Meeting America's Kyoto Protocol Target: Policies and Impacts

In December 1997, 160 nations negotiated and reached agreement on the Kyoto Protocol to the Framework Convention on Climate Change. The Kyoto Protocol establishes binding greenhouse gas (GHG) emissions reduction targets for industrialized nations during the first "budget period"(2008-2012). For the United States, the target is 7 percent below 1990 emissions. But the United States emitted 1,803 million metric tons (MMT) of carbon or carbon equivalent in 1998, nearly 10 percent more than U.S. GHG emissions in 1990. With the passing of time, is it still possible for the United States to meet its Kyoto Protocol target (or substantially meet its target) through domestic actions? What set of policies could be adopted to reach or approach America's Protocol target? What economic costs and benefits would these policies have? And what other impacts?

In order to address these questions, we consider a broad set of national policies that would increase energy efficiency, accelerate the adoption of renewable energy technologies, and shift to less carbon-intensive fossil fuels (i.e., displace some coal use with natural gas). In total, we examine the following ten policies.

The U.S. Department of Energy (DOE) has the authority to set and upgrade appliance and equipment efficiency standards where technically and economically feasible. We assume DOE sets new standards on lighting ballasts, water heaters, clothes washers, and central air conditioners and heat pumps, transformers, refrigerators and freezers, furnaces and boilers, commercial packaged air conditioning equipment, gas ranges, and reflector lamps during the next five years. As part of this policy, we also propose that the federal government expand ENERGY STAR^® labeling programs to a wider range of products including various home electronics products, microwave ovens, and packaged commercial refrigeration equipment.

B. Greater Adoption of Building Energy Codes and Market Incentives for Efficient New Construction

The Energy Policy Act of 1992 (EPAct) requires all states to adopt a commercial building code that meets or exceeds the ASHRAE 90.1-1989 model standard and requires all states to consider upgrading their residential code to meet or exceed the Model Energy Code. We assume that DOE enforces the commercial building code requirement in EPAct and that states comply. We also assume that relevant states upgrade their residential energy code to either the 1995 or 1998 Model Energy Code, either voluntarily or through the adoption of a new federal requirement. Furthermore, we propose that the model energy codes are significantly improved during the next decade and that all states adopt mandatory codes that go beyond current "good practice" by 2010. To complement building energy codes, we propose offering financial incentives to stimulate the construction of some highly efficient new homes and commercial buildings.

Buildings in existence today will account for approximately two-thirds of the energy used in the buildings sector in 2020. To promote energy savings in existing buildings, we propose setting energy performance targets for different types of buildings and providing a variety of inducements and services to encourage (and in some cases require) building owners to upgrade their buildings to meet these targets. For residential buildings, a possible target level is the 1993 Model Energy Code, which defines good practice for new homes. For commercial buildings, a possible target level is the eligibility threshold for the ENERGY STAR^®Commercial Buildings Program. In order to induce building owners to meet these performance levels, we propose a combination of technical assistance and financing to help owners identify and implement the most cost-effective efficiency measures.

Electric utilities historically have funded programs to encourage more efficient energy use, assist low-income families with home weatherization and energy bill payment, promote the development of renewable energy sources, and undertake research and development. However, increasing competition and restructuring have led to a decline in these "public benefit expenditures." In order to ensure that energy efficiency programs and other public benefits activities continue, we propose creating a national public benefits trust fund, similar in concept to the public benefits fund included in the Clinton Administration's federal utility restructuring proposal. The federal trust fund would provide matching funds to states for eligible public benefits expenditures. The size of the public benefits trust fund we recommend is based on a non-bypassable wires charge of two-tenths of a cent per kWh, identical to proposals included in Senator Jeffords' (S. 1369) and Rep. Pallone's (H.R. 2569) restructuring bills.

Utilities and other power generators can be required to supply or purchase a specified amount of capacity or percentage of total electricity generation from renewable sources through what is known as a Renewable Portfolio Standard (RPS). We propose requiring 10 percent non-hydro renewables by 2010 and 20 percent non-hydro renewables by 2020, along the lines of the requirements in Senator Jeffords bill (S. 1369). Utilities and other power generators would be allowed to achieve the RPS through installation of renewables on their own and/or purchase of tradable renewable credits. But rather than allowing the amount of renewable generation to vary with the amount of electricity demand, we assume fixed amounts of renewables are required nationwide. These amounts are calculated by applying the percentage requirements given above to the levels of electricity demand in our Base Case (see explanation of Base and Policy Cases below).

F. Standards, Market Incentives, and Voluntary Programs to Increase the Efficiency of Passenger and Freight Vehicles

The average fuel economy of new passenger vehicles (cars and light trucks) has declined from nearly 26 miles per gallon (mpg) in 1988 to less than 24 mpg in 1999 due to increasing vehicle size and power, the rising market share of light trucks, and the lack of tougher Corporate Average Fuel Economy (CAFE) standards. We propose strengthening the CAFE standards for cars and light trucks and instituting complementary market incentive and promotion programs. Specifically, we propose increasing the CAFE standards for cars and light trucks combined to 42 mpg by 2010 and 58 mpg by 2020. Furthermore, we propose expanding the federal "gas guzzler" tax and converting it to a revenue-neutral fee and rebate system. This would stimulate demand for cleaner and more efficient vehicles in all classes. Also, we recommend adopting tax incentives and other initiatives at both the federal and state levels to help create markets for innovative, highly efficient hybrid and fuel cell vehicles.

We also propose policies to improve the efficiency of new medium- and heavy-duty trucks. These policies include expanded research and development, vehicle labeling and promotion, financial incentives to stimulate the introduction of new technologies, and efficiency standards if necessary.

We propose adopting full fuel-cycle GHG standards for motor fuels, similar in concept to the renewable portfolio standard for electricity generation. The standards would be specified as a cap on the average GHG emissions factor of all motor fuels, thereby reducing both petroleum use and net carbon emissions from the transport sector. Fuel suppliers would have the flexibility to meet the standard on their own or by buying tradable credits from other producers of renewable or low-GHG fuel. In particular, we propose a GHG emissions standard for gasoline, starting at a 5 percent reduction in the emissions factor in 2010 and increasing 1 percent per year to a 15 percent reduction by 2020. The GHG standards could be complemented by expanded R&D programs, market creation programs, and financial incentives to stimulate the production of low-carbon fuels such as cellulosic ethanol and biomass- or solar-based hydrogen.

Combined heat and power (CHP) systems greatly increase energy efficiency by simultaneously producing electricity and useful thermal output in industries or buildings. However, a variety of barriers including hostile utility policies, onerous environmental permitting requirements, lack of recognition of CHP's full benefits in environmental and utility regulations, and unfavorable tax treatment are limiting the growth of CHP in the United States. In order to overcome these barriers, we propose: (1) providing expedited permitting for CHP systems; (2) recognizing the full benefits, including avoided power plant emissions and greater utility grid reliability, in environmental and utility sector assessments and policies; (3) removing utility-driven barriers through FERC action, national restructuring legislation, and state action; and (4) establishing a standard depreciation period of seven years for all new CHP systems.

In order to stimulate energy efficiency improvements by industries, we propose establishing voluntary agreements between the federal government and individual companies or entire industrial sectors. Companies or sectors would pledge to reduce their overall energy and carbon emissions intensities (energy and carbon per unit of output) by a significant amount, say at least 10-20 percent over 10 years. The government would encourage participation and support implementation by providing technical and financial assistance to participating companies, offering to postpone consideration of more drastic regulatory or tax measures if a large portion of industries participate, and by expanding federal R&D and demonstration programs. Voluntary agreements of this type have resulted in substantial energy and carbon emissions reductions in some European nations such as Germany, the Netherlands and Denmark.

Older, highly polluting coal-fired power plants are "grandfathered" under the Clean Air Act, meaning that a majority of the 300,000 MW of coal-fired generating capacity in the United States does not meet the same emissions standards as plants built after the enactment of the Clean Air Act in 1970. Utilities have an incentive to operate these dirty power plants due to their low operating cost. We propose requiring these older coal-fired power plants to meet the same emissions standards as new plants. Some plants would be modernized and cleaned up but many would be shut down and replaced with much cleaner resources, either renewable sources or natural gas-fired combined cycle power plants.

We analyze energy use, carbon emissions, other pollutant emissions, and economic costs for both a Base Case and integrated Policy Case during 2000-2020. We use DOE's National Energy Modeling System, known as NEMS, to conduct this analysis, along with our own assessments of some of the policies and key parameters. Our Base Case is derived from the Reference Case Forecast in the Annual Energy Outlook 1999 prepared by the Energy Information Administration. It is meant to represent energy use and carbon emissions given current policies and trends. The ten policies are considered together in what we designate as the Policy Case.

Table ES-1 shows the overall results. In the Base Case, total primary energy consumption reaches about 112 quads in 2010 and 121 quads in 2020, a 1.1 percent per year growth rate on average. The ten policies reduce primary energy consumption 18 percent by 2010 and 33 percent by 2020, relative to energy use in the Base Case in those years, through increased efficiency and greater adoption of CHP. Renewable energy use (both hydro and non-hydro) accounts for about 12 percent of primary energy supply in 2010 and 19 percent of total energy supply in 2020 in the Policy Case. In contrast, renewables contribute only 7.5 percent of total energy supply in 2020 in the Base Case, about the same percentage as in 1997.

In the Base Case, carbon emissions reach 1,779 million metric tons carbon equivalent (MMT) by 2010 and 1,968 MMT by 2020. Base Case emissions are 33 percent greater than the 1990 level by 2010 and 47 percent greater by 2020. In the Policy Case, carbon emissions decline so that they are 12 percent less than 1997 emissions and about 4.5 percent less than 1990 emissions by 2010. Carbon emissions in 2010 in the Policy Case are about 500 MMT (28 percent) less than in the Base Case. While this is not quite enough to reach America's Kyoto Protocol target of 7 percent below 1990 emissions during 2008-2012 (assuming the Base Case Forecast is accurate), it is very close. It should be possible to achieve the Kyoto target (i.e., a further 30 MMT reduction) through some combination of: (1) further domestic reductions from additional policy initiatives; (2) deeper reductions in emissions of other GHGs; (3) purchase of emissions reductions from other Annex 1 countries; and (4) reductions in developing countries from Clean Development Mechanism projects.

**Table ES-1: Overall Results for the Base and Policy Cases**
			2010	2010	2020	2020
			Base	Policy	Base	Policy
Energy		1997	Case	Case	Case	Case
	End Use (Q)	70.4	84.7	74.8	92.6	73.4
	Primary Energy Use (Q)	93.2	111.9	92	121.1	80.5
	Non-Hydro Renewable (Q)	3.6	5.0	7.7	5.7	11.6
	Hydro Renewable (Q)	3.1	3.2	3.2	3.4	3.4
	Intensity per Unit GDP (Q/trillion $)	12.9	11.3	9.3	10.4	6.9
Carbon
	Emissions (MMT)	1,453	1,779	1,277	1,968	894
	Intensity per unit energy (MMT/Q)	15.7	15.9	13.9	16.3	11.1
	Intensity per unit GDP (MMT/trillion $)	204	180	129	168	77
Air Pollutants¹
	Sulfur dioxide (MMT)	18.2	12.3	5.4	12.4	2.9
	Nitrogen oxide (MMT)	17.8	11.7	9.9	11.7	8.4
	Particulate matter (MMT)	1.4	1.3	1.1	1.4	1.0
Economic Impacts²
	Net Benefits (billion 96$)	-	-	203	-	510

¹Air pollutant emissions are from burning fossil fuels and biomass in the industrial, buildings, transport (on-road only), and electric sectors.
²Costs and benefits are cumulative, using a 5 percent discount rate.

The set of ten policies continues to provide carbon emissions reductions after 2010 while the economy is expanding. Compared to the Base Case, carbon emissions are cut 1,074 MMT (55 percent) in 2020 in the Policy Case. Emissions in 2020 in the Policy Case also are about 34 percent less than energy sector emissions in 1990. This level of carbon emissions reduction is consistent with a climate stabilization scenario whereby all industrialized nations cut their absolute carbon emissions by over 50 percent by 2050 and over 90 percent by 2100.

Figure ES-1 shows the history of the carbon intensity of the U.S. economy (carbon emissions per unit of GDP) from 1970 to the present along with the carbon intensity projections in the Base and Policy Cases. Carbon intensity declined by about 40 percent over the past three decades. In the Base Case, it is projected to decline at a slower rate-about 17 percent from 1997 to 2020 due to continued modest reductions in energy intensity. In the Policy Case, the projected decline is much more dramatic, by 60 percent from 1997 to 2020, owing to both energy intensity reduction and decarbonization of energy supplies. But the downward slope is much closer to historical trends in the Policy Case than in the Base Case.

Table ES-2 presents the carbon emissions reductions from each of the ten policies. In this breakdown, carbon emissions reductions arising from policies that reduce electricity use are credited to the buildings and industrial sectors since this is where the policies are aimed. Also, the public benefits trust fund policy is divided between the buildings and industrial sectors since it affects electricity consumption in both sectors. With this perspective, the buildings-related policies are responsible for about 22 percent of the overall reductions, largely through impacts on electricity generation and emissions. The industrial policies are responsible for about 25 percent of the total reductions, the transportation policies about 33 percent, and the electric supply policies about 20 percent. Figure ES-2 displays these results graphically.

**Table ES-2: Carbon Emission Reductions for Each Policy (MMT)**
	1990	2010	2020
TOTAL BASE CASE EMISSIONS	1,338	1,779	1,968
Reductions in the Buildings Sector
appliance standards & labeling	0	23	41
building codes	0	11	19
building retrofits	0	14	36
public benefits	0	70	142
Total Sectorial Reductions	0	119	238
Reductions in the Industrial Sector
CHP	0	49	121
voluntary agreements	0	71	95
public benefits	0	33	65
Total Sectorial Reductions	0	153	281
Reductions in the Transportation Sector
greenhouse gas standard for fuel	0	22	124
vehicle efficiency improvement	0	109	231
Total Sectorial Reductions	0	130	355
Reductions in the Electric Sector
renewable portfolio standard	0	55	158
emission standards on coal power plants	0	43	40
Total Sectorial Reductions	0	98	199
TOTAL POLICY CASE EMISSIONS	1,338	1,277	894

The set of ten policies also significantly reduces air pollutants. Implementing the policies would reduce SO₂ emissions the most—62 percent by 2010 and 84 percent by 2020. Emissions of particulates would be cut 20 percent by 2010 and 35 percent by 2020 and NO_xemissions would drop 17 percent by 2010 and 30 percent by 2020. Clearly, taking action to reduce carbon emissions as proposed in the Policy Case would provide public health and local/regional environmental benefits.

Table ES-3 summarizes the direct economic costs and benefits in the Policy Case. The policies would induce incremental investments in high-efficiency motors, advanced industrial processes, more efficient lighting and appliances, more fuel-efficient cars and trucks, renewable energy technologies, alternative fuels, cleaner and more efficient power plants, and so on. We estimate a total investment of $213 billion through 2010 and $627 billion through 2020, expressed in 1996 dollars using a 5 percent real discount rate. But final consumers would save over $400 billion through 2010 and over $1.1 trillion through 2020 in energy bill and operating savings. These savings more than offset the investments costs, with net savings of about $200 billion through 2010 and over $500 billion through 2020. Furthermore, these estimates are conservative because they do not account for the fuel or operating savings that persist after 2020 even though some measures are installed towards the end of the time period considered, and they do not include the indirect economic benefits from lower air pollution.

Implementing the ten policies creates incomes and jobs for those companies who produce, market, and service the energy efficiency and renewable energy. The efficiency measures then lower the energy bills of the businesses and households that utilize the more efficient equipment. Respending of these energy bill savings creates additional jobs and incomes since expenditures are shifted to areas of the economy (such as food, housing, and entertainment) that are more labor-intensive than the energy supply sectors. While we believe the overall effect would be a net increase in jobs in the economy in the Policy Case, we did not explicitly analyze these macroeconomic impacts in this study.

Conclusion

This study shows that the United States can achieve its emissions target under the Kyoto Protocol—7 percent below 1990 levels for the first "budget period" of the Protocol—entirely or largely through domestic actions, even though the first budget period starts in about eight years. However, U.S. GHG emissions are now 10 percent greater than they were in 1990. Achieving America's Kyoto target requires strong, new national policies. Further delay could jeopardize America's ability to meet the Kyoto target.

New policies are needed to stimulate greater energy efficiencies in all sectors of the economy as well as to accelerate the adoption of renewable energy sources and shift away from carbon-intensive fossil fuels. Some of the policies can be implemented without new legislation, such as adoption of more stringent appliance efficiency standards, additional product labeling, tougher fuel economy standards on cars and light trucks, reducing barriers to CHP, and voluntary agreements and related policies to reduce industrial energy use. Other policies require new legislation but have been adopted already by some states or municipalities.

The set of policies proposed here would yield other benefits besides lower GHG emissions and economic benefits for households and businesses. Oil imports would be reduced, thereby improving America's trade balance and reducing its vulnerability to supply constraints and oil price shocks. U.S. industries that produce efficient and clean technologies to meet climate policy goals would be poised to capture a large share of the rapidly growing world markets for these technologies. And cutting fossil fuel use would reduce air pollutants, thereby improving public health and reducing damage to crops, forests, buildings, and water resources.

Table ES-3: Cumulative Investment Costs and
Fuel/O&M Savings in the Policy Case (Billion, 1996$)

	Through	Through
	2010	2020
Investment Costs	213	627
Fuel and O & M Savings	416	1137
Net Savings	203	510

In summary, the policies proposed here can be justified even if global warming and GHG emissions were not of concern. The primary obstacles are lack of political will and in some cases industry opposition, not technical or economic viability.