EPA says cap-and-trade would be cheap and effective

The US Environmental Protection Agency says new draft energy legislation could succeed in “moving the US to a clean energy economy”.

In publishing its preliminary analysis of the draft clean energy and climate legislation put forward by Representatives Henry A Waxman and Edward Markey; the EPA concluded the bill would make real inroads towards combating global warming. More specifically, the analysis says the cap on global warming emissions would accelerate renewable energy deployment by 150 per cent over the next two decades. In addition, energy efficiency measures will significantly decrease energy demand, reducing primary energy needs by 6 per cent in 2020, 9 per cent in 2030, and 13 per cent in 2050, the EPA estimates.

The analysis focused on the cap and trade scheme of the bill. It found the cost of the scheme – a controversial issue during the current lean economic times that Republicans have already latch onto – would be “relatively modest assuming the bulk of revenues from the program are returned to the household”.

Here are their main points (emphasis is ours):

– Household consumption is reduced by 0.02-0.11 per cent in 2015 and 0.17-0.19 per cent in 2020 and 0.37-0.39 per cent in 2030, relative to the no policy case.
– Household consumption under the WM Draft scenario still increases by 9-10 per cent percent between 2010 and 2015 and 18-19 per cent between 2010 and 2020.
– In comparison to the baseline, the 5 and 10 year consumption growth under the policy is only 0.1 and 0.2 percentage points lower for 2015 and 2020, respectively.
– A policy that failed to return revenues from the programme to consumers would lead to substantially larger losses in consumption.

• For the duration of the policy, average annual household consumption is estimated to decline in a range of $98 to $140 dollars per year* relative to reference scenario.
– This represents 0.1 to 0.2 percent of household consumption.
– These costs include the effects of higher energy prices, price changes for other goods and services, impacts on wages and returns to capital.
– Cost estimates also reflect the value of emissions allowances returned lump sum to households which offsets much of the cap & trade program’s effect on household consumption.

• While this analysis contains a set of scenarios that cover some of the important
uncertainties when modeling the economic impacts of a comprehensive climate policy, there are still remaining uncertainties that could significantly affect the results.
*Annual net present value cost per household (discount rate = 5%) averaged over 2010-2050

Costs to consumers are obviously going to be very important in determining how much political support the bill gains in congress. Earlier this year the Republican party, using a study by MIT, argued that the cost would be $3,128 for every household. This was based on taking MIT’s estimate that such a scheme would raise $366bn a year, and dividing that figure for each household – something that one of the study’s authors said was ‘so wrong it’s hard to know where to begin‘.

The EPA also said the carbon price would be lower than its previous estimates: $13 to $17 per tonne in 2015 and $17 to $20 in 2020.

The price of carbon is important and views vary widely: Duke Energy predicts that a cap and trade system will increase energy prices by 40 per cent but analysis by Point Carbon which estimated the price at $13.70 per tonne also estimated that this would only increase household energy costs by 7 per cent.

Related links:

The new US emissions cap and trade bill explained (FT Energy Source)
The price of US carbon (FT Energy Source)

Energy Source is no longer updated but it remains open as an archive.

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