New Energy Forecasts Show Time is Right for Senate Action

WRI Senior Associate John Larsen answers questions about recent emissions reductions and what they mean for climate legislation.

Q: The Energy Information Agency (EIA) recently announced that emissions are projected to drop 6% this year. Why?

A: Energy demand in the United States is changing because of the recession. The transportation, electric power and industrial sectors have all seen lower energy demand in part because of high energy prices but also because of lower economic output. Coal use in particular has dropped off because of recent declines in natural gas prices and lower electricity demand. Since coal is the most carbon-intensive fossil fuel, drops in its use translate to big drops in emissions compared to other fuels.

At the same time, clean, renewable energy is growing as a proportion of the electricity grid, indicating that zero-emitting energy sources are playing an increasingly important role in our economy.

EIA’s projections for 2010 show emissions increasing slightly as the economy begins to pick up again.

Q: How do these emissions reductions compare to those required in the House-passed American Clean Energy and Security Act (H.R. 2454)?

A: The House climate bill requires total U.S. greenhouse gas emissions to be 3% below 2005 levels in 2012, when its cap-and-trade program begins. Given that the EIA projects that U.S. emissions are 6% below 2005 levels today (and are only forecasted to rise slowly), it is very likely that the bill’s requirements for the first year of the program would be met.

This is very good news for business. It means that transitioning to a cap-and-trade program should not add any significant stress to the U.S. economy, contrary to what opponents of ACES have argued.

Q: If emissions stay flat, what would this mean for the new U.S. carbon market?

A: If we continue at 2009 emissions levels, there would be lower demand for allowances and offsets from regulated entities such as utilities and coal-fired plants than projected by EIA and the U.S. Environmental Protection Agency. However, ACES essentially sets a price floor on allowances of $10, which will ensure that a sufficient price on carbon is established even if demand is low. In addition, some regulated companies will likely buy up low-cost allowances and bank them for future use.

Q: Critics of cap-and-trade say this isn’t the right time to act on climate change. Is that true?

A: Actually, the exact opposite is true. Cap-and-trade provides a great deal of flexibility in a down economy. With the price of allowances down, businesses and utilities will have an easier time transitioning. This will allow businesses to get comfortable with the new emissions requirements at relatively low cost, as well as giving them certainty that the investments that they make in clean technology will have value in the future. If the Senate acts now, it will be easier for businesses in the long run.