Climate Change: Comparison and Analysis of S. 1151 and the Draft "Climate and Economy Insurance Act of 2005"

Order Code RL32953

CRS Report for Congress

Received through the CRS Web

Climate Change: Comparison and Analysis of

S. 1151 and the Draft “Climate and

Economy Insurance Act of 2005”

Updated July 18, 2005

name redacted

Specialist in Energy Policy

Resources, Science, and Industry Division

name redacted

Specialist in Energy Policy

Resources, Science, and Industry Division

Congressional Research Service ˜ The Library of Congress

Climate Change: Comparison and Analysis of S. 1151

and the Draft “Climate and Economy

Insurance Act of 2005”

Summary

Climate change is generally viewed as a global issue, but proposed responses

generally 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 greenhouse gases to

1990 levels by the year 2000. Over the past decade, a variety of voluntary and

regulatory actions have been proposed or undertaken in the United States, but carbon

dioxide emissions have continued to increase.

Several proposals designed to address greenhouse gases have been introduced

in the 109th Congress. Two proposals, S. 1151, introduced by Senators McCain and

Lieberman, and a draft alternative, announced by Senator Bingaman, received

increased scrutiny in preparation for the Senate’s debate on comprehensive energy

legislation. During that debate, S. 1151, introduced as S.Amdt. 826, was defeated on

a 38-60 vote. In contrast, the draft alternative remains a work-in-progress and has yet

to be introduced. This report compares these two proposals.

Both proposals would establish market-based systems to limit emissions of

greenhouse gases. However, the proposals differ in how those systems would work.

S. 1151 would establish an absolute cap on emissions from covered entities, and

would allow entities to trade emissions under that cap. The draft amendment would

limit emissions intensity (greenhouse gas emissions per unit of GDP), and establish

a cost-limiting safety valve to protect against high compliance costs. Each would set

up a tradeable permit program to begin addressing emissions by the year 2010.

In 2004, the Energy Information Administration analyzed an earlier version of

S. 1151. Under EIA’s analysis, S. 1151 would achieve a 6.7% reduction in overall

greenhouse gas emissions in 2010 compared with its projected business-as-usual

scenario, but would not return emissions to their 2000 or 1990 levels. This contrasts

with the CRS estimate that the draft amendment would reduce overall greenhouse gas

emissions 2.5% in 2010 compared with EIA’s business-as-usual scenario.

The two proposals represent different answers to the price-versus-quantity issue

in reducing greenhouse gases. In general, market-based mechanisms to reduce CO2

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. 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. 1151 leans toward

the quantity (total emissions) side of the equation; the draft amendment leans more

toward the price side. This report will be updated as events warrant.

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Proposed Senate Legislation: A Comparison of Two Proposals . . . . . . . . . . . . . . 2

Results: Emission Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Analysis: Addressing the Price versus Quantity Issue . . . . . . . . . . . . . . . . . . . . . . 9

Uncertainty in Emission Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Uncertainty in Cost Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Price versus Quantity: The Safety Valve . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

List of Tables

Table 1. Comparison of Key Topics Covered by S. 1151 and

the Draft Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Table 2. Projected Emissions Under S. 1151 and Draft Amendment . . . . . . . . . . 8

Table 3. Factors Potentially Affecting Emission Reductions . . . . . . . . . . . . . . . . 9

Climate Change: Comparison and Analysis

of S. 1151 and the Draft “Climate and

Economy Insurance Act of 2005”

Introduction

Climate change is generally viewed as a global issue, but proposed responses

generally 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 Over the past 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. But

carbon dioxide 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 also rejected the concept of mandatory emissions reductions.

Since then, the Administration has focused U.S. climate change policy on voluntary

initiatives to reduce the growth in greenhouse gas emissions. This focus is

particularly evident in the Administration’s 2002 Climate Action Report (CAR)

submitted under the provisions of the UNFCCC. Of the over 50 programs

summarized in the 2002 CAR, only six are described as “regulatory.”3 These

regulatory programs were generally implemented to achieve energy or environmental

goals other than the reduction of greenhouse gas emissions, but produced a

concomitant greenhouse gas emissions reduction. In this sense, they could be

considered the results of a “no regrets”4 policy where climate change effects resulting

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). Other greenhouse gases

are controlled under the Montreal Protocol on Substances that Deplete the Ozone Layer, and

not covered under this proposed legislation or other international agreements.

2

For further information, see CRS Report RL30692, Global Climate Change: The Kyoto

Protocol.

3

Most of the programs outlined in the report involve research, technical assistance,

information gathering, or technical assistance programs initiated by the federal government,

or voluntary emissions reduction programs coordinated by the government.

4

The “no regrets” policy was one of establishing programs for other purposes, that would

have concomitant greenhouse gas reductions. Therefore, only those policies that reduced

(continued...)

CRS-2

from related air quality and energy policies are included in the decision-making

process on new or modified rules.

A number of congressional proposals to advance programs designed to reduce

greenhouse gases have been introduced in the 109th Congress. These have generally

followed one of three tracks. The first is to improve the monitoring of greenhouse

gas emissions — in order 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 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 also have

the added effect of reducing greenhouse gases; 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, specifically comparing the major provisions of two proposals that

received attention during the Senate’s debate on the Senate version of H.R. 6 — The

Energy Policy Act of 2005.

Proposed Senate Legislation:

A Comparison of Two Proposals

In February 2005, Senators McCain and Lieberman introduced S. 342, the

Climate Stewardship Act of 2005.5 The primary focus of the proposed legislation is

to reduce U.S. emissions of greenhouse gases through the use of flexible, marketbased mechanisms. In May 2005, Senators McCain and Lieberman introduced S.

1151, an expanded version of S. 342 that includes a new title designed to encourage

innovation and deployment of less carbon intensive technologies, sequester carbon

emissions, or mitigate the effects of climate change. The bill’s emission reduction

provisions are very similar to S.Amdt. 2028 (to S. 139) of the 108th Congress, which

the Senate debated in 2003. That amendment failed on a 43-55 vote. During the

debate on the Energy Policy Act of 2005, S. 1151 was introduced as S.Amdt. 826 and

defeated on a 38-60 vote.

As summarized in Table 1, S. 1151 would require mandatory and economywide emission reductions. Using a flexible, market-based implementation strategy,

the bill would require economy-wide reductions, but permits participation in precertified international trading systems and in carbon sequestration programs to

achieve part of the reduction requirement. The bill excludes residential and

agricultural sources of greenhouse gases, along with entities that do not own a single

4

(...continued)

greenhouse gas emissions at no cost were considered.

5

At the same time, Representatives Gilchrest and Olver introduced H.R. 759, which is very

similar to S. 342.

CRS-3

facility that emits more than 10,000 metric tons of carbon dioxide equivalents

annually.6

A draft amendment,7 announced by Senator Bingaman, is based on the report

of the National Commission on Energy Policy (NCEP) that called for a mandatory,

economy-wide tradeable permit program to begin limiting greenhouse gases.8 The

Climate and Economy Insurance Act of 2005 (hereafter referred to as the “draft

amendment”) would mandate an accelerated reduction in the greenhouse gas intensity

of the country’s economy.9 Between 2010 and 2019, the draft amendment would

require a 2.4% annual reduction in greenhouse gas emissions per dollar of projected

gross domestic product (GDP). After 2019, this reduction would increase to 2.8%

annually.

Implementation would be through a flexible, market-oriented allowance trading

program. The total number of allowances each year would be calculated based on

the mandated decline in greenhouse gas intensity, and projected GDP growth.

However, the draft amendment includes a cost-limiting safety valve that allows

covered entities to make a payment to DOE in lieu of reducing emissions. The initial

price of such payments would be $7 a ton in 2010.10 Thus, if a covered entity

chooses, it may make payments to DOE at a specific price rather than make any

necessary emissions reductions.

The most notable difference between the two proposals is their approach to

controlling emissions of greenhouse gases. Both would cover the majority of U.S.

greenhouse gas emissions. However, while S. 1151 would place an absolute cap on

emissions from covered entities, the draft amendment aims to reduce greenhouse gas

intensity. Under S. 1151, while emissions from covered entities would be capped,

uncovered emissions would be expected to continue to rise: ultimately, overall U.S.

emissions would be expected to grow. Under the draft amendment, if it is assumed

that all U.S. emissions are covered, economic growth would determine whether total

U.S. emissions grow or decline: if economic growth outpaces the scheduled

reductions in emissions intensity, or the proposal’s safety valve is invoked, emissions

could continue to grow.11

6

For more information on S. 1151, see CRS Report RS22076, Climate Change: Summary

and Analysis of the Climate Stewardship Act, by (name redacted) and Brent Yacobucci.

7

Announced at a press briefing held June 17, 2005, in the Dirksen Senate Office Building.

The draft amendment is dated June 16, 2005. It was not introduced as an amendment during

debate on the Energy Policy Act of 2005 and remains a work-in-progress.

8

The National Commission on Energy Policy, Ending the Energy Stalemate: A Bipartisan

Strategy to Meet America’s Energy Challenges (December 2004). For background on the

Commission, please refer to their website: [http://www.energycommission.org].

9

Greenhouse gas intensity is a measure of greenhouse gas emissions per unit of Gross

Domestic Product (GDP).

10

For more information on safety valves, see CRS Report RS21067, Global Climate

Change: Controlling CO2 Emissions — Cost-Limiting Safety Valves, by (name redacted).

11

If GDP growth continues at historic rates (roughly 3% to 4% per year), absolute emissions

levels would be projected to increase by roughly 1% per year.

CRS-4

A second key difference is the establishment of a cost-limiting “safety valve”

in the draft amendment. Under this proposal, covered entities in need of extra

tradeable allowances may purchase them on an open market, or they can make a

payment to DOE at a set price (i.e., the safety valve).12 Under S. 1151, there is no

provision to limit the price per allowance that a covered entity would be required to

pay.

In addition, the two proposals differ in other ways, as well, including which

entities are covered, which agency has primary responsibility for the program, how

credits for early action and other activities can be generated, and how proceeds from

the sale/auction of allowances will be utilized. Table 1 compares key topics covered

by the two proposals.

Table 1. Comparison of Key Topics Covered by S. 1151

and the Draft Amendment

Topic

S. 1151

Draft Amendment

Emission

Reduction /

Limitation

Scheme

Absolute cap on total emissions

from all covered entities.

Emissions target based on a

progressively lower limit on

greenhouse gas intensity over

time and projected economic

growth.

Specific

Emissions

Limits

Emissions from covered entities

are capped at their 2000 levels

beginning in 2010.

Starting in 2010, through 2019,

allowable greenhouse gas

intensity decreases 2.4% yearly

from projected 2009 levels.

After 2019, allowable

greenhouse gas intensity

decreases 2.8% yearly.

Greenhouse

Gases Defined

Carbon dioxide, methane,

nitrous oxide (N2O),

hydrofluorocarbons (HFCs), per

fluorocarbons (PFCs), and

sulfur hexafluoride (SF6).

Same six gases.

12

$7 per metric ton of carbon dioxide equivalent in 2010, increasing by 5% annually after

2010. The price is in nominal 2010 dollars.

CRS-5

Topic

S. 1151

Draft Amendment

Covered

Entities

In metric tons of carbon dioxide

equivalents: any electric power,

industrial, or commercial entity

that emits from any single

facility owned by the entity over

10,000 metric tons carbon

dioxide equivalent annually; any

refiner or importer of petroleum

products for transportation use

that, when combusted, will emit

over 10,000 metric tons

annually; and any importer or

producer of HFCs, PFCs, or SF6

that, when used, will emit over

10,000 metric tons of carbon

equivalent.

All “Regulated Fuel

Distributors” and “Nonfuel

Regulated Entities.” Regulated

Fuel Distributors include natural

gas pipelines, petroleum

refineries, natural gas

processing plants, and most coal

mines, as well as importers of

petroleum products, coal, and

coke. Nonfuel regulated entities

include manufacturers and

importers of

hydrofluorocarbons, per

fluorocarbons, sulfur

hexafluoride, and nitrous oxide,

as well as cement and lime

producers, aluminum smelters,

and certain underground coal

mines.

Responsible

Agency

Environmental Protection

Agency (EPA), with the

Department of Commerce

(DOC)

Department of Energy (DOE)

General

Allocating and

Implementing

Strategy

A tradeable allowance system is

established: DOC shall

determine allocations based on

several economic and equity

criteria, including efficiency and

impact on consumers.

Allowances are to be allocated

upstream to refiners and

importers of transportation fuel,

along with producers of HFCs,

PFCs, and SF6, and downstream

to electric generation, industrial,

and commercial entities.

A tradeable allowance system

with cost-limiting safety valve

is established: DOE shall

determine allocations to covered

sectors with special allocations

to electric generator and energy

intensive manufacturers to

protect their profits. Allowances

are to be allocated upstream to

all Regulated Fuel Distributors

and Nonfuel Regulated Entities.

Allocations to covered entities

are provided at no cost.

Allocations to covered entities

are provided at no cost.

DOC shall determine the

number of allowances allocated

to the Climate Change Credit

Corporation (established by the

bill).

5% of yearly allowances

(increasing to 10% by 2020) to

be auctioned by DOE with

funds deposited in a Climate

Change Trust Fund. (established

by the bill).

Public Sale /

Auction of

Allowances

The Corporation may buy and

sell allowances, and use the

proceeds to reduce costs borne

by consumers (see “Revenue

Recycling” below).

Also, see “Cost-Limiting Safety

Valve” above.

CRS-6

Topic

Cost-Limiting

Safety Valve

S. 1151

No provision.

Draft Amendment

If the allowance market price is

too high, in lieu of submitting

an allowance, a covered entity

may submit a payment to DOE

at the safety valve price.

For 2010, the safety valve price

is set at $7 per metric ton of

carbon dioxide equivalent.

After 2010, this price increases

5% annually.

Other Market

Trading

System

Features

Up to 15% of required

reductions may be achieved

through pre-certified

international emissions trading

programs, carbon sequestration,

reductions from non-covered

entities, and borrowing against

future reductions.

Credits may be submitted by

covered entities in lieu of

allowances. Credits may be

generated through various

means, including geologic

carbon dioxide sequestration,

fuel exports, and the export or

destruction of HFCs, PFCs, SF6,

and N2O.

Banking

Banking of allowances is

permitted — allowances may be

saved for use in future years.

Banking of allowances is

permitted — allowances may be

saved for use in future years.

Early

Reduction

Credits and

Bonus Credits

Entities that reduce emissions

before 2010 may receive bonus

allowances for 2010 through

2015. Reductions achieved

under more stringent mandatory

state programs are eligible for

bonus allowances.

DOE may distribute up to 1% of

a total annual allowances for

early reduction projects reported

under either DOE’s 1605(b)

program or EPA’ s Climate

Leaders Program.

Entities that enter an agreement

with EPA to reduce emissions to

1990 levels by 2010 are also

allowed to achieve 20% of their

reduction requirement (as

opposed to 15% — see above)

between 2010 and 2015 through

international emissions trading,

sequestration, or reductions by

non-covered entities.

CRS-7

Topic

S. 1151

Draft Amendment

Revenue

Recycling

Revenue recycling to reduce

consumer costs and to assist

dislocated workers and affected

communities, along with

assistance with deploying new

technology, is provided through

a Climate Change Credit

Corporation; however, the

methodology and amount is

unspecified. Assistance to lowincome persons and

communities is included.

Further, at least 50% of revenue

received must be used for

technology deployment.

Revenues generated from

auctions of allowances and

safety valve payments are

deposited in a Climate Change

Trust Fund. Funds are to be

allocated for adaptation, lowcarbon energy technologies and

vehicles, advanced energy

technologies, and sequestration

projects. In addition, 1% of

allowances available for

allocation are to be distributed

to organizations that retrain,

educate or provide other

assistance to displaced workers.

Scope

The provisions cover the 50

states and the District of

Columbia.

The provisions cover the 50

states and the District of

Columbia.

Penalty for

noncompliance

Excess emission penalties are

equal to three times the market

price for allowances on the last

day of the year at issue.

Excess emission penalties are

equal to three times the safety

valve price for the calendar year

at issue.

Other Key

Provisions

Provisions include studies of

research on abrupt climate

change; and creation of a

national greenhouse gas

database, among others. A new

Innovation Administration

infrastructure is created, along

with program initiatives to

promote less carbon intensive

technology, adaption,

sequestration, and related

activities.

Through a joint resolution of the

House and the Senate, Congress

may amend provisions to

change the total number of

yearly allowances, the

allocation of those allowances,

and the safety valve price.

Results: Emission Reductions

As discussed in the next section, emission reduction estimates under both

options involve at least some uncertainty, particularly for the draft amendment. Thus

the estimates provided in Table 2 should be considered “ballpark” in nature.

In 2004, The Energy Information Administration (EIA) analyzed an earlier

version of S. 1151.13 Under EIA’s analysis, S. 1151 would achieve a 6.7% reduction

13

Energy Information Administration, Analysis of Senate Amendment 2028, the Climate

Stewardship Act of 2003 (May 2004). S.Amdt. 2028 is very similar to S. 1151 and is used

(continued...)

CRS-8

in overall greenhouse gas emissions in 2010 compared with its projected business-asusual scenario, but would not return greenhouse gas emissions to their 2000 or 1990

levels. This result contrasts with CRS’s estimate that the draft amendment would

result in a 2.5% reduction in overall greenhouse gas emissions in 2010 compared

with EIA’s business-as-usual scenario.14

CRS did not estimate longer term reductions from either S. 1151 or the draft

amendment because of the inherent uncertainty involved in such projections.

Qualitatively, it can be stated that emissions of greenhouse gases would likely

continue to increase under both options, although somewhat more slowly than

business-as-usual. In the case of S. 1151, the percentage of greenhouse gases not

covered by the bill would increase and would be uncontrolled by the reduction

program. Thus, the initial reduction in emissions achieved in 2010 would be slowly

eaten up over time. In the case of the draft amendment, covered emissions would

continue to grow to the extent that projected economic growth outstripped the 2.4%

annual reduction in carbon intensity (2.8% beginning in 2020), and to the extent that

increased costs drove covered entities to invoke the safety valve rather than further

reduce emissions. In the longer term, emissions could potentially rise faster under the

draft amendment than under S. 1151.

Table 2. Projected Emissions Under S. 1151

and Draft Amendment

(billions of metric tons of carbon dioxide equivalents)

Year

Reference Case

S.Amdt. 2028

(surrogate for S.

1151)

Draft Amendment

1990

6.1

6.1

6.1

2000

7.0

7.0

7.0

2010

8.1

7.6

7.9

Sources: 1990 and 2000 data: U.S. submission to the United Nations Framework Convention on

Climate Change, 2010 projections. For S.Amdt. 2028: Energy Information Administration, Analysis

of Senate Amendment 2028, the Climate Stewardship Act of 2003 (May 2004). S.Amdt. 2028 is very

similar to S. 1151 and is used as a surrogate here. However, the number of covered entities may be

more or less under S. 1151 then assumed here, so the estimates may understate or overstate actual

reductions that would be achieved under S. 1151. For the draft amendment, calculations by CRS are

based on projected GDP and carbon intensity improvements by Energy Information Administration,

Annual Energy Outlook 2005, DOE/EIA-0383(2005), February 2005. See text for discussion of

uncertainties surrounding the draft amendment’s estimate. Estimates do not take into account the

potential for carbon sequestration.

13

(...continued)

as a surrogate here. However, the number of covered entities may be greater or fewer under

S. 1151 than assumed here, so the estimates may understate or overstate actual reductions

that would be achieved under S. 1151.

14

Assumptions for analysis are discussed in the next section.

CRS-9

Analysis: Addressing the Price versus

Quantity Issue

Uncertainty in Emission Reductions

The projected emission reductions under the draft amendment are more

uncertain than under S. 1151. The primary source of uncertainty for S. 1151 is the

precise number of covered entities that must meet the reduction requirements. In

EIA’s analysis of previous versions of S. 1151, the assumed coverage is about 75%;

supporters of the bill have suggested the coverage is about 85%. The difference is

significant as higher coverage means more reductions than estimated by EIA and

more certainty about their quantity; lower coverage means lower compliance costs,

but greater uncertainty about quantity.

Table 3. Factors Potentially Affecting Emission Reductions

S. 1151

Draft Amendment

GDP Growth

No

Yes

Carbon Intensity

Improvement

No

Yes to year 2009

Covered Entities

Yes

Yes

Safety Valve

No

Yes

As indicated in Table 3, the draft amendment has several uncertainties with

respect to emissions reductions. Unlike S. 1151, which defines a historic emissions

baseline which covered entities must achieve, the draft amendment calculates a future

baseline from projections of 2009 GDP growth and carbon intensity improvement.

Both of those variables are uncertain. In EIA’s current projections, economic growth

to 2010 is assumed under its three scenarios to range from 2.5% annually (low case)

to 3.6% annually (high case) with its reference case set at 3.1% annually. CRS

calculations presented in Table 2 assume the reference case assumption of 3.1%

annual GDP growth. However, as indicated here, this estimate could be off by 20%,

or more.

Likewise, the carbon intensity improvement projection is uncertain. Based on

EIA projections, CRS estimated a 2009 carbon intensity of 165 million metric tons

carbon equivalent per million dollars GDP (MMTCE/M$GDP) for its calculations.

However, based on the President’s Climate Change Initiative, the targeted 2009

carbon intensity is in the range of 159 MMTCE/M$GDP).15 Likewise, improvement

could be less than projected, as current intensity levels are considerably higher than

15

See CRS Report 98-235 ENR, Global Climate Change: U.S. Greenhouse Gas Emissions

— Status, Trends, and Projections, by (name redacted) and (name redacted).

CRS-10

those projected under the initiative. The 2002 estimate of carbon intensity is 183

MMTCE/M$GDP.

Like S. 1151, the draft amendment raises some questions as to the exact extent

of its coverage. The CRS estimate in Table 2 assumes 100% coverage. However,

there are potentially entities not covered under the draft amendment.

The final uncertainty affecting emissions reductions achieved under the draft

amendment is the safety valve. All analysis done of previous versions of S. 1151

indicate that a $7 per ton of carbon dioxide safety valve would be triggered

immediately.16 In contrast, the Energy Information Administration’s analysis projects

the safety valve would be triggered around the year 2015.17 As the degree to which

reductions could be achieved before the safety valve would be triggered is disputed,

another layer of uncertainty is added to the emission reductions achieved under the

draft amendment, particularly in the longer term.

Uncertainty in Cost Estimates

The projected cost under S. 1151 is more uncertain than under the draft

amendment. A major source of uncertainty for S. 1151 is future growth in

greenhouse gas emissions by covered entities. Because S. 1151 establishes a firm

cap on greenhouse gas emissions based on the year 2000, any increased emissions

resulting from continuing economic growth would have to be offset. The more

robust the economic growth, the greater potential for more emissions that would have

to be offset to maintain the cap. In general, more emission reductions probably means

higher costs. If economic growth is less robust, fewer reductions would have to be

made and costs would be less.

S. 1151 cost estimates are affected by several other uncertainties. In three

studies conducted on the cost of previous versions of S. 1151, two studies placed the

potential permit price in 2010 at $9 a ton (2001$), and one at $15 a ton (2001$). The

sources of the differing estimates are different assumptions about the availability of

the following: (1) cost effective energy efficiency improvements, (2) cost-effective

non-CO2 greenhouse gas reductions, (3) cost-effective carbon sequestration and

international credits, and (4) future natural gas supply. With a program designed to

achieve a least-cost solution through a market-based allowance trading system,

restricting the availability of options increases projected costs. The range between

the two studies indicating $9 a ton and the one indicating $15 a ton illustrates the

sensitivity and uncertainty surrounding S. 1151’s potential costs.18

16

See CRS Report RS22076, Climate Change: Summary and Analysis of the Climate

Stewardship Act (S. 342, S. 1151, and H.R. 759), by (name redacted) and Brent Yacobucci.

17

The National Commission on Energy Policy, Ending the Energy Stalemate: A Bipartisan

Strategy to Meet America’s Energy Challenges (December 2004), p. 26. Also: Energy

Information Administration, Impacts of Modeled Recommendations of the National

Commission on Energy Policy, Report SR/OIAF/2005-02 (April 2005).

18

For more, see CRS Report RS22076, Climate Change: Summary and Analysis of the

Climate Stewardship Act (S. 342, S. 1151, and H.R. 759), by (name redacted) and Brent

(continued...)

CRS-11

The draft amendment’s cost estimates are not as sensitive to the factors

identified above. Partly this is by design, and partly this is because the draft

amendment requires less emission reductions than S. 1151. Unlike S. 1151, the draft

amendment incorporates economic growth into its emissions limitation target,

permitting some increase in future emissions if projected economic growth exceeds

the mandated improvement in greenhouse gas intensity. Fewer offsets required

translates into lower costs.

Like S. 1151, the draft amendment’s projected cost is affected by the assumed

availability of cost-effective control measures, such as those noted above — energy

efficiency improvements, cost-effective carbon sequestration and non-CO2

greenhouse gas reductions, along with assumed future natural gas supply. However,

the draft amendment does not extend its flexible market implementation program to

international credits in the manner that S. 1151 does. Thus, no uncertainty (or

possible lower costs) is introduced by the potential for international trading.

The National Commission on Energy Policy placed the permit price of its

proposal (on which the draft amendment is based) at $5 a ton in 2010 (2004$).

Although there are uncertainties in the draft amendment’s potential costs, its safety

valve puts a firm limit on its upside risk — $7 a ton (nominal 2010$). Converting

these estimates to 2001 dollars, the projected permit price for the draft amendment

would be $4.8 - $5.9 a ton (2001$).19 Besides putting a ceiling on upside cost, the

draft amendment’s safety valve narrows the band of potential costs substantially.

The remaining cost uncertainty is with respect to the lower bound of costs.

Price versus Quantity: The Safety Valve

The purpose of a safety valve is to bound the costs of any climate change control

program (price) at the expense of reductions achieved (quantity).20 In general,

market-based mechanisms to reduce CO2 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 available caps allowable emissions),

while letting the marketplace determine what each permit will be worth. Likewise,

a carbon tax (or the safety valve contained in the draft amendment) sets the

maximum unit (per ton of CO2) cost that one should pay for reducing emissions,

while the marketplace determines how much actually gets reduced. In one sense,

18

(...continued)

Yacobucci.

19

For the safety valve, EIA estimated its 2003 dollar valve at $6.10 a ton. CRS converted

it, along with the NCEP cost estimate to 2001 dollars using the GDP implicit price deflator.

See Energy Information Administration, Impacts of Modeled Recommendations of the

National Commission on Energy Policy, Report SR/OIAF/2005-02 (April 2005).

20

See CRS Report RS21067, Global Climate Change: Controlling CO2 Emissions — CostLimiting Safety Valves, by (name redacted).

CRS-12

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.

For those confident that achieving a specific level of CO2 reduction will yield

significant benefits — enough so that even the potentially very high end of the

marginal cost curve does not bother them — a pure tradeable permit program may

be most appropriate. CO2 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 CO2 achieved

is less certain. Emitters of CO2 would spend money controlling CO2 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 CO2 emissions cannot be accurately forecast. In essence, the

safety valve on the draft amendment could be seen as a contingent carbon tax.

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

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. 1151 leans

toward the quantity (total emissions) side of the equation; the draft amendment leans

more toward the price side.

Conclusion

The two proposals — S. 1151 and the draft amendment — would establish

market-based systems to limit emissions of greenhouse gases. However, the

proposals differ in how those systems would work. S. 1151 would establish an

absolute cap on emissions from covered entities, and would allow entities to trade

emissions under that cap. The draft amendment would limit greenhouse gas

emissions intensity and establish a cost-limiting safety valve to protect against high

compliance costs. Under both proposals, short-term U.S. emissions would likely be

below a business-as-usual scenario, although reductions under S. 1151 are likely to

be larger and more certain. In contrast, the cost of the draft amendment is likely to

be less and more predictable. However, under both proposals, total U.S. emissions

could be expected to continue their upward trend, albeit at a slower rate than

currently forecasted.

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