THE NATIONAL COMMISSION ON ENERGY POLICYSUMMARY OF RECOMMENDATIONSDece - PDF document

THE NATIONAL COMMISSION ON ENERGY POLICYSUMMARY OF RECOMMENDATIONSDecember 2004 NDINGTHENERGYTALEMATEA Bipartisan Strategy to Meet Americ懕s Energy Challenges This report is a product of a bipartisan Commission of 16 members of diverse expertiseand affiliations, addressing many complex and contentious topics. It is inevitable thatarriving at a consensus document in these circumstances entailed innumerableomises. Accordingly, it should not be assumed that every member is entirelysatisfied with every formulation in the report, or even that all of us would agree withany given recommendation if it were taken in isolation. Rather, we have reachedconsensus on the report and its recommendations as a package, which taken as a wholeve approach to the economic, national security, andy issue presents to our nation. OWLEDGEMENTS y was founded in 2002 by the William and Flora Hewlett Foundation and itsTrusts, the John D. and Catherine T. MacArthur Foundation, the David and LucilePackard Foundation, and the Energy Foundation. The Commission would like to express its sincere appreciation for ommission would also like to thank the following Commissioner representatives for their many contributions to the CommissionÕs ongoing work and to this report: don Binder artners; Kelly Sims Gallagher, Director, Energy Technology Innovation Project, Belfer Center for Science & InternationalAffairs, Harvard University; Marianne S. Kah, Chief Economist, ConocoPhillips; William J. Klinefelter, Assistant to the President, Legislative and Political Director, United Steelworkers of America; Ralph Loomis, ecutive Assistant to the Chairman, Exelon Corporation; Meredith Montgomery, District Aide, Office of Texas State Senator Rodney Ellis.In addition, the Commission would like to express its thanks to Robert G. Card, Director and President, Kaiser-ort. NDINGTHENERGYTALEMATEA Bipartisan Strategy to Meet Americ懕s Energy Challenges THE NATIONAL COMMISSION ON ENERGY POLICYSUMMARY OF RECOMMENDATIONSDecember 2004 www.energycommission.org JOHN P. HOLDREN Co-Chair Teresa and John HeinzProfessor of EnvironmentalPolicy, Harvard UniversityWILLIAM K. REILLY Co-Chair Founding Partner, AquaInternational Partners;former Administrator of the U.S. EnvironmentalProtection AgencyJOHN W. ROWE Co-Chair Chairman and CEO, Exelon Corporation Congressional Chair Senior Policy Advisor, Van Ness Feldman PC;Senior Advisor, Lexecon,Inc.; former U.S.Representative, INMARILYN BROWNDirector, Energy Efficiencyand Renewable EnergyProgram, Oak Ridge National LaboratoryRALPH CAVANAGH Senior Attorney & Co-Director, Energy Program,Natural Resources Defense CouncilARCHIE W. DUNHAM Chairman, ConocoPhillipsRODNEY ELLIS State Senator, Texas NCEP COMMISSIONERS National Commission on Energy Policy LEO W. GERARD International President,United Steelworkers of AmericaF. HENRY HABICHT CEO, Global Environment & Technology Foundation;former Deputy Administratorof the U.S. EnvironmentalProtection AgencyMARIO J. MOLINAInstitute Professor,Massachusetts Institute of TechnologySHARON L. NELSON Chief, Consumer ProtectionDivision, WashingtonAttorney픀s General Office; Chair, Board of Directors,LINDA STUNTZStuntz, Davis & Staffier;former Deputy Secretary of EnergySUSAN TIERNEYManaging Principal, The Analysis Group; formerAssistant Secretary of EnergyR. JAMES WOOLSEYVice President, Booz Allen Hamilton; former Director of Central IntelligenceMARTIN B.ZIMMERMANClinical Professor ofBusiness, Ross School ofBusiness, the University ofMichigan; Group VicePresident, Corporate Affairs,Ford Motor Company National Commission on Energy Policy 3 1. ENHANCING OIL SECURITY ꔀIncrease and diversify world oil production and expand global network of strategic petroleum reserves.ꔀReform and significantly strengthen vehicle efficiency standards. ꔀProvide $3 billion over ten years in manufacturer and consumer incentives for domestic production andpurchase of efficient hybrid-electric and advanced diesel vehicles. 2. REDUCING RISKS FROM CLIMATE CHANGE ꔀEstablish a mandatory, economy-wide tradable-permits program to limit greenhouse gas emissions while -equivalent reduction.ꔀLink further U.S. action to developed and developing nation commitments. 3. INCREASING ENERGY EFFICIENCY Integrate improvements in efficiency standards with targeted technology incentives, R&D, consumer 4. ENSURING AFFORDABLE, RELIABLE ENERGY SUPPLIES ꔀNatural Gas: expand and diversify supplies of this critical resource-Adopt effective public incentives for the construction of an Alaska natural gas pipeline.Encourage the siting and construction of liquefied naturLNGLNGastructure.ꔀAdvanced Coal Technologies: ensure a future for the nationÕs most plentiful energy resource-Provide $4 billion over ten years in public incentives for integrated gasification combined cIGCCIGCCe and sequestration.-Provide $3 billion over ten years in public incentives to demonstrate commercial-scale carbon capture and geologicsequestration at a variety of sites.-Fulfill existing federal commitments on nuclear waste management.-Provide $2 billion over ten years from federal energy research, development, demonstration, and deployment budgetso new advanced nuclear facilities. -Significantly strengthen the international non-proliferation regime. ECOMMENDATIONS 4 National Commission on Energy Policy ꔀRenewable Energy Sources: tap AmericaÕs technological potential Increase federal R&D funding for renewable electricity technologies by $360 million annually.-Expand and extend from 2006 through 2009 the federal tax credit for electricity production from non-carbon energyresources.Support efforts by the Federal Energy RegulatorFERCFERCess the need for better integration ofintermittent renewable resources (such as wind and solar power) into the interstate grid system. -Establish a $1.5 billion program over ten years to increase domestic production of non-petroleum renewabletransportation fuels. 5. STRENGTHENING ESSENTIAL ENERGY SYSTEMS ꔀReduce barriers to the siting of critical energy infrastructure.ꔀProtect critical infrastructure from accidental failure and terrorist threats.ꔀSupport a variety of generation resources Ñ including both large-scale power plants, small-scale ÒdistributedÓand/or renewable generation Ñ and demand reduction (for both electricity and natural gas) to ensureaffordable and reliable energy service for consumers. ꔀEncourage increased transmission investment and deployment of new technologies to enhance the availabilityvery. to reduce power plant emissions. 6. DEVELOPING ENERGY TECHNOLOGIES FOR THE FUTURE Double federal government funding for energy research and development, while improving the managementof these efforts and promoting effective public-private partnerships.ease incentives for private sector energy research, development, demonstration, and early ꔀExpand investment in cooperative international ERDinitiatives and improve coordination among relevantProvide incentives for early deplo1122yproduced efficient v33y produced alternative tr44anced National Commission on Energy Policy 5 This report presents key findings from anintensive, three-year effort to develop consensusrecommendations for future U.S. energy policy. Bringingtogether a diverse and bi-partisan group of leaders frombusiness, government, academia, and the non-profitcommunity, the National Commission on Energy Policypolarized debate about energy and to advance acoherent strategy for meeting the energy challenges of and political integrity to overcome the current stalematein national energy policy. The challenges that must be addressed are atonce familiar and new. Long-standing anxieties about thenationÕs underlying energy security have resurfaced at athe largest cascading power outage in U.S. history. Recentdevelopments in world oil markets, including rapidgrowth in global demand and the emergence of terroristthreats to oil facilities, are bringing new urgency toperennial concerns about the nationÕs exposure to oilprice shocks and supply disruptions. Similar price andsupply concerns increasingly apply to natural gas marketswhere sustained price increases and extreme volatilityhave begun to signal a steadily widening gap betweendomestic supply and demand for this economically andenvironmentally valuable fuel. At the same time, theuncertain state of restructuring efforts in the nationÕselectric industry is prompting urgent questions about theprospects for needed investment in an infrastructure thatis essential to nearly every facet of modern life. All of these issues present formidablechallenges in their own right, even as the inability of the Congress to pass comprehensive energy legislationin 2003 and 2004 demonstrated the political difficulty ofaddressing them. Meanwhile, the overall picture is vastlyes between energyproduction and use and the environment. In particular,the risk of global climate change from emissions releasedossil fuel combustion will exert a profound influenceon the worldÕs energy options and choices over thedecades ahead. In this context, the old notion of energyenergy resources needed to support a healthy economyremains the core imperative, but in the 21 centuryand terrorism-related vulnerabilities inherent in theimpacts of the current energy system. GOALS The pages that follow set forth the CommissionÕsspecific recommendations for addressing these linkedobjectives, beginning with oil security and climatechange risks Ñ arguably two of the most difficult issuesfor U.S. energy policy. Thus, the first chapter of thisreport describes a package of measures designed to improve U.S.oil security by increasing global oil supplyand reducing growth in domestic demand. The nextchapter proposes a mandatory, economy-wide tradable-permits system for limiting emissions of carbon dioxide and This report recommends a revenue-neutral package of measures designed to ensureaffordable and reliable supplies of energy for the twenty-first century while respondingto growing concern about energy security and the risks of global climate change drivenby energy-related greenhouse gas emissions. Through these recommendations andassociated analysis, the Commission seeks to establish a constructive center in the oftenpolarized debate over national energy policy. I National Commission on Energy Policy other greenhouse gases. The third and fourth chaptersdescribe a set of complementary proposals for, on the ving energy efficiency throughout the economy (i.e., in buildings, equipment,industry, and transportation) and, at the same time, promoting energy supply of cross-cutting policy objectives, from reducing thenationÕs exposure to resource constraints and supplydisruptions to reducing climate change risks. Specifically, Chapter IV recommends a number ensure adequate supplies of natural gasand to promote the expanded deployment of low-carbonenergy alternatives Ñ including advanced coaltechnologies with carbon sequestration, next-generation, and renewable sources for electricityproduction and transportation fuels. Recognizing that arobust and resilient energy infrastructure and healthymarkets provide the necessary foundation for ensuringcontinued access to needed energy resources, Chapter Vaddresses the need to site critical infrastructure,protectformance and reliability of the nationÕs electricity that clean, secure, and affordable energy will be availableor the United States and the world. In ChapterVI, the Commission therefore recommends that thefederal government promote technology innovation inboth the public and private sectors by significantlyexpanding and refocusing federal energy research anddevelopment programs. POLICIES THAT WORK TOGETHER It is important to emphasize that thes various recommendations were designedto be mutually reinforcing and are intended to functionas a package. Each component of that package is thextensive discussions and rigorous analysis,informed by many of the nationÕs top energy experts. Theexploration, substantive debate, and principledcompromise. Early on, Commissioners agreed that ay, affordable energy, and adequate energysupplies were essential prerequisites for tackling all otherpolicy objectives; that markets Ñ appropriately regulatedthe most efficient solutions; that policies must beappreciation for the law of unintended consequences;and that gradual adjustments are generally preferable todramatic interventions. REJECTING MYTHS ON THE LEFT AND RIGHT y important, Commissioners foundcommon ground in rejecting certain persistent myths Ñon the left and on the right Ñ that have often served topolarize and paralyze the national energy debate. Theseinclude, for example, the notion that energyindependence can be readily achieved throughproposition that uncertainty justifies inaction in the faceen current trends, the consequences ofinaction are all too clear. Under business-as-usualemissions by 2025. At the global level, oil consumptionand emissions will grow 57 and 55 percent respectivelyover the same timeframe and the Earth will be headingrapidly Ñ perhaps inexorably Ñ past a doubling andtoward a tripling of atmospheric greenhouse gass view, this is not ascenario that should inspire complacency, nor is itconsistent with the goal of reducing the nationÕsxposure to potentially serious economic, National Commission on Energy Policy 7 POLICY CRITERIA potential policy options, the Commission appliedseveral general criteria, including: economic efficiency;fectiveness and consumer impacts; ability toprovide appropriate incentives for future action;flexibility for adjustment in response to furtherxperience, new information, and changed conditions; REVENUE NEUTRALITY Another important consideration was impact onthe U.S. Treasury. Here the Commission sought to ensuree, its proposed policies achievedrevenue neutrality; that is, they are expected to roughlypay for themselves (see Table 1). ditional federal outlays of approximately $36billion over ten years. To cover those outlays, theCommission outlines proposals that would raise abouta small portion of emission allowances under theproposed tradable-permits system for greenhouse gases.aken together, the CommissionÕsrecommendations aim to achieve a gradual butnevertheless decisive shift in the nationÕs energy policy.Their near-term impacts, by design, will be modest, andsome will undoubtedly find them grossly inadequate tothe challenges at hand. Others will criticize the samerecommendations for going too far, precisely becausethey initiate a process of long-term change withconsequences that no one can fully predict. Theseamiliar. They characterize the stalemate ingridlock or in a piecemeal, special interest-drivenapproach to energy policy. These outcomes are no longeracceptable. It is time for the stalemate to end. National Commission on Energy Policy Notes: 1. United States Department of Energy, Energy Information Administration, Annual Energy Outlook 2004 with Projeco 2025 ashington, DC: Energy Information Administration, 2004), 8, 95, http://www.eia.doe.gov/oiaf/aeo/index.html. ional Energy Outlook 2004 ashington, DC: Energy Information Administration, 2004), 28, 137, Fig. 72, http://www.eia.doe.gov/oiaf/ieo/index.html. 3. Expected auction revenue over the first decade of program implementation (i.e., from the begining of 2010 to thealue of $2.6 billion per year. Expected safety valve revenues contributeear. Over ten years, the total revenue generated is projected to equal roughly $36 billion. IMPROVING OIL SECURITY o enhance the nationÕs energy security andreduce its vulnerability to oil supply disruptions andIncreasing and diversifying world oil productionwhile expanding the global network of strategicpetroleum reserves.ꔀSignificantly raising federal fuel economy standardsfor cars and light trucks while reforming the 30-year-old Corporate Average Fuel EconomCAFECAFEprogram to allow more flexibility and reducein over a five-year period beginning no later thanes to encourage domesticin global consumption (expected to grow by more thanxt two decades), continuinginstability in the Middle East and other major oil-production capacity.Oil production in the United States peaked inhighly important to the nationÕs economy and energysecurity, it cannot compensate for anticipated growth indomestic demand, which is expected to reach 29 millionbarrels per day by 2025 Ñ a more than 40 percentincrease over current consumption levels. Improving the nationÕs energy security andreducing its vulnerability to high oil prices and supplydisruptions are more meaningful and ultimatelyachievable policy goals than a misplaced focus on energy focusing in equal measure on expanding and diversifyingoil supplies and improving efficiency, especially in thetransportation sector. Additional Commissionrecommendations aim to expand transportation fuelsupplies by enabling production of unconventional oilThe CommissionÕs recommendations forimproving passenger vehicle fuel economy, increasingthe contribution from alternative fuels, and improvingould significantly UMMARYOFECOMMENDATIONS National Commission on Energy Policy 9 outset, would be auctioned to accommodate newentrants, stimulate the market in emission permits, andStarting in 2013, the amount of permits auctioned wouldincrease by one-half of one percent each year (i.e., to 5.5The CommissionÕs proposal also includes asafety valve mechanism that allows additional permits tobe purchased from the government at an initial price of$7 per metric ton of carbon dioxide (CO )-equivalent.The safety valve price would increase by 5 percent peryear in nominal terms to generate a gradually strongermarket signal for reducing emissions withouty displacing existing energy infrastructure.In 2015, and every five years thereafter, Congresswould review the tradable-permits program and evaluatewhether emissions control progress by major tradingpartners and competitors (including developing countriessuch as China and India) supports its continuation. If not,ersely, internationalstrengthen U.S. efforts. metric tons of CO 2 -equivalent in 2010 to 9.1 billionmetric tons by 2020 Ñ a roughly 1.3 billion metric tonincrease. Modeling analyses suggest that theCommissionÕs proposal would reduce emissions in 2020by approximately 540 million metric tons. If thetechnological innovations and efficiency initiativesproposed elsewhere in this report further reduceabatement costs, then fewer permits will be purchasedety valve mechanism and actual reductionscould roughly double to as much as 1.0 billion metrictons in 2020, and prices could fall below the $7 safetyalve level. The impact of the CommissionÕs proposedenergy prices would be modest. Modeling indicatesthat relative to business-as-usual projections for 2020,average electricity prices would be expected to rise bygas prices would rise by about 7 percent (or $0.40 permmBtu); and gasoline prices would increase 4 percentould decline by 9percent below current forecasts, yet would stillincrease in absolute terms by 16 percent relative totoday픀s levels, while renewable energy productionwould grow more substantially; natural gas use andoverall energy consumption, meanwhile, would changeonly minimall1.5 percent or less1.5 percent or lesse to business-Overall, the CommissionÕs greenhouse gashousehold the welfare equivalent of $33 per year in 2020expected GDP growth, from 63.5 percent to 63.2 percent,between 2005 and 2020. National Commission on Energy Policy 11