U.S. Climate Policy Prospects in Wake of COP15

1. U.S. Climate Policy Prospects in Wake of COP15 Henry Lee Princeton University February 9, 2010

2. 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”

3. 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

4. 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.

5. 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.

6. Scenarios • Places a price of $30/ton of CO2 on emissions in 2010 that escalates to $60 in 2030 (surrogate for cap and trade) • Add to the CO2 tax a gasoline tax , which increases prices by $0.50 in 2010 and escalates 10% per year –reaching $3.36 in 2030. • Extend CAFE 2020-2030 at the same level of increases (2010-2020) called for in EISA legislation • Tax Credits for alternative motor vehicles based on extending Plug-In Hybrid credits to a larger array of vehicles

7. 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, CO2 emissions in the transport sector are reduced by 17% and oil imports by 4.5 million barrels below the AEO reference case.

8. Results (continued) • CAFE alone results in higher efficiency gains, but fails to obtain significantly greater CO2 reductions because of increased vehicle miles traveled, especially in the 2020-2030 period. • 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.

9. 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).

10. 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).

11. Challenges • Regulatory • Water • Siting • Institutional • Without a price on carbon, it will be difficult to penetrate the electric market • CO2 reductions from significant penetration of the transport sector are limited (3-4% reduction for converting 50% of fleet by 2030)