For other versions of this document, see http://wikileaks.org/wiki/CRS-RL34520 ------------------------------------------------------------------------------ Order Code RL34520 Climate Change: Comparison and Analysis of S. 1766 and S. 2191 (S. 3036) June 4, 2008 Larry Parker and Brent Yacobucci Specialists in Energy and Environmental Policy Resources, Science, and Industry Division Climate Change: Comparison and Analysis of S. 1766 and S. 2191 (S. 3036) Summary Several proposals designed to address greenhouse gases have been introduced in the 110th Congress. Two proposals, S. 1766, introduced by Senators Bingaman and Specter, and S. 2191, introduced by Senators Lieberman and Warner and reported by the Senate Committee on Environment and Public Works on May 20, 2008, are receiving increased scrutiny in preparation for Senate debate on S. 2191. On May 20, 2008, Senator Boxer introduced S. 3036, which is identical to the reported version of S. 2191 except that it contains a proposed budget amendment to make the bill deficit neutral. On June 2, 2008, the Senate invoked cloture on a motion to proceed on S. 3036, allowing discussion of the bill, but not allowing amendments to be introduced. As of June 4, 2008, it is unclear whether the Senate will agree on the motion to proceed, leading to further discussion and allowing amendments to be introduced. The two proposals -- S. 1766 and S. 2191 -- would establish market-based systems to limit emissions of greenhouse gases. However, the proposals differ in how those systems would work. S. 2191 would establish an absolute cap on emissions from covered entities and would allow entities to trade emissions under that cap. S. 1766 would establish emissions targets on covered entities and allow those entities to either meet emission reduction targets through a trading program or make a safety valve payment in lieu of reducing emissions. Under both proposals, short-term U.S. emissions would likely be below a business-as-usual scenario, although reductions under S. 2191 are guaranteed by the cap and are projected to be larger, particularly over the long-term. In contrast, costs under S. 1766 are likely to be lower and more predictable than under S. 2191. A major policy question is whether one is more concerned about the possible economic cost of the program and therefore willing to accept some uncertainty about the amount of reduction received (i.e., favoring a "safety valve" like S. 1766); or one is more concerned about achieving a specific emission reduction level with costs handled efficiently, but not capped (i.e., pure tradeable permits as in S. 2191). S. 2191 leans toward the quantity (total emissions) side of the equation; S. 1766 leans toward the price side of the equation. Contents Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Proposed Senate Legislation: Comparison of S. 1766 and S. 2191 . . . . . . . . . . . . 2 Results of Analyses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Emissions Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Impact on GDP Per Capita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Allowance Prices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Auction Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Analysis: Addressing the Price versus Quantity Issue . . . . . . . . . . . . . . . . . . . . . 19 Uncertainty in Emissions Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Uncertainty in Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Price versus Quantity: The Safety Valve . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 List of Figures Figure 1. Total Estimated U.S. Greenhouse Gas Emissions Under S. 1766 and S. 2191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 2. Total Estimated U.S. Greenhouse Gas Emissions From Each Model Under S. 1766 and S. 2191 . . . . . . . . . . . . . . . . . . . . . . 12 Figure 3. Estimated GDP per Capita (2005$) Under S. 1766 and S. 2191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Figure 4. Estimated GDP per Capita (2005$) From Each Scenario Under S. 1766 and S. 2191 . . . . . . . . . . . . . . . . . . . . . . . . . 14 Figure 5. Percentage Change in GDP Per Capita Under S. 1766 and S. 2191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Figure 6. Percentage Change in GDP per Capita From Each Scenario Under S. 1766 and S. 2191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 7. Projected Allowance Prices Under S. 1766 and S. 2191 . . . . . . . . . . . 17 Figure 8. Estimated Annual Revenues From Allowance Auctions Under S. 1766 and S. 2191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Figure 9. EPA/ADAGE Analysis of S. 1766 . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 List of Tables Table 1: Comparison of Selected Provisions of S. 1766 and S. 2191 . . . . . . . . . . 4 Table 2. Assumptions about the Availability of Current Electric Generating Technologies and CCS in 2030 . . . . . . . . . . . . . . . . . . . . . . . . . 22 Climate Change: Comparison and Analysis of S. 1766 and S. 2191 (S. 3036) Introduction Climate change is a global issue, but proposed responses generally would require action at the national level. In 1992, the United States ratified the United Nations Framework Convention on Climate Change (UNFCCC), which called on industrialized countries to take the lead in reducing the six primary greenhouse gases to 1990 levels by the year 2000.1 For more than a decade, a variety of voluntary and regulatory actions have been proposed or undertaken in the United States, including monitoring of power plant carbon dioxide emissions, improved appliance efficiency, and incentives for developing renewable energy sources. However, greenhouse gas emissions have continued to increase. In 2001, President George W. Bush rejected the Kyoto Protocol, which called for legally binding commitments by developed countries to reduce their greenhouse gas emissions.2 He has also rejected the concept of mandatory emissions reductions.3 Since then, the Administration has focused U.S. climate change policy on voluntary initiatives to reduce the growth in greenhouse gas emissions. In contrast, in 2005, the Senate passed a Sense of the Senate resolution on climate change declaring that Congress should enact legislation establishing a mandatory, market-based program to slow, stop, and reverse the growth of greenhouse gases at a rate and in a manner that "will not significantly harm the United States economy" and "will encourage comparable action" by other nations.4 A number of congressional proposals to advance programs designed to reduce greenhouse gases have been introduced in the 110th Congress. These have generally followed one of three tracks. The first is to improve the monitoring of greenhouse gas emissions to provide a basis for research and development and for any potential future reduction scheme. The second is to enact a market-oriented greenhouse gas 1 Under the United Nations Framework Convention on Climate Change (UNFCCC), those gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). Some greenhouse gases are controlled under the Montreal Protocol on Substances that Deplete the Ozone Layer, and are not covered under UNFCCC. 2 For further information, see CRS Report RL33826, Climate Change: The Kyoto Protocol, Bali "Action Plan," and International Actions, by Susan R. Fletcher and Larry Parker. 3 President George W. Bush, President Bush's Speech on Global Climate Change (June 11, 2001). 4 S.Amdt. 866, passed by voice vote after a motion to table failed 43-54, June 22, 2005. CRS-2 reduction program along the lines of the trading provisions of the current acid rain reduction program established by the 1990 Clean Air Act Amendments. The third is to enact energy and related programs that would have the added effect of reducing greenhouse gases:5 an example would be a requirement that electricity producers generate a portion of their electricity from renewable resources (a renewable portfolio standard). This report focuses on the second category of bills, and on two bills in particular: S. 1766 and S. 2191 (as reported).6 Note that CRS has a more comprehensive discussion of the costs and benefits of S. 2191 available.7 Many of the caveats and limitations about modeling and forecasting in that report are applicable to this one. Readers are urged to consult that report in addition to reading this one. Proposed Senate Legislation: Comparison of S. 1766 and S. 2191 S. 1766. Introduced July 11, 2007, by Senators Bingaman and Specter, S. 1766 would set emissions targets on most of the country's greenhouse gas emissions.8 Beginning in 2012, covered entities would face emissions limits, with emissions targets set at their 2006 levels in 2020. The emissions targets would decline steadily until 2030, when the emission target would be set at the entities' 1990 levels. For each ton of carbon dioxide equivalent, covered entities can comply with the bill by submitting an allowance through a trading program or by paying a safety valve price (called a Technology Accelerator Payment or TAP). Under the trading program, allowances are allocated to various entities, including covered entities; eligible facilities (non-covered facilities that may be in covered sectors), such as coal mines and carbon-intensive industries; states; and parties conducting sequestration activities. Initially, 24% of all allowances are auctioned, a percentage that increases over time. The TAP is set at $12 per metric ton of carbon dioxide equivalent in 2012, increasing 5% annually above the rate of inflation. The bill also requires countries that do not take comparable action to control emissions to submit special 5 For discussions of relevant energy legislation, see CRS Report RL34294, Energy Independence and Security Act of 2007: A Summary of Major Provisions, by Fred Sissine, and CRS Report RL33831, Energy Efficiency and Renewable Energy Legislation in the 110th Congress, by Fred Sissine, et al. 6 For a review of additional climate change related bills, see CRS Report RL34067, Climate Change Legislation in the 110th Congress, by Jonathan L. Ramseur and Brent D. Yacobucci. 7 CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci. 8 Greenhouse gas emitting activities such as methane emissions from landfills, coal mines, animal waste, and municipal wastewater projects, along with nitrous oxide emissions from agricultural soil management, wastewater treatment, and manure management, are not included under the targets, although credits for use by covered entities are available or may be generated by verified greenhouse gas reductions in these areas. CRS-3 allowances (or their foreign equivalent) to accompany imports into the United States of covered greenhouse gas intensive goods and/or primary products. S. 2191. Senators Lieberman and Warner introduced S. 2191 on October 18, 2007. As reported by the Senate Committee on Environment and Public Works the bill would cover emissions from petroleum producers and importers, facilities that produce or import more than 10,000 tons (of carbon dioxide equivalent) of fluorinated chemicals annually, any facility that uses more than 5,000 tons of coal annually, any natural gas processing plant or importer (including LNG), and any facility that emits more than 10,000 tons (of carbon dioxide equivalent) of HFCs annually as a byproduct of hydrochloro-fluorocarbon production. S. 2191 is estimated by its sponsors to reduce total U.S. greenhouse gas emissions 19% below 2005 levels by 2020 (up from 15% as introduced) and 63% below 2005 levels by 2050. The bill would establish a Carbon Market Efficiency Board to observe the allowance market and implement cost-relief measures if necessary. Like S. 1766, S. 2191 also requires countries that do not take comparable action to control emissions to submit special allowances (or their foreign equivalent) to accompany exports to the United States of any covered greenhouse gas intensive goods and primary products. On April 10, 2008, a proposed amendment to S. 2191 was submitted to the Congressional Budget Office (CBO) to be included in the scoring of the bill. The amendment would provide for some of the auctioned revenues to be put aside for deficit reduction purposes. On May 20, Senator Boxer introduced S. 3036, which is identical to the reported version of S. 2191 except that it contains the above deficit reduction amendment. On June 2, 2008, the Senate invoked cloture on a motion to proceed on S. 3036. Table 1 summarizes the major provisions of each bill. CRS-4 Table 1: Comparison of Selected Provisions of S. 1766 and S. 2191 S. 2191 as reported, with deficit Topic S. 1766 (Bingaman/Specter) reduction amendment (S. 3036) (Lieberman/Warner) Emission Emissions targets for all Absolute cap on total emissions reduction/ covered entities. from all covered entities. limitation scheme Responsible To be determined by the EPA. agency President. Greenhouse Carbon dioxide, methane, Same. gases defined nitrous oxide, hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6) Specific In 2012, the emissions target In 2012, emissions from covered emissions for covered entities is set at entities are capped at 5.775 billion limits 6.652 billion metric tons. metric tons. Cap is reduced Target is reduced annually annually thereafter until 2050. thereafter until 2030. Emission target for covered Emission cap for covered sources in sources in 2020 is 6.188 billion 2020 is 4.924 billion metric tons. metric tons. Emission target for covered Emission cap for covered sources in sources in 2030 is 4.819 billion 2030 is 3.860 billion metric tons. metric tons. Reductions beyond 2030 would Emission cap for covered sources in require additional 2040 is 2.796 billion metric tons. congressional action. Emission cap for covered sources in If the President determines that 2050 is 1.732 billion metric tons. scientific, technological, and international considerations suggest further reductions are warranted, his/her recommendations are to be considered by Congress under expedited procedures. Covered Regulated fuel distributors Assuming no capture of greenhouse entities include petroleum refineries, gases (GHGs), any producer or natural gas processing plants, importer of petroleum- or coal-based and importers of petroleum liquid or gaseous fuel that emits products, coke, or natural gas. GHGs, or any facility that produces Regulated coal facilities are or imports more than 10,000 tons entities that consume more than carbon dioxide equivalent (CO2e) of 5,000 tons of coal a year. GHG chemicals annually; any Regulated nonfuel entities are facility that uses more than 5,000 producers and importers of tons of coal annually; any natural HFCs, PFC, SF6 , N2O, or gas processing plant or importer CRS-5 S. 2191 as reported, with deficit Topic S. 1766 (Bingaman/Specter) reduction amendment (S. 3036) (Lieberman/Warner) products containing such (including LNG); and any facility compounds, and adipic acid that emits more than 10,000 CO2e of and nitric acid plants, HFCs annually as a byproduct of aluminium smelters, and hydrochloro-fluorocarbon facilities that emits HFCs as a production. byproduct of HCFC production. General Two compliance systems are A tradeable allowance system is allocating and provided. Covered entities may established. Off the top, a share of implementing choose which one to use or allowances is auctioned for deficit strategy employ a combination of both: reduction increasing from 6.1% in 2012 to 15.99% in 2031 and First, a tradeable allowance thereafter. Then the "remainder system is established. In 2012, allowances" are distributed in 2012 53% of allowances are (adjusted in future years) as follows: allocated to covered and 38% of allowances to covered eligible industrial entities; 23% electric utilities, industrial facilities, allocated to states and for and cooperatives, declining steadily sequestration and early to zero in 2031; 10.5% to states for reduction activities; 24% are conservation, extra reductions, and auctioned to fund low income other activities; 7.5% for various assistance, carbon capture and sequestration activities; 11% storage, and adaptation allocated for electricity and natural activities. The percentage gas consumer assistance; 5% for auctioned increases steadily, early reductions; 0.5% for tribal reaching 53% by 2030. governments; 1% for methane reduction projects; and 21.5% (plus Second, a Technology an early auction of 5%) auctioned to Accelerator Payment (i.e., fund technology deployment, carbon safety valve) may be paid in capture and storage, low income and lieu of submitting one or more rural assistance, and adaptation allowances. activities, as well as program management. The percentage auctioned by the Climate Change Credit Corporation (CCCC) increases steadily, reaching 69.5% by 2031 and thereafter. Public Beginning in 2012, 24% of Beginning in 2012, 6.1% of total sale/auction of available allowances are allowances are auctioned for deficit allowances auctioned to fund low income reduction. Further, 21.5% of assistance, technology, and "remainder allowances" (plus 5% adaptation activities. The from an early auction of 2012 percentage auctioned increases remainder allowances) are auctioned steadily, reaching 53% by to fund the activities of the CCCC. 2030; after that it increases 1 This percentage increases steadily to percentage point annually 69.5% by 2031 and thereafter. through 2043. Revenues from the auction are to be Revenues from the auction are deposited in one of ten funds created to be deposited in one of three in the Department of the Treasury: funds created by the Deficit Reduction Fund, Technology CRS-6 S. 2191 as reported, with deficit Topic S. 1766 (Bingaman/Specter) reduction amendment (S. 3036) (Lieberman/Warner) Department of the Treasury: Deployment, Energy Independence the Energy Technology Acceleration Fund, Energy Deployment Fund, the Climate Assistance Fund, Climate Change Adaptation Fund, and the Worker Training Fund, Adaptation Energy Assistance Fund. Fund, and the Climate Change and National Security Fund, as well as a fund for program management and two Emergency Firefighting Funds. Cost-limiting A Technology Accelerator A Carbon Market Efficiency Board safety valve Payment (TAP) (i.e., safety is established to observe the valve) may be paid in lieu of allowance market and implement submitting one or more cost-relief measures if necessary. allowances. For 2012, the TAP Measures include increased price is set at $12 per metric allowance borrowing from future ton, rising 5% above inflation allocations; increased use of offsets annually thereafter. and foreign allowances; expanded payback period for such allowances; If the President determines the lower interest charged for borrowed TAP should be increased or allowances; and expanded total eliminated to achieve the act's borrowed allowances. Increased purposes, his recommendations borrowing is limited to 5% of the are to be considered by emission cap and the repayment Congress under expedited schedule cannot be longer than 15 procedures. years. If the President determines a national security emergency exists, the President may temporarily adjust, suspend, or waive any regulation promulgated under this program (subject to judicial review). Penalty for Excess emissions penalties are Excess emission penalties per ton non- equal to three times the TAP are equal to the higher of $200 or compliance price for that calendar year. In three times the mean market price addition, civil penalties are for allowances during the year the $25,000 a day for violating allowance was due, plus a 1-to-1 provisions of the act. offset from a future year allocation. Domestic Establishes program to provide Up to 15% of allowance requirement Offsets / credits obtained through may be met through domestic Credits verified domestic reductions offsets: emissions reductions from from non-covered activities agricultural sequestration, land use (offsets). No limit the use of change, forestry, manure domestic offsets to meet management, and other specified allowance requirement. activities. Percentage may be increased by the Carbon Market Efficiency Board International If the President determines that Up to 15% of allowance requirement Offsets / emission credits issued under may be met through certified foreign Credits foreign programs or foreign allowance markets. Percentage may offset projects are comparable, be increased by the Carbon Market CRS-7 S. 2191 as reported, with deficit Topic S. 1766 (Bingaman/Specter) reduction amendment (S. 3036) (Lieberman/Warner) he may promulgate rules Efficiency Board. allowing such credits or offsets to be used to meet the act's emission targets. No more than 10% of an entity's emissions target can be met through foreign emission credits and foreign offset projects. Banking Banking of allowances is Banking of allowances is permitted; permitted; allowances may be allowances may be saved for use in saved for use in future years. future years. Early One percent of allowances Five percent of "remainder reduction available from 2012 through allowances" established for 2012 credits and 2020 are allocated to early (declining steadily to zero in 2017) bonus credits reductions reported under the are allocated to early reductions 1992 Energy Policy Act's reported under the 1992 Energy 1605(b) program, EPA's Policy Act's 1605(b) program, Climate Leaders Program, or a EPA's Climate Leaders Program, or state-administered or privately a state-administered or voluntary administered registry. program. Geologic sequestration projects Four percent of remainder built from 2008 through 2030 allowances established for 2012 receive bonus allowances for through 2035 are available on a the first 10 years of operation. steadily declining basis from 2012 through 2039 for geologic sequestration projects for electric generating plants built from 2008 through 2035. The bonus allowances are limited to the first 10 years of operation. Revenue A new Energy Technology Off the top, a growing share of recycling Deployment Fund is funded by allowances are auctioned for deficit TAP revenues and some reduction. auction proceeds. Activities to be funded include zero- or low- Revenues received by "remainder carbon energy, advanced coal allowance" auctions are to be and sequestration, cellulosic received by the CCCC. Activities to biomass, and advanced be funded include technology technology vehicles. deployment activities (including zero- or low-carbon energy, A new Climate Adaptation advanced coal and sequestration, Fund is funded by some cellulosic biomass, and advanced auction proceeds. Activities to technology vehicles); assistance be funded include coastal, activities (including low income, arctic, and fish and wildlife weatherization, and rural impact mitigation. assistance); worker transition assistance; and adaptation activities A new Energy Assistance Fund (including wildlife conservation and is funded by some auction restoration, aquatic ecosystems, and CRS-8 S. 2191 as reported, with deficit Topic S. 1766 (Bingaman/Specter) reduction amendment (S. 3036) (Lieberman/Warner) proceeds. Activities to be coastal habitats). funded include low-income and rural energy assistance, and Revenues would also fund a Climate weatherization. Change and National Security Program within the U.S. Agency for International Development to report annually on the ramifications of climate change for national security. Such sums as are necessary to maintain a fund of $1.1 billion is directed toward wildland fire suppression activities by the Bureau of Land Management and the Forest Service. Other key Provisions include periodic Provisions require new appliance provisions review of the activities of the standards in 2012 and provide for nation's five largest trading new model building efficiency partners, an National Academy standards by 2010. of Sciences assessment of the status of climate change Beginning in 2018, requires annual science, emission control review of foreign countries' GHG technologies, and energy control actions. security implications. Beginning in 2019, requires foreign Beginning in 2019, requires countries that do not take foreign countries that do not comparable emission reduction take comparable emission actions to submit international reduction actions to submit reserve allowances (or foreign international reserve equivalents) to accompany exports allowances (or foreign of any covered greenhouse gas equivalents) to accompany intensive goods and primary exports of any covered products to the United States. Least greenhouse gas intensive goods developed nations or those that and primary products to the contribute no more than 0.5% of United States. Least-developed global emissions are excluded. nations or those that contribute no more than 0.5% of global Requires periodic review of the emissions are excluded. bill's implementation and purposes Proceeds from the sale of such by the NAS. reserve allowances are to be deposited in an International Establishes a separate cap-and-trade Energy Deployment Fund to program to limit U.S. production encourage and finance and consumption of HFCs. international technology development. Establishes a low carbon fuel standard (LCFS) requiring transportation fuels to have, on average, 10% lower lifecycle emissions per unit of energy by 2020. CRS-9 Results of Analyses Two studies have been completed that compare S. 1766 and S. 2191 under the same baseline conditions. The most comprehensive analysis has been conducted by the U.S. Environmental Protection Agency (EPA). The reports are entitled EPA Analysis of the Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008), and EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14, 2008).9 The analyses employ a suite of models and basecases, along with some useful sensitivity analysis. This report will focus on three of the models and two basecases.10 ! The first model is ADAGE: a computable general equilibrium (CGE) model developed by RTI International.11 The S. 1766 and S. 2191 cases employing the reference basecase are designated EPA/ADAGE-REF in this report, while the cases employing the high technology basecase are designated EPA/ADAGE-TECH. ! The second model is IGEM: a CGE model developed by Dale Jorgenson Associates.12 The cases employing the reference basecase are designated EPA/IGEM-REF in this report, while the cases employing the high technology basecase are designated EPA/IGEM- TECH. ! The third model is IPM: a dynamic, deterministic linear programming model of the U.S. electric power sector developed by ICF Resources. The cases employing the IPM model are designated EPA/IPM in this report.13 A second analysis has been conducted by the Energy Information Administration (EIA). The report is entitled Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008) and included an updated analysis of S. 1766.14 The analysis employs EIA's NEMS model: 9 The report and supporting model runs are available at [http://www.epa.gov/climatechange/ economics/economicanalyses.html] 10 Other EPA models focus on forests and agriculture, non-CO2 gases, and climate assessment. 11 For more information on the ADAGE model, see [http://www.rti.org/adage] 12 For more information on the IGEM model, see [http://post.economics.harvard.edu/faculty/ jorgenson/papers/papers.html] 13 For more information on the IPM model, see [http://www.epa.gov/airmarkets/progsreg/ epa-ipm/index.html] 14 EIA's previous report was entitled Energy Market and Economic Impacts of S. 1766, the Low Carbon Economy Act of 2007 (January 2008). CRS-10 a macroeconomic forecasting model with extensive energy technology detail.15 In addition to conducting a "core" analysis of S. 2191 using its preliminary 2008 Annual Energy Outlook (AEO) Baseline, EIA also conducts some useful sensitivity analysis that focuses on the upside risk of increased energy prices under S. 2191. However, EIA did not update the sensitivity analysis it had previously conducted on S. 1766. The core16 S. 2191 analysis and the updated S. 1766 analysis are designated EIA/NEMS in this report. Emissions Reductions Figures 1 and 2 present greenhouse gas emissions under S. 1766 and S. 2191 as estimated by the models. For S. 2191, the spread in projected emissions reductions is largely the result of two factors: (1) estimated emissions growth in the 10%-15% of the economy not covered under the bill, and (2) estimated use of international allowances or offsets to meet emission reduction requirements. If a covered entity submits an international allowance or offset for compliance purposes, the entity can emit a comparable amount domestically. This latter point is most evident in the ADAGE estimates. For S. 1766, the spread would also be in response to these uncertainties, although the EPA cases and EIA's updated analysis did not include international credits. What the figures do not show is that the TAP (safety valve) is increasingly used by covered entities after 2030, preventing the projected emissions from achieving the targets specified under the bill. This result is discussed more fully later. 15 For more on the NEMS model, see [http://www.eia.doe.gov/oiaf/aeo/overview/index.html] 16 The use of the word "core" should not imply that EIA believes it to be the most likely scenario. CRS-11 Figure 1. Total Estimated U.S. Greenhouse Gas Emissions Under S. 1766 and S. 2191 12000 11000 GHG Emissions (MMT CO2 Eq.) 10000 9000 8000 7000 6000 5000 4000 2010 2020 2030 2040 2050 Reference Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS S. 2191 Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS S. 1766 Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS Sources for Figures 1 and 2: U.S. Environmental Protection Agency (EPA), EPA Analysis of the Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008). Notes: Estimates beyond 2030 are speculative for three reasons: 1) beyond 2030, S. 1766 requires additional congressional action to further tighten the emissions cap; 2) EIA's NEMS model does not extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci. CRS-12 Figure 2. Total Estimated U.S. Greenhouse Gas Emissions From Each Model Under S. 1766 and S. 2191 12000 GHG Emissions (MMT CO2 Eq.) 11000 10000 9000 8000 7000 6000 5000 4000 2010 2020 2030 2040 2050 Reference Cases EPA/ADAGE-REF EPA/ADAGE-TECH S. 2191 Cases EPA/ADAGE-REF EPA/ADAGE-TECH S. 1766 Cases EPA/ADAGE-REF EPA/ADAGE-TECH 12000 GHG Emissions (MMT CO2 Eq.) 11000 10000 9000 8000 7000 6000 5000 4000 2010 2020 2030 2040 2050 Reference Cases EPA/IGEM-REF EPA/IGEM-TECH S. 2191 Cases EPA/IGEM-REF EPA/IGEM-TECH S. 1766 Cases EPA/IGEM-REF EPA/IGEM-TECH 12000 GHG Emissions (MMT CO2 Eq.) 11000 10000 9000 8000 7000 6000 5000 4000 2010 2020 2030 2040 2050 Reference Cases EIA/NEMS S. 2191 Cases EIA/NEMS S. 1766 Cases EIA/NEMS CRS-13 Impact on GDP Per Capita Figures 3 and 4 present the estimated GDP per capita as estimated by each of the scenarios for the reference case and under S. 1766 and S. 2191. Not surprisingly, the GDP effects of both bills are absorbed by the uncertainty reflected in the reference case assumptions. In the five scenarios, the increase in GDP between 2010 and 2030 ranges between 62% and 81% in the base cases. Under S. 2191, the more stringent bill, the range is 62% to 80%. These figures indicate the models' conclusions that the economy continues to grow under S. 1766 and S. 2191, albeit at a somewhat slower rate than under their respective reference cases. The virtual superimposition of the curves in Figures 3 and 4 shows how little variability there is between the base cases and the model results. Figure 3. Estimated GDP per Capita (2005$) Under S. 1766 and S. 2191 $110,000 $100,000 GDP per Capita (2005$) $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 2010 2020 2030 2040 2050 Reference Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS S. 2191 Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS S. 1766 Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS Sources for Figures 3 and 4: U.S. Environmental Protection Agency (EPA), EPA Analysis of the Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008). Notes: Estimates beyond 2030 are speculative for three reasons: 1) Beyond 2030, S. 1766 requires additional congressional action to further tighten the emissions cap; 2) EIA's NEMS model does not extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036 by Larry Parker and Brent Yacobucci. CRS-14 Figure 4. Estimated GDP per Capita (2005$) From Each Scenario Under S. 1766 and S. 2191 $110,000 $100,000 GDP per Capita (2005$) $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 2010 2020 2030 2040 2050 Reference Cases EPA/ADAGE-REF EPA/ADAGE-TECH S. 2191 Cases EPA/ADAGE-REF EPA/ADAGE-TECH S. 1766 Cases EPA/ADAGE-REF EPA/ADAGE-TECH $110,000 $100,000 GDP per Capita (2005$) $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 2010 2020 2030 2040 2050 Reference Cases EPA/IGEM-REF EPA/IGEM-TECH S. 2191 Cases EPA/IGEM-REF EPA/IGEM-TECH S. 1766 Cases EPA/IGEM-REF EPA/IGEM-TECH $110,000 $100,000 GDP per Capita (2005$) $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 2010 2020 2030 2040 2050 Reference Cases EIA/NEMS S. 2191 Cases EIA/NEMS S. 1766 Cases EIA/NEMS CRS-15 To help sort this out further, Figures 5 and 6 present the relative percentage reduction in GDP per capita for the two bills. With the exception of the IGEM model, all projections for S. 1766 and S. 2191 showed a zero to 1% decrease in GDP per capita through 2030. As discussed in the previous CRS report, IGEM's higher estimates are the result of its structure and assumptions.17 Figure 5. Percentage Change in GDP Per Capita Under S. 1766 and S. 2191 0% -1% Change in GDP per Capita -2% -3% -4% -5% -6% -7% 2010 2020 2030 2040 2050 S. 2191 Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS S. 1766 Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS Sources for Figures 5 and 6: U.S. Environmental Protection Agency (EPA), EPA Analysis of the Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008). Notes: Estimates beyond 2030 are speculative for three reasons: 1) Beyond 2030, S. 1766 requires additional congressional action to further tighten the emissions cap; 2) EIA's NEMS model does not extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci. 17 For example, the IGEM model assumes that as prices increase, people tend to work less and buy less, effectively multiplying the effect of any reduction in economic output. For a more detailed discussion, see CRS Report RL34489, p. 35. CRS-16 Figure 6. Percentage Change in GDP per Capita From Each Scenario Under S. 1766 and S. 2191 0% Change in GDP per Capita -1% -2% -3% -4% -5% -6% -7% 2010 2020 2030 2040 2050 S. 2191 Cases EPA/ADAGE-REF EPA/ADAGE-TECH S. 1766 Cases EPA/ADAGE-REF EPA/ADAGE-TECH 0% -1% Change in GDP per Capita -2% -3% -4% -5% -6% -7% 2010 2020 2030 2040 2050 S. 2191 Cases EPA/IGEM-REF EPA/IGEM-TECH S. 1766 Cases EPA/IGEM-REF EPA/IGEM-TECH 0% Change in GDP per Capita -1% -2% -3% -4% -5% -6% -7% 2010 2020 2030 2040 2050 S. 2191 Cases EIA/NEMS S. 1766 Cases EIA/NEMS CRS-17 Allowance Prices Figures 7 and 8 present the estimated allowance prices for S. 1766 and S. 2191. Generally, the figures indicate that S. 1766's TAP price is the controlling price, achieving the cost certainty for which the safety valve is designed. As expected, the allowance prices for S. 2191 slowly spread in the out-years, as evident in the figures. It should be noted that the EIA/NEMS case for S. 2191 mimics the extension of S. 2191 to 2050 by requiring the model to have a 5 billion allowance bank at the end of 2030. In the case of S. 1766, by 2030, the bank has been exhausted and covered entities are making TAP payments in lieu of additional reductions. Figure 7. Projected Allowance Prices Under S. 1766 and S. 2191 250 200 Allowance Price (2005$) 150 100 50 0 2010 2020 2030 2040 2050 S. 2191 Cases EPA/ADAGE-REF EPA/ADAGE-TECH EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS S. 1766 Cases EPA/All Cases EIA/NEMS Sources for Figures 7 and 8: U.S. Environmental Protection Agency (EPA), EPA Analysis of the Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March 14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008). Notes: Estimates beyond 2030 are speculative for three reasons: 1) Beyond 2030, S. 1766 requires additional congressional action to further tighten the emissions cap; 2) EIA's NEMS model does not extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci. For S. 1766, in both EPA models and in all cases presented, the allowance price is equal to the TAP ("safety valve") price for that year. CRS-18 Auction Revenues Both S. 2191 and S. 1766 would auction a significant portion of allowances, although auction revenues would be significantly higher in S. 2191 for two reasons: 1) S. 2191 allocates more allowances for auction; and 2) S. 2191's allowance prices are higher. Starting in 2012, both bills would auction roughly a quarter of all allowances. In later years, S. 2191 auctions a larger share of allowances than S. 1766: in 2030, S. 2191 would auction roughly 68% of allowances, while S. 1766 would auction 53%. Also, as shown in Figures 7 and 8, in all models, S. 2191 has higher prices than S. 1766 (in some cases two to three times as high). Figure 9 shows estimated auction revenues based on allowance prices in the EPA/ADAGE- TECH case. Using allowance prices from the other scenarios would show an even wider discrepancy between auction revenues, as the EPA/ADAGE-TECH case presents the lowest allowance price for S. 2191, while all of the models peg S. 1766 allowance prices at or near the TAP price. Figure 8. Estimated Annual Revenues From Allowance Auctions Under S. 1766 and S. 2191 $140,000 $120,000 Annual Auction Revenue (million 2005$) $100,000 $80,000 $60,000 $40,000 $20,000 $0 2012 2017 2022 2027 S. 2191 S. 1766 Source: CRS Analysis of S. 2191 and S. 1766 using allowance price estimates from EPA/ADAGE- TECH case. CRS-19 CRS has chosen to present auction revenues only to 2030 for two reasons. First, S. 1766 requires a new congressional vote (under special procedures) in order to continue beyond 2030. Second, based on the analyses available, the TAP becomes the dominant compliance strategy after about 2030, suggesting Congress may want to reassess its level at that time, if additional reductions are considered warranted. Analysis: Addressing the Price versus Quantity Issue S. 1766 and S. 2191 represent different answers to the choice between controlling the price and the quantity of emissions under a market-based control strategy. In general, market-based mechanisms to reduce greenhouse gas emissions focus on specifying either the acceptable emissions level (quantity) or compliance costs (price), allowing the marketplace to determine the economically efficient solution for the other variable. If one is more concerned about the possible economic cost (price) of the program, then use of a safety valve to limit costs could appear to some more appropriate, even through it introduces some uncertainty about the amount of reduction achieved (quantity). In contrast, if one is more concerned about achieving a specific emission reduction level (quantity), with costs handled efficiently, but not capped, a tradeable permit program without a safety valve may be viewed as more appropriate. In the case of these alternatives, S. 2191 leans toward the quantity (total emissions) side of the equation; S. 1766 leans toward the price side of the equation. Uncertainty in Emissions Reductions The projected emission reductions under S. 2191 are more certain than under S. 1766. There are two key sources of uncertainty for S. 2191: (1) the precise number of covered entities that must meet the reduction requirements and the future emissions growth from non-covered entities, and (2) the availability and use of international allowances that meet the bill's compliance requirement but do not reduce domestic emissions. S. 2191 is estimated to cover about 85% of the country's greenhouse gas emissions. In addition, the analyses presented here assume that international credits that meet S. 2191's eligibility requirements would be available at reasonable prices. In other analyses of S. 2191, this assumption is disputed. S. 1766 has these uncertainties, plus an additional one in the form of the safety valve. As indicated in the Results section, the cases reviewed here generally assume that the allowance price equals the safety valve price or is very close. This results in banking in the early years of the program and use of that bank later. As the program approaches 2030, the bank is exhausted and covered entities begin making TAP payments. As illustrated in Figure 10, the result is an actual emissions level that is higher than the level targeted by the bill.18 18 In early years, as the bank is built up, both annual emissions and cumulative emissions are below the targets in the bill. As the bank is used up, annual emissions exceed the targets, and (continued...) CRS-20 Because the TAP price becomes the allowance price over time in all cases under S. 1766, projected emissions exceed the bill's target once the TAP is triggered. This situation reveals the emissions uncertainty that a safety value introduces. The TAP price is a compliance strategy independent of the cap-and-trade compliance strategy. Thus, the actual emissions reduction under S. 1766 depends on the interplay between allowance prices and TAP prices. For example, EPA/IGEM-REF sensitivity analysis indicates unlimited availability of international credits would keep allowance prices below the TAP price.19 EIA/NEMS does not project beyond 2030; however, none of the sensitivity analyses from EIA's previous analysis resulted in an allowance price below the TAP price in 2030. The result could change if the sensitivity analyses were updated to the 2008 Annual Energy Outlook (AEO) baseline (with lower projected baseline emissions and thus, presumably, lower compliance costs). Figure 9. EPA/ADAGE Analysis of S. 1766 10,000 GHG Emissions (MMT CO2 Eq.) 9,000 8,000 Using Bank 7,000 Paying TAP 6,000 5,000 Banking 4,000 3,000 2,000 2012 2017 2022 2027 2032 2037 2042 2047 Reference Case Emissions Target Actual Covered Emissions Source: CRS Analysis of data from EPA/ADAGE-REF S. 1766 case. Uncertainty in Cost Estimates The projected cost effects under S. 2191 are more uncertain than under S. 1766. A major source of uncertainty for S. 2191 is future business-as-usual growth in greenhouse gas emissions by covered entities. Because S. 2191 establishes a strict cap on greenhouse gas emissions from covered entities based on limits specified in the bill, any increased emissions resulting from continuing economic growth would have to be reduced or offset. The more robust the economic growth, the greater 18 (...continued) cumulative emissions approach and eventually equal the bill target. When the TAP is included, once the bank is exhausted (and cumulative emissions are equal to the target) annual and cumulative emissions exceed the targets in all future years. 19 However, S. 1766 allows covered entities to meet only 10% of allowance requirements through international offsets. CRS-21 potential for higher emissions that would have to be offset to maintain the cap. In general, greater emissions reduction leads to higher costs. If economic growth is less robust, fewer reductions would be necessary and costs would be less.20 S. 2191 cost estimates are affected by several other uncertainties. As noted earlier, the span of estimated allowance prices under S. 2191 is significant. The differing estimates are based on varied assumptions about the availability of the following: (1) cost-effective energy efficiency improvements, (2) cost-effective non- CO2 greenhouse gas reductions and other offsets, (3) cost-effective carbon capture and storage technology (CCS) and other low-carbon emitting technology, and (4) cost-effective international allowances and/or credits. With a program designed to achieve a least-cost solution through a market-based allowance trading system, restricting the availability of options -- be they emissions reduction opportunities (i.e., offsets) or new technology -- increases projected costs. Hence, the incentives and funding for new technology and the availability of offsets and credits under S. 2191 are critical to its long-term success. S. 1766 cost estimates are not as sensitive to the factors identified above. Partly this is by design, and partly this is because S. 1766 targets less emission reductions than S. 2191. The reduction targets under S. 1766 are not as stringent as the emissions cap under S. 2191, as discussed earlier. Fewer emissions reductions required translates into lower costs. This is reinforced by the TAP price, which is projected to become the dominant compliance strategy in the long-term. The effect of lower emission reduction targets is illustrated by the impact of the two bills on projected 2030 electric generation, as illustrated in Table 2. As discussed in CRS Report RL34489, in some ways, the interplay between nuclear power, renewables, and coal-fired capacity with CCS is a proxy for the need for a low-carbon source of electric generation in the mid- to long-term.21 As indicated, a considerable amount of low-carbon generation will have to be built under S. 2191 in order to meet the reduction requirement. The amount of capacity constructed depends on the models' base case assumptions about future supply and demand and need for capacity replacement/retirement under S. 2191, along with the degree of consumer response to rising prices and incentives contained in S. 2191. The amount necessary under S. 1766 is substantially less as fewer existing facilities are retired or replaced. For example, EPA/IPM estimates that for 2025, about 193 gigawatts (GW) of oil- fired, natural gas-fired, and coal-fired capacity would be retired under S. 2191; it estimates only 95 GW of such capacity would be retired under S. 1766. 20 For more information, see CRS Report RL33970, Greenhouse Gas Emission Drivers: Population, Economic Development and Growth, and Energy Use, by John Blodgett and Larry Parker. 21 CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci, p. 47. CRS-22 Table 2. Assumptions about the Availability of Current Electric Generating Technologies and CCS in 2030 Nuclear Renewable Natural Coal with Power Power Gas-fired CCS S. 1766 EPA/ADAGE-REF about 65 about 58 GW little about 39 GW GW (built) (built) (built) EPA/ADAGE- about 65 about 59 GW little about 33 GW TECH GW (built) (built) (built) EPA/IPM (2025) 44 GW 11 GW 6 GW 99 GW (built) (limit and (built) (built) built) EIA/NEMS 57 GW 45 GW 76 GW 232 GW (built) (built) (built) (built) (plus 19 GW no CCS) S. 2191 EPA/ADAGE-REF about 71 about 58 GW little 165 GW (built) GW (built) (built) EPA/ADAGE- about 70 about 61 GW little 89 GW (built) TECH GW (built) (built) EPA/IPM (2025) 44 GW 61 GW 6 GW 80 GW (built) (limit and (built) (built) built) EIA/NEMS 264 GW 112 GW 77 GW 64 GW (built) (built) (built) (built) AEO 2007 baseline 12.5 GW 12.4 GW 88.2 GW 145 GW (no CCS) Source: EPA cases: "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 S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008). Note: "Limit" is the maximum amount the model assumes can be built -- it is not necessarily the amount the model determined would be built. "Built" is the amount the model determined needed to be built. "About" is an estimate by CRS of the additional capacity necessary for the increased electricity production projected by the model between 2010 and 2030 under S. 1766 and S. 2191 in the absence of capacity data being provided. The estimates are calculated assuming an 80% capacity factor for biomass, 90% for nuclear power and coal, 48% for renewables, and 85% for natural gas. CRS-23 To put these numbers into historical context, from 1963 to 1985, 78 GW of nuclear power were ordered, constructed, and began operation.22 For the 19-year period of 1966 through 1984, the country added 464 GW of generating capacity, including 210 GW of coal-fired capacity, 38 GW of hydropower, 27 GW of natural gas capacity (steam technology), 46 GW of oil-fired capacity, and 54 GW of peaking capacity to improve system reliability after the 1965 blackout. In addition to new additions, between 1965 and 1972, about 400 coal-fired generating units were converted to oil to meet environmental requirements. After the 1973 oil embargo, this trend was reversed, with 11 GW of capacity converted back to coal by 1983.23 For a more recent example, from 2001 through 2005, the United States added about 180 GW of new capacity -- almost all natural gas-fired.24 Like S. 2191, S. 1766's projected cost is affected by the assumed availability of cost-effective control measures, such as those noted above -- energy efficiency improvements, non-CO2 greenhouse gas reductions and other offsets, carbon capture and storage technology and other low-carbon emitting technology, and cost-effective international credits. However, S. 1766 does not represent as much of a shift in generation supply as does S. 2191. This is evident from the projected impact of S. 1766 on coal production for electricity generation, where the model results indicate stable production under S. 1766; under S. 2191, future coal production is heavily dependent on the models' assumptions about the availability and cost-effectiveness of CCS technology compared with alternatives, such as nuclear power. Combined with a more modest reduction requirement, S. 1766's safety valve caps the upside risk of costs and ensures its costs would be lower than S. 2191. Although there are uncertainties in S. 1766's potential costs, its safety valve puts a strict upper limit on compliance cost -- $12 a ton (nominal 2012$), increasing 5% annually in real terms. Besides putting an upper bound on cost, S. 1766's safety valve narrows the band of potential costs substantially; the remaining cost uncertainty is only with respect to the lower bound of costs. Price versus Quantity: The Safety Valve The purpose of a safety valve price is to bound the costs of any climate change control program (price) at the expense of reductions achieved (quantity).25 In general, market-based mechanisms to reduce greenhouse gas emissions focus on specifying either the acceptable emissions level (quantity), or compliance costs (price), and allowing the marketplace to determine the economically efficient solution for the other variable. For example, a tradeable permit program sets the amount of emissions allowable under the program (i.e., the number of permits allocated caps 22 Compiled from EIA's Reactor Status List available from EIA's website. 23 Energy Information Administration, Fuel Choice in Steam Electric Generation: Historical Overview, DOE/EIA-0472 (August 1985), pp. 5 and 7. 24 Environmental Protection Agency, EPA Analysis of the Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008), p. 49. 25 See CRS Report RL33799, Climate Change: Design Approaches for a Greenhouse Gas Reduction Program, by Larry Parker. CRS-24 allowable emissions), while letting the marketplace determine what each permit will be worth. Likewise, a carbon tax (or the safety valve contained in S. 1766) sets the maximum unit cost (per ton of CO2) that one should pay for reducing emissions, while the marketplace determines how much actually gets reduced. In one sense, preference for a pure tradeable permit system or inclusion of a safety valve depends on how one views the uncertainty of costs involved and benefits to be received.26 For those confident that achieving a specific level of greenhouse gas reduction will yield significant benefits -- enough so that even the potentially very high end of the marginal cost curve is not a concern -- a pure tradeable permit program may be most appropriate. Greenhouse gas emissions would be reduced to a specific level, and in the case of a tradeable permit program, the cost involved would be handled efficiently, though not controlled at a specific cost level. This efficiency occurs because through the trading of permits, emission reduction efforts concentrate at sources at which controls can be achieved at least cost. However, if one is more concerned about the potential downside risk of substantial control costs to the economy than of the benefits of a specific level of reduction, then including a safety valve may be most appropriate. In this approach, the level of the safety valve effectively caps the marginal cost of control that affected entities would pay under the reduction scheme, but the precise level of greenhouse gas reductions achieved is less certain. Emitters of greenhouse gases would spend money controlling greenhouse gas emissions up to the level of the safety valve. However, since the marginal cost of control among millions of emitters is not well known, the overall emissions reductions for a given safety valve level on greenhouse gas emissions cannot be accurately forecast. In essence, the safety valve contained in S. 1766 could be seen as a contingent carbon tax. Conclusion The two proposals -- S. 1766 and S. 2191 -- would establish market-based systems to limit emissions of greenhouse gases. However, the proposals differ in how those systems would work. S. 2191 would establish an absolute cap on emissions from covered entities, and would allow entities to trade emissions under that cap. S. 1766 would establish emissions targets on covered entities and allow those entities to meet those targets, either through trading program or by making a safety valve payment in lieu of reducing emissions. Under both proposals, short- term U.S. emissions would likely be below a business-as-usual scenario, although reductions under S. 2191 are guaranteed and projected to be larger, particularly over the long-term. In contrast, the cost of S. 1766 is likely to be less and more predictable than S. 2191. Hence, a major policy question is whether one is more concerned about the possible economic cost of the program and therefore willing to accept some 26 For another discussion of this trade-off, see EPA, Tools of the Trade: A Guide to Designing and Operating a Cap and Trade Program for Pollution Control (June 2003), p. 2-5. CRS-25 uncertainty about the amount of reduction received (i.e., a safety valve); or one is more concerned about achieving a specific emission reduction level with costs handled efficiently, but not capped (i.e., pure tradeable permits). S. 2191 leans toward the quantity (total emissions) side of the equation; S. 1766 leans toward the price side of the equation. ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-RL34520