U.S. Climate Policy Prospects in Wake of COP15

Henry Lee Princeton University February 9, 2010

Why is getting a Domestic Climate Agreement so hard?

• • • • Public support is shallow and thus easily persuaded to delay action US energy policy has historically emphasized low prices, while actions to reduce carbon emissions require higher energy prices.

Strong anti-establishment sentiment arising in US (see Tea Party) – targets include business, government and academic elites 47% of American public receive their information from the “new media”

What actions may happen

• • • • • Attempt to reduce scope to electric and large industrial sectors Attempt to have EPA regulate Attempt to subsidize and promote particular energy options—nuclear, offshore oil, renewables, biofuels, efficiency All will face major challenges To watch post-2010: fiscal crisis meets anti-tax sentiment

Transportation Sector

• • • • Transportation accounts for 28% of US GHG emissions and most of these emissions are in the passenger vehicle sector. Most of US oil consumed in this sector, and thus any effort to reduce US oil imports will have to focus on reductions in gasoline consumption.

The cost of reducing GHG emissions in this sector is higher than the cost of reductions in the stationary source sectors.

Projected increases in gasoline consumption (2010-2030) are driven by increases in GDP and personal income.

ETIP Study

• Starts with EIA’s Reference Case from 2009

Annual Energy Outlook

– Oil prices increase from $77 in 2010 to $124 in 2030 and gasoline prices in 2030 are $1 higher than today.

– Higher prices trigger greater demand response and greater penetration of renewable options – Also looked at a high price scenario where 2030 prices are $198 – Used NEMS model to assess impacts on different cases.

Scenarios

1. Places a price of $30/ton of CO cap and trade) 2 on emissions in 2010 that escalates to $60 in 2030 (surrogate for 2. Add to the CO 2 tax a gasoline tax , which increases prices by $0.50 in 2010 and escalates 10% per year –reaching $3.36 in 2030.

3. Extend CAFE 2020-2030 at the same level of increases (2010-2020) called for in EISA legislation 4. Tax Credits for alternative motor vehicles based on extending Plug-In Hybrid credits to a larger array of vehicles

Results

• • • None of these scenarios is sufficient to meet the Obama Administration goal of a 14% reduction from 2005 levels by 2020.

The carbon tax alone has very little impact on gasoline consumption.

Accompanied by the gasoline tax, the impact is much greater. Assuming the high priced scenario ($198 oil) plus the $3.36 tax, CO reference case.

2 emissions in the transport sector are reduced by 17% and oil imports by 4.5 million barrels below the AEO

Results (continued)

• • • CAFE alone results in higher efficiency gains, but fails to obtain significantly greater CO especially in the 2020-2030 period.

2 reductions because of increased vehicle miles traveled, Tax credits are a very expensive option costing the government between $22-$37 billion per year.

Even with the high priced scenario plus the gasoline tax, losses in GDP relative to the reference case are less than 1% and GDP is expected to grow 2-4% through 2030.

Is Shale Gas an Option?

• • There is a growing consensus that the resource base is very large and could dramatically increase reserve estimates for natural gas.

Estimates of costs seem to be location-specific and range between $4.50 per Mcf and $8.00 per Mcf (price of conventional gas on Feb 3: $5.52 per Mcf).

Shale gas must be competitive

• • Must be competitive with other sources, including LNG Gas must increases sales into 1) electric markets (versus coal), or 2) transportation markets (versus gasoline).

Challenges

1. Regulatory – Water – Siting – Institutional 2.

Without a price on carbon, it will be difficult to penetrate the electric market 3. CO 2 reductions from significant penetration of the transport sector are limited (3-4% reduction for converting 50% of fleet by 2030)