Global warming cap to cost U.S. 0.26% of GDP says Energy Department

Global warming cap to cost U.S. 0.26% of GDP says Energy Department

mongabay.com

January 23, 2007

A proposed cap-and-trade system to curb U.S. greenhouse-gas emissions will cost the U.S. economy 0.26 percent of annual GDP according to a new study by the Department of Energy’s Energy Information Agency (EIA). The EIA says that the plan would lead to higher energy prices inlcuding a 5 percent rise in the price of gasoline, an 8 percent climb in the price of heating-oil an 11 percent increase in the price of natural gas and electricity.

The study comes in response to a request from Senators Bingaman, Landrieu, Murkowski, Specter, Salazar, and Lugar for an analysis of a proposal that would regulate emissions of greenhouse gases (GHGs) — including carbon dioxide, methane from coal mining,
nitrous oxide from nitric acid and adipic acid production, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride — through a “national allowance cap-and-trade system”. Caps would be based on targeted reductions in greenhouse gas intensity, defined as emissions per dollar of Gross Domestic Product (GDP), with a target reduction in GHG intensity of 2.6 percent annually between 2012 and 2021, and 3.0 percent per year beginning in 2022. The program “allows regulated entities to pay a pre-established emissions fee in lieu of submitting an allowance”, meaning that firms can pay a fixed price (initially set at $7 per metric ton of carbon dioxide equivalent in 2012) for their emissions. The price would increase by 5 percent over the projected rate of inflation, eventually rising to $14.18 in 2030.

Projected GHG emissions under a proposed cap, no cap, and the Kyoto protocol (which applies to the 2012 period but for the sake of the chart has been flat-lined out until 2030).

The proposal initially calls for 90 percent of allowances to be distributed free to specified entities but this proportion would fall to around 62 percent in 2030. The balance of allowances would be auctioned, the proceeds from which (up to $50 billion) would be accumulated into a “Climate Change Trust Fund,” to provide incentives and pay for research, development, and deployment of technologies to reduce greenhouse gas emissions.

The EIA study says that the Bingaman proposal would result in a 24 percent increase in GHG emissions between 2004 and 2030, or about half of what would otherwise be forecast without caps. Most of the reductions in the early years of the program would tkae place outside the energy sector.

EIA says that carbon sequestration — where carbon dioxide is removed from the atmosphere and stored — is expected to reduce emissions by about 4 percent.

This article is based on EIA’s “Energy Market and Economic Impacts of a Proposal to Reduce Greenhouse Gas Intensity with a Cap and Trade System”.