RFF-NEPI Study Briefing Alan Krupnick Senior Fellow and

1. RFF-NEPI Study Briefing Alan Krupnick Senior Fellow and Director of the Center for Energy Economics and Policy (CEEP) San Francisco Breakfast November 4, 2010

2. Goals of Study Consistently assess and score policies according to • CO2 emissions reductions • Reductions in oil use • Welfare costs and cost-effectiveness Point to promising policies for an overall energy strategy for the U.S.

3. What’s Distinctive • POLICIES(not technologies) • COMPREHENSIVE – 35 (incl. 4 cross-cutting) • CONSISTENCY (apples to apples)(NEMS-RFF model across all policies) • WELFARE COSTS (not GDP or expenditures) • TARGET REDUCTIONS FOR OIL AND CO2 • BOUNDING ASSUMPTIONS FOR MARKET FAILURE (no, partial, complete)

4. Oil Use mmbd CO2 Emissions GT 18 124.5 12.3 16 112 .2 2010-2030 2020 2030 Setting Targets

5. INDIVIDUAL POLICIES Cross-cutting combinations

6. Individual Oil Reduction Policy Ideas • Power of Pricing: Taxes for reducing oil • Affects all aspects of consumer and business decisions • Recycle revenues for political palatability. But take care • Liquefied natural gas (LNG) heavy-duty trucks • 18-wheelers travel 100,000 miles/yr @ 5 miles/gallon diesel • LNG for range • Operation in Port of Los Angeles • ~ $70,000 more expensive investment • Cheaper to operate on natural gas • Still a net cost to society, even assuming complete market failure • Infrastructure issue: hub and spoke system becoming more common, but resale market could be problematic • Safety Issues

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8. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2010 2020 2030 2020 2030 2020 2030 Core 1 Optimistic battery Optimistic costs battery costs, subsidies Conventional Gasoline Electric-Gasoline Hybrid Plug-in HEV10 Plug-in HEV40 Results In almost all cases, subsidy has a strong effect on hybrid penetration of the fleet….

9. Results • But little effect on oil use and GHG emissions • Reason is that CAFE is binding for the manufacturers When there are more hybrids purchased, it is easier to meet CAFE • Is this a likely outcome? • One view that CAFE would just change in response

10. Counting Costs of Pollution, Accidents and Congestion

11. Individual CO2 Policy Ideas • Cap and Trade/carbon tax is most effective and cost-effective • Clean Energy Portfolio Standard (all but coal) does relatively well if pricing is not an option. • Subsidizing loans “better” than subsidizing investment costs for energy efficient investments

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13. Conclusions • Getting even 2 mmbpd reduction in oil consumption is tough • Not a lot of good options beyond taxes • Except heavy-duty truck policy • CEPS-ALL a reasonable CO2 option if CAT is dead. • Assumptions about market failure and external costs really affect overall costs

15. $100/person $45/person

16. Concluding message • We can make progress now. Don’t need to wait for technology advances. • From $45-$100 per person per year vs. welfare costs of congestion per person: $1,200 per DC commuter* • At $100/person per year, $30 billion per year vs. welfare costs of congestion for U.S.: $80 billion* * Texas Transportation Institute

17. Abundant Shale Gas Resources • Can shale gas lead to long-run price stability? • Modeled replacing NEMS gas resource estimates with those of Potential Gas Committee • Scenario 1: 269.3 tcf shale gas resources (EIA 2007) • Scenario 2: 615.9 tcf shale gas resources (PGC 2009)  Can keep natural gas prices low—even with big gains in natural gas demand

18. Scenario Analysis: Supply and Demand, 2030 25% Lower prices sustainable, even with strong demand increases

19. Abundant Shale Gas Resources Can natural gas be a bridge to low-carbon future? • Without climate policy, abundant natural gas increases energy use and CO2 emissions • With climate policy (C&T), abundant natural gas increases natural gas use and electricity use falls • Abundant natural gas moderately reduces cost of reducing CO2 emissions • Emissions allowance price falls about 1 percent • PV cost of carbon policy reduced about 1 percent ($1 billion)  A “narrow” (flimsy?) bridge to a low carbon future

20. Electricity Prices and Quantities, 2030

21. Scenario 2: High Gas, No CO2 Policy Scenario 4: High Gas, CO2 Policy

22. Next Steps • Death of cap and trade doesn’t mean no movement on CO2 (or oil) • Clean Air Act for EPA • Unconnected policies in Congress • Important that each is reasonably cost-effective and that the policies work together

23. Next Steps, cont. • Bechtel Project • Stakeholder-driven • Heavy-Duty CAFÉ standards • Coal generation efficiency and BAT standards • Energy Efficiency loan vs investment subsidies • Alternative Compliance Payments • Clean Energy Development Administration • Second-best policy/combination policy paper • Communications: LNG Issue Brief; Hybrid vehicles Issue Brief; Green jobs, GDP and Welfare Costs Paper

24. Other Ideas • Shale gas preferences, risks and regulations • Examine geological and operator-based risks • Identify local preferences for economic/health and environmental tradeoffs involving shale gas extraction • Link to regulatory implications. • What’s wrong with current energy policies • Drivers of renewables internationally

25. Welfare Costs • The concept underpinning government cost-benefit analyses • Lost consumer satisfaction and profits from a policy and lost tax revenue to government from pre-existing tax programs • E.g.’s: gasoline tax: loss in satisfaction from driving less because of higher prices at the pump; technology mandate/subsidy: excess of investment cost over PDV of energy savings

26. Welfare costs vs. GDP • GDP is the value of all goods and services produced in an economy. • Consider a new technology mandate: • Higher investment costs (I) ADD to GDP, REDUCE welfare • Energy savings (S) REDUCE GDP and RAISE welfare If I>S  ADD to GDP, REDUCE welfare