Statementof David G. Hawkins, June 12, 2002

Hearings on S. 556, the Clean Power Act:

U.S. Senate Committee on Environment & Public Works

June 12, 2002

Testimony of David G. Hawkins

Director, NRDC Climate Center

Natural Resources Defense Council

Five years ago Chairman Jeffords introduced S.687, the first comprehensive bill to control the four major pollutants released by fossil-fuel power plants. Today we are gathered to discuss the bill he and others introduced in this Congress, S.556, the Clean Power Act. There is broad agreement now that power plants should be cleaned up. But there are enormous differences in the benefits conferred by the Clean Power Act and the competing approach sketched by the administration. I welcome the opportunity to testify on behalf of Natural Resources Defense Council’s (NRDC) 500,000 members in support of the Clean Power Act and to describe why we believe it is the right approach for cleaning up power plant pollution.

The Clean Power Act will produce major benefits for Americans’ health and the quality of our environment. Indeed, the bill’s provisions to limit global warming pollution can help America regain leadership in acting to protect the planet from devastating changes to the climate.

Both the administration and the Clean Power Act’s sponsors agree that air pollution from power plants imposes large costs on health, environment and the economy in the United States. Sulfur dioxide (SO₂) pollution is a major cause of fine particles that cause tens of thousands of premature deaths every year, with 30,000 premature deaths attributed to pollution from the power sector. SO₂ also acidifies lakes, streams, and soils and pollutes our national parks with haze that spoils vistas that once were clear. Nitrogen oxide (NOx) is another power plant acid rain pollutant. NOx also forms smog, fine particles and haze and overloads estuaries with nitrogen fertilizer contributing to dead zones in places like the Chesapeake Bay, Long Island Sound, the Gulf of Mexico and other coastal waters. Power plants also emit more mercury than any other remaining category of pollution sources. Mercury is a nerve poison that builds up to hazardous levels once released in the environment. Mercury contamination is so pervasive that 41 states have issued fish consumption warnings for their water bodies. Finally, and largest in terms of tonnage and extent of potential damage, heat-trapping carbon dioxide (CO₂) from power plants is the largest U.S. contributor to global warming. While the administration now acknowledges CO₂’s role in climate change, it continues to oppose any policy action to establish binding limits on CO₂ emissions.

Comparing the Clean Power Act and the Administration Proposal

In February, the administration released a description of the power plant legislation it would support. NRDC’s summary of the administration’s approach is that, compared to competing proposals, it condemns the public to much higher pollution exposures, threatens local air quality, and prevents timely action to address the risks of global warming. Not only did the administration approach reject the bipartisan (more accurately, tri-partisan) Clean Power Act, it also rejected an August 2001 proposal from EPA, the expert agency Congress has charged with implementing clean air programs. While no legislation has been submitted and many details remain murky, enough is known about the administration’s proposal to demonstrate how poorly it performs, when compared to the Clean Power Act, or for that matter, to EPA’s August 2001 recommendation:

· For the three traditional pollutants, the Clean Power Act gets far greater pollution reductions much faster than the administration proposal.

· The differences in total loadings under S.556 compared to the administration proposal between now and 2020 will result in significantly greater health and environmental damage with the administration approach.

· By failing to address CO₂ emissions from power plants, the Administration proposal delays action to limit emissions from America’s largest single source of global warming pollution.

· The administration proposal may save industry some compliance expenses in the short term compared to the Clean Power Act but the government’s own analyses show that the added benefits provided to Americans by the Clean Power Act are much larger than the temporary industrial cost savings. Further, by incorporating effective measures to increase energy efficiency and the use of renewable energy sources to help meet the emissions caps called for in the bill, S.556 can achieve a net reduction in consumer bills while delivering a dramatic improvement in environmental quality.

· While the Clean Power Act guarantees that all communities will enjoy major cuts in pollution from nearby and distant power plants, the administration would allow increases in local pollution that would make some local communities worse off.

The Clean Power Act, not the flawed administration proposal deserves your support. We urge the Committee to mark up S.556 soon and report it to the Senate for consideration. The toll that the four-horsemen of fossil-fuel power plant pollution inflicts daily on Americans is far too great to delay action to clean up this industry.

Clear Skies: Clearly Dirtier

While the administration has decided on an attractive sounding name for its proposal, the Clear Skies Initiative (CSI), the only thing that is clear about the proposal is that it is clearly dirtier than the Clean Power Act (and than the EPA August 2001 proposal). The caps and timetables proposed under CSI for the traditional pollutants would allow millions more tons of these hazards to be released over the next two decades than under the Clean Power Act, with clearly greater damage done to Americans’ health and our environment. (See Figure 1).

While the Clean Power Act requires an annual cap of 2.25 million tons of SO₂ to be met by 2007, the administration CSI proposal allows twice as much pollution, 4.5 million tons, and does not require that reduction until 2010. The CSI briefing materials also imply that the SO₂ cap will be lowered in a second phase to a level of 3 million tons per year by 2018. But the fine print in the proposal states an administrative review process is required before the second phase cap is set. This means that the reductions claimed for the second phase are no more certain than the outcome of a future ambient air quality standard setting process. If CSI became law, the only thing Congress, the public and states could count on would be the first phase cap of 4.5 million tons. On the other hand, industry lawyers could count on thousands of billable hours (fees that electricity consumers will pay) as they assist their clients in the “review” of the second phase cap. (See Figure 2 for state-by-state comparisons of emissions under the CSI in 2010 and 2020 and the EPA August 2001 proposal).

As a result of the much higher caps for SO₂ under the CSI approach, the health and environmental damages would continue at much higher levels than under the Clean Power Act. Over the period 2007-2020, the CSI approach would result in at least 40 million tons more SO₂ emissions than under the Clean Power Act. The higher emissions allowed by CSI would inflict great damage to public health, including as many as 10,000 additional premature deaths every year for at least a decade. In its analysis of its August 2001 proposal (a document that the administration still has not released officially), EPA calculated the health benefits from SO₂ and NOx caps set at the level of the Clean Power Act as including the prevention of “over 19,000 premature deaths” annually.[1] In contrast, EPA estimates the CSI approach will avoid “up to 9,000 premature deaths” in 2010.[2] (See Figure 3 for current mortality rates).

As indicated by the higher number of preventable deaths under the CSI approach, the larger SO₂ caps in the administration proposal would leave more areas violating the fine particle standard, placing a greater burden on state and local officials to pursue difficult and more expensive reductions in prolonged state-by-state rulemaking proceedings. According to EPA computer runs prepared last September but made available to the Committee only last week, an SO₂ cap of 3.58 million tons would leave nearly twice as many counties in the eastern U.S. in violation of the fine particle standard than would a cap of 2 million tons per year.[3] Since, as discussed above, the CSI proposal only guarantees a statutory cap of 4.5 million tons, this will complicate and most likely delay attainment planning efforts in areas where millions of people live.

In addition to causing greater mortality and morbidity, the additional SO₂ emissions under CSI would leave more lakes and streams susceptible to chronic acidity from acid deposition. According to computer runs made available to the Committee last week, an SO₂ cap greater than 2 million tons per year will leave 15 percent of today’s chronically acid lakes in the Adirondacks still chronically acidic as long away as the year 2030. In the Southeastern U.S. stream acidification will worsen under the caps above 2 million tons, with 44 percent of streams in the Southeast predicted to be either chronically or episodically acidic under a 3.58 million ton cap.[4]

As with SO₂, the CSI approach also allows much higher NOx emissions than the Clean Power Act: 2.1 million tons beginning in 2008 compared to 1.51 million tons beginning in 2007. This results in 9 million more tons of cumulative NOx loadings between 2007-2020, even if one assumes that EPA succeeds in lowering the cap to 1.7 million tons in 2018 as represented by the administration’s descriptions of the CSI proposal. These added emissions will also mean more acid deposition, more eutrophication of coastal waters, and more fine particle pollution than under the Clean Power Act.

For mercury, the CSI proposal sets an initial cap five times higher than the Clean Power Act: 26 tons per year starting 2010 compared to 5 tons per year starting in 2007 under the Clean Power Act. Even the optional second phase of CSI would leave 15 tons per year of mercury emissions and not be triggered until 2018. Compared to the Clean Power Act, the CSI approach would result in a cumulative added mercury burden of 330 tons between the years 2007-2020 even if EPA succeeds in lowering the cap in 2018. Because mercury is an accumulative toxin, these added tons will do their damage for scores of years after they are released.

The Committee should note that the current Clean Air Act requires EPA to adopt a performance standard based on Maximum Achievable Control Technology (MACT) in the next few years, with compliance required by the end of 2007. In the regulatory development process now underway, EPA is evaluating performance requirements that would achieve the 5 ton-per-year cap in the Clean Power Act and the weakest option being analyzed by the agency (at the request of the utility industry) is a level only slightly higher than the nominal CSI phase 2 target. In sum, the CSI approach for mercury delays the cleanup of this toxin by ten years compared to the current law and calls for a cap that is three to five times larger than the more protective options currently under consideration at EPA.

Finally, as the Committee knows, the CSI proposal rejects any limit on CO₂ emissions, despite the fact that power plants are responsible for 40 percent of U.S. emissions of this heat-trapping pollutant. Instead, the administration has called for a continuation of voluntary measures even though electric sector CO₂ emissions grew by more than 25 percent during the previous decade of voluntary “commitments,” a growth rate triple that of the rest of U.S. emission sources. In the next section of my testimony I will discuss why the Committee should reject this terribly flawed approach to controlling power plant pollution and adopt the comprehensive program in the Clean Power Act.

Global Warming and the Clean Power Act

The Clean Power Act’s provisions to cap CO₂ pollution from power plants are responsive to several fundamental facts about global warming:

· The magnitude and the scope of the threat posed by global warming are already large and will grow the longer we delay action to address it.

· Power plants are responsible for 40 percent of US CO₂ pollution and their emissions will continue to increase without action.

· It is in the strategic interest of the U.S. to commercialize modern technologies that reduce the growth in global warming pollution in all countries.

· An integrated strategy of emission caps and measures to increase energy efficiency and use of renewable energy sources can succeed in reducing all four air pollutants from power plants at lowest overall costs.

The Challenge of Climate Change

At the end of May the U.S. Government submitted its latest “Climate Action Report” (National Communication) to the United Nations under the Rio Treaty that the U.S. ratified 10 years ago. That report summarized the harm that could be done to America and Americans from a wide range of changes to our climate caused by human emissions of global warming pollutants.

If left unchecked global warming will have profound effects on the United States from Florida to Alaska and from California to Maine. Based on research by top U.S. scientists over the last four years, and extensively peer reviewed, the report identifies many threats to our way of life, including:

· In Florida, rising sea levels, higher temperatures and higher CO₂ concentrations threaten to literally reshape Florida. Much of the Everglades as well as other important coastal wetlands would be inundated. Florida’s famed coral reefs, already suffering from the effects of coastal development and extreme heat during the 1998 El Nino, may be destroyed. Florida’s growing elderly population, many of whom came to Florida to enjoy its mild climate, is particularly vulnerable to heat stress when mild weather is replaced by stifling heat.

· In Vermont and New York, sugar maples could disappear and ski areas will become increasingly snowless.

· In the West, alpine meadows could disappear and water resources could be stretched to the breaking point. Conflicting demands for water are already a source of tension between farmers and urban dwellers as well as between the United States and Mexico. These problems will be exacerbated by severe reductions in a critical natural reservoir: mountain snowpacks. Rising temperatures will result in more precipitation as rain, rather than snow, and an earlier spring snowmelt, resulting in an increased risk of spring flooding as well as summer drought.

Two recent NRDC reports highlight some of the risks documented in the government’s assessment of climate threats. Our report Feeling the Heat in Florida emphasizes that in addition to the threats described above, Florida’s tourism industry would be severely damaged by disappearing beaches and the loss of other natural resources that bring divers and sport fishers to the state. More recently NRDC released a report on the effects of global warming on trout and salmon, which found that the habitat for individual species of these prized fish could shrink by 5 to 17 percent by 2030 and by 14 to 34 percent by 2060, as the cold clear streams on which these fish depend become increasingly tepid.

The opponents of action to combat global warming were quick to argue that the extent and location of harm is “uncertain.” Inaction is not excused by claims the threats are uncertain and the warnings not specific enough. We are not locked into a fate of exposing our children to future threats simply because we do understand today the size of the risk. We know now the prudent steps we can take to reduce the risks of harm from global warming. The key is to start now with effective programs to limit the emissions that cause global warming. The Clean Power Act is just such a step.

To appreciate why it is necessary and productive to begin now to carry out an effective action program to cut emissions, a quick overview of climate change fundamentals is helpful. A variety of gases and compounds associated with human activity change the heat-trapping characteristics of the atmosphere. In particular, CO₂ released by fossil fuel burning and deforestation is the largest single source of heat-trapping emissions to the atmosphere. This increase in heat trapping is changing the climate, even while we argue how soon the changes will harm us.

To avoid confusion caused by statements that CO₂ is “natural,” it is important to understand how human activity has changed the earth’s natural carbon cycle. CO₂ in the atmosphere is part of a continuous cycle of exchanges of carbon between vegetation, animals, soils, the oceans and the air.[5] While huge amounts of carbon flow between these pools every year, the amount of CO₂ in the atmosphere since the last glacial period over 12,000 years ago was fairly constant (around 600 billion metric tons of carbon) until we began widespread burning of fossil fuels around two hundred years ago. Our use of fossil fuels has fundamentally changed the natural carbon cycle by adding to the atmosphere immense quantities of carbon that have been stored underground, isolated from the natural cycle for hundreds of millions of years.

In the last couple of hundred years, burning fossil fuels has added about 300 billion tons of carbon to the atmosphere, half of that amount in the last 25 years.[6] Under mid-range growth forecasts for the entire globe, humans will add nearly another 300 billion tons of fossil fuel carbon to the atmosphere in the next 25-30 years, driving CO₂ concentrations ever higher. Without corrective action, this emissions growth will escalate every decade for the foreseeable future, resulting in middle-of-the road forecasts of 1500 billion tons of added carbon during the course of this century. This is an amount double the total amount of carbon that is now in the atmosphere.

This added carbon changes a natural, hospitable carbon cycle into one that poses threats of unprecedented harmful change to patterns of temperature, storms, rainfall, drought, fires, flooding, sea levels, and all other aspects of our life that are affected by climate. Beyond the scope of the threats, the other feature that makes carbon pollution different from traditional air pollution concerns is the long lifetime of carbon in the air. For every 1000 tons of carbon we emit today, 400 tons will still be in the air when our great-great grandchildren are born 100 years from now; and 1000 years from now 150 tons will still be in the air. So the carbon train is not one we can shift into reverse. If we are to avoid climate changes that persist for centuries we have to do it by limiting the amount of carbon we put in the air in the first place, not by waiting for what we have emitted to “disappear.”

So how much fossil carbon is it “safe” to add to the natural carbon cycle? The short answer is, the more carbon we add to the atmosphere, the greater are the risks of serious irreversible harm. Today’s atmospheric concentrations are already 30 percent higher than pre-industrial levels and we are on our way to doubling concentrations over the next several decades if we do not take action. The Intergovernmental Panel on Climate Change (IPCC) reports support a conclusion that to avoid serious, widespread risks of damage we should keep concentrations from rising above 50-60 percent higher than pre-industrial levels (450 parts per million (ppm) or less).

Others will argue we may be able to go higher without great harm. But the point remains, without action to limit emissions, we will commit ourselves to much higher levels before we know if we, our children, and our children’s children’s children can live with the changes we have caused. Thus, responsible policy is to do as much as we can to preserve our options to stabilize concentrations at levels not too much higher than today while we learn more about how sweeping future climate changes may be.

To preserve our options to keep long-term concentrations from exceeding prudent levels we must organize ourselves to live within a carbon budget. Given the long atmospheric life of carbon, once emitted, we know how many tons of carbon we can add to the atmosphere over a long period of time and still keep long-term concentrations below some target level. Scientists agree that to preserve the option of stabilizing CO₂ concentrations at 450 ppm we must limit cumulative carbon emissions to about 900 billion tons in the two centuries from 1900-2100.[7] These may seem, at first, like immense periods of time that someone else, someone later, can worry about; but they are not. As I mentioned above, we have already emitted 300 billion tons of our budget and the next 300 billion tons will be released in the next 25-30 years; without effective programs, humans are likely to put 1800 billion tons of carbon in the air between the start of the 20^th century and the end of this century.

We must understand that further delay in adopting policies to limit emissions means the remaining budget will be consumed at ever increasing rates. We all remember the idea of “stopping distance” from high school drivers’ education classes: the faster your speed, the more ground you cover before you can stop. The same lesson applies here: the expanding global economy means we are emitting carbon and consuming the global carbon budget more rapidly every year. In 1970 when the Clean Air Act was passed, global carbon emissions from energy use were 4.1 billion metric tons; in 1999 they were 6.1 billion tons; and in 2020 they are forecast to be 10 billion tons. To avoid burning through our budget before we can deploy climate friendly technologies, we have to send the policy signal now to the private and public sectors that designing and using low-carbon systems makes good sense.

These are no longer theoretical calculations. Figure 4 shows how much of a 450 ppm and a 550 ppm budget we have left today and how rapidly it will be consumed under a plausible business as usual scenario. By the years 2020 or 2030, we will have consumed more than half the budget consistent with stabilizing at either of these levels.

New fossil power plants that are now in the planning and financing stage represent a major commitment of the remaining carbon budget. Once built, these long-lived capital investments will operate and emit carbon for a large fraction of this century. The International Energy Agency forecasts over 600 gigawatts[8] of new coal plants will be built between 1997 and the year 2020, an increase of 60 percent above today’s world coal capacity in a little over 20 years. Much of this capacity is in the fast growing economies of the developing world. Without a policy change, these plants almost certainly will use conventional combustion technology and will emit some 60-80 billion tons of carbon over their lifetimes.[9] Business and government officials are designing and financing these plants today and they are doing so without an appreciation of how much of the global carbon budget their individual decisions will consume.

The fact is that rapid consumption of the carbon budget will hurt all countries by limiting our range of choices and making future negotiations of any climate agreement much more difficult. It is in the strategic interest of the U.S. (and other countries) to develop a cooperative program to convince decision-makers around the world that all countries will benefit if each deploys low-carbon energy systems in order to slow the consumption of the global carbon budget. But without policy action in the U.S., such efforts, if made, are likely to be met with a polite nod and dismissal.

Breaking the Climate Impasse with the Clean Power Act

The Clean Power Act can break the policy impasse on global warming and set in motion the changes in public and private sector investments that are essential for developed and developing countries alike to limit CO₂ emissions to prudent levels over the course of the next century. While any path we pursue to combat global warming can take decades to finish, if we are to keep open the options of stabilizing CO₂ concentrations below levels double pre-industrial concentrations it is essential that we begin now, not ten or twenty years from now.

By putting in place a cap and trade system for the electric sector, the Clean Power Act will send a signal now to energy planners and private investors to find innovative ways to reduce carbon emissions associated with our production and use of electricity. There is no question that major reductions in CO₂ from today’s levels are technically and economically feasible today; the market actors simply need a reason to use the available menu of options. Greater use of lower carbon fuel, improved production and demand-side efficiency, expansion of cogeneration and combined heat and power systems, replacement of old and inefficient plants with modern technology all will reduce CO₂ from our electric generating system. But these approaches will not be deployed in today’s increasingly competitive electric power markets if they involve expenditures even slightly less profitable than what corporate investment hurdle rates demand. And as long as carbon can be emitted for free, there will be no value assigned to investment options that reduce carbon emissions, no matter how affordable they may be.

Let me give an example of a promising, climate friendly system of investments that is not being pursued today even though its components are technically proven, profitable and would contribute to reducing our dependence on oil imports. For years, we have injected CO₂ into oil wells with declining production to boost the amount of oil that can be recovered. Today in the U.S. oil producers pump around 30 million tons of CO₂ into oil fields in a process known as enhanced oil recovery (EOR), supplying about 200,000 barrels a day of our oil needs. These EOR operations are largely concentrated in the southwestern U.S. where a network of pipelines ships CO₂ to oilfields in the Permian Basin. Unfortunately for climate needs, nearly all of this CO₂ comes from natural CO₂ reservoirs rather than from the hundreds of combustion and natural gas processing sources that are also located in the region.

Oil geologists believe that we could greatly increase EOR recovery, perhaps by an order of magnitude. But believe it or not, the constraint is a shortage of CO₂ supply! While it is technically feasible to build industrial sources that would separate CO₂ and provide it for EOR use, that is not the path that the market is pursuing. Instead, operators of existing natural CO₂ reservoirs are proposing to drill new wells to meet demand. Later this week the comment period will close on a proposal to drill new CO₂ extraction wells in the Canyons of the Ancients National Monument in southwestern Colorado.[10] As long as CO₂ can be dumped for free from power plants, the logic of the market favors pulling CO₂ out of the ground to meet EOR demand rather than capturing it from sources that release it to the atmosphere.

Meanwhile, in the San Joaquin Basin oil fields in California, potential EOR operations are on hold because of the lack of a developed CO₂ supply. The Department of Energy has done an economic study of a proposal to build coal-based Integrated Gasification Combined Cycle (IGCC) plants near the California fields, separating the CO₂ for EOR injection and selling the electricity in the western grid. The good news is that DOE concludes these projects could use commercially proven technology and make a profit without any government subsidies. The bad news, according to the same study, is that as long as CO₂ can still be emitted for free, a project developer can make more profit building a conventional natural gas plant and venting the CO₂ to the atmosphere. [11] Absent a policy incentive, like that provided by the Clean Power Act, to make avoiding CO₂ emissions economically attractive, these systems are not likely to be built.

The irony is that the coal industry is one of the most hostile opponents to adoption of binding limits on carbon emissions even though such limits are needed to stimulate a commercial market for IGCC power plants. At present nearly all new fossil generation planned for construction in the U.S. are natural gas plants, given the uncertainty that faces coal with climate policy in a state of confusion. If coal is to continue as a major player in the U.S. and elsewhere for more than a few decades it will only be if technologies like IGCC, that make it feasible to store carbon permanently in geologic formations, are commercially deployed at sufficient scale to buy down their costs to fully competitive levels. The U.S. is one of the few countries in the world with the resources to carry out such a program in a short period of time.

Time is of the essence. While we argue domestically about whether to enact caps on carbon like those in the Clean Power Act, the rest of the world is making energy investment decisions. As I mentioned earlier, some 600 gigawatts of new coal capacity are on the drawing boards for construction in the next twenty years, most of that in the developing world. The logic of the market dictates that these plants will be conventional coal plants, which are still slightly cheaper than more efficient, sequestration-ready IGCC plants. The U.S. has the power to change that calculus. If we do so, the benefits to us and other countries will be enormous. We can provide a needed technology to a worldwide market and the use of that technology together with a balanced portfolio of efficiency programs and renewable energy systems, can avoid committing the planet to unmanageable growth in CO₂ emissions. The opportunity cost posed by those 600 gigawatts of new coal plants now being planned and built is enormous. We and others will rue our choice if we do nothing to steer that massive investment to a lower-carbon alternative. Enacting the Clean Power Act is a way to shape our future rather than just letting it happen to us.

Comparing Benefits and Costs of Power Plant Proposals

In developing its multipollutant proposal for the Administration last August, EPA calculated the benefits of a set of caps essentially the same as those in the Clean Power Act. EPA has concluded that these pollution reductions would provide enormous benefits for public health and the environment, including over 19,000 premature deaths avoided annually and larger reductions in pollution-related disease.[12] Using standard methods, EPA estimated the economic benefits of these health improvements as worth $154 billion annually. The compliance costs to achieve these enormous benefits were calculated at about $10 billion per year.

This analysis should have made clear to anyone concerned about the welfare of the public that the Clean Power Act’s caps for traditional pollutants are a massive bargain for the American public. But the Administration ignored EPA’s analysis and developed its much weaker CSI proposal.

EPA estimates the CSI approach will cost industry about $3.5 billion in 2010 and $6.5 billion in 2020 but cuts health benefits in half.[13] These numbers reflect a remarkable and disappointing choice by the administration: its proposal saves industry an average of $5 billion annually over the decade from 2010-2020 but costs the public in excess of $50 billion in benefits annually over the same period in lost health benefits, most notably incurring an additional 10,000 avoidable premature deaths annually for most of this period. It is difficult to conceive of a justification for this decision and the administration has offered none.

While EPA’s analysis was ignored by the administration, it stands as an uncontested estimate of the benefits of the caps for the traditional pollutants contained in the Clean Power Act. EPA’s August analysis did not address the benefits or costs of controlling CO₂ because the President in his letter of March 2001 had ruled out that option. However, in November 2001, EPA and the Energy Information Administration (EIA) provided the Committee with reports estimating the total costs of the Clean Power Act, including its CO₂ provisions.[14] Below I will summarize why NRDC and others believe the costs estimated by EPA and EIA in their reference case scenarios dramatically overstate the actual costs of the bill.

The True Costs of Limiting CO₂

Adopting the CO₂ caps in the Clean Power Act would change incentives and promote investments in efficiency, renewable energy and CO₂ capture and avoidance measures. But the administration says it would cost too much. Last November, EPA Assistant Administrator Holmstead testified against S.556, claiming that the bill would cause a significant increase in electricity prices. This Committee heard similar claims in the 1980’s when industry and the Reagan Administration claimed that enacting acid rain controls would raise electric rates by 30 percent or more. Of course, nothing like that happened, nor will it under the Clean Power Act.

Five main assumptions affect forecasted costs of carbon limits: 1) the predicted growth in electricity and natural gas demand; 2) the expected deployment of new technology, 3) the method used to distribute emission allowances and recycle revenues to prevent windfall profits to electric generating companies; 4) the schedule of emission reductions required under existing law, and 5) the investments in new natural gas generating capacity expected to result from business-as-usual. One can calculate high costs for controlling carbon emissions only if one assumes little is done to improve energy efficiency and use of renewable energy; if one assumes that Congress will let electric generators retain $50-100 billion in windfall profits; if the reference case is chosen such that technologies and regulations are frozen at today’s levels; and if the recent expansion of electricity generation from natural gas is ignored. Unfortunately, the published analyses by EPA and the Energy Information Administration (EIA) have emphasized cases that rely on all these flawed assumptions.

It is worth noting though, that despite the use of multiple assumptions that drive costs upward, EIA concluded that the Clean Power Act would only raise the costs of generating electricity by about nine percent.[15] Since generation costs are less than half of the rates on a typical customer’s bill, if only the added generation costs were passed on to the consumer, the impact on rates would be even smaller. As discussed below, this can be achieved by intelligent design of the allowance allocation system.

“Business as usual” or “reference” scenarios used by both EIA and EPA to project the future without new multi-pollutant power plant emissions controls do not include several Clean Air Act activities that will on their own require substantial additional power plant emissions clean-up. Future power plant emissions requirements not included in EIA/EPA baselines include: Section 112 MACT rulemaking (mercury and other hazardous air pollutants) and subsequent “residual risk” rulemaking; PM 2.5 NAAQS implementation; 8-hour ozone NAAQS implementation; and visibility requirements (regional haze). While future power plant emissions reduction requirements (reduction targets and dates) cannot be precisely predicted, plausible scenarios for such requirement can certainly be developed and modeled as opposed to being ignored as was done in the analyses presented to the Committee last fall.

Also worth noting is that none of the EIA or EPA analyses include scenarios with significant market penetration of coal gasification (IGCC) power plants. Congress is moving towards enacting financial incentives intended to move IGCC technology rapidly into the market. The Bush Administration strongly supports such incentives. As discussed above, penetration of IGCC technology into the market could fundamentally alter how the power system would respond (physically, economically and politically) to multi-pollutant clean up requirements.

However, no EIA or EPA analyses to date appear to include scenarios with substantial deployment of this technology. Such scenarios should be included and would likely show significantly different results than the current EIA/EPA “4P” scenarios.

Another serious concern about the EIA/EPA reference case assumptions is that much of the costs projected for meeting “4P” caps similar to those in the Clean Power Act are for building and operating new natural gas power plants to displace coal generation. However, the market is already building many of these plants - so they should not be “counted” as a cost of the Clean Power Act.

For example, 160,000 MW of combined cycle natural gas electricity generation capacity is scheduled to be operational by 2005 with about 110,000 MW of that either already operating or under construction.[16] And, yet, EIA only has about 85,000 MW of online capacity in their 2010 reference case projection, with EPA showing a similar result. There is obviously something wrong with these forecasts. Adjusting EIA and EPA analyses to reflect this market activity would substantially lower costs forecasted for the bill’s carbon reductions.

The Committee also should be aware that the models used to produce EPA’s original cost estimates for S.556 have been revised and the revisions result in significantly lower cost estimates. EPA’s October 2001 cost study[17] contained a number of methodological flaws, which have been addressed in further analysis carried out by the original study’s principal authors.[18] The revised version of the original EPA modeling effort corrects a number of important errors. The gas supply function is now more responsive, so that a given increase in price results in a larger increase in supply. This change has lowered both the gas prices (thus reducing the cost of carbon reductions) as well as the control costs for mercury.

The improved analysis also maps the technology scenarios from both the EIA’s advanced technology case and the integrated program of efficiency and renewable energy policies from the November 2000 report by the Department of Energy’s (DOE) principle research labs, “Scenarios for a Clean Energy Future (CEF),” more accurately than was previously done. This creates a better demand response and greater penetration of energy efficiency and other low-carbon technologies into the marketplace. These effects were underestimated in the original modeling done for EPA.

According to the both the original EPA report and the updated analysis, U.S. gross domestic product would be consistently higher under the Clean Power Act than under business-as-usual as a result of the stimulus-producing measures for energy efficiency and renewable energy promoted by the bill. As for natural gas dependence, the bill’s program of efficiency and renewable energy would actually reduce natural gas use for electricity generation compared to the Administration's energy plan. Thus, the large spike in natural gas use that the administration has forecasted would simply not occur.

Furthermore, price spikes for both electricity and natural gas were grossly exaggerated in previous analyses. For example, in its original analysis EPA projected an increase in average electricity price, compared to today’s value, of more than 2 cents per kilowatt-hour in the year 2015, when the CEF “moderate” efficiency and renewable policies were assumed to be implemented. In contrast, the revised analysis projects an increase of less than one half of a cent per kilowatt-hour under the CEF moderate policy scenario.

As for natural gas prices, the original EPA assessment projected that by 2015 wellhead natural gas prices under the Clean Power Act with CEF moderate policy initiatives would be about 5 percent higher than the reference case projection for that year. The new analysis finds that in fact the gas price will be lower than the business-as-usual projection by 3.5 percent. With the Clean Power Act carbon caps and the implementation of the EIA advanced technology case, the costs of generating electricity to meet forecasted demand would actually be as much as $26 billion less in 2015 than under the Administration's energy plan.[19]

The Role of Energy Efficiency and Renewable Energy

Both the EPA and EIA reports on the Clean Power Act demonstrate the power of the integrated strategy of emission caps, improved efficiency, and greater renewable energy sources that is called for in the bill. By improving efficiency and increasing the share of renewable energy sources, we can reduce the rate of growth in demand for electricity and for natural gas, thereby allowing the emission reductions required by the bill to be achieved without diminishing economic growth. The tools to accomplish this smarter energy future have been documented in DOE’s “CEF” report, which shows that an integrated program of efficiency and renewable energy policies can save consumers money and help achieve reduced emissions, including CO₂ emissions at much lower costs.

The EIA has criticized the CEF policies as not being achievable. But EIA has not supported its criticism with any real analysis – rather EIA merely asserts that this rapid deployment of energy efficiency and renewable power technology is unlikely. It is important to understand the relative competencies of these two different institutions within DOE. EIA’s expertise is in retrospective analysis of energy market statistics, so it is not surprising that its projections forward are heavily colored by its familiarity with the past trends. In contrast, the national energy labs that prepared the CEF report are expert in the engineering and economics of conventional and advanced energy efficiency and renewable energy technologies. The CEF experts have prepared a rebuttal to EIA’s criticism that adds further support to the CEF report’s findings.[20] I attached this rebuttal to my testimony before this Committee last November and would like to include it in the record of this hearing as well since their response has not been answered by EIA to my knowledge.

An examination of the CEF report demonstrates the reasonableness of the national energy labs’ view that we have a large untapped potential to improve efficiency and save money. The measures called for in the CEF report are not dream technologies, waiting to be invented; they are common-sense initiatives designed to increase the use of technologies that already exist. The CEF measures include improved appliance efficiency, through labeling, standards, and financial incentive programs. They include similar measures for buildings, calling for less wasteful heating, cooling and lighting systems and weatherization and rebate programs to reduce gas and electric use in existing buildings.

EIA claims the CEF’s projected rate of deployment for these technologies is unreasonable. But in only six months, Californians were able to reduce their electricity consumption by 6 percent during the summer of 2001, with no deprivation. This experience should encourage us not to sell short our ability to be smarter about energy use, given the appropriate policy support.

The administration asserts the goal of its energy plan and carbon intensity initiative is to reduce demand and greenhouse gas emissions to levels below EIA’s business as usual (BAU) forecasts.[21] These are laudable goals but the administration’s use of BAU forecasts to critique the Clean Power Act is inconsistent with those goals. The administration needs to adopt specific policies designed to achieve appropriately ambitious goals for energy efficiency and renewable energy. When it does so, it will conclude, as DOE’s experts have, that S.556 will help, not hurt consumers.

When policies to promote efficiency and renewables are combined with emission caps the cost of meeting S.556’s pollution targets is dramatically reduced compared to BAU assumptions. In the revised EPA analysis they find that by implementing even the very modest efficiency efforts, as suggested in the EIA’s “advanced technology” scenario, electricity generation costs fall below BAU costs. For example, in 2010 for the EIA advanced technology case there would be a $12 billion savings in electric generation costs as compared to BAU costs, while by 2015 with the slightly more aggressive CEF moderate efficiency and renewable policies, the saving would rise to as much as $26 billion.[22] We can clean up power plants and save consumers money through smart policies to reduce waste and increase renewable energy supplies.

Who Profits—Polluters or Consumers?

EPA’s analysis from last fall makes another unstated assumption that drives up costs for consumers. Mr. Holmstead blamed S.556 for these consumer cost increases but the real blame lies with the approach chosen by EPA. Even though EPA’s earlier study shows changes in generating costs under the Clean Power Act range from a maximum increase of $17 billion per year to a savings of $3 billion per year, the study calculates consumers’ bills would go up by $50 to $100 billion per year. [23] EPA reaches this conclusion by assuming that the law Congress will enact will let generators retain windfall profits from the value of carbon permits under a cap and trade program. EPA’s approach assumes a large transfer of wealth from consumers to shareholders of generating companies, by grandfathering the value of carbon permits to the polluters themselves.

S.556 does not call for any such result. With more sensible approaches to carbon allowance allocation than the administration assumes, households will have lower net costs under the Clean Power Act. There are a number of approaches to deny windfall profits to generators and recycle revenue to consumers and the bill encourages EPA to adopt such approaches in designing the cap and trade program for carbon. The Committee may wish to act affirmatively to be sure that the most effective allocation program is used.

The Role of Natural Gas

The administration also has claimed that S.556 will endanger energy security by requiring too much natural gas for electric generation. But large increases in natural gas use do not occur if the integrated CEF efficiency and renewable policies called for in S.556 are implemented. Under either the moderate or advanced CEF policy programs, EPA’s study confirms that natural gas use in electric generators will by 2015 be slightly less then what is expected under BAU growth with no emission controls.[24] There is no reason to oppose limits on carbon pollution in order to avoid excessive dependence on natural gas or any other single fuel for electricity generation. Smart policies that harness the largely untapped potential of efficiency and renewable energy do a better job of promoting fuel diversity and attack the problem of global warming at the same time.

A Piecemeal Approach to Power Plant Pollution is Flawed

Decoupling CO₂ control from the control of traditional pollutants as the administration proposes would lose valuable time that we need to prevent global warming from becoming an unmanageable problem. In addition this approach would increase costs and uncertainty for the electric generating sector. No one disputes that the strategies companies will use to clean up power plants will be different if they pursue a strategy to limit CO₂ instead of a strategy that ignores the pollutant. The administration’s CSI approach will encourage investment in end-of-pipe controls that target one or possibly two of the traditional pollutants while doing nothing to reduce CO₂ emissions. These added investments will actually tend to prolong the lives of some of the CO₂ emitting sources in the country. In contrast, a comprehensive program like the Clean Power Act will allow a full range of techniques to be used, including use of cleaner fuels, supply and demand-side efficiency programs and repowering existing plants with new technologies whose CO₂ can be geologically sequestered.

As the Committee knows, even President Bush has indicated that climate policy is in flux and is subject to review in, what by utility planning terms, is the near future. In his February 14, 2002 statement the President said that the government would review its progress in 2012 and decide on next steps. While this ten-year delay is long and harmful from a climate policy standpoint it provides no certainty to utility planners. Of course, 2012 is two presidential terms away and the policy may well be reviewed long before then. But even if a company assumed the review would not occur until 2012, the potential for a policy change at that time implicates investment decisions being made today for large capital projects like power plants.

CSI Threatens Local Air Quality

Beyond the differences in the proposals to control traditional pollutants and CO₂, there is another sharp difference between the Clean Power Act and the administration’s CSI approach. While the Clean Power Act would protect and improve local air quality, the CSI approach would threaten it. The Clean Power Act guarantees that each power plant community’s pollution will improve by requiring old plants to meet modern performance standards after they have been fully paid off. The CSI approach contains no such safeguard. Indeed, high administration officials have stated that they will advocate repeal of provisions in the current law that protect local air quality.

The current law requires large pollution sources that undergo modifications to structure their projects so that they do not increase local pollution. If there is a significant emissions increase from such projects the Act requires the source to meet modern performance standards to minimize the pollution it adds to the community air shed. In a nonattainment area such projects must also offset their emissions to avoid making existing unhealthy air levels even worse. This offset program is the original emission trading program, put in place by the Ford Administration and ratified by Congress in 1977.

The current administration would scrap these safeguards, claiming that the caps it proposes will provide adequate protection. First, as discussed above, the CSI caps are so large that they will leave many areas with unhealthy air even if no hotspots developed. Second, the administration argument ignores the fact that a national cap cannot by itself prevent increases in local air pollution. The administration cites the operation of the 1990 Act’s acid rain program to argue that national caps can avoid hot spots. But the 1990 acid rain cap program did not do away with the “new source review” (NSR) programs; it kept them in place. It is the combination of the cap and the NSR programs that has produced regional reductions without local pollution increases.

This history is relevant for another reason: as the administration notes, the acid rain cap program has been implemented with tremendous cost savings to industry. The point the administration and industry critics of the NSR programs seem unable to acknowledge is that these cost savings were achieved with the NSR provisions remaining as a fully functioning part of the law. When the President’s father proposed his acid rain cap legislation in 1990 he did not propose to get rid of the NSR safeguards. That was a wise decision and the current president should follow his lead.

Thank for the opportunity to present these views. I’ll be happy to answer your questions.

[1] U.S. EPA, “A Comprehensive Approach to Clean Power,” August 3, 2001, at 21.

[2] U.S. EPA, “Human Health Benefits of Clear Skies,” May 2002.

[3] U.S. EPA, “Projected PM2.5 and Ozone Nonattainment Maps.”

[4] U.S. EPA, “Water quality.ppt,” May 2002.

[5] Humans do indeed exhale CO₂ but that does not add to the total CO₂ in the atmosphere. The CO₂ we exhale comes from plants we eat (either directly, as vegetables, or indirectly, as meat). The plants we consume removed and stored carbon from the atmosphere while growing. Human breathing simply returns the same amount to the air.

[6] Not all the added CO₂ stays in the air. A significant amount is taken up by vegetation and by the ocean. If this did not happen, today’s atmospheric CO₂ concentration would already be 50 percent higher than pre-industrial levels rather than the measured 30 percent increases.

[7] For a target of 550 ppm (double pre-industrial levels) the two-century budget is about 1200 billion tons of carbon.

[9] As I will describe below, it is now possible to build coal plants that are designed to be capable of storing carbon in geologic formations. But this technology will not be used without a policy signal that carbon emissions should be constrained.

[10] See Environmental Assessment notice at http://www.co.blm.gov/canm/kdmorganea.htm.

[11] Reuther, J, et al., “Prospects for Early Deployment of Power Plants Employing Carbon Capture,” U.S. DOE National Energy Technology Laboratory, 2002. Available at http://www.netl.doe.gov/publications/others/techrepts/2430-1a.pdf.

[12] “Comprehensive Approach” , note 1, supra.

[13] U.S. EPA,”Clear Skies Initiative Summary,” at 17. See notes 1-2, supra.

[14] The administration has not provided a formal assessment of the benefits of controlling CO₂ under S.556 but as the administration’s May 2002 National Communication demonstrates, the benefits of effective action to limit global warming will be enormous.

[15] Energy Information Administration “Analysis of Strategies for Reducing Multiple Emissions from Electric Power Plants with Advanced Technology Scenario,” Office of integrated Analysis and Forecasting, U.S. Department of Energy, October 2001.

[16] Clean Air Task Force, “Concerns with EIA and EPA Multi-Pollutant Power Plant Clean Up Studies,” December 2001.

[17] Report prepared for Senators Jeffords and Lieberman, “Economic Analysis of a Multi-Emissions Strategy,” U.S. Environmental Protection Agency, Office of Air and Radiation, Office of Atmospheric Programs, October 2001.

[18] John A. Laitner and Donald A. Hanson, “The Macroeconomic Impacts of a Multi-Emission Reduction Strategy,” presented at Electric Utilities Environment Conference, Tucson, Arizona, January 22-25, 2002.

[19] It is also noteworthy that last November’s EIA analysis predicts cumulative savings of as much as $220 billion in electric generation costs by 2020 if the Clean Power Act’s caps and the advanced technology policies in the CEF study are implemented, even though EIA has emphasized other findings in presenting the results of the study.

[20] Koomey, et al., October 18, 2001, “Assessment of EIA’s statements in their multi-pollutant analysis about the Clean Energy Futures Report’s scenario assumptions.”

[21] See President Bush’ Climate Initiative announcement of February 14, 2002 at www.whitehouse.gov.

[22] Calculated as the difference from the base case in total retail expenditures on electricity minus the value of CO₂ allowances plus the costs of energy R&D and efficiency incentive programs.

[24] In the updated EPA assessment BAU gas use in 2015 is 1333 billion kWh and with the Clean Power Act and CEF moderate measures it is 1331 billion kWh.