Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost?

1. Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost? Topic: Abatement Costs Dan Baneman ECON 331

2. Factors behind rising emissions in the US • Continued expansion of US economy • Rapid growth in buildings-and-appliances and transportation sectors • Driven by rising population and consumption • Greater use of carbon-based power in electric power generation • Driven by construction of new coal-fired power plants without carbon capture and storage (CCS) technology • Reduced absorption by forests and agricultural lands • Annual GHG emissions projected to increase by 35 percent by 2030. • On current path, US emissions in 2030 would exceed GHG reduction targets in legislation by 3.5 to 5.2 gigatons

3. Overview of Authors’ Approach • Authors estimated net costs and abatement benefits in terms of CO2 equivalent reduction of more than 250 abatement options. • Grouped options into clusters based on energy use patterns and technology features of different sectors. • Limited focus to abatement options with a marginal cost below $50 per ton of carbon dioxide abated. • Project a range of three outcomes for each option and integrate the values into abatement supply (marginal cost) curves.

4. Overview of Authors’ Approach • Low-range case • Would reduce annual emissions by 1.3 gigatons by 2030; not sufficient to bring projected levels of GHG back to current levels. • Mid-range case • Would bring annual emissions below current levels but would not be enough to reach goals laid out in legislative proposals. • High-range case • Would be required to meet objectives proposed in current legislation. However, this would require an extraordinary amount of national commitment. • Authors focus primarily on mid-range case.

6. Marginal cost curve: basic theory Price of carbon emissions Marginal Cost 0 Abatement 6

7. A real life abatement curve

9. Negative marginal cost of abatement:How is this possible? • Agency issues • Energy efficiency: mismatch between who pays the cost and who reaps the benefit. • Lack of information • Consumers can’t easily access information on energy efficiency from different appliances, different usage techniques, etc. • Consumer desire for rapid payback • i.e., Irrationally high implicit discount rate • Consumers may not properly value energy savings • Some examples later on…

10. Five main sectors for potential abatement • Buildings and appliances • Transportation • Industrial sectors • Electric power • Carbon sinks

12. 1. Buildings and appliances (B&A) • Emissions from B&A expected to grow faster than any other sector, due to low efficiency and fast projected growth. • Emissions expansion due to increased emissions from: • Direct sources (e.g. on-site combustion of fossil fuels) • Indirect sources (e.g. electricity consumed by commercial and residential buildings) • Fast projected growth means large potential for low-cost abatement. • Cheaper to install clean/energy-efficient technologies in new facilities than to retrofit later on. • Thus, greater potential for low-cost abatement from expanding industries, since this potential abatement would be achieved through clean technologies in facilities that haven’t been constructed yet.

13. Buildings and appliances (B&A) • B&A has 51 percent of abatement potential in mid-range case (54 percent in high-range case). • Negative-cost options result from: • Agency issues with alignment of incentives. • Example: condominiums and energy-efficient installments. • Builder/owner usually doesn’t pay the energy bill, but consumers only stay for 2-3 years, which isn’t enough time to reap returns individually. • Lack of information (and high implicit discount rates). • Example: insulation in homes • Builders try to minimize “first cost,” and they don’t face any of the energy costs. • Consumers usually don’t know much about insulation options. • Exacerbated by consumers overvaluing immediate costs relative to long-term savings from energy efficiency. • Result is poor insulation at a net economic loss for consumers.

14. Buildings and appliances (B&A): Specific abatement opportunities • Lighting • Residential lighting tends to be inefficient compared to commercial lighting. Current technologies and new technologies being developed could result in substantial energy use reductions. (LEDs, CFLs, etc.) • Potential rebound effect. • Electronic equipment • Big opportunity due to large expected growth in number and energy intensity of devices, and large potential to improve per-unit energy consumption. • Usage improvements (e.g. fewer stand-by losses) • Better consumer knowledge (e.g. large variation in energy consumption of different types of TVs) • HVAC (Heating, Ventilation and Air Conditioning) • More efficient HVAC equipment in both initial installations and retrofits • Better building design • Again, potential rebound effect • Building shells • Better shells in both commercial and residential buildings (e.g. insulation, reflective roof coatings) • Much cheaper (as much as $80/ton) to install with initial construction than to retrofit

15. Buildings and appliances (B&A) • Specific barriers to address: • Information visibility • e.g. Energy consumed by a given appliance • e.g. Information on energy savings from placing refrigerator in cool vs. warm room • Agency issues • Energy bill-payer may not be involved for full relevant time period to reap returns, so incentives for energy efficiency/GHG abatement aren’t aligned (e.g. condo example from before).

16. 2. Transportation • Projected improvements in vehicle efficiency are more than offsetby growth in vehicle miles traveled, which is a function of the number of vehicles on the road and the average miles per vehicle. • Sound familiar? Difference from earlier CAFE/rebound effect discussion is that we’re considering number of total vehicles as well as miles traveled per vehicle. • Between 2005 and 2030: • 96 million more cars and light trucks • 11% increase in annual miles traveled by each vehicle.

17. Transportation: Abatement opportunities • Biofuels • Emit less carbon • Production costs declining due to innovation (science, refinery design) • Cellulosic biofuels have lower production costs and carbon content than starch biofuels • Fuel economy • Technology upgrades improving fuel efficiency • Hybrids • Less potential for low-cost abatement if there are efficiency improvements from biofuels and technology

18. Transportation • Barriers: • Consumers’ willingness-to-pay for expected gas long-term savings (a la Alcott & Wozny) • Depends on advances in cellulosic biofuel technologies to reduce production costs

19. 3. Industrial sector: Abatement opportunities • Recovery/conversion of non-CO2 GHGs (e.g. methane) • Carbon capture and storage (CCS) • Expected to become commercially available in industrial/manufacturing settings by 2020 • Combined heat and power (CHP) • Cost of savings (e.g. through switching from coal to natural gas) varies a lot by sector and geography • Energy efficiency • New product and process innovation

20. Industrial sectors • Barriers: • Energy price volatility adds risk (e.g. coal to natural gas transition), making returns on expenditures for energy efficiency improvements less certain. • Investment hurdles. Where improvements are widely distributed, there may be disproportionate management costs. • Lack of focus on energy efficiency. “The more you look, the more you find.” Industries aren’t always aware of cost-saving abatement opportunities.

21. 4. Electric power • Carbon Capture and Storage (CCS) • Captures concentrated CO2 emissions at the point of generation and stores them. Best economics when coupled with coal-fired power plants because of high carbon concentration of exhaust gases. • Still an expensive, early-stage technology. No substantial abatement potential until 2020, but a lot of potential afterwards. • Wind power • Abatement cost will rise rapidly as attractive sites are unlocked and used up. • Nuclear power • Solar power • Still expensive and relatively energy-inefficient • Continued technological improvements expected • High up-front system costs • Natural gas (e.g. from coal) • Short-term solution, but not economically efficient for sustainable abatement because future natural gas sources are projected to be higher-cost, raising prices.

22. Electric power • Barriers • Technological development needed (CCS, renewables)

23. 5. Carbon sinks:Abatement opportunities • Afforestation (forest-planting) of marginal lands with low opportunity costs. • 7% of US pastureland qualifies as marginal due to erosion and/or low productivity. Could be converted to forestland without affecting livestock production. • Costs: opportunity costs, conversion costs, maintenance costs. • The South has best potential to contribute (50%) • With cropland: Conservation Reserve Program (CRP) encourages land-owners to take marginal cropland out of production; this could be afforested without affecting crop production. • Tillage practices • Forest management • Winter cover crops • Planting legume or grass cover over harvested land in winter increased carbon-storing potential of the soil. • Also reduces fertilizer needed during growing season by 30%, so it can save costs.

24. Role for policymakers • Coordinated set of abatement policies. • Abatement options are widely distributed across sectors and geographical regions. • Thus, a policy approach that doesn’t address the full range of options risks missing reduction targets and/or increasing total abatement costs to society. • Start quickly. • Many low-cost opportunities are “time perishable.” Negative cost options will start to disappear (e.g. cost of instituting energy-efficient technology is cheaper with initial construction than retrofitting). • Many negative cost options aren’t happening currently. Need policy support for: • Visibility/information (e.g. money/energy savings from different appliances, putting refrigerator in a cool room, etc.) • Change incentives to correct agency issues (cost/benefit mismatch) (e.g. insulation with builders vs. homeowners, condo owners vs. consumers) • Visible, sustained signals to create certainty about the price of carbon and required emissions reductions. • This will encourage investments in options with a long lifecycle. Lack of information is a barrier to long-term investment.

25. Key take-away points: • Almost 40 percent of low-cost (below $50/ton) abatement is achievable at zero or negative marginal costs. • i.e., Savings to society would offset spending. • Why hasn’t this happened already? To reiterate: • Agency issues. Mismatches between which parties incurs the costs and which parties reap the benefits. • Lack of information about impact of individual decisions. • Consumer desire for rapid payback when an up-front investment is required. • Abatement opportunities are spread across many different sectors. • Largest option (CCS for coal-fired power plants) offers less than 11 percent of total abatement potential • Abatement potential and costs vary across geography. • About 3.5 times as abatement potential (at less than $50 per ton) in the South than the Northeast (1130 megatons vs. 330 megatons). • Sectoral variations. • Northeast: More low-cost B&A and transportation opportunities due to dense populations. • South: More low-cost options in industrial sectors and afforestation. • Significant abatement will require a coordinated policy response in order to achieve abatement targets at minimal cost to society.