ Energy_ and_ Environment/ files/ MRN-NEEM%
20Integrated% 20Model% 20for% 20Analysis% 20of% 20US% 20Greenhouse% 20Gas% 20Policies. pdf.
11 While the CRA study uses the term “ reference” to refer to their middle policy scenario, this report uses the term
“ reference case” in general to refer to the “ business- as- usual” scenario.
12 The Heritage Center for Data Analysis, The Economic Consequences of Waxman- Markey: An Analysis of the
American Clean Energy and Security Act of 2009 ( August 5, 2009).
13 CBO’s various studies on H. R. 2454 and related issues are available on its website at http:// www. cbo. gov/
publications/ collections/ collections. cfm? collect= 9.
14 Science Applications International Corporation ( SAIC), Analysis of The Waxman- Markey Bill “ The American Clean
Energy and Security Act of 2009” ( H. R. 2454) Using The National Energy Modeling System ( NEMS), A report by the
American Council for Capital Formation and the National Association of Manufacturers ( August, 2009).
15 The report also states that its results include the impact of low carbon fuel standards— which are not included in H. R.
2454 as introduced, reported by any House Committee, or passed by the House.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 3
“ low cost” case with several restrictions on technology availability, and is designed as ACCF-NAM/
NEMS in this review. The analysis also includes a “ high cost” sensitivity case that uses
some of the most constrained and high- cost assumptions of any of the analyses presented here,
and is discussed here as appropriate
Massachusetts Institute of Technology: A seventh analysis has been conducted by the
Massachusetts Institute of Technology ( MIT) Joint Program on the Science and Policy of Global
Change. The report is an appendix to a more comprehensive analysis of cap- and- trade programs
released in April 2009.16 The appendix is titled: Appendix C: Analysis of the Waxman- Markey
American Clean Energy and Security Act of 2009 ( H. R. 2454). The appendix employs MIT’s
EPPA CGE model and presents sensitivity analyses of H. R. 2454’ s offset provisions. The case
that incorporates a gradual increase in available offsets ( entitled “ H. R. 2454 with Medium
Offsets”) is designated MIT/ EPPA in this report. 17
Beyond these more comprehensive studies of H. R. 2454, there have been numerous more focused
efforts, generally targeting specific economic issues. These reports are generally presented in
short presentation formats with limited documentation. Most have to do with electricity price
impacts and are discussed at an appropriate time later in the report.
Beyond specific caveats each of these analyses has, there are some more general caveats the
reader should keep in mind when comparing them to each other:
First, the different studies analyze the impact of H. R. 2454 at different stages of its
development. The NBCC/ CRA analysis is of the bill as introduced in April 2009. The EPA
analyses is of the bill as reported by the Energy and Commerce Committee in May 2009. The
EIA, ACCF/ NAM, and MIT analyses are of the bill as passed by the House. The version analyzed
by the Heritage Foundation depends on the date of the WebMemo or other presentation of the
results, although its allowance allocation scheme is generally based on a memorandum by
Representatives Waxman and Markey dated May 14, 2009.18 Likewise, analyses by CBO reflect
the legislative point in the debate where the analysis was done. At each stage of the legislative
process, changes were made to the bill that affect the compliance costs and the distribution of
allowance value.
Second, H. R. 2454 is a comprehensive energy and environmental bill ( not just a cap- and- trade
bill), and the studies differ in terms of the scope of their analyses. The NBCC analysis focuses
on the cap- and- trade program ( including bonus allowances for carbon capture and storage, and
the impact of free allowance allocations on regional and U. S. welfare impacts) and the combined
renewable energy and energy efficiency standard for electricity ( RES) in Title I of the bill. The
EPA analyses include these areas, along with State Energy and Environmental Development
( SEED) accounts, and an explicit analysis of the allocation of allowances to trade- exposed,
energy- intensive industries. The EIA analysis includes the cap- and- trade program, the combined
energy efficiency and renewable energy standard for electricity, carbon capture and sequestration
provisions, and various energy efficiency provisions ( e. g., lighting standards). The Heritage
16 Sergey Paltsev, et al., The Cost of Climate Policy in the United States, MIT Joint Program on the Science and Policy
of Global Change, Report No. 173 ( April 2009).
17 The H. R. 2454 with medium offsets scenario is summarized on p. C19. For more information on the EPPA model,
see http:// web. mit. edu/ globalchange/ www/ eppa. html.
18 Representatives Henry A. Waxman and Edward J. Markey, Proposed Allowance Allocation ( May 14, 2009).
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 4
Foundation study is limited to carbon dioxide emissions from the energy sector; other sectors are
not incorporated in their analysis. The ACCF- NAM analysis discusses the impact of H. R. 2454 in
terms of the cap- and- trade provisions, renewable portfolio standards, energy efficiency standards,
and supposed low- carbon fuel standards. The MIT analysis includes the combined renewable
energy and energy efficiency standard for electricity in Title I along with the cap- and- trade
provisions in Title III.
Third, the studies examined in this report are published with different levels of documentation,
making comparative analysis difficult. Each study’s sponsor has selected features or impacts it is
particularly interested in highlighting, and presentations of projections that emphasize those
points. In order to increase the comparability of the various cases examined here, CRS has
converted all publicly available data presented by the cases to 2005 dollars ( where appropriate)
and interpolated missing data where possible. Likewise, where studies have stated they used
specific projections as a reference case ( such as EIA’s Annual Energy Outlook 2009 projections),
CRS has assumed those assumptions have not been altered except as specifically stated by the
study. In some cases, the authors of the reports were contacted in order to clarify assumptions or
results. Finally, CRS has attempted to present projections in the most comparable fashion
possible.
Fourth, a special note with respect to the RES is appropriate. As noted above, seven cases
( EPA/ ADAGE, EPA/ IGEM, NBCC/ CRA, EIA/ NEMS, ACCF- NAM/ NEMS, CBO, and
MIT/ EPPA) clearly included the RES in their analyses. EPA and CRA do not highlight any
significant cost increases directly resulting from implementing RES, while EIA states that no
additional costs are entailed by compliance with the RES as sufficient renewable energy is
incorporated in the baseline. Likewise, CBO finds that the RES requirement is not binding.
ACCF- NAM/ NEMS only includes it as one reason for increasing energy prices. However, the
MIT/ EPPA case finds the RES raises household costs, particularly in early years when the RES is
increasing rapidly. MIT found the effect moderates in later years, but the overall losses in the
early years depress the level of savings and investment that continues to affect the economy in
later years. 19
Overview of the Major Cap- and- Trade Provisions of
H. R. 245420
As passed by the House, Title III of H. R. 2454 would amend the Clean Air Act to set up a cap-and-
trade system that is designed to reduce greenhouse gas ( GHG) emissions from covered
entities 17% below 2005 levels by 2020 and 83% below 2005 levels by 2050. Covered entities
are phased into the program over a four- year period from 2012 to 2016. When the phase- in
schedule is complete, the cap will apply to entities that account for 84.5% of U. S. total GHG
emissions. By including other provisions contained in the legislation ( e. g., a separate cap- and-trade
program for hydrofluorocarbons ( HFCs)), the World Resources Institute ( WRI) estimates
that the overall potential net reductions in GHG emissions from the economy as a whole ( as
19 Paltsev, et al. p. C10.
20 For more information on all provisions of H. R. 2454, see CRS Report R40643, Greenhouse Gas Legislation:
Summary and Analysis of H. R. 2454 as Passed by the House of Representatives , coordinated by Mark Holt and Gene
Whitney.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 5
opposed to just covered entities) from H. R. 2454 could range from 28%- 33% below 2005 levels
in 2020 and 75%- 81% in 2050.21
The market- based approach adopted by H. R. 2454 would establish an absolute cap on the
emissions from covered sectors and would allow trading of emissions permits (“ allowances”)
among covered and non- covered entities. 22 The bill achieves its broad coverage through an
upstream compliance mandate on petroleum, most fluorinated gas producers and importers, a
downstream mandate on electric generators and industrial sources, and a midstream mandate on
natural gas local distribution companies ( LDCs). 23 Generally, the emissions cap would limit
greenhouse gas emissions from entities that produce or import more than 25,000 metric tons
annually ( carbon dioxide equivalent) of greenhouse gases ( or produce or import products that
when used will emit more than 25,000 metric tons of greenhouse gases).
Emission Allowance Allocation
If left unmitigated, any greenhouse gas cap- and- trade program ( as well as a carbon tax
alternative) would be regressive. In an attempt to mitigate this distributional problem, H. R. 2454
allocates a substantial percentage of the allowances available for the benefit of energy consumers
and low- income households. In some cases, these allowances are allocated at no cost to entities
such as LDCs, with the express purpose of mitigating energy cost increases; in other cases, such
as low- income assistance, the allowances are auctioned by EPA and the proceeds distributed to
eligible recipients. As the program proceeds, between 2026 and 2035, the energy cost relief, along
with other free allocations are phased out in favor of more government auctioning with most of
the proceeds returned to households on a per- capita basis. See Figure 1 and Figure 2 for a
summary of how emission allowances are distributed in 2016 and 2030, respectively.
21 John Larsen and Robert Hellmayr, Emission Reductions Under the American Clean Energy and Security Act of 2009
( World Resources Institute, May 19, 2009).
22 See “ Common Terms” box for definitions of terms in boldface.
23 Title III sets up a separate cap- and- trade program for hydrofluorocarbons ( HFCs).
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 6
Figure 1. Simplified Emission Allowance Distribution— 2016
Int'l Adapt., 1%
Int'l Clean Tech., 1%
Dom. Wildlife & Res.,
0.39%
Auction,
16.5%
Deficit Reduction,
0.2%
Domestic Adapt.,
0.9%
Worker Assistance,
0.5%
Low- Income
Consumers, 15%
Domestic Adapt.,
0.1%
Dom. Wildlife & Res.,
0.62%
R& D, 1.5%
Autos, 3% Int'l Deforest., 5%
Ag.& Renewables
Incentives, 0.28%
Energy Eff.
( States), 7.1%
Small Refiners,
0.25%
CCS, 1.75%
Oil Refiners, 2%
Trade- Exposed
Industries, 13.4%
Heating oil
Consumers,
1.5%
Natural Gas
LDCs, 9%
Small Electric
LDCs, 0.5%
Long- Term Contracts,
1.5% Merchant Coal, 3.5%
Electric LDCs, 30%
Source: Prepared by CRS
Figure 2. Simplified Emission Allowance Distribution— 2030
Auction,
R& D, 1.5% 65.3%
Domestic
Adaptation, 3.9%
Dom. Wildlife
& Res., 1.54%
Int'l Clean Tech., 4%
Auctioned in Prior
Years, 17%
Consumer Rebate, 30%
Dom. Wildlife & Res.,
2.46%
Worker Assistance, 1%
Low- Income
Consumers, 15%
Domestic Adapt., 0.1%
Int'l Adapt., 4%
Trade- Exposed
Industries, 6.7%
CCS, 5%
Energy Eff.
( States), 5%
Int'l Deforestation,
3%
Source: Prepared by CRS
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 7
H. R. 2454’ s allocation scheme also attempts to smooth the economy’s transition to a less carbon-intensive
future through free allowance allocations to energy- intensive, trade- exposed industries,
merchant coal- fired electric generators, and petroleum refiners. Bonus allotments of allowances
are allocated for emission reductions achieved by carbon capture and storage technology. Except
for carbon capture and storage, these free allocations of allowances are phased out by the early to
mid- 2030s.
Finally, H. R. 2454’ s allocation scheme attempts to address greenhouse gas emissions by
providing allowances to help prevent further tropical deforestation and to fund climate adaptation
activities.
Price Control
Because allowance prices can be volatile, cap- and- trade bills generally provide some mechanisms
to address either potential price fluctuations, or allowance prices more generally. H. R. 2454 does
not have a “ safety valve”— an alternative compliance option that permits covered entities to pay
an excess emissions fee instead of reducing emissions. Instead, the legislation addresses cost
control through five main mechanisms: ( 1) unlimited banking and limited borrowing, ( 2) a two-year
compliance period, ( 3) a strategic reserve auction with a pool of allowances available at a
minimum reserve price, ( 4) periodic auctions with a reserve price, and ( 5) broad limits on the use
of offsets.
With respect to allowance price volatility, the bill includes two design elements that may dampen
volatility to some degree. First, the bill allows entities to borrow ( without interest) allowances
from the year immediately following the current year, effectively creating a rolling two- year
compliance period. Second, EPA is directed to hold strategic reserve auctions. A strategic reserve
of allowances borrowed from future years is auctioned off in the early years of the program. This
increases the availability of allowances early, but maintains the overall emissions cap. The
strategic reserve auction would include a reserve price: $ 28/ allowance in 2012 that would
increase annually in 2013 and 2014. Starting in 2015, the reserve price would be 60% above the
36- month rolling average allowance price.
Regular auctions mandated by the bill also have a reserve price: $ 10 ( in 2009 dollars) in 2012,
increasing at 5% real annually. An auction reserve price would help create an allowance price
floor, and may help dampen allowance price spikes. The auctions, along with the other
mechanisms listed above, attempt to bracket volatility. Whether they would work is subject to
debate, particularly with respect to short- term price volatility.
As will be discussed further later in the report, with respect to overall cost control, analysis
indicates that an important cost control mechanism in the cap- and- trade program is the
availability of domestic and international offsets. The bill limits the availability of domestic and
international offsets to two billion tons of emissions annually— divided equally between domestic
and international pools. According to analyses done by EPA, EIA, the Congressional Budget
Office, and CRA International, the availability of these offsets reduces projected allowance prices
under the program by half or more. 24
24 U. S. Environmental Protection Agency, EPA Preliminary Analysis of the Waxman- Markey Discussion Draft: The
American Clean Energy and Security Act of 2009 in the 111th Congress ( April 20, 2009); Energy Information
Administration, Energy Market and Economic Impacts of H. R. 2454, the American Clean Energy and Security Act of
( continued...)
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 8
Another concern with respect to a cap- and- trade program is potential allowance market abuse and
manipulation. The size of a U. S. carbon market could be in the hundreds of billions of dollars,
and is likely to involve all of the financial instruments, particularly derivatives, that any other
commodity market includes. To provide oversight of the newly created carbon allowance market,
the bill has detailed provisions for Federal Energy Regulatory Commission ( FERC) oversight of
the cash allowance market, and enhanced Commodity Futures Trading Commission ( CFTC)
oversight of allowance derivatives. With respect to the latter, the bill would remove energy
commodities ( including carbon allowances) from the category of “ exempt commodity” and
require that over- the- counter transactions be cleared through a clearing house ( a standard feature
of a futures exchange). In addition the CFTC is required to establish position limits, thus setting
ceilings on the number of energy contracts that any person could hold.
Additional Provisions
Besides the two emission caps created under Title III, the bill contains other provisions in Titles
III and IV to reduce greenhouse gas emissions and potential carbon leakage. Among the most
important of these provisions are ( 1) prevention of tropical deforestation, ( 2) performance
standards for uncovered entities that emit over 10,000 metric tons annually, ( 3) discounted
international offsets after 2017; and ( 4) programs designed to reduce potential carbon leakage.
First, H. R. 2454 has a supplemental greenhouse gas reduction program that requires EPA to use
some of the allowances available under the cap- and- trade program to fund international projects
to reduce deforestation. The goal of the program is to achieve 720 million metric tons of
additional emission reductions in 2020 ( about 10% of U. S. 2005 emissions), and a total of 6
billion metric tons by 2025 ( about equal to U. S. emissions in 1990). If achieved, this would have
a significant effect on the net emission reductions achieved in the early years of the program, as
suggested by the WRI study cited earlier.
Second, as noted above, not all greenhouse gas emitting sources are covered by the Title III cap-and-
trade programs. Under other provisions of Title III, stationary sources not covered by the
Title III caps are potentially subject to greenhouse gas performance standards. WRI estimates that
standards for uncapped sources could reduce emissions from such sources by about 115 million
metric tons annually.
Third, as passed, the cap- and- trade program requires that international offsets submitted for
compliance beginning in 2018 be discounted ( i. e., it takes 1.25 offset credits to equal 1.00
allowance). Depending on the number of international offsets used for compliance after 2017, the
discount factor could add up to 375 million metric tons of reductions annually, according to WRI.
Fourth, H. R. 2454 takes two primary approaches to mitigating the potential impact of carbon
leakage on the net greenhouse gas reductions to be achieved under the bill. 25 The first is the
(... continued)
2009 ( August 4, 2009); Congressional Budget Office, Congressional Budget Office Cost Estimate: H. R. 2454,
American Clean Energy and Security Act of 2009 ( as Ordered Reported by the House Committee on Energy and
Commerce) ( June 5, 2009); and, CRA International, Impact on the Economy of the American Clean Energy and
Security Act of 2009 ( H. R. 2454), prepared for the National Black Chamber of Commerce ( May 2009).
25 For a full discussion of carbon leakage, see CRS Report R40100, “ Carbon Leakage” and Trade: Issues and
Approaches, by Larry Parker and John Blodgett.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 9
allocation of allowances at no cost to energy- intensive, trade- exposed industries, as identified
above. The second is an international reserve allowance scheme that essentially imposes a
shadow allowance requirement on importers of energy- intensive, trade- exposed products,
creating a de facto tariff. Basically, the scheme would require importers of energy- intensive
products from countries with insufficient carbon policies to submit a prescribed amount of
“ international reserve allowances,” or IRAs, for their products to gain entry into the United
States. Based on the greenhouse gas emissions generated in the production process, IRAs would
be submitted on a per- unit basis for each category of covered goods from a covered country.
Whether the international reserve allowance scheme would actually work is unclear. The daunting
administrative, informational, and analytical resources necessary to implement such a program
would create significant issues in any attempt to implement it. Likewise, it is not clear that the
World Trade Organization ( WTO) implications of the provision have been fully exposed and
accommodated.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 10
Common Terms
Allowance. A limited authorization by the government to emit 1 metric ton of carbon dioxide equivalent. Although
used generically, an allowance is technically different from a credit. A credit represents a ton of pollutant that an entity
has reduced in excess of its legal requirement. However, the terms tend to be used interchangeably, along with
others, such as permits.
Auctions. Auctions can be used in market- based pollution control schemes to allocate some, or all of the
allowances. Auctions may be used to: ( 1) ensure the liquidity of the credit trading program; and/ or ( 2) raise
( potentially considerable) revenues for various related or unrelated purposes.
Banking. The limited ability to save allowances for the future and shift the reduction requirement across time.
Cap- and- trade program. An emissions reduction program with two key elements: ( 1) an absolute limit (“ cap”) on
the emissions allowed by covered entities; and ( 2) the ability to buy and sell (“ trade”) those allowances among
covered and non- covered entities.
Coverage. Coverage is the breadth of economic sectors covered by a particular greenhouse gas reduction program,
as well as the breadth of entities within sectors.
Discount rate. See discussion on page 40.
Emissions cap. A mandated limit on how much pollutant ( or greenhouse gases) an affected entity can release to the
atmosphere. Caps can be either an absolute cap, where the amount is specified in terms of tons of emissions on an
annual basis, or a rate- based cap, where the amount of emissions produced per unit of output ( such as electricity) is
specified but not the absolute amount released. Caps may be imposed on an entity, sector, or economy- wide basis.
Greenhouse gases. The six gases recognized under the United Nations Framework Convention on Climate Change
are carbon dioxide ( CO2), methane ( CH4), nitrous oxide ( N2O), sulfur hexafluoride ( SF6), hydrofluorocarbons ( HFC),
and perfluorocarbons ( PFC). H. R. 2454 also includes nitrogen trifluoride ( NF3).
Leakage. The shift in greenhouse gas ( GHG) emissions from an area subject to regulation ( e. g., cap- and- trade
program) to an unregulated area, so reduction benefits are not obtained. This would happen, for example, if a GHG
emitting industry moved from a country with an emissions cap to a country without a cap.
Offsets. Emission credits achieved by activities not directly related to the emissions of an affected source. Examples
of offsets would include forestry and agricultural activities that absorb carbon dioxide, and reductions achieved by
entities that are not regulated by a greenhouse gas control program.
Reference case. The “ business- as- usual” projection, or “ baseline” for each case in the absence of new controls
established by new legislation or regulation.
Revenue recycling. How a program disposes of revenues from auctions, penalties, and/ or taxes. Revenue recycling
can have a significant effect on the overall cost of the program to the economy, as well as to specific sectors, regions,
or income brackets.
Sequestration. Sequestration is the process of capturing carbon dioxide from emission streams or from the
atmosphere and then storing it in such a way as to prevent its release to the atmosphere.
Earlier Versions of the Bill
There are six key changes between the cap- and- trade provisions of a draft version of the bill
circulated by its sponsors, and H. R. 2454 as introduced, as reported by the House Committee on
Energy and Commerce, and the House- passed version:
• The introduced version ( and subsequent versions) of the bill contains a less
stringent cap on emissions for covered sources in the early years of the program
compared to the initial discussion draft.
• The original discussion draft discounted domestic and international offsets by
20% ( requiring 1.25 tons of offsets to equal 1 ton of covered emissions). As
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 11
introduced, reported, and passed, only international offsets are discounted, and
only after 2017.
• The distribution of allowances was somewhat modified between the reported and
House- passed versions to include allocations for early actions, small electric
LDCs, small refineries, and other stakeholders.
• Further, the allocation for all electric LDCs was modified to prohibit any LDC
from receiving more allowances than it needs to offset increased electricity costs
resulting from the bill.
• The reported version of the bill made the International Reserve Allowance
scheme a discretionary program that could not begin before 2025. The version as
passed by the House made the implementation mandatory unless positive action
was taken by the Congress to halt it. In addition, the definition of covered goods
under the provisions was expanded from primary goods ( e. g., iron and steel) to
include other energy- intensive items, including items “ manufactured for
consumption.”
• Significant changes were made to the offset provisions from the reported version
to the version passed by the House. These include establishing a separate
program for offsets from domestic agriculture and forestry to be administered by
the U. S. Department of Agriculture, with all other offsets administered by EPA
( in earlier versions, all offsets were administered by EPA); and the establishment
of “ term offset credits” to address concerns over the permanence of some offset
projects.
Introduction: Models Cannot Reliably Predict the
Future Costs of a Climate Change Program
Lessons from SO2 Cap and Trade Program
During the Clean Air Act debate in 1990 on the Title IV sulfur dioxide ( SO2) cap- and- trade
program, CRS found it difficult to analyze the cost of the bill beyond the first 10 years ( 1990-
2000), and considered any breakdown of 2000 data on a state- by- state basis as “ not useful for any
more than illustrative purposes.” 26 As stated in 1990:
It is difficult ( and some would consider it unwise) to project costs up to the year 2000, much
less beyond. The already tenuous assumption that current regulatory standards will remain
constant becomes more unrealistic, and other unforeseen events ( such as electric utility
deregulation) loom as critical issues which can not be modeled. Hence, cost projections
beyond the year 2000 are at best speculative, and are more a function of each model’s
assumptions and structure than they are of the details of proposed legislation. Projections
this far into the future are based more on philosophy than analysis. 27 [ emphasis in
original]
26 See CRS Report 90- 63, Acid Rain Control: An Analysis of Title IV of S. 1630, by Larry Parker ( January 31, 1990),
p. 13. ( Available from the author.)
27 Ibid., p. 16.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 12
The history of resulting SO2 cap- and- trade program costs has proven illuminating. As indicated in
Table 1, the 2010 cost estimates for the SO2 cap- and- trade program made in 1990 proved to be
substantially higher than what is now estimated to be the program’s actual costs. Indeed, the EPA-ICF
low estimate— the estimate closest to the projected actual number— is both 50% higher than
the actual number, and the estimate least focused- on in the original ICF report. 28 It is interesting
that none of the analyses were willing to “ speculate” with assumptions that would have created a
2010 cost estimate lower than EPA’s then- current projection. 29
Equally interesting is that the “ best” 2000 estimate was off by almost the same 50% that the 2010
estimate was. 30 Like the 2010 estimates, the assumptions either underestimated the ingenuity and
creativity of companies in responding to the SO2 requirements, or mis- read the economics of the
cap- and- trade process. As explained below by Chestnut and Mills in 2005, the gross over-estimates
are essentially the product of the models’ failure both to fully incorporate the flexibility
that the cap- and- trade program provided participants and to explore the potential for
technological breakthroughs and enhancements:
Costs are lower than originally predicted primarily because flexibility occurred in areas that
were thought to be inflexible and technical improvements were made that were not
anticipated. Factors contributing to the lower costs included lower transportation costs for
low- sulfur coal ( attributed to railroad deregulation), productivity increases in coal production
leading to favorable prices for low- sulfur and mid- sulfur coal, cheaper than expected
installation and operation costs for smokestack scrubbers, and new boiler adaptations to
allow use of different types of coal. It appears that Title IV has worked as expected to
provide the flexibility and incentives for producers to find low- cost compliance options.
[ footnote omitted] Banking opportunities also induced early reductions in emissions for
some facilities. Harrington et al. ( 2000) compared estimates of actual costs of many large
regulatory programs to predictions of those costs made while the regulatory programs were
being developed and found a tendency for predicted costs to overstate the actual
implementation costs, especially for market- based programs such as the SO2 trading
program. They cite technological innovation and unanticipated efficiency gains as key
factors leading to lower than predicted costs. They noted that unit costs are often more
accurately predicted than total costs because predicted emission reductions are sometimes
overstated, but they report that predicted unit costs and total costs were both overstated for
Title IV. 31
28 The only 2010 national utility cost estimate mentioned in the summary of findings is for the High Case: “ Longer-term
costs reach about $ 5 billion [ 1988 dollars] per year by 2010 under both the High House and Senate cases, due to
the provisions requiring new source emissions to be offset.” The Low House and Senate cases for 2010 are not
mentioned. See EPA- ICF: ICF Resources Incorporated, Comparison of the Economic Impacts of the Acid Rain
Provisions of the Senate Bill ( S. 1630) and the House Bill ( S. 1630), Prepared for the U. S. Environmental Protection
Agency ( July 1990), p. 21.
29 The implementation of the SO2 provisions of the Clean Air Interstate Rule ( CAIR) will significantly increase the
stringency of the SO2 cap for 23 states and the District of Columbia and will likely prevent EPA from estimating actual
Title IV compliance costs in 2010 because of program interaction.
30 In its 1990 analysis, CRS concurred with the range of estimates provided by the EPA- ICF analysis for 2000. As
suggested above, CRS did not estimate the costs for 2010. See CRS Report 90- 63, Acid Rain Control: An Analysis of
Title IV of S. 1630, by Larry Parker ( January 31, 1990), p. 56. ( Available from the author.)
31 Lauraine G. Chestnut and David M. Mills, “ A fresh look at the benefits and costs of the US acid rain program,”
Journal of Environmental Management 77 ( 2005) p. 255.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 13
Table 1. Representative Sample of 1990 Estimates
of Annual Compliance Cost for SO2 Cap- and- Trade Program
( billions, 2005$)
2000 2010
EPA- ICF $ 2.7-$ 3.6 $ 3.4-$ 8.0
NCAC- Pechan $ 4.4-$ 4.6
( annual average
for 2000- 2009)
no estimate
EEI- TBSa $ 7.1-$ 8.7 $ 7.9-$ 11.2
Estimated Actual Costs
2000- 2007: Ellerman, et al.
2010: EPA
$ 1.9
( annual average
for 2000- 2007)
$ 2.2
Source: EPA- ICF: ICF Resources Incorporated, Comparison of the Economic Impacts of the Acid Rain Provisions of
the Senate Bill ( S. 1630) and the House Bill ( S. 1630), Prepared for the U. S. Environmental Protection Agency ( July
1990); Pechan: E. H. Pechan & Associates, Clean Air Act Amendment Costs and Economic Effects: A Review of Published
Studies, Prepared for the National Clean Air Coalition, National Clean Air Fund ( October 1990); TBS: Temple,
Barker & Sloane, Inc., Economic Evaluation of H. R. 3030/ S. 1490 “ Clean Air Act Amendments of 1989”: Title V, The
Acid Rain Control Program, Prepared for the Edison Electric Institute ( August 30, 1989). Estimated 2000- 2007
actual cost from A. Denny Ellerman, Paul L. Joskow, and David Harrison, Jr., Emissions Trading in the U. S.:
Experience, Lessons, and Considerations for Greenhouse Gases, prepared for the Pew Center on Global Climate
Change ( November 2007) p. 15. Estimated 2010 actual cost from: EPA, Acid Rain Program Benefits Exceed
Expectations, Figure 4, p. 3. Available at http:// www. epa. gov/ airmarkets/ cap- trade/ docs/ benefits. pdf. All estimates
converted to 2005 dollars using the GDP implicit price deflator.
a. Analysis of original Administration bill. EPA estimated that the final bill was $ 400 million ( 1988 dollars)
annually more expensive than the original proposal. See EPA, Office of Air and Radiation, Clean Air
Amendments: Cost Comparison ( January 23, 1990).
An Illustrative Example from Analyses of H. R. 2454
There is no reason to believe that cost estimates for greenhouse gas reductions will be any
more accurate than the 1990 SO2 estimates; indeed, they are likely to be less reliable. This is
not to say that they will be too high; they may be too low. To illustrate, CRS examines some
results of the modeling efforts with respect to the costs of H. R. 2454. To frame this illustration,
we focus on the three primary drivers of greenhouse gas emissions: ( 1) population, ( 2) incomes
( measured as per capita gross domestic product [ GDP]), and ( 3) intensity of greenhouse gas
emissions relative to economic activities ( measured as metric tons of greenhouse gas emissions
per million dollars of GDP). As shown in the following formula, a country’s annual greenhouse
gas emissions are the product of these three drivers:
( Population) x ( Per Capita GDP) x ( Intensityghg) = Emissionsghg
This is the relationship for a given point in time; over time, any effort to change emissions alters
the exponential rates of change of these variables. This means that the rates of change of the three
left- hand variables, measured in percentage of annual change, sum to the rate of change of the
right- hand variable, emissions.
Using the three drivers, Table 2 provides the essential assumptions from four analyses of H. R.
2454 for the year 2050. The Heritage Foundation analysis is not included because it covered only
the energy sector and only until 2035; the EIA and ACCF/ NAM analyses are not included
because they only project to 2030. Examining the “ business- as- usual” reference cases, a range of
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 14
assumptions are employed by the models. As suggested by the formula above, the differing
assumptions result in different 2050 baseline GHG emissions: 8.4 billion metric tons for
EPA/ ADAGE, 8.4 billion metric tons for EPA/ IGEM, 9.7 billion metric tons for NBCC/ CRA, and
10.1 billion for MIT/ EPPA— a 20% difference from the lowest to the highest. Interestingly, major
sources of disagreement in the reference cases include per capita GDP and population
projections— two variables that are generally not the focus of greenhouse gas reduction strategies.
Table 2. Reference Case and H. R. 2454 Analyses for 2050
Model
Population
( millions)
Difference
from lowest
to highest
model
GDP per
capita
( 2005$)
Difference
from
lowest
to highest
model
GHG
Intensity
( GHG/
GDP) a
Difference
from lowest
to highest
model
Reference Case Scenario
EPA/ ADAGE 400 $ 88,531 237
EPA/ IGEM 446 $ 80,207 234
NBCC/ CRA 432 $ 87,921 255
MIT/ EPPA 440
12%
$ 87,355
10%
263
12%
H. R. 2454 Scenario
EPA/ ADAGE 400 $ 87,382 132
EPA/ IGEM 446 $ 78,563 146
NBCC/ CRA 432 $ 86,602 115
MIT/ EPPA 440
12%
$ 85,759
11%
129
27%
Source: ADAGE and IGEM model assumptions from the “ Data Annex” available on the EPA website at
http:// www. epa. gov/ climatechange/ economics/ economicanalyses. html. The NBCC/ CRA model assumptions are
based on Figure 3.20 and Table B- 4 of the report and EIA’s AEO 2009 Early Release. The MIT model
assumptions are based on the table on p. C- 19 of the report. All estimates converted to 2005 dollars using the
GDP implicit price deflator.
a. Measured in metric tons of greenhouse gas emissions per million dollars of GDP.
Moving to the H. R. 2454 scenario as modeled, the variability in the results widens for two of the
three drivers ( the 2050 reference case population remains constant in the three models), but the
range of projected 2050 greenhouse gas emissions estimates narrows: 4.6 billion metric tons for
EPA/ ADAGE, 5.1 billion metric tons EPA/ IGEM, 4.3 billion metric tons for NBCC/ CRA, and
4.8 billion metric tons for MIT/ EPPA— a 19% difference. The models’ assumptions about the
flexibility and responsiveness of the U. S. economy resulted in some interesting reversals in 2050
between the base case and H. R. 2454 scenario that narrow this range: ( 1) the CRA and MIT
models, which have the highest GHG intensity assumption in the reference case, have the lowest
GHG intensity under H. R. 2454. ( 2) In contrast, the EPA/ IGEM model, which has the lowest
GHG intensity assumption in its reference cases, has the highest GHG intensity result under H. R.
2454.
Because of these different views of the economy, the economic impact of the bill is almost lost in
the differences in the models’ reference case assumptions. As indicated in Table 2, the
EPA/ ADAGE, NBCC/ CRA, and MIT/ EPPA model projections of the country’s 2050 GDP per
capita under H. R. 2454 are greater than the reference case projections of EPA/ IGEM. According
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 15
to the EPA/ ADAGE model, the 2050 GDP per capita of the country is reduced by 1.3% under
H. R. 2454; 2.0% according to the EPA/ IGEM projection, 1.5% according to the NBCC/ CRA
analysis, and 1.8% according to the MIT/ EPPA analysis.
In some ways, the above comparison underestimates the uncertainty involved because all the
analyses are linked to some degree to the 2009 EIA Annual Energy Outlook ( AEO) reference case
projection. The AEO projections have changed over time ( and will continue to do so in the
future). Figure 3 below presents the changes in the three drivers ( substituting energy intensity for
greenhouse gas intensity) and resulting baselines from EIA’s reference case projections over the
past four years. As indicated, projected 2030 greenhouse gas emissions have dropped by almost a
quarter over that four- year period. Most of this reduction results from less optimistic assumptions
about GDP growth per capita and a small improvement in energy efficiency that overwhelmed an
increasing population projection. If the analyses reviewed in this report were conducted using
EIA’s 2006 reference case projections, instead of its 2009 projections, the compliance costs
associated with the program would be significantly higher.
The uncertainty about the future direction of the basic drivers of greenhouse gas emissions
and the economy’s responsiveness ( economically, technologically, and behaviorally)
illustrate the inability of models to reliably predict the ultimate macroeconomic costs of
reducing greenhouse gases. Policy relevant analysis provides insight into the features and
design of proposals that increase or reduce compliance cost and under what economic,
technological, and behavior conditions, and that identify potential intended and unintended
consequences on the economy. Models cannot accurately predict the future, but they can
indicate the sensitivity of a program’s provisions to varying economic, technological, and
behavioral assumptions that may assist policymakers in designing a greenhouse gas
reduction strategy.
Major Points of this Section
• Past history shows that models cannot reliably predict the future.
• The models of H. R. 2454 do not agree on the key drivers of emissions in the reference ( business- as- usual)
case— in many instances, these differences overwhelm the results under the policy ( H. R. 2454) case.
• Models can inform policymakers by providing insight into design features that increase or reduce compliance
costs.
CRS- 16
Figure 3. Changes in EIA’s Annual Energy Outlook ( AEO) Reference Case Projections for Major Economic Indicators
Indexed to AEO 2006 Reference Case
Population
0.75
0.8
0.85
0.9
0.95
1
1.05
2010 2020 2030
AEO 2006 AEO 2007 AEO 2008 AEO 2009
Energy Intensity
0.75
0.8
0.85
0.9
0.95
1
1.05
2010 2020 2030
AEO 2006 AEO 2007 AEO 2008 AEO 2009
GDP per Capita
0.75
0.8
0.85
0.9
0.95
1
1.05
2010 2020 2030
AEO 2006 AEO 2007 AEO 2008 AEO 2009
Emissions
0.75
0.8
0.85
0.9
0.95
1
1.05
2010 2020 2030
AEO 2006 AEO 2007 AEO 2008 AEO 2009
Source: Energy Information Administration, Annual Energy Outlook ( various years).
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 17
Likelihood for More Noise in Greenhouse Gas
Reduction Cost Estimates
The potential for noise is greater in estimating the costs of a GHG program than the simple three
driver illustration presented above. In its analysis of H. R. 2454, EPA presents four pages of
bullets identifying various limitations on its modeling exercise and four pages of additional
“ qualitative” considerations. 32 This is a good indicator of the modeling complexity in attempting
to estimate the impact of a greenhouse gas reduction bill. These modeling limitations reflect the
inherent complexity of such strategies that cannot be quantified or predicted.
Complexity of the Problem
Compared with the complexity of implementing a greenhouse gas cap- and trade scheme, the SO2
program was simple. Conceptually, a CO2 tradable permit program could work similarly to the
SO2 program. However, significant differences exist between the acid rain process and possible
global warming factors that affect current abilities to model responses. For example, the acid rain
program involves up to 3,000 new and existing electric generating units that contribute two- thirds
of the country’s SO2. This concentration of sources ( and the fact that they are stationary) makes
the logistics of allowance trading administratively manageable and enforceable. The imposition
of the allowance requirement is straightforward. The acid rain program is a “ downstream”
program focused on the electric utility industry. The allowance requirement is imposed at the
point of SO2 emissions so the participant has a clear price signal to respond to. The basic dynamic
of the program is simple, although not necessarily predictable.
A comprehensive greenhouse gas cap- and- trade program would not be as straightforward to
implement. Greenhouse gas emissions sources are not concentrated. Although over 80% of the
greenhouse gases generated comes from fossil fuel combustion, only about 34% comes from
electricity generation. Transportation accounts for about 28%, direct residential and commercial
use about 11%, agriculture about 7%, and direct industrial use about 19%. 33 Thus, small dispersed
sources in transportation, residential/ commercial, agriculture, and the industrial sectors are far
more important in controlling greenhouse gas emissions than they are in controlling SO2
emissions. This greatly increases the economic sectors and individual entities that may be
required to reduce emissions.
It also affects the operation of a cap- and- trade program, as the diversity of sources creates
significant administrative and enforcement problems for a tradable permit program if it is meant
to be comprehensive. A downstream approach is impractical for a comprehensive greenhouse gas
program where the transportation sector and dispersed residential, commercial, and agricultural
sources emit almost half the total emissions. One alternative is to move the imposition point more
“ upstream” in those sectors, as is done by H. R. 2454. This complicates the economics of the
program as the price signal has to work its way through multiple paths to the particular entities—
32 U. S. Environmental Protection Agency, EPA Analysis of the American Clean Energy and Security Act of 2009: H. R.
2454 in the 111th Congress – Appendix ( June 23, 2009), pp. 12- 15, 46- 49.
33 U. S. Environmental Protection Agency, U. S. Inventory of Greenhouse Gas Emissions and Sinks: 1990- 2007 ( April
15, 2009), p. ES- 14.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 18
utilities, consumers, industry— that are the ultimate sources of the greenhouse gases. Arguably,
the primary purpose of an economic mechanism, such as a cap- and- trade program, is to put a
price on greenhouse gas emissions. In the case of a comprehensive cap- and- trade program, the
impact of that price signal will not be simple or straightforward, with unintended consequences
likely. 34 In addition, attempts by analysts to capture the general equilibrium effects of the
program’s interaction with the overall economy add a layer of assumptions and opaqueness to the
analysis that can hide insights the analysis may have on program design and implementation.
Flexibility of Cap- and- Trade Program
The flexibility envisioned by most GHG cap- and- trade proposals exceeds that of the SO2
program. Acid rain is a regional problem that resulted in independent responses by the United
States and Canada. The United States chose a cap- and- trade program that included important
flexibility mechanisms like banking; Canada chose a variety of approaches and the entire process
was later codified by treaty. Offsets ( emission reductions made by entities not directly covered by
the program) are not a major component of the SO2 program. Uncovered industrial entities that
want to participate in the program must become covered entities with their own baselines and
monitoring equipment. The SO2 program also sets up a small reserve of allowances to reward
reductions through conservation and renewable energy efforts. With the sulfur dioxide cap- and-trade
system being limited to the United States, there is no international trading in the acid rain
program.
In contrast, most GHG cap- and- trade proposals ( including H. R. 2454) expand the number of
emission mitigation opportunities— effectively increasing the number of allowances— by
permitting offsets from a wide variety of sources, including agricultural practices, forestry
projects, sequestration activities, and alternative energy projects. 35 These diverse sources multiply
as the trading extends globally and as other non- CO2 greenhouse gases are included in the supply
mix. Finally, the interaction of these various supply sources and the demand of other countries
also reducing emissions ( or who may decide to reduce in the future) provide for an almost infinite
number of possible scenarios. Crucially, as noted earlier, the availability of offsets has a
significant impact on compliance costs, while contributing significant complications to the
verification and accounting process.
Importance of Technology to Future Results
The three- driver analysis illustrated the importance of reducing the greenhouse gas intensity of
the economy to reducing overall greenhouse gas emissions. The other two drivers, population and
economic growth, are generally not elements targeted for reduction under greenhouse gas
reduction programs ( indeed, by any federal program).
The key factor in reducing the intensity driver over the long run is technology development. This
is recognized in most greenhouse gas reduction bills, including H. R. 2454, with substantial
34 This is particularly true if allowances are allocated to upstream entities at no cost. See Sergey Paltsev, et al.,
Assessment of U. S. Cap- and- Trade Proposals, MIT Joint Program on the Science and Policy of Global Change
( April 2007), p. 5.
35 Including offsets as a compliance option would not affect the cap, but would change the mix of activities performed
to achieve the reduction target. See CBO, The Use of Offsets to Reduce Greenhouse Gases ( August 3, 2009).
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 19
funding, incentives, regulatory standards, and price signals to encourage both accelerated
deployment and the initiation of efforts to develop new generations of technology. The
effectiveness of these initiatives and price signals would be pivotal to the ultimate cost of any
reduction strategy, particularly in the long term. As stated by Houghton:
Technology change is a particularly critical component of the climate change debate. For
example, the cost of meeting stabilization levels is very sensitive to assumptions about future
technologies. If assumed technology improvements lead to relatively low emissions, then it
is relatively inexpensive to meet stabilization levels, and vice versa. Furthermore, technology
research and development is a very significant policy instrument in the portfolio of options. 36
Increasing Problems with Ceteris Paribus Analysis37
As was the case with analyses of the SO2 cap- and- trade program, current studies of greenhouse
gas reduction proposals assume that, in the absence of new legislation, EPA would take no action
in this area between now and the year 2050, and no future initiatives would be enacted in related
areas, such as energy policy. This seems unlikely. Indeed, the potential for a future requirement to
reduce greenhouse gas emissions may already be having an effect on decisions by industry and
consumers. As noted by EIA in its analysis of S. 2191 of the 110th Congress:
While forecasting policy change is beyond EIA’s mandate, an argument can be made that, all
else being equal, public and industry awareness of climate change as a major policy issue can
potentially impact energy investment decisions even if no specific policy change actually
occurs. Any adjustment to reflect the influence of climate change as an unresolved policy
issue, while raising costs in the Reference Case, would generally reduce the estimated
incremental impact resulting from the full implementation of a given policy response. 38
Changing Reference Cases By Changing Laws
In its analysis of the Lieberman- Warner cap- and- trade bill of the 110th Congress ( S. 2191), CRS
noted that policy baselines for greenhouse gas emissions can be shifted significantly through new
initiatives, and used the enactment of the 2007 Energy Independence and Security Act ( EISA) as
an example. In conclusion, CRS noted that “ More changes are likely over the 40- year time frame
of S. 2191.” 39 This conclusion has been verified in the course of one year with the passage of the
American Recovery and Reinvestment Act ( ARRA) in February 2009.
ARRA contains many energy provisions that could lead to reductions in greenhouse gas
emissions, including new federal funding, loan guarantees, and tax credits to stimulate
investments in energy efficiency and renewable energy activities. 40 The passage of ARRA
36 John Houghton, “ Introduction,” Energy Economics 28 ( 2006), p. 535.
37 From Latin, roughly meaning all else being held the same. In analysis, this refers to the practice of holding certain
variables constant to isolate the effect of the variable being analyzed.
38 Energy Information Administration, Energy Market and Economic Impact of S. 2191, the Lieberman- Warner
Climate Security Act of 2007 ( April 2008) p. viv.
39 CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/ S. 3036, by Larry Parker and Brent D.
Yacobucci.
40 For more information on the energy provisions of ARRA, see CRS Report R40412, Energy Provisions in the
American Recovery and Reinvestment Act of 2009 ( P. L. 111- 5), coordinated by Fred Sissine.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 20
motivated EIA to develop a new Annual Energy Outlook 2009 ( AEO2009) baseline to reflect the
provisions of ARRA and to update the rapidly changing macroeconomic outlook for the United
States and global economies in general. Focusing on the projected effects of ARRA, among the
results of this reworking of the AEO2009 baseline were ( 1) a 27,700 megawatt ( MW) increase in
projected renewable electric generating capacity by 2030, ( 2) a 4,900 MW reduction in the
projected increase in nuclear power capacity, and ( 3) an 11,300 MW reduction in overall electric
generating capacity. The net result is a projected reduction in 2030 of 36.5 million metric tons of
energy- related carbon dioxide emission from the level estimated by EIA without ARRA. 41
Changing Reference Cases By Changing Regulation42
Estimating the cost of H. R. 2454’ s cap- and- trade program, as compared to the baseline without
new legislation, requires one to make an assumption regarding “ business as usual” – i. e., what
constitutes the baseline level of regulation in the absence of new legislation. The current baseline
includes no federal controls on CO2; for any future cost projection, however, the baseline appears
likely to be influenced by ongoing and future EPA initiatives that rely on existing legislative
authority.
The Clean Air Act ( CAA) is a powerful tool that can be used to regulate emissions of greenhouse
gases from mobile sources of all kinds, their fuels ( with the exception of jet fuel), and both large
and small stationary sources. The possibilities for regulation of GHGs through existing CAA
authority have been outlined in a number of places: for a CRS discussion of the existing
authorities, see CRS Report R40585, Climate Change: Potential Regulation of Stationary
Greenhouse Gas Sources Under the Clean Air Act, by Larry Parker and James E. McCarthy, and
CRS Report R40506, Cars and Climate: What Can EPA Do to Control Greenhouse Gases from
Mobile Sources?, by James E. McCarthy.
Regulating GHG emissions under existing CAA authority would require EPA to make a finding
that greenhouse gases “ cause, or contribute to, air pollution which may reasonably be anticipated
to endanger public health or welfare.” 43 Such an endangerment finding was proposed by EPA on
April 24, 2009, as a first step toward the proposal and promulgation of GHG emission standards
for motor vehicles. 44
EPA has also discussed its intended actions. On May 22, 2009, the agency along with the
Department of Transportation published a Federal Register notice outlining the agency’s
intention to promulgate GHG emission standards for motor vehicles under Section 202 of the
Act; 45 these standards are expected to be promulgated by March 2010. In a recent document, EPA
41 Department of Energy, Energy Information Administration. An Updated Annual Energy Outlook 2009 Reference
Case Reflecting Provisions of the American Recovery and Reinvestment Act and Recent Changes in the Economic
Outlook, Report #: SR- OIAF/ 2009- 03, ( April 2009) p. 35.
42 This section prepared by James McCarthy, Specialist in Environmental Policy.
43 The quoted language appears in Section 202 of the act, dealing with motor vehicles. Similar language can be found in
Section 111 ( stationary sources), Section 211 ( fuels), Section 213 ( nonroad engines and vehicles), Section 231
( aircraft), and Section 615 ( protection of the stratosphere).
44 U. S. EPA, “ Proposed Endangerment and Cause or Contribute Findings for Greenhouse Gases Under Section 202( a)
of the Clean Air Act,” 74 Federal Register 18886, April 24, 2009.
45 Environmental Protection Agency and Department of Transportation, “ Notice of Upcoming Joint Rulemaking to
Establish Vehicle GHG Emissions and CAFE Standards,” 74 Federal Register 24008, May 22, 2009.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 21
stated that the agency’s promulgation of motor vehicle standards will trigger the best available
control technology requirements for emissions of GHGs from new stationary sources, such as
power plants, under the Prevention of Significant Deterioration program, in Sections 165 and 169
of the Act. 46
The Administrator has substantial discretion in defining what emission limits should be set, and
what sections of the act she might use to control GHGs. Greenhouse gases could be defined as
criteria air pollutants, or not. They could be controlled in mobile sources of all kinds. They could
be subject to New Source Performance Standards ( NSPS), Prevention of Significant Deterioration
( PSD), or Maximum Available Control Technology ( MACT) requirements. Each of these has its
own standard- setting process and criteria.
To some extent, the important question may be how the Administrator would define the source
categories. If all power plants are considered in the same category, then the act’s authority could
be used to require the use of natural gas or cleaner fuels ( or at least to set emission standards
based on the emissions from plants using such fuels). If coal- fired plants were their own category
or a technological approach were taken, the best technology could be carbon capture and
sequestration ( CCS). How the sources would be categorized would be at the discretion of the
Administrator.
The Administrator would also get to make technical judgments concerning whether technologies
are “ available” or “ achievable.” These judgments would be crucial in determining how much
technology- forcing the regulations would do.
Indeed, it can be argued that the potential for new regulations casts doubts as to most of the
“ business- as- usual” reference cases presented here. A regulatory approach to greenhouse gas
control has the potential of being significantly more expensive than the program established by
H. R. 2454. Thus, H. R. 2454 may be a cost- effective option if the alternative is regulatory action
by EPA. As noted by MIT in their study:
Another important consideration in estimating the cost of H. R. 2454 is that under the U. S.
Supreme Court ruling in Massachusetts vs. EPA CO2 was found to be a pollutant, and
therefore could require EPA regulation under the Clean Air Act. H. R. 2454 would supersede
such EPA regulations. At this point it is unknown what EPA would require under this ruling
but such regulations could be a costly way to reduce emissions. An argument can therefore
be made that H. R. 2454 should be compared against such an EPA regulatory approach, and
the bill could be a more efficient way to achieve the emission reduction target. 47
46 See “ EPA Acknowledges GHG Vehicle Rules Will Trigger Utility CO2 Permit Limits,” InsideEPA, August 19,
2009. The article refers to EPA Administrator Lisa Jackson’s August 12, 2009 response to a petition from three
environmental groups in the matter of a PSD permit issued to Louisville Gas and Electric Co. by the Kentucky Division
for Air Quality, Petition No. IV- 2008- 3.
47 Paltsev, et al., p. C17.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 22
Major Points of this Section
• Addressing greenhouse gas emissions is a highly complex problem, with many different variables— a cap- and-trade
program for greenhouse gases will be much larger and more complex than the existing SO2 cap- and- trade
program.
• The effects of flexibility provisions of cap- and- trade legislation ( e. g., offset supply, strategic auctions) may be
difficult to model.
• Technology development will be a key factor in cost control.
• Noise in the models is further driven by constantly changing statutes and regulations.
• If EPA pursues greenhouse gas controls through existing regulatory authority ( mainly the Clean Air Act), the
results could be more expensive than an equivalent cap- and- trade program.
Measuring the Noise: A Web of Cost Measures
Because of the economic and regulatory complexities and interactions noted above, analysts have
generally chosen to focus on estimating the macro- economic effects of proposals, such as GDP
impacts. There are two components of macro- economic cost measures: ( 1) the direct abatement
( or compliance) cost of a greenhouse gas reduction program, and ( 2) the general equilibrium
effects of a greenhouse gas reduction program ( i. e., the interactions of the direct abatement costs
with the rest of the economy).
The most common measure presented is Gross Domestic Product ( GDP). GDP measures the total
value of goods and services produced within a nation’s borders. 48 Although it is commonly used
as a measure of quality of life, this application is problematic. Generally, it includes only those
items for which there is a value defined in a market, and does not take into account some
activities that have economic value, but no market valuation ( e. g., leisure time, environmental
quality, etc.). Thus, GDP is intended to be a measure of economic activity, not quality of life.
A second measure sometimes presented is consumption effects ( sometimes called welfare
effects). Unfortunately, the models do not measure consumption or welfare effects in a consistent
fashion ( the primary advantage of using GDP). This problem is discussed later in the section on
“ Impact on Households.” In addition, like GDP, none of the definitions of consumption or welfare
currently employed quantify any benefits from improved environmental quality.
A third measure often presented is allowance prices. Allowance prices reflect to some degree the
aggregate marginal cost of reductions as estimated by the models. Marginal cost is the cost of
reducing the last ton ( and, therefore, the most expensive) of greenhouse gases required by the
program at a specific point in time. Marginal costs are very useful to affected entities in choosing
what reduction strategy would be the most cost- effective in achieving reductions required by the
cap- and- trade program. Marginal costs are not average costs and therefore cannot be simply
multiplied by the greenhouse gases reduced to estimate total compliance cost. They also need to
be put into the context of the overall reduction achieved at the given point and time being
examined.
48 It has four basic components: private consumption ( including most personal expenditures of households);
investments by business and households in capital ( including new house purchases); government expenditures on goods
and services ( but not transfer payments, such as Social Security); and net imports.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 23
However, allowance prices in most analyses are not equal to marginal costs of achieving the
specified reductions in a specific year because of program provisions, such as banking. Banking
activity reflects the assumed foresight of affected entities to the likelihood of increasing
allowance prices ( in real terms) as the cap tightens. As indicated by the experience with the SO2
program, entities will bank substantial allowances early and use them later as the program’s
requirements tighten. This results in allowance prices being higher than marginal costs in the
early years of the program, and lower in later years. This ability to time- shift reduction
requirements and compliance costs means that allowance price projections reflect the assumed
foresight of affected entities as much as they do actual marginal costs.
In examining cost measures, aggregate welfare indicators such as GDP may be overemphasized.
As illustrated above in Table 2, aggregate, macroeconomic cost results for H. R. 2454 are
generally lost in the uncertainty about future conditions. Focusing on aggregate macroeconomic
measures may lead readers to miss valuable insights into the analyses’ assumptions and their
conclusions about the costs or benefits of certain compliance strategies. For example, Figure 4
below shows a 1997 scatter- plot by World Resources Institute ( WRI) of 162 predicted impacts
estimates from 16 different economic models of the U. S. economy as a result of a CO2 abatement
program. As indicated, the vast majority of estimates fall with a range of 0%- 4% of GDP,
regardless of the reduction requirement. Over- emphasis on GDP or other aggregate cost
measures can obscure fundamental technological, economic, or behavioral insights the
analyses may have in helping policymakers craft legislation. Instead, the analysis becomes a
“ black box” exercise with little enlightenment function.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 24
Figure 4. Predicted Impacts of Carbon Abatement on the U. S. Economy
( 162 Estimates from 16 Models)
Source: Robert Repetto and Duncan Austin, The Costs of Climate Protection: A Guide for the Perplexed, World
Resources Institute, 1997.
This resulting “ fog” is inherent when analysts choose to include the general equilibrium effects of
a program in their cost measure— a fog that can limit the explanatory value of the analysis. While
supporting use of aggregate welfare cost measures, MIT notes:
GE [ general equilibrium] effects can stem from interactions with pre- existing distortions
( e. g., taxes), from externally induced terms- of- trade effects, from the fact that the domestic
policy itself creates terms- of- trade effects, and from other rigidities in the economy. Many
aspects of model structure produce GE effects that are not easy to separately measure
because of the inherent interactions in the economy. 49
49 Sergey Paltsev, et al., Assessment of U. S. Cap- and- Trade Proposals, MIT Joint Program on the Science and Policy of
Global Change ( April 2007), p. 27. “ Terms- of- trade” is the relative price of a country’s exports compared to its imports
on international markets.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 25
Generally, the cases examined here have not chosen to separate the two components of macro-economic
cost measures: ( 1) the direct abatement ( or compliance) cost of a greenhouse gas
reduction program, and ( 2) the general equilibrium effects of a greenhouse gas reduction program
( i. e., the interactions of the direct abatement costs with the rest of the economy). 50 The
availability of accurate compliance cost estimates would allow policymakers to put current
greenhouse gas reduction proposals in the context of other environmental initiatives— be they
acid rain or toxic air pollutants— and, indeed, to the overall environmental agenda, and greatly
increase the transparency of the analyses’ insights. It would also help relieve confusion between
compliance costs, average costs ( per ton reduced), and the other commonly presented costs, such
as allowance prices. 51 It is argued that an aggregate macroeconomic cost measure provides a more
complete view of the economic impact of proposed legislation, and helps identify potential
unintended economic effects of compliance strategies. This may be true, particularly if, for
example, auction revenues are being recycled via a reformed tax code. However, as indicated
here, aggregated macroeconomic cost measures, such as GDP, can also be interpreted to
merely show that the United States has a massive economy that can absorb substantial
shocks with limited long- term effect.
Three Perspectives: Getting Out of the Noise
Breaking through the fog of analyses and cost indicators, cost estimates to reduce greenhouse gas
emissions vary greatly and focus attention on an estimator’s basic beliefs about the problem and
the future, in addition to simple, technical differences in economic assumptions. In a previous
report, CRS identified three “ lenses” through which people can view the global climate change
issues, and their influence on cost analysis. 52 These are summarized in Table 3. None of these
perspectives is inherently more “ right” or “ correct” than another; rather, they overlap and to
varying degrees complement and conflict with one another. People generally hold to each of the
lenses to some degree.
50 EPA does break out compliance costs ( called “ abatement costs”) from the general equilibrium effects of H. R. 2454.
However, as noted by EPA, its compliance cost estimates are overestimates of actual costs. Further, the overestimation
increases as the tonnage reduction requirement and marginal costs increase. CBO does provide a breakdown of
estimated compliance costs ( called “ net economywide costs”), but does not conduct an analysis of the general
equilibrium effects of H. R. 2454.
51 For a good discussion of the confusion that can arise from mixing cost measures, see Anne E. Smith, Jeremy Platt,
and A. Denny Ellerman, “ The Cost of Reducing SO2 ( It’s Higher Than You Think),” Public Utilities Fortnightly ( May
15, 1998), pp. 22- 29.
52 CRS Report 98- 738, Global Climate Change: Three Policy Perspectives, by Larry Parker and John Blodgett.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 26
Table 3. Influence of Climate Change Perspectives on Policy Parameters
Approach Seriousness of problem
Risk in developing mitigation
program Costs
Technology Is agnostic on the merits of the
problem. The focus is on
developing new technology that
can be justified from multiple
criteria, including economic,
environmental, and social
perspectives.
Believes any reduction program
should be designed to maximize
opportunities for new technology.
Risk lies in not developing
technology by the appropriate time.
Focus on research, development,
and demonstration; and on
removing barriers to
commercialization of new
technology.
Viewed from the bottom- up.
Tends to see significant
energy inefficiencies in the
current economic system that
currently available ( or
projected) technologies can
eliminate at little or no
overall cost to the economy.
Economic Understands issue in terms of
quantifiable cost- benefit analysis.
Generally assumes the status quo
is the baseline from which costs
and benefits are measured.
Unquantifiable uncertainty tends
to be ignored.
Believes that economic costs
should be examined against
economic benefits in determining
any specific reduction program.
Risk lies in imposing costs in excess
of benefits. Any chosen reduction
goal should be implemented
through economic measures such
as tradable permits or emission
taxes.
Viewed from the top- down.
Tends to see a gradual
improvement in energy
efficiency in the economy, but
significant costs ( usually
quantified in terms of GDP
loss) resulting from global
climate change control
programs. Typical loss
estimates range from 0- 4% of
GDP.
Ecological Understands issues in terms of
their potential threat to basic
values, including ecological viability
and the well- being of future
generations. Such values reflect
ecological and ethical
considerations; adherents see
attempts to convert them into
commodities to be bought and
sold as trivializing the issue.
Rather than economic costs and
benefits or technological
opportunity, effective protection of
the planet’s ecosystems should be
the primary criterion in determining
the specifics of any reduction
program. Focus of program should
be on altering values and
broadening consumer choices.
Views costs from an ethical
perspective in terms of the
ecological values that global
climate change threatens.
Believes that values such as
intergenerational equity
should not be considered
commodities to be bought,
sold, or discounted. Costs are
defined broadly to include
aesthetic and environmental
values that economic analysis
cannot readily quantify and
monetize.
However, different combinations of these perspectives lead to different cost estimates. An
illustration of this can be seen in the contrast between the H. R. 2454 results obtained by the
American Council for Capital Formation/ National Association of Manufacturers ( ACCF/ NAM)
high cost case and the “ high technology” sensitivity case conducted by EIA using the same
model: EIA’s NEMS model. Table 4 summarizes the general approach of the two analyses
according to the three perspectives identified above. In its sensitivity case, EIA mimics H. R.
2454’ s various technology and efficiency provisions by employing its High Technology baseline
that has more aggressive technology development assumptions than its reference case, and also
includes banking, and phased- in offsets. In contrast, ACCF/ NAM is not confident that new
technology, new energy sources, and market mechanisms ( e. g., carbon offsets, banking) will be
sufficiently available to achieve H. R. 2454’ s emission targets. Accordingly, ACCF/ NAM’s High
Cost case assumptions differ substantially from EIA’s High Technology sensitivity analysis by
discouraging banking, restricting the availability of offsets to half that allowed in H. R. 2454, and
significantly restricting availability of various low- and non- carbon technologies beyond what is
embedded in the NEMS base case.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 27
Table 4. General Perspective of ACCF/ NAM- High Cost and EIA- High Technology
Assumptions
EIA High Technology ACCF/ NAM- High
Technology Assumes no constraints on
technology availability beyond
those embedded in the NEMS
model
Assumes significant
constraints on further low-and
non- carbon technology
availability beyond that
embedded in NEMS
Economic Assumes aggressive technology
development, efficient decision-making
via banking, and phasing in
of offsets to the levels allowed in
H. R. 2454 ( 2 billion metric tons)
Assumes short- term decision-making
with a 10% discount
rate; total offsets allowed
limited to 1 billion metric tons
annually ( 50 million from
international sources)
Ecological Assumes decisions made in favor
of technology and efficiency
because of H. R. 2454’ s incentives,
regulations, and price signal
Assumes none— total GHG
emissions are not presented
Source: Energy Information Administration ( EIA), Energy Market and Economic Impacts of H. R. 2454, the American
Clean Energy and Security Act of 2009 ( August 4, 2009); Science Applications International Corporation, Analysis of
The Waxman- Markey Bill “ The American Clean Energy and Security Act of 2009” ( H. R. 2454) Using the National
Energy Modeling System ( NEMS/ ACCF- NAM 2), a report by the American Council for Capital Formation and the
National Association of Manufacturers ( 2009).
As indicated by Table 5, the widely different cost assumptions provided the expected results,
although both analyses remained in the 0- 4% GDP range common for greenhouse gas reduction
analysis. Allowance price estimates diverge significantly by 2030, but this cost measure tends to
exaggerate differences between results and should not be confused with average costs or program
costs. This is particularly true for analyses of H. R. 2454, as ACCF/ NAM did not publish its
environmental results in terms of greenhouse gases reduced; thus, one can not compare the
allowance price with what is being reduced over time. Unfortunately, the analyses do not present
sufficient sensitivity analysis and other information to determine whether it is the economic
assumptions ( e. g., discount rates and offset availability), the behavioral assumptions ( e. g., impact
of efficiency programs), the technology assumptions ( e. g., availability), or what combination of
these assumptions that explains the differences in results.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 28
Table 5. Selected Results from EIA’s “ High Technology” and ACCF- NAM’s “ High
Cost” Cases
Year EIA High Technology ACCF- NAM High Cost
GDP per capita Reduction From Reference Case 2020 0.06% 0.4%
2030 0.31% 2.4%
Allowance Price ( 2005$) 2020 $ 26 $ 58
2030 $ 54 $ 150
Total GHG Emissions 2020 6.8 ( 5.8 net of offsets) not presented
2030 6.1 ( 4.0 net of offsets) not presented
Source: Energy Information Administration ( EIA), Energy Market and Economic Impacts of H. R. 2454, the American
Clean Energy and Security Act of 2009 ( August 4, 2009); Science Applications International Corporation, Analysis of
The Waxman- Markey Bill “ The American Clean Energy and Security Act of 2009” ( H. R. 2454) Using the National Energy
Modeling System ( NEMS/ ACCF- NAM 2), a report by the American Council for Capital Formation and the National
Association of Manufacturers ( 2009). All estimates converted to 2005 dollars using the GDP implicit price
deflator.
Some attempts have been made to sort out the importance of various assumptions in analyzing the
costs of greenhouse gas reduction proposals, beginning with Repetto and Austin’s effort for the
World Resources Institute ( WRI) in 1997, with more recent efforts by Barker, Qureshi and Kohler
in 2006 and Barker and Jenkins in 2007.53 Dr. Repetto has set up a website where people may
answer seven key questions about the cost and benefit assumptions they feel are most reasonable
and find out how their choices would affect GDP. 54 Through meta- analysis of the results from
multiple independent studies, the role of various assumptions and methodologies are quantified. 55
In general, these studies found seven underlying assumptions affecting results: ( 1) the efficiency
of the economic response; 56 ( 2) availability of non- carbon technology; 57 ( 3) availability of the
Kyoto mechanisms; 58 ( 4) method of revenue recycling; ( 5) method of incorporating technological
advancements; ( 6) inclusion of non- climate- related environmental benefits; and ( 7) inclusion of
climate- related benefits. None of the models reviewed in this report quantify any
environmental benefits in their analyses.
53 Robert Repetto and Duncan Austin, The Costs of Climate Protection: A Guide for the Perplexed, World Resources
Institute ( 1997); Terry Barker, Mahvash Saeed Qureshi, and Jonathan Kohler, The Costs of Greenhouse Gas Mitigation
with Induced Technological Change: A Meta- Analysis of Estimates in the Literature, Tyndall Centre for Climate
Change Research ( July 2006); and Terry Barker and Katie Jenkins, The Costs of Avoiding Dangerous Climate Change:
Estimates Derived from a Meta- Analysis of the Literature, A Briefing Paper for the Human Development Report 2007
( May 2007).
54 http:// www. climate. yale. edu/ seeforyourself/.
55 As defined by Repetto on the “ See For Yourself” website: “ The meta- analysis was based on more than 1,400 policy
simulations performed with the various models. It used statistical regression analysis to ascribe differences among
models in the predicted economic cost of a given percentage reduction of greenhouse gas emissions to differences
among models in specific assumptions. Though some of the models related only to the U. S. economy, others to the
world economy, the meta- analysis found that both sets of models produced the same results.”
56 In this regard, Computable General Equilibrium Models ( CGE) generally assume efficient economic responses to
programs while macroeconomic models allow time for the economy to adjust, resulting in higher short- term costs.
57 Some models include a “ backstop” technology in unlimited amounts at a specified high price.
58 Offset credits from the Clean Development Mechanism ( CDM) and Joint Implementation ( JI).
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 29
Major Points of this Section
• The “ cost” of a cap- and- trade program can be counted in different ways: ( 1) direct abatement/ compliance costs;
and ( 2) effects on the overall economy. Further, those results may be presented in different units and/ or over
different time frames.
• Various cost measures have their own limitations.
• The preferred cost measure ( and time frame) may be driven by one’s perspective of the problem.
Results for H. R. 2454
Impact on Greenhouse Gas Emissions
Figure 5 and Figure 6 present U. S. greenhouse gas emissions under H. R. 2454 as estimated by
the cases that presented such data, relative to their baseline assumptions. The range might seem
surprising, given the emission cap defined in the bill. The cause of the range is largely two- fold:
( 1) estimated emissions growth in the roughly 15% of the economy not covered under the bill, ( 2)
estimated use of international offsets to meet emission reduction requirements— international
offsets would reduce total global emissions but would not reduce emissions within the United
States.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 30
Figure 5. Total Estimated U. S. Greenhouse Gas Emissions Under H. R. 2454
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GHG Emissions ( MMT CO2 Equivalent)
Reference Cases EPA/ ADAGE EPA/ IGEM NBCC/ CRA
EIA/ NEMS HF/ GI MIT/ EPPA CBO
H. R. 2454 Cases EPA/ ADAGE EPA/ IGEM NBCC/ CRA
EIA/ NEMS HF/ GI MIT/ EPPA
HF/ GI models energy- related
CO2 emissions only
Sources: EPA/ ADAGE and EPA/ IGEM: “ Data Annex” available on the EPA website at http:// www. epa. gov/
climatechange/ economics/ economicanalyses. html MIT/ EPPA: Sergey Paltsev, et al., “ Appendix C” of Paltsev et al.,
The Cost of Climate Policy in the United States, MIT Joint Program on the Science and Policy of Global Change
( 2009). EIA/ NEMS: EIA, Energy Market and Economic Impacts of H. R. 2454, the American Clean Energy and Security
Act of 2009, ( August 2009). NBCC/ CRA: CRA International, Impact on the Economy of the American Clean Energy
and Security Act of 2009 ( H. R. 2454) ( May 2009). CBO: CBO, CBO Cost Estimate: H. R. 2454 American Clean Energy
and Security Act of 2009 As ordered reported by the House Committee on Energy and Commerce, ( June 5, 2009).
HF/ GI: The Heritage Center for Data Analysis, The Economic Consequences of Waxman- Markey: An Analysis of the
American Clean Energy and Security Act of 2009 ( August 5, 2009).
Note: HF/ GI emission estimates are for energy- related carbon dioxide emissions only.
CRS- 31
Figure 6. Total Estimated U. S. Greenhouse Gas Emissions Under H. R. 2454, by Case
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GHG Emissions ( MMT CO2 Equivalent)
Reference Cases EPA/ ADAGE EPA/ IGEM
H. R. 2454 Cases EPA/ ADAGE EPA/ IGEM
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GHG Emissions ( MMT CO2 Equivalent)
Reference Cases EIA/ NEMS
H. R. 2454 Cases EIA/ NEMS
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GHG Emissions ( MMT CO2 Equivalent)
Reference Cases NBCC/ CRA HF/ GI
H. R. 2454 Cases NBCC/ CRA HF/ GI
HF/ GI models energy- related CO2
emissions only
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
11,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GHG Emissions ( MMT CO2 Equivalent)
Reference Cases MIT/ EPPA CBO
H. R. 2454 Cases MIT/ EPPA
Source: See Figure 5.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 32
The steepest reduction path is for HF/ GI. It should be noted that the HF/ GI emissions path is for
energy- related CO2 emissions only. However, if one adds a reasonable estimate for the covered
and non- covered emissions excluded from the HF/ GI analysis, HF/ GI would probably still have
the most stringent interpretation of the bill’s requirements. This is most likely due to the no
banking and declining offset supply assumed in the HF/ GI case. HF/ GI also has the least baseline
growth of any of the cases presented here, reducing the overall emission reductions it requires.
Indeed, with its relatively low offset price, the baseline and offset price assumptions combine to
result in a slight rise in U. S. emissions under H. R. 2454 before 2018, at which point the declining
availability of offsets assumed by HF/ GI forces the analysis to increase domestic emission
reductions to meet the increasing stringency of the cap.
The case that results in the most reductions from baseline levels is NBCC/ CRA. This result is
despite the very generous offset availability assumptions used by NBCC/ CRA in its analysis, and
is driven in part by the fact that NBCC/ CRA has one of the highest projections for emissions in
the reference case.
The highest emissions permitted under the bill are estimated by the EIA/ NEMS case. This higher
emissions level is likely the result of a substantial use of international offsets. For example, in
2030, EIA estimates 23% and 46% more international offsets than EPA’s IGEM and ADAGE
cases, respectively. Further, for 2030, EIA estimates more than three times the number of total
offsets in the HF/ GI case.
Impact on Non- Greenhouse Gas Emissions
None of the reports reviewed here presented the effects of H. R. 2454 on conventional air
pollutants, such as sulfur dioxide and nitrogen oxides, or on hazardous air pollutants, such as
mercury. However, some data were available in the Data Annex of the EPA/ IPM analysis and the
data spreadsheets from the EIA analysis. The probable reason for not presenting such data in their
reports is the current uncertainty about future regulation of these pollutants. EPA is likely to
proceed with more stringent regulation of conventional air pollutants over the next decade. The
Clean Air Interstate Rule is undergoing revision with respect to sulfur dioxide and nitrogen oxides
and EPA is currently proceeding with developing a Maximum Achievable Control Technology
( MACT) rule for mercury. Table 6 presents the data contained in these two cases’ data
appendices. The EIA case assumes the continuation of a CAIR- like regulatory structure for sulfur
dioxide and nitrogen oxides, and it would appear that the EPA/ IPM does also. As indicated, the
EPA/ IPM projects a 7%- 8% reduction in sulfur dioxide and a 8%- 9% reduction in nitrogen oxides
in 2025 from H. R. 2454 along with about a 15% reduction in mercury emissions. In contrast,
EIA/ NEMS projects about an 8% increase in sulfur dioxide emission under H. R. 2454 in 2025,
but reductions of about 19% and 27% in nitrogen oxide and mercury emissions respectively. EIA
states that the increase in SO2 emission results from utilities being disinclined to invest in SO2
scrubbers because of GHG requirements, and SO2 banking behavior.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 33
Table 6. Estimated Emissions of Conventional Air Pollutants from Electric Utilities in
2025
EPA/ IPM EIA/ NEMS
Reference
Case
H. R. 2454
Case
Reference
Case
Basic H. R.
2454 Case
SO2 ( million short tons) 3.9 3.7 3.7 4.0
NOx ( million short tons) 2.3 2.1 2.1 1.7
Hg ( tons) 34 29 29 21
Source: EPA/ IPM: “ Data Annex” available on the EPA website at http:// www. epa. gov/ climatechange/ economics/
economicanalyses. html. EIA/ NEMS: EIA, Energy Market and Economic Impacts of H. R. 2454, the American Clean
Energy and Security Act of 2009, ( August 2009), http:// www. eia. doe. gov/ oiaf/ servicerpt/ hr2454/ index. html.
Impact on GDP Per Capita59
Figure 7 and Figure 8 present the estimated GDP per capita in the baseline and H. R. 2454
scenarios for the various cases. As suggested by the discussion of “ noise” earlier, uncertainty
about the future size of the economy is greater than the impact of H. R. 2454. Indeed, they are so
intertwined as to make the results nearly meaningless in one sense. In another sense, the figures
indicate the cases’ consistent expectations that the economy continues to grow under H. R. 2454,
albeit at a slower rate than under their respective reference cases.
59 In this report, all dollar estimates are in constant 2005 dollars, unless otherwise noted.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 34
Figure 7. GDP per Capita ( 2005$) Under H. R. 2454
$ 40,000
$ 50,000
$ 60,000
$ 70,000
$ 80,000
$ 90,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GDP per Capita ( 2005$)
Reference Cases EPA/ ADAGE EPA/ IGEM NBCC/ CRA
EIA/ NEMS HF/ GI ACCF- NAM/ NEMS MIT/ EPPA
CBO H. R. 2454 EPA/ ADAGE EPA/ IGEM
NBCC/ CRA EIA/ NEMS HF/ GI ACCF- NAM/ NEMS
MIT/ EPPA
Sources: EPA/ ADAGE and EPA/ IGEM: “ Data Annex” available on the EPA website at http:// www. epa. gov/
climatechange/ economics/ economicanalyses. html. MIT/ EPPA: Sergey Paltsev, et al., “ Appendix C” of Paltsev et al.,
The Cost of Climate Policy in the United States, MIT Joint Program on the Science and Policy of Global Change
( 2009). EIA/ NEMS: EIA, Energy Market and Economic Impacts of H. R. 2454, the American Clean Energy and Security
Act of 2009, ( August 2009). ACCF- NAM/ NEMS: SAIC, Analysis of The Waxman- Markey Bill “ The American Clean
Energy and Security Act of 2009” ( H. R. 2454) Using The National Energy Modeling System ( NEMS), report by the
ACCF and NAM ( 2009). NBCC/ CRA: CRA International, Impact on the Economy of the American Clean Energy and
Security Act of 2009 ( H. R. 2454) ( May 2009). CBO: CBO, CBO Cost Estimate: H. R. 2454 American Clean Energy and
Security Act of 2009 As ordered reported by the House Committee on Energy and Commerce, ( June 5, 2009). HF/ GI:
The Heritage Center for Data Analysis, The Economic Consequences of Waxman- Markey: An Analysis of the American
Clean Energy and Security Act of 2009 ( August 5, 2009).
CRS- 35
Figure 8. GDP per Capita ( 2005$) Under H. R. 2454, by Case
$ 40,000
$ 50,000
$ 60,000
$ 70,000
$ 80,000
$ 90,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GDP per Capita ( 2005$)
Reference Cases EPA/ ADAGE EPA/ IGEM
H. R. 2454 EPA/ ADAGE EPA/ IGEM
$ 40,000
$ 50,000
$ 60,000
$ 70,000
$ 80,000
$ 90,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GDP per Capita ( 2005$)
Reference Cases MIT/ EPPA CBO
H. R. 2454 MIT/ EPPA
$ 40,000
$ 50,000
$ 60,000
$ 70,000
$ 80,000
$ 90,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GDP per Capita ( 2005$)
Reference Cases NBCC/ CRA HF/ GI
H. R. 2454 NBCC/ CRA HF/ GI
$ 40,000
$ 50,000
$ 60,000
$ 70,000
$ 80,000
$ 90,000
2010 2015 2020 2025 2030 2035 2040 2045 2050
GDP per Capita ( 2005$)
Reference Cases EIA/ NEMS ACCF- NAM/ NEMS
H. R. 2454 EIA/ NEMS ACCF- NAM/ NEMS
Source: See Figure 7.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 36
To sort the situation out a little further, Figure 9 and Figure 10 show percentage reductions in
GDP per capita from H. R. 2454 ( relative to the cases’ respective reference cases) according to the
seven cases presented here.
With the exception of the HF/ GI cases, all projections for all years between 2020 and 2050 fell
into a range between a 0.1% increase ( EPA/ ADAGE for 2015 and 2020) and a 2.1% decrease
( EPA/ IGEM for 2050). As indicated in Figure 9 and Figure 10, the HF/ GI case produced
estimated percentage GDP per capita reductions in 2030 that were at least 50% greater than those
of all other cases, and over twice as high as the estimates from four of the six other cases. 60
The HF/ GI case used the most constrained offset supply of any of the analyses, particularly in the
out- years. Further, HF/ GI modeled only energy- related CO2 reductions, thus removing from the
analysis potential low- cost emissions reductions from non- CO2 gases.
The only year for which GDP per capita estimates were presented for all cases is 2030. The two
cases that use EIA’s NEMS model, the EIA/ NEMS and ACCF- NAM/ NEMS analyses show a
steep trajectory for percentage GDP per capita reductions between 2025 and 2030. However, the
NEMS model does not provide projections beyond 2030. Therefore, it is unclear whether this
trajectory would continue beyond 2030, ultimately resulting in projections similar to those of the
HF/ GI case, or whether the curve would flatten out or rise over time. 61 In this regard, it should be
noted that the EIA/ NEMS case builds up a 13 billion allowance bank ( based on EPA’s analyses of
banking behavior) in anticipation of the increasingly stringent caps and rising allowance prices to
2050; in contrast, HF/ GI does not permit any banking. Results for the other four cases
( EPA/ ADAGE, EPA/ IGEM, NBCC/ CRA, and MIT/ EPPA) show a much shallower decline rate,
with an overall decline in GDP per capita of between 1.3% and 2.1% in 2050 ( relative to the
baselines).
60 It should be noted that some sensitivity analyses conducted by EPA, EIA, MIT, and ACCF- NAM resulted in GDP
losses in the range projected by HF/ GI. Most of these sensitivity cases involved assumptions that severely restricted or
eliminated international credit availability.
61 For example, model may assume that certain options do not become available until a specified year, leading to higher
costs before the assumed year and lower costs later.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 37
Figure 9. Percentage Change in GDP per Capita Under H. R. 2454 Relative to the
Reference Case
- 4%
- 3%
- 2%
- 1%
0%
1%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Percentage Change in GDP per Capita
EPA/ ADAGE EPA/ IGEM NBCC/ CRA EIA/ NEMS
HF/ GI ACCF- NAM/ NEMS MIT/ EPPA
Note: Reductions are relative to each model’s reference case baseline.
Sources: CRS Analysis of data from each model. EPA/ ADAGE and EPA/ IGEM: “ Data Annex” available on the
EPA website at http:// www. epa. gov/ climatechange/ economics/ economicanalyses. html. MIT/ EPPA: Sergey Paltsev,
et al., “ Appendix C” of Paltsev et al., The Cost of Climate Policy in the United States, MIT Joint Program on the
Science and Policy of Global Change ( 2009). EIA/ NEMS: EIA, Energy Market and Economic Impacts of H. R. 2454,
the American Clean Energy and Security Act of 2009, ( August 2009). ACCF- NAM/ NEMS: SAIC, Analysis of The
Waxman- Markey Bill “ The American Clean Energy and Security Act of 2009” ( H. R. 2454) Using The National Energy
Modeling System ( NEMS), report by the ACCF and NAM ( 2009). NBCC/ CRA: CRA International, Impact on the
Economy of the American Clean Energy and Security Act of 2009 ( H. R. 2454) ( May 2009). HF/ GI: The Heritage
Center for Data Analysis, The Economic Consequences of Waxman- Markey: An Analysis of the American Clean Energy
and Security Act of 2009 ( August 5, 2009).
CRS- 38
Figure 10. Percentage Change in GDP per Capita Under H. R. 2454 Relative to the Reference Case, by Case
- 4%
- 3%
- 2%
- 1%
0%
1%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Percentage Change in GDP per Capita
EPA/ ADAGE EPA/ IGEM
- 4%
- 3%
- 2%
- 1%
0%
1%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Percenage Change in GDP per Capita
MIT/ EPPA
- 4%
- 3%
- 2%
- 1%
0%
1%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Percenage Change in GDP per Capita
NBCC/ CRA HF/ GI
- 4%
- 3%
- 2%
- 1%
0%
1%
2010 2015 2020 2025 2030 2035 2040 2045 2050
Percenage Change in GDP per Capita
EIA/ NEMS ACCF- NAM/ NEMS
Source: See Figure 9.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 39
Allowance Price Estimates
Figure 12 and Figure 13 present the estimated allowance prices for each of the cases examined
here. It is clear from the figures that assumptions about offset use and banking have a
fundamental influence on projected prices. For example, as noted earlier, the HF/ GI case does not
include banking and limits the use of offsets to 15% of the allowance pool ( far below what H. R.
2454 allows). 62 Likewise, the ACCF- NAM/ NEMS case limits offsets to a total of one billion
metric tons each year ( 95% from domestic sources and 5% from foreign sources). These two
cases result in the highest allowance price estimates by 2025. Further, while most cases assume
that use of foreign offsets will outpace domestic offsets in earlier years, the ACCF- NAM/ NEMS
case assumes that domestic offsets dominate ( the HF/ GI and MIT/ EPPA cases do not differentiate
between domestic and foreign offsets).
Along with the HF/ GI and ACCF- NAM/ NEMS cases, the EIA/ NEMS case shows the most rapid
increase in allowance prices between 2020 and 2030. This is likely a key factor in the rapid
increase in percentage GDP loss shown above in Figure 9 and Figure 10. In each of these cases,
the banking behavior assumed may have some influence on the slope. The HF/ GI case does not
allow banking, while the ACCF/ NAM/ NEMS case limits banking to 5 billion metric tons. The
EIA/ NEMS case allows more banking, requiring a total bank of 13 billion metric tons in 2030.63
In contrast, the EPA/ IGEM case projects that the total bank of allowances would peak at roughly
20 billion metric tons in 2029. As noted above, banking allows firms to spread their costs and
decision- making over time, generally raising allowance prices in early years and lowering them in
later years.
Of the remaining cases ( EPA/ ADAGE, EPA/ IGEM, NBCC/ CRA, MIT/ EPPA, and CBO),
allowance prices generally fall within a band ( between $ 13 and $ 21 in 2015), and increase at a
steady rate through 2050 ( between 4% and 6% annually). For EPA, MIT, and CRA, these smooth
allowance price curves are likely part of the reason for the relatively smooth projections for GDP
loss under these cases in Figure 9 and Figure 10; CBO did not project GDP effects.
Under the HF/ GI case offset prices are well below allowance prices from 2020 onward. This
suggests that, if available, more offsets would be purchased than the 15% assumed in the HF/ GI
case. Indeed, the knee in the HF/ GI allowance price “ curve” is the result of the low- cost offsets
being fully utilized by 2018, resulting in a shift in marginal costs to higher utility emissions
control costs ( mostly natural gas capacity substitution for coal- fired capacity). All of the cases
generally agree that the availability of offsets significantly lowers the cost of the program;
conversely, if offsets are unavailable, the cost of the program will likely increase significantly, as
discussed later.
62 For example, as written H. R. 2454 would allow an entity to meet up to approximately 30% of its requirement using
offsets in 2012, a percentage that increases to roughly 67% by 2050.
63 As the NEMS model does not make projections beyond 2030, in its modeling EIA assumed that a total bank of 13
billion metric tons would be maintained in 2030. “ In anticipation of increasingly stringent caps and rising allowance
prices after 2030, covered entities and investors are assumed to amass an aggregate allowance bank of approximately
13 BMT by 2030 through a combination of offset usage and emission reductions that exceed the level required under
the emission caps.”: EIA, Energy Market and Economic Impacts of H. R. 2454, the American Clean Energy and
Security Act of 2009, ( August 2009), p. viii. Sensitivity analysis by EIA indicated that if this bank were not required,
allowance prices would decrease by about one third in 2020 and 2030.
Climate Change: Costs and Benefits of the Cap- and- Trade Provisions of H. R. 2454
Congressional Research Service 40
The Role of Discount Rates
Economic analyses use discount rates to show how entities ( e. g., individuals, businesses, government) evaluate the
opportunity cost of money ( or good