Surpising Conclusions in EPA's Analysis of Waxman-Markey Climate Bill

Originally posted at the Breakthrough Institute

The Waxman-Markey climate bill (AKA the American Clean Energy and Security Act) would reduce the amount of renewable energy deployed in the United States relative to business-as-usual, increase the amount of coal-fired electricity generation relative to 2005 levels, and provide no incentive for a move to cleaner cars, according to a new analysis by the U.S. Environmental Protection Agency (EPA).

We certainly can't vouch for EPA's methodology or assumptions. However, with EPA's conclusions about the likely cost of the Waxman-Markey bill on U.S. Households and the broader economy being widely cited, the surprising and even counter-intuitive projections that underlie EPA's cost estimates are worth a close look. In this post we dig passed the EPA's executive summary to take a closer look at their modeling and projections.

The climate bill is now poised for a vote on the floor of the U.S. House of Representatives as soon as Friday, following a deal struck late Wednesday between the bill's champion and Energy Committee Chairman Henry Waxman (D-CA) and Agriculture Committee Chairman Collin Peterson (D-MN). Waxman agreed to further concessions to secure the support of agricultural interests and their Congressional champions, including agreeing to strip EPA of primary oversight over the domestic carbon offsets market, giving the US Department of Agriculture jurisdiction over these programs instead, provide additional free allowances for rural electric co-operatives, and place a moratorium on new EPA rules to strengthen the environmental integrity of biofuels like corn ethanol.

The EPA analysis of the latest incarnation of Waxman-Markey concludes that the bill will actually result in somewhat slower expansion of wind, solar, geothermal and other renewable energy power plants than under business-as-usual projections.

EPA's modeling finds that under its business as usual scenario, electricity-generating capacity from renewable energy sources like wind, solar and geothermal would grow from 36 GW in 2005 to 40 GW in 2020 and to 43 GW in 2025. But under Waxman Markey legislation, renewable generating capacity would grow to 39 GW in 2020 and 41 GW in 2025.

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While EPA projects that the overall percentage share of renewable energy increases under Waxman-Markey [p. 3 and 26], there will actually be fewer new wind, solar and geothermal plants built if the bill passes than under BAU projections. The reason, says the EPA, is the low carbon price and reduced demand for electricity overall (driven predominately by the bill's energy efficiency titles, not the cap and trade program). "Under H.R. 2454, electricity demand is reduced significantly and allowance prices are not high enough to drive a significant amount of additional low- or zero- carbon energy (including nuclear, renewables, and CCS) in the shorter-term, excluding the technologies with specific financial incentives (e.g., CCS)," notes the Agency [p. 27].

This analysis is significant because the large-scale deployment of renewable technologies like solar power in Japan and Germany and wind power in Denmark was crucial for technological innovations that reduced the price of those technologies. While energy efficiency can modestly reduce emissions in the U.S., experts say clean, affordable, and scalable sources of power are needed to reduce global emissions 50 percent by 2050, which the IPCC recommends, while over the same period doubling or tripling energy consumption as poor countries develop.

EPA projects a modest (3%) increase in total annual electricity generation from renewable sources in 2025, relative to BAU, despite the lower cumulative renewable energy capacity additions under Waxman-Markey. This is the result of "greater reliance on biomass co-firing at existing coal plants," the Agency explains [p. 26]. But while biomass fuels reduces carbon emissions it may also extend the profitable life of aging conventional coal-fired power plants.

EPA projects a continued and robust role for coal-fired electricity generation under Waxman-Markey, with overall electricity from coal-fired power plants actually higher than 2005 levels through at least 2025. Electricity generation from conventional coal-fired power plants (without carbon capture and sequestration) will be slightly higher in 2015 under the Waxman-Markey bill than in 2005 and will remain roughly constant through 2020, according to EPA's projections. By 2025, conventional coal-fired power plants will be just a few percentage points lower than 2005 levels. After including EPA's projections for new coal plants with carbon capture and storage (CCS) technology, electricity generation from coal actually increases between 2005 and 2025 under the Waxman-Markey bill [p. 26].

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The EPA also finds that the legislation would legally permit emissions in regulated sectors of the economy to remain above 2005 levels until sometime after 2025. This contrasts with the bill's stated objective to "[r]educe carbon emissions from major U.S. sources by 17% by 2020."

EPA projects "the usage of international offsets [will] average over 1 billion tCO2e [tons of CO2-equivalent] each year" under the ACES cap and trade program [p. 3 and 36]. That's in addition to roughly 170-300 million tons of domestic offsets regulated firms are projected to purchase each year between 2012-2030, according to EPA's modeling [p. 34]. Excluding offsets, EPA concludes that actual emissions reductions in supposedly capped sectors of the U.S. economy will not fall below historic 2005 emissions levels until sometime after 2025 [p. 11].

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The new EPA analysis is an update to an early EPA analysis issued in April. The new analysis takes into account the impacts of the recession and the American Recovery and Reinvestment Act on BAU projections and the changes in the legislation since originally introduced. If polluters covered under the cap and trade program utilize the quantity of offsets EPA projects, the emissions cap itself will not require polluters to reduce their own emissions below the EPA's older business as usual projections until 2028, according to Breakthrough Institute's calculations [see .xlsx file here]. With the EPA's BAU case revised down significantly in this new update, it will take an even smaller percentage of the two billion tons of offsets legally-permitted by the bill to eliminate any pressure from the cap itself to reduce emissions below BAU levels and render the cap effectively non-binding for decades to come. (Graph below shows the effect of EPA's projected offset usage relative to the older BAU projections -- we have contacted EPA to request the data set for the new BAU scenario and will update this graphic when we receive that data.)

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If new baseload nuclear power and CCS-equipped coal plants are not technically feasible in the time-line projected by EPA, pressure will fall on baseload conventional coal plants to increase generation above the levels shown above, or for new coal-fired power plants to be constructed with a corresponding increased reliance on international offsets [p. 36]. Cumulative reliance on international offsets increases 15.5% if nuclear power is only available at BAU levels, according to EPA's sensitivity analysis [p. 36].

The expansion of CCS generation under Waxman-Markey is driven by the incentives provided for the technology in the form of bonus allowances from the emissions allowances under the cap and trade program (Title I, Subtitle B, Sec. 115 of the bill) and the bill's CCS early deployment program funded by a dedicated micro-carbon tax on all electricity sold in the United States (Title I, Subtitle B, Sec 114) [p. 27]. Without these direct deployment incentives, the carbon price generated by the bill's cap and trade program would not be sufficient to spur the major deployment of carbon capture and storage technology.

EPA also found that Waxman Markey would have little to no effect on driving habits or technology innovation in the automotive sector. The carbon prices projected by EPA under Waxman-Markey ($13-16 per ton from 2015-2020) amount to an increase of just 13 to 16 cents per gallon. That price signal is unlikely to drive any significant shift in either consumer or business investment decisions, EPA concludes. Waxman-Markey will not drive the purchase of more few efficient vehicles or encourage less overall driving, EPA says. "The increase in gasoline prices that results from the carbon price ($0.13 in 2015, $0.25 in 2030, and $0.69 in 2050 under Scenario 2 - H.R. 2454) is not sufficient to substantially change consumer behavior in their vehicle miles traveled or vehicle purchases at the prices at which low GHG emitting automotive technologies can be produced" [Appendix p. 60].

Nor is the price signal going to provide incentive for auto manufacturers to invest in more fuel-efficient vehicles, let alone more technologically advanced plug-in hybrid or electric vehicles. As EPA writes, "The relatively modest indirect price signal on vehicle manufacturers from this particular cap-and-trade policy creates little incentive for the introduction of low-GHG automotive technology" [Appendix p. 60].