Additional Topics Submitter’s Name/Affiliation: William Prindle, Deputy Director, ACEEE If there is an additional topic related to the design of a mandatory market based program that you would like to address, please submit comments on this form. Why Energy Efficiency Requires Explicit Treatment in Climate Policy ACEEE wants to emphasize to the Committee the importance of engaging energy efficiency in any effective national climate policy. As the studies we have cited elsewhere in our responses to the Committee’s questions have shown, energy efficiency is one of the most cost-effective ways to address carbon emissions, and it can lead to a climate policy that produces net economic benefits, not penalties, for the economy. Yet energy efficiency will not happen automatically through a broad, upstream cap-and-trade program, because efficiency occurs downstream, at the end-use level. This means that emissions traders typically will not accept emission reductions credits from energy efficiency as valid, because reductions in energy use do not assure upstream emission reductions. This is particularly problematic in the power sector. Our analysis leads us to the conclusion that to be engaged effectively in climate policy, efficiency requires two key policy commitments: 1. A direct allocation, or auction, of allowances to entities charged with acquiring energy efficiency and other clean energy resources. 2. Parallel, complementary policies outside the cap regime, which are designed to achieve targeted energy savings in the most cost-effective way. These include energy efficiency resource standards (EERS), public benefits funds (PBF), and appliance standards The Modeling of Climate Policy Must Better Address Efficiency’s Benefits We suggest that the climate science argument is largely completed. Virtually all serious analysts agree that carbon emissions are already creating serious climate problems, and that serious policy responses are needed. The zone of contention has now shifted to the world of economics, asking not whether we should reduce carbon emissions, but can we do it at an acceptable economic cost? ACEEE has reviewed the major economic modeling studies conducted to date on climate change policy, and we find a marked divide in their approaches. One school takes a highly aggregated view of the economy, applies the estimated effects of climate policy in a fairly simple and aggregated way, and produces findings that tend to show somewhat negative economic impacts. The EIA, MIT, and CRA international studies of the Climate Stewardship Act fall in this category1. 1 Energy Information Administration. 2003. Analysis of S.139, the Climate Stewardship Act of 2003. Washington, D.C.: U.S. Department of Energy, SR/OIAF/2003-02). http://www.eia.doe.gov/oiaf/servicerpt/ml/pdf/sroiaf Sergey Paltsev et al.. 2003. Emissions Trading to Reduce Greenhouse Gas Emissions in the United States: The McCain-Lieberman Proposal Cambridge, MA: Joint Program on the Science and Policy of Global Change, Report 97. 1 Additional Topics Submitter’s Name/Affiliation: William Prindle, Deputy Director, ACEEE Another set of analyses tends to look in more depth at the technology and sector impacts that would result from climate policy, including shifts of capital, energy, and labor resources among various sectors of the economy. These more fine-grained studies tend to show that carbon emissions can be realized at much lower levels of economic impact, and indeed can produce positive net economic benefits.2 We urge the Committee and others in Congress to take a more intensive look at the economic modeling issues around climate change, especially those that involve energy efficiency. Having studied this topic, we offer two key observations: • Some macroeconomic models do not assess the economic effects of energy efficiency with any specificity. They tend to simply simulate energy price increases in the economy and assume that energy efficiency will occur through price elasticity effects. They tend to treat reduced energy expenditures simply as a reduction of output from a given sector, ignoring the inter-sectoral substitutions of capital, energy and labor that more detailed models capture. • Some models use a general equilibrium approach in which it is assumed that energy technology is optimally deployed in the economy. This means that any shift in the technology mix must, by the design of the model itself, impose costs on the economy. Yet ACEEE and others have amply documented that market barriers and other forces extensively limit the deployment of cost-effective technologies, meaning that a large measure of efficiency investment can occur at net savings to the economy. Given these limitations in some of the models used to assess the economic impacts of climate policy, we urge the Committee to conduct a thorough investigation of these issues, so that a more balanced picture can be developed of the likely economic impacts of climate policy. At the Anne E. Smith, Paul Bernstein, and W. David Montgomery. 2003. The Full Cost of S.139, With and Without Its Phase II Requirements Washington, D.C.: Charles River Associates. 2 Barrett, James, et al. 2005. Jobs and The Climate Stewardship Act. How Curbing Global Warming Can Increase Employment. Natural Resources Defense Council. Barrett, James and J. A. Hoerner, Clean Energy and Jobs: A Comprehensive Approach to Climate and Energy Policy (Washington, D.C.: Center for a Sustainable Economy and the Economic Policy Institute, 2002) Energy Innovations: A Prosperous Path to a Clean Environment (American Council for an Energy-Efficient Economy (ACEEE), The Alliance to Save Energy, Natural Resources Defense Council, Tellus Institute, and Union of Concerned Scientists, June 1997) Florentin Krause et al., “Cutting Carbon Emissions at a Profit (Part II): Impacts on U.S. Competitiveness and Jobs,” Contemp Econ Policy, Volume 21 (2003) Hanson, Don, and Laitner, John A. “Skip”. 2004. “An integrated analysis of policies that increase investments in advanced energy-efficient/ low-carbon technologies”. Energy Economics 26 (2004) 739– 755. Hahneman, Michael, et al. Managing Greenhouse Emissions in California. The California Climate Center at UC Berkeley. 2006. Sanstad, Alan H., Stephen J. DeCanio, and Gale A. Boyd, “Estimating Bounds on the Macroeconomic Effects of the Clean Energy Future Policy Scenarios,” Energy Policy, Volume 29, Issue 14 (November 2001) 2 Additional Topics Submitter’s Name/Affiliation: William Prindle, Deputy Director, ACEEE moments, opponents of climate policy action have been able to use a few modeling approaches to claim that vigorous climate policy would exact a heavy toll on the economy. Yet at least as many analysts have found that climate policy, if studied in enough depth, can be shown to generate positive economic impacts. In the RGGI modeling process, the states used the REMI regional input-output model to assess economic impacts. REMI found that RGGI would create small but positive economic impacts, increasing regional output, employment, and personal income in the region. When an increased commitment to energy efficiency was modeled in RGGI, the economic benefits increased several fold. Consumer energy bills fell by up to $100 per year.3 These results suggest that Congress should take a harder look at the economic analyses conducted for the Climate Stewardship Act, and that for future consideration of climate policies, the Committee should seek a more balanced set of economic analyses. 3 Lisa Petraglia & Dwayne Breger. REMI Impacts for RGGI Policies based on the Std REF & Hi-Emission REF. Presentation to the RGGI Stakeholders meeting, November 17, 2005. 3 Design Elements of a Mandatory Market–based GHG Regulatory system Executive Summary Submitter’s Name/Affiliation: Gary L. Rainwater, Ameren Corporation Additional General Topics If there is an additional topic related to the design of a mandatory market based program that you would like to address, please submit comments. In evaluating the points in the White Paper, the absence of a specific legislative context and structure, such as a discussion draft or bill, makes it difficult to fully assess the relative importance of various design features. The possible importance of emissions trading and other design features such as banking, borrowing, offsets, baseline protection and credit for early action, allocation of allowances, compensating mechanisms, multi-year baselines and phased-in compliance would be highly dependent on the stringency of the targets and timetables and the availability of technologies to respond to such a program. The interrelationship of key design elements can only be seen within a specific legislative context or structure, not in isolation or even in series. Should the Committee draft or review a legislative proposal, we look forward to having the opportunity to review and comment on it before it is formally introduced. In the next few years, the combined carbon dioxide (CO2) emissions of China and India are projected to surpass the U.S.’s CO2 emissions. This demonstrates the importance of considering global and multinational emissions of GHG in the cost effectiveness of any program, as well as ensuring the US economy is not harmed through commensurate trade agreements or loss of manufacturing jobs. 1 Design Elements of a Mandatory Market–based GHG Regulatory system Executive Summary Submitter’s Name/Affiliation: Gary L. Rainwater, Ameren Corporation While endorsing neither a mandatory regulatory regime nor any of the specific