12
The Public Sector Response

In December 2004 the National Commission on Energy Policy released its report Ending the Energy Stalemate (NCEP, 2004). The Commission, which was launched in 2002 and funded by the William and Flora Hewlett Foundation and other philanthropies, was established as a bipartisan group with members from business, federal and state governments, academia, labor, and non-governmental organizations.

“We started with what clearly was a stalemate in U.S. energy policy,” said John Holdren, who co-chaired the Commission with former EPA administrator William Reilly and Exelon CEO John Rowe. A gap between rising oil use and declining domestic production had been widening since 1985, with little policy action to address the gap on either the supply or the demand side. Corporate average fuel economy (CAFE) standards had been unchanged since 1985 for passenger cars and had been constant from 1987 to 2005 for light-duty trucks, including pickups, vans, and sport utility vehicles. The whole-fleet average was 24 miles per gallon in 2003, the same as it had been in 1981. Thirteen years after the United States had ratified the UN Framework Convention on Climate Change, no requirement or incentive was in place to reduce carbon dioxide emissions from the energy sector. No new nuclear reactor had been ordered in the United States since 1978, and the siting of new liquid natural gas terminals and even wind farms had been stymied by NIMBY (“not in my back yard”) sentiments, which Holdren said were rapidly transitioning to BANANA sentiments—“build absolutely nothing anywhere near anyone.” And federal spending on energy-technology research, development, and demonstration projects in 2004 was the same as in 1987, even though the gross domestic product had almost doubled.



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12 The Public Sector Response I n December 2004 the National Commission on Energy Policy released its report Ending the Energy Stalemate (NCEP, 2004). The Commission, which was launched in 2002 and funded by the William and Flora Hewlett Foundation and other philanthropies, was established as a bipartisan group with members from business, federal and state governments, academia, labor, and non-governmental organizations. “We started with what clearly was a stalemate in U.S. energy policy,” said John Holdren, who co-chaired the Commission with former EPA administrator William Reilly and Exelon CEO John Rowe. A gap between rising oil use and declining domestic production had been widening since 1985, with little policy action to address the gap on either the supply or the demand side. Corporate average fuel economy (CAFE) standards had been unchanged since 1985 for passenger cars and had been constant from 1987 to 2005 for light-duty trucks, including pickups, vans, and sport utility vehicles. The whole-fleet average was 24 miles per gallon in 2003, the same as it had been in 1981. Thirteen years after the United States had ratified the UN Framework Convention on Climate Change, no requirement or incentive was in place to reduce carbon dioxide emissions from the energy sector. No new nuclear reactor had been ordered in the United States since 1978, and the siting of new liquid natural gas terminals and even wind farms had been stymied by NIMBY (“not in my back yard”) sentiments, which Holdren said were rapidly transitioning to BANANA sentiments—“build absolutely nothing anywhere near anyone.” And federal spending on energy-technology research, development, and demonstra- tion projects in 2004 was the same as in 1987, even though the gross domestic product had almost doubled. 0

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0 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE The Commission had two overarching objectives. The first was to develop recommendations that can ensure ample, clean, reliable, and affordable energy for the United States in the 21st century while responding to growing concerns about the nation’s energy security and the risks of global climate change. The second was for its recommendations to command the bipartisan support nec- essary to break the long-running energy policy stalemate in the Congress and be enacted. In seeking to meet these objectives, the Commission adhered to several guiding principles. It preferred market-based solutions and gradual adjustments rather than dramatic interventions. It sought to take into account the law of unintended consequences. It aimed for revenue neutrality, economic efficiency, cost-effectiveness, low consumer impacts, appropriate incentives for future action, flexibility for future adjustments, equity, political viability, and ease of implementation, monitoring, and measurement. The Commission’s 2004 report made a variety of important recommenda- tions. With regard to oil and gas supplies, it encouraged nations with under- developed oil reserves to allow foreign investment in their energy sectors. It supported research and development on technologies to mitigate the environ- mental impacts of developing unconventional oil resources. It urged the United States to fill the Strategic Petroleum Reserve and encouraged other nations to establish publicly owned reserves. It recommended creating incentives for con- struction of an Alaskan natural gas pipeline and removing hurdles for the siting and construction of liquid natural gas facilities. It also recommended increased resources for public land planning and permitting. With regard to dampening the growth of demand for liquid fuels, the Commission recommended significantly strengthening federal fuel economy standards for cars and light trucks while also reforming the CAFE program. It urged that manufacturer and consumer incentives be put in place to promote domestic production and increased use of advanced diesel and hybrid-electric cars. It also proposed pursuing efficiencies in the heavy-duty truck fleet and the existing passenger vehicle fleet. To address climate change risks, the Commission proposed initiating in 2010 a mandatory, economy-wide, tradable-permits system to limit greenhouse gas emissions. The permit system would be designed to reduce the carbon emissions intensity of the United States by 2.4 percent per year and would have a “safety valve” (which is discussed later in this chapter) to prevent excessive economic dislocations. The Commission also recommended linking subsequent U.S. action with comparable efforts by other developed and developing nations via a program review in 2015 and every 5 years thereafter. “This was the provi- sion that was necessary to assure people on the Commission concerned about the competitiveness effect of the United States’ embracing a price on carbon emissions and having our major competitors not do so,” said Holdren. A set of recommendations directed to protecting critical energy infrastruc- ture called for addressing the vulnerability of the electricity grid to attack and

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0 THE PUBLIC SECTOR RESPONSE improving security on cyberattacks against the systems that manage the power grid. In addition, the Commission asked for an examination of whether surveil- lance technologies developed for defense and intelligence purposes could be applied to widely deployed energy systems. Research and development on energy technologies received special empha- sis in the Commission’s recommendations. Its report called for doubling the annual real federal expenditures for energy research, development, and dem- onstration in the next 5 years, to a level of $3.3 billion in 2004 dollars in 2010. Within this effort, the Commission recommended that funding for international cooperation on energy research, development, and demonstration should be tripled, to $750 million per year, and that the increased spending also should be complemented with a tripling of federal expenditures for accelerated deploy- ment of the most promising technologies that successfully pass the demonstra- tion phase. These expenditures would amount to $2 billion per year by 2010. Finally, the Commission concluded that the tax code should be revised to increase private-sector incentives to invest in energy research, development, demonstration, and early deployment. Cleaner coal technology should be one focus of the technology-innova- tion effort, Holdren said. “I use that term deliberately rather than ‘clean coal technology’ because many people point out there is no such thing as clean coal technology, but we can certainly make it cleaner.” Specifically, the Commission recommended that federal early-deployment incentives of $400 million over the next decade should be directed to faster commercialization of integrated gasification combined-cycle coal plants, which sharply reduce emissions of air pollutants, produce liquid and gaseous fuels as well as electricity, and can be more easily retrofitted to capture carbon dioxide. Additionally, it concluded that the development and commercial-scale demonstration of carbon dioxide capture and sequestration technologies also should receive $300 million in federal support over the next decade. The Commission called for nuclear energy technologies to receive $2 bil- lion over the course of a decade from the federal government for “first mover” advanced nuclear power plants to demonstrate improved safety and econom- ics. The United States also should move expeditiously to establish a project for centralized, interim storage of spent fuel at no fewer than two locations. “We would no longer have all the eggs in the Yucca Mountain basket,” Holdren said. In parallel, the United States should work to reduce the risk of nuclear prolif- eration by reiterating a commitment to continue indefinitely the longstanding moratorium on commercial reprocessing of spent nuclear fuel and the construc- tion of commercial breeder reactors, emphasizing the policy of discouraging the accumulation of separated plutonium in civil fuel cycles elsewhere, and working to prevent the deployment of uranium-enrichment and spent-fuel-reprocessing capacity in additional countries. “Some of these might be seen as controversial,

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0 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE [but] all of these recommendations were unanimous. There were no dissenting opinions in this diverse and bipartisan group about any of these matters.” In the area of renewable energy technologies, the Commission said, the United States should accelerate the development and deployment of non-petro- leum transportation fuels, especially cellulosic ethanol and diesel from biomass and wastes. Research, development, and demonstration should be increased from $25 million to $150 million per year over 5 years, and $750 million in early deployment incentives should be funded from 2008 to 2017, according to the Commission. In addition, research, development, and demonstration on solar photovoltaic and solar thermal energy systems should go from $83 mil- lion to $300 million per year. And the renewable energy production tax credit should be extended and expanded to include all energy sources that do not emit carbon. The Commission recommended increasing manufacturer and consumer incentives for more efficient vehicles from $80 million per year in 2004 to $300 million per year. It also called for increasing federal research, develop- ment, and demonstration funding on efficiency improvements in buildings and appliances from $60 million to $300 million per year. And funding on improved efficiency in industrial processes should go from $93 million per year to $200 million per year. Both the Commission and the Energy Information Administration con- ducted an analysis of the economic impact of its recommendations. According to the EIA, the impact of the carbon emissions permit system would not exceed 0.15 percent of the gross domestic product in 2025. “At the forecasted rate of growth—2.8 percent—Americans would have to wait until about January 18, 2025, to be as rich as they otherwise would have been on January 1 of that year,” Holdren pointed out. Furthermore, the full set of policies recommended by the Commission would reduce the gross domestic product by no more than 0.4 per- cent in 2025 while reducing greenhouse gas emissions by 11 percent from the reference case. However, although coal use in 2025 would be 10 percent below the reference case, it would still be 22 percent above the level of 2003. ACTIONS TAKEN BY THE BUSH ADMINISTRATION Reuben Jeffery laid out the actions taken by the Bush Administration in general, and the State Department in particular, to address issues of energy security and the environment. First, the administration has emphasized diversi- fication away from hydrocarbons over the medium and long term. For example, a week before the Academies’ energy summit, the U.S. government hosted the Washington International Renewable Energy Conference to highlight the importance of renewable and alternative energy technologies. Since 2001, ethanol production has quadrupled from 1.6 billion gallons to an estimated 6.4 billion gallons in 2007, Jeffery said. Biodiesel production

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0 THE PUBLIC SECTOR RESPONSE is up 80 percent from 2006. Wind energy production has increased by more than 300 percent from 3 years ago, and solar capacity has doubled in the past several years. Admittedly, all of these increases are from small bases, and each source needs to develop more quickly to become a significant element of energy supplies, Jeffery acknowledged, but the growth has been significant. The State Department is helping governments, private companies, and researchers collaborate on promising technologies, Jeffery said. For example, a partnership between the United States and Brazil is intensifying collaborative research to speed the commercialization of the next generation of biofuels and catalyze sustainable production of biofuels in countries in the Western Hemi- sphere. The State Department also is developing compatible biofuels standards in the Western Hemisphere and in Europe—a necessary step for biofuels to become a global economic commodity. Since 2001 the administration has dedicated and the American taxpayer has invested $37 billion in science and technology research related to cli- mate change, including $18 billion for the development and promotion of clean energy technology, Jeffery said. For example, President Bush has made a $2 billion commitment to a clean technology fund administered by the World Bank and supported by Japan, the United Kingdom, and other partners. The fund aims to bring the best available clean energy technologies to emerging markets. International partnerships initiated or led by the United States are work- ing to bring clean, safe civilian nuclear power to developing countries, Jeffery observed. These partnerships increase the security of energy supplies, allow countries to become less dependent on foreign oil and gas, and limit the spread of potentially dangerous weapons technologies. In 2006, at the St. Petersburg Summit, the G-8 nations agreed to various principles that address energy security, investment in the energy sector, sus- tainable development, and climate change. These principles include support for open, transparent, efficient, competitive energy markets; diversification of energy sources and routes; and environmentally sound development and use of energy. These principles are very much in keeping with U.S. domestic policy goals, Jeffery observed. In Europe and Asia, the United States is working with regional partners and private companies to encourage increased energy production and greater diversity in transit routes to bring these products to market. The United States is partnering with Asian countries through the Asia-Pacific Economic Coop- eration forum to improve energy efficiency, reforestation, and cooperation in green technology. A formal strategic economic dialogue with China, and broader energy dialogues with China and other emerging economies, seek to encourage the adoption of market-based energy policies, the rapid adoption of clean energy technologies, and a responsible approach to the development of oil resources.

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0 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE The United States also has launched multilateral technology initiatives such as the International Partnership for the Hydrogen Economy, which explores the advancement of hydrogen as a fuel, and the Carbon Sequestration Leader- ship Forum, which works to improve technology to capture carbon dioxide and store it safely underground. The Methane to Market Partnership seeks to capture and use the greenhouse gas methane as a fuel source instead of releas- ing it into the atmosphere. To directly address global greenhouse gas emissions, the United States is committed to developing an environmentally effective and economically sus- tainable framework under the UN Framework Convention on Climate Change, Jeffery stated. At the UN Climate Conference in Bali in December 2007, the United States helped forge consensus on a roadmap for these negotiations, which are scheduled to conclude by December 2009. To advance these negotia- tions, President Bush launched the Major Economies Process to bring together the top energy-consuming countries from the developed and developing world, which together represent some 80 percent of the world’s energy use, economic growth, and greenhouse gas emissions. Through the Major Economies Pro- cess, the United States hopes to build consensus among the key players in a number of areas, including a shared long-term global emissions reduction goal, national mid-term plans and goals, and cooperative technology strategies in key sectors. Solving U.S. energy problems will require many years, Jeffery observed. Accordingly, the United States must take action today and do more to improve energy security and address the challenges of global warming. At the same time, the nation must confront its continued reliance on oil, natural gas, and coal, which creates political, economic, and environmental challenges. Cooperation among governments and the continued dedication of many individuals and groups will be essential for success, Jeffery said. At the Department of Energy, the administration has boosted investments in research and development at all stages of the innovation cycle to help the United States break its “over-dependence on fossil fuels,” according to Samuel Bodman. At a very broad level, President Bush has proposed a linked set of increases for federally funded research in the physical sciences under the American Competitiveness Initiative. “This is serious money for serious sci- ence in areas like supercomputing, nanotechnology, advanced nuclear reactor technologies, and fusion energy,” Bodman said. “The results may not be seen for 5 or 10 years, or even decades, but the critical investments must be made now.” The $4.7 billion request for the Department of Energy’s Office of Science in fiscal year 2009, an increase of almost 20 percent over the enacted fiscal year 2008 appropriation, reflects the administration’s commitment to sustaining vital investment in the physical sciences, Bodman said. “Getting Congress to actually appropriate at the levels it has authorized and that the President has committed to has been, let us say, a challenge,” Bodman observed. “But we are hopeful,

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0 THE PUBLIC SECTOR RESPONSE because the commitment to science stems not from a sense that there are imme- diate political gains to be had from such funding, but from a deep recognition that our energy future rests on sustained leadership in basic research.” The administration also has laid out an aggressive strategy to expand the availability of renewable energy and alternative fuels, Bodman said. The president’s Advanced Energy Initiative is identifying the technologies that could have the greatest impact on the marketplace in the relatively near future and then pursuing those technologies with increased resources and aggres- sive timelines. Examples include cellulosic biofuels, advanced hybrid vehicle technologies, hydrogen fuel cells, solar photovoltaics, and high-efficiency wind power. “These are things that are already in the pipeline and, as a matter of sound public policy, need to be pushed more quickly to market,” Bodman said. Bringing these technologies to market will require collaborations among gov- ernment, industry, and academia, and the federal government is using a range of collaborative models—including cost-sharing partnerships and loan guaran- tee programs—to share with the private sector some of the risk of developing commercially viable, innovative technologies. For example, Bodman said, six large-scale biorefinery projects together will receive up to $385 million—and a total of more than $1.2 billion—through public-private partnerships over the next 4 years. When fully operational, these six biorefineries are expected to produce more than 130 million gallons of cellulosic ethanol per year. In addition, the Office of Science is investing more than $400 million over 5 years in three cutting-edge Bioenergy Research Centers. These centers are attracting world-class scientists and engineers from academia, industry, and national laboratories to bring the latest tools of the biotechnology revolution to bear on clean energy production. A major focus of the centers will be under- standing how to reengineer biological processes to develop new, more efficient methods for converting the cellulose in plant material into ethanol or other bio- fuels that serve as a substitute for gasoline. After 6 months of work, promising scientific results are already emerging from this investment, Bodman said. Ray Orbach elaborated on the money being distributed by the Office of Science. Over the next 5 years, the office is supporting 20 to 30 Energy Frontier Research Centers, which can be located in universities, national laboratories, or the private sector. Each will be funded at a level of $2 million to $5 million for an initial 5-year period. “We want to bring the best talent in our country . . . to, literally, save our Earth,” Orbach said. “There is a continuum of investment that this country has to make. We can’t guarantee that the investment will work, but we can guarantee that if we don’t make the investment, we’re stuck with last century’s technologies and we won’t get there.” Bodman noted that he had issued a policy statement that laid out guiding principles, responsibilities, and a review process to ensure that new technolo- gies are deployed and that continuity and uniformity of technology transfer activities are maintained throughout the Department of Energy. Also, three

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0 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE venture capital firms were recently selected to participate in the department’s Entrepreneur in Residence pilot program, which aims to accelerate deploy- ment and commercialization of advanced clean energy technologies from three national laboratories into the global marketplace. “By empowering research- ers and entrepreneurs, we are furthering President Bush’s initiatives aimed at developing and deploying cutting-edge technologies to address the challenges that face our nation,” Bodman stated. Even as the administration has been emphasizing renewables and alterna- tive fuels, it has recognized that the U.S. economy will remain heavily dependent on fossil fuels. Efficiency and the reduction of carbon emissions—including the demonstration of carbon sequestration capacity—therefore remain priorities at the Energy Department, Bodman said. The department has funded four cost- shared carbon sequestration projects in the United States and plans to fund three more. These projects will conduct large-volume tests for the storage of 1 million or more tons of carbon dioxide in deep saline reservoirs. Collectively, these formations have the potential to store more than 100 years’ worth of car- bon dioxide emissions from all major sources of pollution in North America. Access to safe and emissions-free nuclear power also must be expanded in the United States, Bodman observed, while responsibly managing waste and dramatically reducing proliferation risks. Nuclear power is currently the only mature technology that can supply large amounts of emissions-free baseload power to help meet the expected growth in consumption. The federal govern- ment has not licensed construction of a new nuclear plant in the United States in nearly 30 years, Bodman noted. “That must change. We are working to see that it does by, among other things, implementing federal risk insurance, or so-called ‘stand-by support,’ and loan guarantees to try to remove some of the roadblocks associated with getting the next generation of nuclear plants on line.” With the rest of the world on the verge of a major nuclear expansion, President Bush introduced in 2006 the Global Nuclear Energy Partnership (GNEP) to facilitate the worldwide expansion of nuclear energy for peaceful purposes in a safe and secure manner. “This historic partnership continues to expand,” Bodman said. “Last month, the Department of Energy welcomed the United Kingdom as the GNEP’s twenty-first partner.” Robert Marlay described the U.S. Climate Change Technology Program at the Department of Energy, which coordinates research and development across 10 federal agencies. The program has four strategic goals related to emissions: reduce emissions from energy end use and infrastructure, reduce emissions from energy supply, capture and sequester carbon dioxide, and reduce emis- sions from non-carbon-dioxide gases. It also has two cross-cutting, supporting strategic goals: improve capabilities to measure and monitor greenhouse gases, and bolster basic science and strategic research. The total budget request for the program for fiscal year 2009 was $4.4 billion. The plan is focused on the United States but is set within a global context,

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 THE PUBLIC SECTOR RESPONSE Marlay said. It reflects the extent to which carbon dioxide emissions must fall to stabilize the concentration of carbon dioxide in the atmosphere at particular levels (Figure 12.1). To achieve a “net-zero emissions future,” progress must be made on all four of the program’s strategic goals (Table 12.1). The underlying message is that “all four of those goals are musts,” according to Marlay. “We can’t just focus on efficiency. We can’t just focus on supply. We’ve got to do something in seques- tration. And, perhaps surprisingly, for those of us who spend most of our life in the energy world, other greenhouse gases are a very major contributor.” Two particular areas stand out in the effort to achieve net-zero emissions. The first is the need to decarbonize the electricity grid through such measures as nuclear power, low-emissions coal power, and renewable power. The other is to “de-oil” transportation, using such measures as hybrid and electric vehicles, alternative fuel vehicles and bio-based fuels, and alternative forms of transpor- tation. Once the grid is decarbonized, moving transportation demands onto the grid is a way to substantially reduce emissions. According to Marlay, the Climate Change Technology Program is pursuing these needs through “novel concepts, interdisciplinary concepts, concepts that are cross-cutting and go across the different stovepipes of different agencies.” The agencies represented by the Climate Change Technology Program have hundreds of separate activities in place that are focused on the program’s broad goals. A portfolio analysis done by the program has sought to prioritize these activities by identifying technologies that are ready to have a major impact on the problems. By bringing on technologies earlier, cumulative emissions can be substantially reduced, said Marlay. “You’re starting earlier, and you get on that path much quicker. . . . What we need to do is we need to figure out how to . . . craft a portfolio that brings it on much sooner, and gives us a much larger benefit.” Even in a very demanding budget environment, the Climate Change Tech- nology Program has been receiving increased budget requests and appropria- tions. Furthermore, these increased investments serve a dual purpose, Marlay said, in that most of the investments made to reduce the potential of climate change also result in greater energy security. For example, if oil intensity is measured by barrels of oil used per trillion dollars of gross domestic product, technology development leading to more efficient use of oil as well as replace- ment of oil with alternatives can reduce oil intensity substantially below a busi- ness-as-usual case. When oil intensity is high, said Marlay, rapid increases in oil prices can cause economic havoc. At the time of the 1973 oil embargo, U.S. oil intensity was high, as was the economic disruption caused by the event. In contrast, during the recession in the late 1980s, oil intensity in Japan was much lower, even though Japan imports 100 percent of its oil. As a result, Japan expe- rienced less economic disruption during that recession than did other countries. If we can reduce oil intensity through technology development, Marlay said,

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2 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE Relevant Planning Emission Trajectories Window 16 Petagrams (billions of metric tons) of carbon per year 750 ppm 14 650 ppm 550 ppm 450 ppm 12 350 ppm 10 8 6 4 2 0 -2 1990 2015 2040 2065 2090 2115 2140 2165 2190 2215 2240 2265 2290 Emission and concentration trajectories based on current level of effort for technology investments Potential carbon reductions based on more aggressive technology investments Relevant planning window to influence longer-term outcomes “we’re going to be very minimally exposed to price shocks because I believe Figure 12-1A.eps that oil will largely vanish fromforms a 2-page spread with 12-1B the economy.” Advanced technologies could significantly reduce the costs of imposing mostly bitmap image low resolution constraints on carbon dioxide emissions. Very high constraints on greenhouse gas levels—somewhere on the order of 450 or 500 parts per million—have a global cost around $250 trillion (in undiscounted dollars) over the 21st century if technologies evolve at the rate they are today. If technology development could be accelerated, the cost could go down 50 to 70 percent, according to Marlay. This would be a huge benefit, said Marlay, that “is well worth going after.” Timing is also critical in reducing the stabilization level of greenhouse

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 THE PUBLIC SECTOR RESPONSE Relevant Planning Concentration Trajectories Window 800 750 ppm 650 ppm 750 550 ppm 450 ppm 350 ppm 700 650 600 550 500 450 400 350 300 1990 2015 2040 2065 2090 2115 2140 2165 2190 2215 2240 2265 2290 FIGURE 12.1 Investments in technology are needed to reduce emissions (facing page) and lower the level at which carbon dioxide concentration is stabilized (above). Figure 12-1B.eps SOURCE: Adapted by DOE from Wigley et al. (1996; Figure 1). with 12-1A forms a 2-page spread mostly bitmap image low resolution gases. For the 450- to 500-ppm scenarios, each of the goals of the Climate Change Technology Program would need to be achieved more quickly than under less severe constraints. “We can’t wait forever,” Marlay said. Marlay discussed three potential barriers to achieving the program’s goals, which apply to all of the scenarios he and others described at the meeting. The first is how to increase the level of research and development funding made available by national governments. “I’m very pleased, if not proud, of the fed- eral government’s leadership on these technologies,” he said. “Japan is the only other country that really is devoting the same kind of resources to this particular problem. All the other countries are dabbling.” However, Marlay noted, the

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 THE PUBLIC SECTOR RESPONSE feasted for 200 years. Now, we’ve just come to the table and you want us to go on a diet. How is that fair?” However, there is also a counterargument, Marlay noted, which was offered by the Canadians at the recent Bali conference. “Yes, but we’re all on a lifeboat and we’re sinking. Don’t you want to help to bail?” “So these are the challenges,” Marlay said. How can global investments in research and development be increased? How can private sector innovation be enhanced? How can international cooperation be advanced? “I have been excited about what I have heard over the past 2 days,” Marlay said. ACTIONS TAKEN BY CONGRESS Senator Jeff Bingaman described the “significant actions” that have been taken in the current Congress and the previous Congress in response to the challenges of energy supply and use. The Congress passed a major energy bill in 2005, when Republicans controlled the Congress, and another in 2007, when Democrats controlled the Congress, both by large margins. In particular, the 2007 Energy Independence and Security Act took six steps that Bingaman considers turning points in energy policy. 1. It mandated the first increase in 32 years in statutory CAFE standards for both cars and trucks. 2. It called for the use of biofuels to grow to 36 billion gallons in 2022, with subsidiary targets within that total for cellulosic ethanol, biodiesel, and other advanced biofuels. 3. It required improved efficiency standards in the use of energy, with a special focus on buildings and lighting. 4. It strengthened the federal commitment to energy research and technol- ogy development, including the Department of Energy’s program for carbon capture and geological storage. 5. It authorized a strong “green jobs” training program, since a large seg- ment of the current energy workforce will soon be eligible for retirement. 6. It created new protections for consumers against manipulation in oil and gas markets. The EIA has calculated that the 2007 bill will reduce the nation’s depen- dence on imported oil and will slow the growth of energy-related carbon emis- sions, Bingaman noted. Compared to the baseline before the law’s enactment, oil imports continue to decline after 2010, according to this analysis, and they stay significantly lower than that baseline. By 2030, imports are reduced by more than 2 million barrels per day from the level that would have been expected without the legislation (Figure 12.3). Energy-related emissions of car- bon dioxide also are forecast to decrease by 500 million metric tons as a result of the new act—an amount equivalent to the annual carbon dioxide emissions

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 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE from South Korea, the world’s ninth largest source of carbon dioxide emissions (Figure 12.4). However, “compared to where we need to go, these are still very modest steps,” Bingaman said. Carbon dioxide emissions will still grow, and oil imports will still be substantial. “Clearly, there is much more that needs to be done.” Nevertheless, as Holdren pointed out, the 2005 legislation did break the stalemate that the National Commission on Energy Policy had been established to address. “It embraced most of the Commission’s recommendations on a number of topics—on oil and gas supply, on energy infrastructure, on the incen- tives for deployment of renewables, nuclear, and clean-coal technology, and on R&D incentives for industry.” There were three main recommendations from the Commission (NCEP, 2004) that the 2005 legislation failed to address, Holdren observed. It did not strengthen the CAFE standards (although the 2007 energy legislation did take that step). It did not significantly increase federal energy research and development. And it did not establish mandatory economy-wide greenhouse gas restraints. Regarding the third point, a Sense of the Senate Resolution passed on June 22, 2005 (see Congressional RecordSenate, June 22, 2005), was interesting for what it said about climate change, according to Holdren. It read: It is the sense of the Senate that Congress should enact a comprehensive and effective national program of mandatory, market-based limits and incentives on emissions of greenhouse gases that slow, stop, and reverse the growth of such emissions at a rate and in a manner that (1) will not significantly harm the United States economy; and (2) will encourage comparable action by other nations that are major trading partners and key contributors to global emissions. (p. S7089) The resolution did not get the vote of every Democrat, Holdren observed, but it got eight votes from Republicans, which was enough for it to pass. The National Commission on Energy Policy remained in existence, with somewhat different membership, after releasing its 2004 report (NCEP, 2004) and released another major report in April 2007 (NCEP, 2007). The updated recommendations again clustered in several areas. The report recommended a 4 percent per year improvement in CAFE standards, with the National High- way Traffic Safety Administration authorized to modify the target up or down. It also called for other cost-effective reductions in transportation energy use, with a focus on heavy-truck fuel economy and efficiency standards for light- duty vehicle replacement tires. To address climate change, the Commission again called on Congress to implement a mandatory market-based program to limit economy-wide U.S. greenhouse gas emissions. This time the targets were more ambitious than in the 2004 report—to return to 2006 levels by 2020 and to get 15 percent below that level by 2030. The 2007 NCEP report also called for a “safety valve” price

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 THE PUBLIC SECTOR RESPONSE 15 Million Barrels per Day 10 Before 5 After 0 2006 2010 2020 2030 Year FIGURE 12.3 The 2007 Energy Independence and Security Act is projected to reduce the amount of oil imported into the United States by more than 2 million barrels per day in 2030. SOURCE: EIA (2008). Figure 12-4.eps redrawn to vector 7,500 6,000 Million Metric Tons 4,500 Before 3,000 After 1,500 0 2006 2010 2020 2030 Year FIGURE 12.4 The 2007 Energy Independence and Security Act is projected to reduce U.S. carbon dioxide emissions by approximately 500 million metric tons by 2030. SOURCE: EIA (2008). Figure 12-5.eps redrawn to vector

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20 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE of $10 per ton of carbon dioxide, escalating at 5 percent per year in real terms. Half of the permits would be distributed to affected industries. The rest would be auctioned and used to increase incentives for advanced technologies and to reduce impacts on low-income individuals. The Commission called for incentives for carbon capture and sequestra- tion using bonus allowances that would be at least equal in value to renewable production tax credits. It also called for stronger incentives for comparable action on the part of key trading partners. The United States should provide technical and financial resources for the transfer of low-carbon technologies, signal its determination to address trade and competitiveness concerns, and link future commitments by the United States to international progress, the Commission said. On efficiency, the 2007 report called for enhancing and extending the tax incentives that were created or extended under the 2005 act. It also called on the Department of Energy to follow through on issuing efficiency standards for 22 categories of appliances and equipment. Regarding renewable sources of energy, the Commission recommended extending the eligibility period for federal production tax credits in 5-year rather than 1- or 2-year increments to provide certainty for the industry that those tax credits would continue to exist. Perhaps most controversially, the new report called for a federal renewable portfolio standard that would increase the share of electricity generated by renewable sources to at least 15 percent by 2020. This was a step the initial Commission had not recommended. The 2007 NCEP report repeated the major recommendations of the earlier report on natural gas and coal. It also recommended conditioning eligibility for public funding or subsidies on the inclusion of carbon capture and sequestra- tion for any new advanced coal projects. “In other words, saying that something is going to be carbon-capture ready would not be good enough,” Holdren said. “In order to qualify for public subsidies, the advanced coal projects would actually have to be doing it.” In addition, new coal plants built without carbon capture sequestration should not be grandfathered under future greenhouse gas regulations. The Environmental Protection Agency should complete as soon as possible a rigorous, formal, and public process to formulate effective regulatory protocols governing long-term storage of carbon dioxide. And carbon capture and sequestration should be included from the outset in any taxpayer-sup- ported efforts to develop coal-to-liquids technology. “This is fairly hard-hitting stuff, if you think about it, and again it was unanimous,” Holdren said. The 2007 NCEP report called more explicitly for amending the Nuclear Waste Policy Act to align its requirements with human engineering and scien- tific capabilities, while adequately protecting health and environment. It said that the Department of Energy should site and operate consolidated national or regional interim storage options, take possession of and/or remove fuel from reactor sites that have been or are being decommissioned, and support research

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2 THE PUBLIC SECTOR RESPONSE and development on alternatives to geological disposal of spent fuel. Plans for interim storage and the federal responsibility for disposal should be sufficient to satisfy the Nuclear Regulatory Commission’s waste confidence requirement. The Commission called for re-evaluating ethanol subsidies and tariffs in light of current fuel mandates and for rationalizing the existing policies so as to direct a larger share of public resources to more promising options than corn ethanol, including cellulosic ethanol, biobutanol, and clean diesel fuel from organic waste. Other hurdles to biofuels deployment also need to be addressed, including deployment of critical supporting infrastructure. Finally, steps should be taken to ensure that policies aimed at reducing the nation’s oil dependence do not end up promoting unsustainable fuel alternatives. On technology innovation, the Commission reiterated the recommenda- tions from the 2004 report that had not been enacted. It called again for a dou- bling of federal expenditures on energy technology research, development, and demonstration—and a tripling of international cooperation—with an emphasis on public-private partnerships and technologies that offer high leverage against multiple challenges. “In other words, let’s aim at oil dependence and climate change at once with technologies that do both.” Holdren showed the effect that the Commission’s recommendations would have on carbon dioxide emissions until 2030 (Figure 12.5). The original set of proposals would stabilize emissions at 8,000 million metric tons of carbon diox- 12,000 10,000 Business-as-Usual Million Metric Tons CO2 Projections 8,000 Historic Emissions Original NCEP Proposal 6,000 New NCEP Proposal 4,000 2,000 0 1990 1995 2000 2005 2010 2015 2020 2025 2030 FIGURE 12.5 Implementing the 2007 recommendations of the National Commission Figure 12-6.eps on Energy Policy could reduce carbon dioxide emissions to approximately 1990 levels. SOURCE: NCEP (2007; p. 12). portrait redrawn to vector

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22 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE ide, whereas the new recommendations would cause emissions to drop during the period to approximately 1990 levels. The largest share of reductions would come from the electric power sector, with reductions from the transportation sector the second largest. The December 2007 energy legislation enacted more of the steps called for by the Commission. It raised CAFE standards to 35 miles per gallon for the combined fleet of cars and light trucks by model year 2020. It also modified the Renewable Energy Standard to start at 9 billion gallons in 2008, rising to 36 billion gallons by 2022, with 21 billion gallons of that to come from advanced biofuels. New Energy Efficiency Equipment Standards cover lighting, residen- tial refrigerators, freezers, and commercial walk-in coolers and freezers. The 2007 legislation expanded research, development, and demonstration for carbon capture and sequestration, directed the Department of Energy to engage the National Academies to review the program, directed the Depart- ment of Energy to work with the National Academies to develop interdisciplin- ary graduate degree programs in geological sequestration, established a univer- sity-based research and development grant program to study carbon capture and sequestration with different types of coal, and created a new efficiency and conservation block grant to be funded at $2 billion per year for 5 years. Several provisions that were in the House bill were not included in the enacted law. These include an energy portfolio standard of 15 percent for renewables by 2020 and a 4-year extension of the tax credit for renewable electricity production. Two oil and gas subsidies were repealed in order to pay for the implementa- tion of the CAFE provisions. However, most of the oil and gas subsidies were left unchanged. As Holdren said, “Tom Friedman gave a talk I heard a few weeks ago in which he said, ‘You couldn’t make this up. They finally passed a big energy bill, and they left the oil and gas subsidies in and took the renew- ables subsidies out.’” The House bill called for repealing $22 billion a year in tax subsidies for oil and gas to pay for efficiency and renewables incentives and the implementation of CAFE, but the Senate version repealed only $1 billion of subsidies—enough to pay for the CAFE implementation but not enough for the efficiency and renewables incentives. The Senate’s excuse was that President Bush had threatened to veto the energy bill because of these provisions, so the Senate engaged in “pre-emptive concession,” according to Holdren. The best way to gauge the actions of the federal government is to “follow the money,” Holdren said. For example, in the proposed fiscal year 2009 bud- get, the request for the Federal Railroad Administration falls by one-third, and grants to Amtrak fall by about a half billion dollars. “Why is that important?” Holdren asked. “It’s important because rail is the most energy-efficient way to transport people and freight, and we’re taking away the support for that transport mode.” The budget request also eliminated the $227 million Weath- erization Assistance Program. Energy technology research, development, and

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2 THE PUBLIC SECTOR RESPONSE demonstration would increase by 6 percent in real terms, bringing it 44 percent above its fiscal year 2006 low. But within that amount, energy-efficiency research and development would go down 2.5 percent, and renewable-energy research, development, and demonstration would fall 28 percent compared to the enacted 2008 budget. “So the news is not, by any means, all good.” Over the past 8 years, funding for efficiency has gone down, fossil fuel funding has gone up, and hydrogen research is up, although down substantially in the fiscal year 2009 request (Table 12.2). Funding for nuclear fission is up substantially, but “a lot of that is, unfortunately, in programs that look designed to push toward early commercial reprocessing, which the Energy Commission thinks is a terrible idea.” Renewables have gone up and down but, in the fiscal year 2009 request, are down. Several bills addressing energy issues were introduced in the 110th Con- gress. Most are broadly compatible with the long-term goal of reducing U.S. greenhouse gas emissions by 60 to 80 percent by 2050. “The key point is that I don’t think we ought to be arguing about whether we need 40 or 50 or 80 percent in 2050,” Holdren said. “The curve looks the same for the next few years in any case. What we need to do is get on it.” Holdren acknowledged that the recommendations of the Commission are “too timid.” The 2007 report admitted as much, saying that even if all the rec- ommendations were enacted, carbon dioxide emissions would not fall to the levels they need to reach. However, the Commission’s recommendations were designed to “reflect our best judgment of what could actually get enacted in the U.S. Congress,” Holdren said, although “that, too, can be accused of being a TABLE 12.2 Funding for Energy Research, Development, and Demonstration at the Department of Energy (million $), 2001 to 2009 2009a 2001 2006 2008 Efficiencyb 548.5 382.5 426.8 416.8 Fossil 518.1 472.8 554.3 598.2 Hydrogen 26.0 131.8 173.1 117.6 Nuclear fission 61.9 236.2 387.5 554.3 Nuclear fusion 236.4 241.1 235.5 396.6 Renewables 335.7 222.8 599.0 452.4 T&D — 125.3 83.4 69.7 Total 1,726.5 1,812.6 2,461.5 2,605.5 aAdministration budget request for 2009. bFunding has fallen for efficiency since 2001 and has risen in other categories. SOURCE: John Holdren, Harvard University, based on data from Kelly S. Gallagher, ETIP Energy RD&D Database, Energy Technology Innovation Project, Belfer Center for Science and Interna- tional Affairs, Harvard Kennedy School, February 14, 2008, available at http://belfercenter.ksg. harvard.edu/publication/3238.

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2 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE pre-emptive concession.” The Commission decided that the greatest need is to get started and that more would be done over time. “We have to work in the society we live in, with the Congress we have,” said Holdren. For success in stabilizing carbon dioxide concentrations in the atmosphere, the greenhouse gas emissions of the United States should be turned around by 2012. “That would be my first measure of success,” Holdren said: “You have to bend the curve. Wherever we need to end up by 2030 or 2050, we need to start bending that curve. . . . The Commission’s recommendations would be enough to achieve that. And, again, if we can make it decline even faster, that’s great.” CAP AND TRADE VERSUS A CARBON TAx The Commission’s most controversial recommendation in both its 2004 and 2007 reports was that there should be a safety valve on the greenhouse gas permit price. The concept is that if a predetermined price is reached in the marketplace, the government would sell as many additional permits as are demanded at that price. In other words, if the safety valve is triggered, the cap- and-trade system turns into a carbon tax. Companies, consumers, and other energy users would have to pay that price for each additional ton of carbon they emit. The attraction of the safety valve is that it finesses a longstanding and other- wise irresolvable conflict between optimists and pessimists over the availability of affordable ways to reduce energy consumption, Holdren said. Pessimists fear that there will not be enough affordable options to reduce emissions cheaply and that the permit price will therefore be high, causing major economic dislocations. Optimists believe that even modest incentives will cause many consumption-reducing options to materialize. If the safety valve level has been reasonably set, it will not be reached and reductions in energy use will occur. “We would not have gotten this bipartisan, multisectoral group to agree to a mandatory economy-wide set of restrictions on greenhouse gases emissions in the United States without a safety-valve provision,” Holdren said. “And many of us believe that some provision of this sort will be required to get the bipar- tisan support of the Congress to vote such a thing into existence.” However, the safety valve has been sharply criticized by some in the envi- ronmental community. “Some of my good friends in the environmental com- munity have called me names for signing off on this proposition,” said Holdren. The main criticism is that the safety valve unduly weakens the program by sacrificing the assurance that the stated target will be reached. The safety valve also is criticized as compromising market principles with what amount to price controls. Holdren suggested that the key issues are the level of the trigger price and its rate of escalation over time. “If you set the safety valve too low or the escala- tion rate too slow, you will encounter the safety valve fairly early and you will

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2 THE PUBLIC SECTOR RESPONSE end up with a carbon tax at a rather low value. But, if you set the thing right, that need not be the case.” Holdren said that he is a technology optimist who believes that many energy-saving options will materialize once a reasonable incentive is in place. If that turns out to be wrong, Congress will certainly revisit the issue on a regular basis and make adjustments. Also, the imposition of a carbon tax would not be a disaster. “Most econo- mists start out with the view that a carbon tax would be preferable to cap and trade, but we accept cap and trade as second best because Congress is never going to pass something with the ‘T’ word in it. So, if what you end up with is a carbon tax by another name, why is that so horrible?” The most important point is to get started sooner rather than later with a mandatory, economy-wide program. This became particularly apparent at the conference in Bali in December 2007, when many developing countries made it clear that they are ready to follow the lead of the United States and other developed countries. “Their rhetoric has changed dramatically in the last few years,” said Holdren. “A few years ago, it was this is a problem that the industrialized countries mainly caused, and you’re going to have to mainly cure [it], and how much we’re willing to do about it is going to depend on how much you’ll pay us. Now the rhetoric is, we understand that this is a problem that is affecting us. We understand that the ultimate solution will require our participation, because we’ve looked at the numbers and we understand that developing countries will be bigger than the industrialized nations as emitters of greenhouse gases after 2015.” For reasons of historical responsibility, capacity, equity, and international law, the United States and other industrialized nations should be first, Holdren said. “I believe that if the United States embraces mandatory economy-wide restraints, China and India and Brazil and Indonesia and Mexico will only be a few years behind in embracing mandatory economy-wide restraints. . . . That means it would be far better for the United States to get going sooner with something that is maybe a little less than ideal than to wait 2, 3, or 5 more years for a better proposal when the Congress, after additional evidence accumulates on the harm from climate change, might be willing to vote through a measure without a safety valve.” Other speakers at the summit made a strong case for a carbon tax instead of a cap-and-trade system. Paul Portney pointed out that past analyses have concluded that higher gasoline prices create a powerful incentive for automo- bile companies to make more fuel-efficient cars and for Americans to use the 200 million vehicles already on the road in more fuel-efficient ways. “For that reason, I think the prospect of a carbon tax—which would of course affect petroleum and gasoline prices and also coal and natural gas—is an attractive idea.” A carbon tax could go up gradually, predictably, and over a considerable period of time. It would curtail not only the use of liquid fuels but also the use of natural gas and coal to produce electricity, while also reducing industrial,

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2 THE NATIONAL ACADEMIES SUMMIT ON AMERICA’S ENERGY FUTURE commercial, and residential use of fossil fuels. It would stimulate the produc- tion of alternatives to fossil fuels, including nuclear power, solar power, wind power, and geothermal power. It would reduce the nation’s reliance on imports of petroleum and natural gas. It also could establish a floor underneath the prices of gasoline and coal if prices should collapse in the future, which cannot be ruled out if the U.S. and global economy were to falter. Another reason for favoring a carbon tax, according to Portney, is that it would generate revenues. Though the U.S. economy has had full or nearly full employment for an extended period, the federal government is still generating large deficits. With a large cohort of people about to enter retirement age, they will begin to collect Social Security and Medicare, which will further add to the deficit. “I would rather raise these revenues by taxing something that we’re trying to discourage than by raising income taxes or taxes on capital,” Portney said. Auctioning off permits under a cap-and-trade system would also generate revenue, Portney said, so another option would be a cap-and-trade system in which significant numbers of permits were sold. “But I think that most of the permits in the cap-and-trade system would inevitably be given away because politicians cannot resist the temptation to give away goodies. And for that rea- son it seems to me that a carbon tax is to be preferred.” Ged Davis noted that in many countries policy leaders are still engaged in an open discussion about the relative merits of a cap-and-trade mechanism or carbon taxation. He also noted that when markets are wide and deep, they can work well, but with relatively young markets there can be significant and sud- den shifts in price. Such price fluctuations can reduce confidence for making long-term investments, which is an argument in favor of carbon taxes. However, “taxes can come and go depending on government positions,” Davis acknowl- edged. And, as Portney noted, “like Count Dracula from a silver cross or the first rays of daylight, politicians run from any mention of new taxes, especially during an election year.” Holdren said that the fluctuations in carbon price in Europe were largely due to having set targets too low initially. The system underestimated how many opportunities were going to be available to avoid carbon emissions at a relatively low price. Also, there were problems with the allocation scheme and how many of the permits were given away. “I think we have all learned from that experience,” Holdren said. “One of the reasons that the Energy Commis- sion changed the details of its recommendations—including the fraction of the permits to be auctioned and the size and level of the safety valve—was learning from the European experience.” Another argument is that there should be not only a ceiling but also a floor on the permit price, Holdren said. Cap-and-trade approaches do generate variability in prices, which creates a lack of signals for firms that are trying to decide how much to invest in alternatives. More thinking needs to be done on

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2 THE PUBLIC SECTOR RESPONSE the best way to construct a system that avoids pitfalls and maximizes benefits. That’s one of the reasons that the Energy Commission is still in existence, Holdren said. It is continuing to work on questions involving cap-and-trade systems, the management of nuclear energy, and an expanded research and development program. A single set of rules or policies will not work well everywhere, said Davis. What is needed is a wide range of suitable options, some of which will appeal in some countries, if not all. At the same time, new policies need to prove themselves within individual countries before they are adopted elsewhere in the world, and this process can take time.