Climate Change: Comparison and Analysis of S. 1766 and S. 2191 (S. 3036)

Climate Change: Comparison and Analysis
of S. 1766 and S. 2191 (S. 3036)
June 4, 2008
Larry Parker and Brent Yacobucci
Specialists in Energy and Environmental Policy
Resources, Science, and Industry Division



Climate Change: Comparison and Analysis
of S. 1766 and S. 2191 (S. 3036)
Summary
Several proposals designed to address greenhouse gases have been introduced
in the 110th Congress. Two proposals, S. 1766, introduced by Senators Bingaman and
Specter, and S. 2191, introduced by Senators Lieberman and Warner and reported by
the Senate Committee on Environment and Public Works on May 20, 2008, are
receiving increased scrutiny in preparation for Senate debate on S. 2191. On May 20,
2008, Senator Boxer introduced S. 3036, which is identical to the reported version
of S. 2191 except that it contains a proposed budget amendment to make the bill
deficit neutral. On June 2, 2008, the Senate invoked cloture on a motion to proceed
on S. 3036, allowing discussion of the bill, but not allowing amendments to be
introduced. As of June 4, 2008, it is unclear whether the Senate will agree on the
motion to proceed, leading to further discussion and allowing amendments to be
introduced.
The two proposals — S. 1766 and S. 2191 — would establish market-based
systems to limit emissions of greenhouse gases. However, the proposals differ in
how those systems would work. S. 2191 would establish an absolute cap on
emissions from covered entities and would allow entities to trade emissions under
that cap. S. 1766 would establish emissions targets on covered entities and allow
those entities to either meet emission reduction targets through a trading program or
make a safety valve payment in lieu of reducing emissions. Under both proposals,
short-term U.S. emissions would likely be below a business-as-usual scenario,
although reductions under S. 2191 are guaranteed by the cap and are projected to be
larger, particularly over the long-term. In contrast, costs under S. 1766 are likely to
be lower and more predictable than under S. 2191.
A major policy question is whether one is more concerned about the possible
economic cost of the program and therefore willing to accept some uncertainty about
the amount of reduction received (i.e., favoring a “safety valve” like S. 1766); or one
is more concerned about achieving a specific emission reduction level with costs
handled efficiently, but not capped (i.e., pure tradeable permits as in S. 2191). S.
2191 leans toward the quantity (total emissions) side of the equation; S. 1766 leans
toward the price side of the equation.



Contents
In troduction ......................................................1
Proposed Senate Legislation: Comparison of S. 1766 and S. 2191............2
Results of Analyses................................................9
Emissions Reductions.........................................10
Impact on GDP Per Capita......................................13
Allowance Prices.............................................17
Auction Revenues............................................18
Analysis: Addressing the Price versus Quantity Issue.....................19
Uncertainty in Emissions Reductions.............................19
Uncertainty in Cost Estimates...................................20
Price versus Quantity: The Safety Valve...........................23
Conclusion ......................................................24
List of Figures
Figure 1. Total Estimated U.S. Greenhouse Gas Emissions
Under S. 1766 and S. 2191.....................................11
Figure 2. Total Estimated U.S. Greenhouse Gas Emissions
From Each Model Under S. 1766 and S. 2191......................12
Figure 3. Estimated GDP per Capita (2005$) Under
S. 1766 and S. 2191...........................................13
Figure 4. Estimated GDP per Capita (2005$) From
Each Scenario Under S. 1766 and S. 2191.........................14
Figure 5. Percentage Change in GDP Per Capita Under
S. 1766 and S. 2191...........................................15
Figure 6. Percentage Change in GDP per Capita From Each Scenario
Under S. 1766 and S. 2191.....................................16
Figure 7. Projected Allowance Prices Under S. 1766 and S. 2191...........17
Figure 8. Estimated Annual Revenues From Allowance Auctions
Under S. 1766 and S. 2191.....................................18
Figure 9. EPA/ADAGE Analysis of S. 1766...........................20
List of Tables
Table 1: Comparison of Selected Provisions of S. 1766 and S. 2191..........4
Table 2. Assumptions about the Availability of Current Electric
Generating Technologies and CCS in 2030.........................22



Climate Change: Comparison and Analysis
of S. 1766 and S. 2191 (S. 3036)
Introduction
Climate change is a global issue, but proposed responses generally would
require action at the national level. In 1992, the United States ratified the United
Nations Framework Convention on Climate Change (UNFCCC), which called on
industrialized countries to take the lead in reducing the six primary greenhouse gases1
to 1990 levels by the year 2000. For more than a decade, a variety of voluntary and
regulatory actions have been proposed or undertaken in the United States, including
monitoring of power plant carbon dioxide emissions, improved appliance efficiency,
and incentives for developing renewable energy sources. However, greenhouse gas
emissions have continued to increase.
In 2001, President George W. Bush rejected the Kyoto Protocol, which called
for legally binding commitments by developed countries to reduce their greenhouse23
gas emissions. He has also rejected the concept of mandatory emissions reductions.
Since then, the Administration has focused U.S. climate change policy on voluntary
initiatives to reduce the growth in greenhouse gas emissions. In contrast, in 2005, the
Senate passed a Sense of the Senate resolution on climate change declaring that
Congress should enact legislation establishing a mandatory, market-based program
to slow, stop, and reverse the growth of greenhouse gases at a rate and in a manner
that “will not significantly harm the United States economy” and “will encourage
comparable action” by other nations.4
A number of congressional proposals to advance programs designed to reduceth
greenhouse gases have been introduced in the 110 Congress. These have generally
followed one of three tracks. The first is to improve the monitoring of greenhouse
gas emissions to provide a basis for research and development and for any potential
future reduction scheme. The second is to enact a market-oriented greenhouse gas


1 Under the United Nations Framework Convention on Climate Change (UNFCCC), those
gases are carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons
(HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). Some greenhouse gases
are controlled under the Montreal Protocol on Substances that Deplete the Ozone Layer, and
are not covered under UNFCCC.
2 For further information, see CRS Report RL33826, Climate Change: The Kyoto Protocol,
Bali “Action Plan,” and International Actions, by Susan R. Fletcher and Larry Parker.
3 President George W. Bush, President Bush’s Speech on Global Climate Change (June 11,

2001).


4 S.Amdt. 866, passed by voice vote after a motion to table failed 43-54, June 22, 2005.

reduction program along the lines of the trading provisions of the current acid rain
reduction program established by the 1990 Clean Air Act Amendments. The third
is to enact energy and related programs that would have the added effect of reducing
greenhouse gases:5 an example would be a requirement that electricity producers
generate a portion of their electricity from renewable resources (a renewable portfolio
standard). This report focuses on the second category of bills, and on two bills in
particular: S. 1766 and S. 2191 (as reported).6
Note that CRS has a more comprehensive discussion of the costs and benefits
of S. 2191 available.7 Many of the caveats and limitations about modeling and
forecasting in that report are applicable to this one. Readers are urged to consult
that report in addition to reading this one.
Proposed Senate Legislation:
Comparison of S. 1766 and S. 2191
S. 1766. Introduced July 11, 2007, by Senators Bingaman and Specter, S. 1766
would set emissions targets on most of the country’s greenhouse gas emissions.8
Beginning in 2012, covered entities would face emissions limits, with emissions
targets set at their 2006 levels in 2020. The emissions targets would decline steadily
until 2030, when the emission target would be set at the entities’ 1990 levels. For
each ton of carbon dioxide equivalent, covered entities can comply with the bill by
submitting an allowance through a trading program or by paying a safety valve price
(called a Technology Accelerator Payment or TAP). Under the trading program,
allowances are allocated to various entities, including covered entities; eligible
facilities (non-covered facilities that may be in covered sectors), such as coal mines
and carbon-intensive industries; states; and parties conducting sequestration
activities. Initially, 24% of all allowances are auctioned, a percentage that increases
over time. The TAP is set at $12 per metric ton of carbon dioxide equivalent in
2012, increasing 5% annually above the rate of inflation. The bill also requires
countries that do not take comparable action to control emissions to submit special


5 For discussions of relevant energy legislation, see CRS Report RL34294, Energy
Independence and Security Act of 2007: A Summary of Major Provisions, by Fred Sissine,
and CRS Report RL33831, Energy Efficiency and Renewable Energy Legislation in theth

110 Congress, by Fred Sissine, et al.


6 For a review of additional climate change related bills, see CRS Report RL34067, Climate
Change Legislation in the 110th Congress, by Jonathan L. Ramseur and Brent D.
Yacobucci.
7 CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036, by Larry
Parker and Brent Yacobucci.
8 Greenhouse gas emitting activities such as methane emissions from landfills, coal mines,
animal waste, and municipal wastewater projects, along with nitrous oxide emissions from
agricultural soil management, wastewater treatment, and manure management, are not
included under the targets, although credits for use by covered entities are available or may
be generated by verified greenhouse gas reductions in these areas.

allowances (or their foreign equivalent) to accompany imports into the United States
of covered greenhouse gas intensive goods and/or primary products.
S. 2191. Senators Lieberman and Warner introduced S. 2191 on October 18,
2007. As reported by the Senate Committee on Environment and Public Works the
bill would cover emissions from petroleum producers and importers, facilities that
produce or import more than 10,000 tons (of carbon dioxide equivalent) of
fluorinated chemicals annually, any facility that uses more than 5,000 tons of coal
annually, any natural gas processing plant or importer (including LNG), and any
facility that emits more than 10,000 tons (of carbon dioxide equivalent) of HFCs
annually as a byproduct of hydrochloro-fluorocarbon production. S. 2191 is estimated
by its sponsors to reduce total U.S. greenhouse gas emissions 19% below 2005 levels
by 2020 (up from 15% as introduced) and 63% below 2005 levels by 2050. The bill
would establish a Carbon Market Efficiency Board to observe the allowance market
and implement cost-relief measures if necessary. Like S. 1766, S. 2191 also requires
countries that do not take comparable action to control emissions to submit special
allowances (or their foreign equivalent) to accompany exports to the United States
of any covered greenhouse gas intensive goods and primary products.
On April 10, 2008, a proposed amendment to S. 2191 was submitted to the
Congressional Budget Office (CBO) to be included in the scoring of the bill. The
amendment would provide for some of the auctioned revenues to be put aside for
deficit reduction purposes. On May 20, Senator Boxer introduced S. 3036, which is
identical to the reported version of S. 2191 except that it contains the above deficit
reduction amendment. On June 2, 2008, the Senate invoked cloture on a motion to
proceed on S. 3036.
Table 1 summarizes the major provisions of each bill.



Table 1: Comparison of Selected Provisions of S. 1766 and S.
2191
S. 2191 as reported, with deficit
TopicS. 1766 (Bingaman/Specter)reduction amendment (S. 3036)
(Lieberman/Warner)
EmissionEmissions targets for allAbsolute cap on total emissions
reduction/covered entities.from all covered entities.
limitation
scheme
ResponsibleTo be determined by theEPA.
agency President.
GreenhouseCarbon dioxide, methane,Same.
gases definednitrous oxide,
hydrofluorocarbons (HFCs),
perfluorocarbons (PFCs), and
sulfur hexafluoride (SF6)
SpecificIn 2012, the emissions targetIn 2012, emissions from covered
emissionsfor covered entities is set atentities are capped at 5.775 billion
limits6.652 billion metric tons. metric tons. Cap is reduced
Target is reduced annuallyannually thereafter until 2050.
thereafter until 2030.
Emission target for coveredEmission cap for covered sources in
sources in 2020 is 6.188 billion2020 is 4.924 billion metric tons.
metric tons.
Emission target for coveredEmission cap for covered sources in
sources in 2030 is 4.819 billion2030 is 3.860 billion metric tons.
metric tons.
Reductions beyond 2030 wouldEmission cap for covered sources in
require additional2040 is 2.796 billion metric tons.
congressional action.
Emission cap for covered sources in
If the President determines that2050 is 1.732 billion metric tons.
scientific, technological, and
international considerations
suggest further reductions are
warranted, his/her
recommendations are to be
considered by Congress under
expedited procedures.
CoveredRegulated fuel distributorsAssuming no capture of greenhouse
entities include petroleum refineries,gases (GHGs), any producer or
natural gas processing plants,importer of petroleum- or coal-based
and importers of petroleumliquid or gaseous fuel that emits
products, coke, or natural gas. GHGs, or any facility that produces
Regulated coal facilities areor imports more than 10,000 tons
entities that consume more thancarbon dioxide equivalent (CO2e) of
5,000 tons of coal a year.GHG chemicals annually; any
Regulated nonfuel entities arefacility that uses more than 5,000
producers and importers oftons of coal annually; any natural
HFCs, PFC, SF6, N2O, orgas processing plant or importer



S. 2191 as reported, with deficit
TopicS. 1766 (Bingaman/Specter)reduction amendment (S. 3036)
(Lieberman/Warner)
products containing such(including LNG); and any facility
compounds, and adipic acidthat emits more than 10,000 CO2e of
and nitric acid plants,HFCs annually as a byproduct of
aluminium smelters, andhydrochloro-fluorocarbon
facilities that emits HFCs as aproduction.
byproduct of HCFC
production.
GeneralTwo compliance systems areA tradeable allowance system is
allocating andprovided. Covered entities mayestablished. Off the top, a share of
implementingchoose which one to use orallowances is auctioned for deficit
strategyemploy a combination of both: reduction increasing from 6.1% in
2012 to 15.99% in 2031 and
First, a tradeable allowancethereafter. Then the “remainder
system is established. In 2012,allowances” are distributed in 2012

53% of allowances are(adjusted in future years) as follows:


allocated to covered and38% of allowances to covered
eligible industrial entities; 23%electric utilities, industrial facilities,
allocated to states and forand cooperatives, declining steadily
sequestration and earlyto zero in 2031; 10.5% to states for
reduction activities; 24% areconservation, extra reductions, and
auctioned to fund low incomeother activities; 7.5% for various
assistance, carbon capture andsequestration activities; 11%
storage, and adaptationallocated for electricity and natural
activities. The percentagegas consumer assistance; 5% for
auctioned increases steadily,early reductions; 0.5% for tribal
reaching 53% by 2030.governments; 1% for methane
reduction projects; and 21.5% (plus
Second, a Technologyan early auction of 5%) auctioned to
Accelerator Payment (i.e.,fund technology deployment, carbon
safety valve) may be paid incapture and storage, low income and
lieu of submitting one or morerural assistance, and adaptation
allowances.activities, as well as program
management. The percentage
auctioned by the Climate Change
Credit Corporation (CCCC)
increases steadily, reaching 69.5%
by 2031 and thereafter.
PublicBeginning in 2012, 24% ofBeginning in 2012, 6.1% of total
sale/auction ofavailable allowances areallowances are auctioned for deficit
allowancesauctioned to fund low incomereduction. Further, 21.5% of
assistance, technology, and“remainder allowances” (plus 5%
adaptation activities. Thefrom an early auction of 2012
percentage auctioned increasesremainder allowances) are auctioned
steadily, reaching 53% byto fund the activities of the CCCC.
2030; after that it increases 1This percentage increases steadily to
percentage point annually69.5% by 2031 and thereafter.
through 2043.
Revenues from the auction are to be
Revenues from the auction aredeposited in one of ten funds created
to be deposited in one of threein the Department of the Treasury:
funds created by theDeficit Reduction Fund, Technology



S. 2191 as reported, with deficit
TopicS. 1766 (Bingaman/Specter)reduction amendment (S. 3036)
(Lieberman/Warner)
Department of the Treasury:Deployment, Energy Independence
the Energy TechnologyAcceleration Fund, Energy
Deployment Fund, the ClimateAssistance Fund, Climate Change
Adaptation Fund, and theWorker Training Fund, Adaptation
Energy Assistance Fund.Fund, and the Climate Change and
National Security Fund, as well as a
fund for program management and
two Emergency Firefighting Funds.
Cost-limitingA Technology AcceleratorA Carbon Market Efficiency Board
safety valvePayment (TAP) (i.e., safetyis established to observe the
valve) may be paid in lieu ofallowance market and implement
submitting one or morecost-relief measures if necessary.
allowances. For 2012, the TAPMeasures include increased
price is set at $12 per metricallowance borrowing from future
ton, rising 5% above inflationallocations; increased use of offsets
annually thereafter.and foreign allowances; expanded
payback period for such allowances;
If the President determines thelower interest charged for borrowed
TAP should be increased orallowances; and expanded total
eliminated to achieve the act’sborrowed allowances. Increased
purposes, his recommendationsborrowing is limited to 5% of the
are to be considered byemission cap and the repayment
Congress under expeditedschedule cannot be longer than 15
procedures. years.
If the President determines a
national security emergency exists,
the President may temporarily
adjust, suspend, or waive any
regulation promulgated under this
program (subject to judicial review).
Penalty for Excess emissions penalties areExcess emission penalties per ton
non-equal to three times the TAPare equal to the higher of $200 or
complianceprice for that calendar year. Inthree times the mean market price
addition, civil penalties arefor allowances during the year the
$25,000 a day for violatingallowance was due, plus a 1-to-1
provisions of the act.offset from a future year allocation.
DomesticEstablishes program to provideUp to 15% of allowance requirement
Offsets /credits obtained throughmay be met through domestic
Creditsverified domestic reductionsoffsets: emissions reductions from
from non-covered activitiesagricultural sequestration, land use
(offsets). No limit the use ofchange, forestry, manure
domestic offsets to meetmanagement, and other specified
allowance requirement.activities. Percentage may be
increased by the Carbon Market
Efficiency Board
InternationalIf the President determines thatUp to 15% of allowance requirement
Offsets /emission credits issued undermay be met through certified foreign
Creditsforeign programs or foreignallowance markets. Percentage may
offset projects are comparable,be increased by the Carbon Market



S. 2191 as reported, with deficit
TopicS. 1766 (Bingaman/Specter)reduction amendment (S. 3036)
(Lieberman/Warner)
he may promulgate rulesEfficiency Board.
allowing such credits or offsets
to be used to meet the act’s
emission targets. No more than
10% of an entity’s emissions
target can be met through
foreign emission credits and
foreign offset projects.
BankingBanking of allowances isBanking of allowances is permitted;
permitted; allowances may beallowances may be saved for use in
saved for use in future years.future years.
EarlyOne percent of allowancesFive percent of “remainder
reductionavailable from 2012 throughallowances” established for 2012
credits and2020 are allocated to early(declining steadily to zero in 2017)
bonus creditsreductions reported under theare allocated to early reductions
1992 Energy Policy Act’sreported under the 1992 Energy

1605(b) program, EPA’sPolicy Act’s 1605(b) program,


Climate Leaders Program, or aEPA’s Climate Leaders Program, or
state-administered or privatelya state-administered or voluntary
administered registry.program.
Geologic sequestration projectsFour percent of remainder
built from 2008 through 2030allowances established for 2012
receive bonus allowances forthrough 2035 are available on a
the first 10 years of operation.steadily declining basis from 2012
through 2039 for geologic
sequestration projects for electric
generating plants built from 2008
through 2035. The bonus allowances
are limited to the first 10 years of
operation.
RevenueA new Energy TechnologyOff the top, a growing share of
recyclingDeployment Fund is funded byallowances are auctioned for deficit
TAP revenues and somereduction.
auction proceeds. Activities to
be funded include zero- or low-Revenues received by “remainder
carbon energy, advanced coalallowance” auctions are to be
and sequestration, cellulosicreceived by the CCCC. Activities to
biomass, and advancedbe funded include technology
technology vehicles.deployment activities (including
zero- or low-carbon energy,
A new Climate Adaptationadvanced coal and sequestration,
Fund is funded by somecellulosic biomass, and advanced
auction proceeds. Activities totechnology vehicles); assistance
be funded include coastal,activities (including low income,
arctic, and fish and wildlifeweatherization, and rural
impact mitigation. assistance); worker transition
assistance; and adaptation activities
A new Energy Assistance Fund(including wildlife conservation and
is funded by some auctionrestoration, aquatic ecosystems, and



S. 2191 as reported, with deficit
TopicS. 1766 (Bingaman/Specter)reduction amendment (S. 3036)
(Lieberman/Warner)
proceeds. Activities to becoastal habitats).
funded include low-income and
rural energy assistance, andRevenues would also fund a Climate
weatherization.Change and National Security
Program within the U.S. Agency for
International Development to report
annually on the ramifications of
climate change for national security.
Such sums as are necessary to
maintain a fund of $1.1 billion is
directed toward wildland fire
suppression activities by the Bureau
of Land Management and the Forest
Service.
Other keyProvisions include periodicProvisions require new appliance
provisionsreview of the activities of thestandards in 2012 and provide for
nation’s five largest tradingnew model building efficiency
partners, an National Academystandards by 2010.
of Sciences assessment of the
status of climate changeBeginning in 2018, requires annual
science, emission controlreview of foreign countries’ GHG
technologies, and energycontrol actions.
security implications.
Beginning in 2019, requires foreign
Beginning in 2019, requirescountries that do not take
foreign countries that do notcomparable emission reduction
take comparable emissionactions to submit international
reduction actions to submitreserve allowances (or foreign
international reserveequivalents) to accompany exports
allowances (or foreignof any covered greenhouse gas
equivalents) to accompanyintensive goods and primary
exports of any coveredproducts to the United States. Least
greenhouse gas intensive goodsdeveloped nations or those that
and primary products to thecontribute no more than 0.5% of
United States. Least-developedglobal emissions are excluded.
nations or those that contribute
no more than 0.5% of globalRequires periodic review of the
emissions are excluded.bill’s implementation and purposes
Proceeds from the sale of suchby the NAS.
reserve allowances are to be
deposited in an InternationalEstablishes a separate cap-and-trade
Energy Deployment Fund toprogram to limit U.S. production
encourage and financeand consumption of HFCs.
international technology
development.Establishes a low carbon fuel
standard (LCFS) requiring
transportation fuels to have, on
average, 10% lower lifecycle
emissions per unit of energy by

2020.



Results of Analyses
Two studies have been completed that compare S. 1766 and S. 2191 under the
same baseline conditions.
The most comprehensive analysis has been conducted by the U.S.
Environmental Protection Agency (EPA). The reports are entitled EPA Analysis ofth
the Low Carbon Economy Act of 2007: S. 1766 in the 110 Congress (January 15,

2008), and EPA Analysis of the Lieberman-Warner Climate Security Act of 2008:th9


S. 2191 in 110 Congress (March 14, 2008). The analyses employ a suite of models
and basecases, along with some useful sensitivity analysis. This report will focus on10
three of the models and two basecases.
!The first model is ADAGE: a computable general equilibrium
(CGE) model developed by RTI International.11 The S. 1766 and S.
2191 cases employing the reference basecase are designated
EPA/ADAGE-REF in this report, while the cases employing the
high technology basecase are designated EPA/ADAGE-TECH.
!The second model is IGEM: a CGE model developed by Dale
Jorgenson Associates.12 The cases employing the reference basecase
are designated EPA/IGEM-REF in this report, while the cases
employing the high technology basecase are designated EPA/IGEM-
TECH.
!The third model is IPM: a dynamic, deterministic linear
programming model of the U.S. electric power sector developed by
ICF Resources. The cases employing the IPM model are designated
EPA/IPM in this report.13
A second analysis has been conducted by the Energy Information
Administration (EIA). The report is entitled Energy Market and Economic Impacts
of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008) and14
included an updated analysis of S. 1766. The analysis employs EIA’s NEMS model:


9 The report and supporting model runs are available at [http://www.epa.gov/climatechange/
economics/economicanalys es.html ]
10 Other EPA models focus on forests and agriculture, non-CO2 gases, and climate
assessment.
11 For more information on the ADAGE model, see [http://www.rti.org/adage]
12 For more information on the IGEM model, see [http://post.economics.harvard.edu/faculty/
j orgenson/papers/papers.html ]
13 For more information on the IPM model, see [http://www.epa.gov/airmarkets/progsreg/
epa-ipm/index.html ]
14 EIA’s previous report was entitled Energy Market and Economic Impacts of S. 1766, the
Low Carbon Economy Act of 2007 (January 2008).

a macroeconomic forecasting model with extensive energy technology detail.15 In
addition to conducting a “core” analysis of S. 2191 using its preliminary 2008 Annual
Energy Outlook (AEO) Baseline, EIA also conducts some useful sensitivity analysis
that focuses on the upside risk of increased energy prices under S. 2191. However,
EIA did not update the sensitivity analysis it had previously conducted on S. 1766.
The core16 S. 2191 analysis and the updated S. 1766 analysis are designated
EIA/NEMS in this report.
Emissions Reductions
Figures 1 and 2 present greenhouse gas emissions under S. 1766 and S. 2191
as estimated by the models. For S. 2191, the spread in projected emissions
reductions is largely the result of two factors: (1) estimated emissions growth in the
10%-15% of the economy not covered under the bill, and (2) estimated use of
international allowances or offsets to meet emission reduction requirements. If a
covered entity submits an international allowance or offset for compliance purposes,
the entity can emit a comparable amount domestically. This latter point is most
evident in the ADAGE estimates. For S. 1766, the spread would also be in response
to these uncertainties, although the EPA cases and EIA’s updated analysis did not
include international credits. What the figures do not show is that the TAP (safety
valve) is increasingly used by covered entities after 2030, preventing the projected
emissions from achieving the targets specified under the bill. This result is discussed
more fully later.


15 For more on the NEMS model, see [http://www.eia.doe.gov/oiaf/aeo/overview/index.html]
16 The use of the word “core” should not imply that EIA believes it to be the most likely
scenario.

Figure 1. Total Estimated U.S. Greenhouse Gas Emissions
Under S. 1766 and S. 2191


12000
11000
q.)
100002 E
O
9000MT C
M
8000s (
ion
7000miss
6000HG E
G
5000
4000
2010 2020 2030 2040 2050
Reference CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/IGEM-REF E PA/IGEM-TEC H EIA/NEMS
S. 2191 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/IGEM-REF E PA/IGEM-TEC H EIA/NEMS
S. 1766 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/IGEM-REF E PA/IGEM-TEC H EIA/NEMS
Sources for Figures 1 and 2: U.S. Environmental Protection Agency (EPA), EPA Analysis of the
Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA
Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March
14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of
S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008).
Notes: Estimates beyond 2030 are speculative for three reasons: 1) beyond 2030, S. 1766 requires
additional congressional action to further tighten the emissions cap; 2) EIAs NEMS model does not
extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very
uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate
Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci.

Figure 2. Total Estimated U.S. Greenhouse Gas Emissions From
Each Model Under S. 1766 and S. 2191


12 000q.)
11000O2 E
10000 C
9 000MMT
8000ns (
7 000ssio
6 000mi
5000G E
4 000GH
2010 2020 2030 2040 2050
Reference CasesEPA/ADAGE-REFEPA/ADAGE-TECH
S. 2191 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
S. 1766 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
12 000q.)
11000O2 E
10000 C
9 000MMT
8000ns (
7 000ssio
6 000mi
5000HG E
4 000G
2010 2020 2030 2040 2050
Reference CasesEPA/IGEM-REFEPA/IGEM-TECH
S. 2191 CasesEPA/IGEM-REFEPA/IGEM-TECH
S. 1766 CasesEPA/IGEM-REFEPA/IGEM-TECH
12 000q.)
110002 E
10000 CO
9 000MMT
8000ns (
7 000ssio
6 000mi
5000HG E
4 000G
2010 2020 2030 2040 2050
Reference CasesEIA/NEMS
S. 2191 CasesEIA/NEMS
S. 1766 CasesEIA/NEMS

Impact on GDP Per Capita
Figures 3 and 4 present the estimated GDP per capita as estimated by each of
the scenarios for the reference case and under S. 1766 and S. 2191. Not surprisingly,
the GDP effects of both bills are absorbed by the uncertainty reflected in the
reference case assumptions. In the five scenarios, the increase in GDP between 2010
and 2030 ranges between 62% and 81% in the base cases. Under S. 2191, the more
stringent bill, the range is 62% to 80%. These figures indicate the models’
conclusions that the economy continues to grow under S. 1766 and S. 2191, albeit
at a somewhat slower rate than under their respective reference cases. The virtual
superimposition of the curves in Figures 3 and 4 shows how little variability there
is between the base cases and the model results.
Figure 3. Estimated GDP per Capita (2005$)
Under S. 1766 and S. 2191


$110, 000
$100, 000
$90, 000)
2005$
$80,000ita (
ap
$70,000er C
p
P
$60, 000GD
$50, 000
$40, 000
2010 2020 2030 2040 2050
Reference CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS
S. 2191 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS
S. 1766 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/IGEM-REF EPA/IGEM-TECH EIA/NEMS
Sources for Figures 3 and 4: U.S. Environmental Protection Agency (EPA), EPA Analysis of the
Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA
Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March
14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of
S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008).
Notes: Estimates beyond 2030 are speculative for three reasons: 1) Beyond 2030, S. 1766 requires
additional congressional action to further tighten the emissions cap; 2) EIAs NEMS model does not
extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very
uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate
Change: Costs and Benefits of S. 2191/S. 3036 by Larry Parker and Brent Yacobucci.

Figure 4. Estimated GDP per Capita (2005$) From Each
Scenario Under S. 1766 and S. 2191


$1 10 , 00 0
$1 00 , 00 05$)
$90,000 (200
$80,000pita
$70,000r Ca
$60,000P pe
$50,000GD
$40,000
20 10 20 20 2 03 0 2 04 0 20 50
Reference CasesEPA/ADAGE-REFEPA/ADAGE-TECH
S. 2191 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
S. 1766 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
$1 10 , 00 0
$1 00 , 00 0)
$90,000 (2005$
$80,00 0pita
$70,000r Ca
$60,000P pe
$50,00 0GD
$40,00 0
20 10 20 20 2 03 0 2 04 0 2 0 50
Reference CasesEPA/IGEM-REFEPA/IGEM-TECH
S. 2191 CasesEPA/IGEM-REFEPA/IGEM-TECH
S. 1766 CasesEPA/IGEM-REFEPA/IGEM-TECH
$1 10 , 00 0
$1 00 , 00 0$)
$90,00 02005
(
$80,00 0pita
$70,000er Ca
$60,000P p
$50,00 0GD
$40,00 0
2010 2020 2030 2040 2050
Reference CasesEIA/NEMS
S. 2191 CasesEIA/NEMS
S. 1766 CasesEIA/NEMS

To help sort this out further, Figures 5 and 6 present the relative percentage
reduction in GDP per capita for the two bills. With the exception of the IGEM
model, all projections for S. 1766 and S. 2191 showed a zero to 1% decrease in GDP
per capita through 2030. As discussed in the previous CRS report, IGEM’s higher17
estimates are the result of its structure and assumptions.
Figure 5. Percentage Change in GDP Per Capita
Under S. 1766 and S. 2191


0%
-1 %
-2 %p i t a
Ca
-3% per
D P
-4% in G
n ge
-5 %C h a
-6 %
-7 %
2 010 2020 203 0 2 040 2 050
S. 2191 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/ IGE M-REF EPA/ IGEM-TECH EIA/ NEMS
S. 1766 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EPA/ IGE M-REF EPA/ IGEM-TECH EIA/ NEMS
Sources for Figures 5 and 6: U.S. Environmental Protection Agency (EPA), EPA Analysis of the
Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA
Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March
14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of
S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008).
Notes: Estimates beyond 2030 are speculative for three reasons: 1) Beyond 2030, S. 1766 requires
additional congressional action to further tighten the emissions cap; 2) EIAs NEMS model does not
extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very
uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate
Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci.
17 For example, the IGEM model assumes that as prices increase, people tend to work less
and buy less, effectively multiplying the effect of any reduction in economic output. For a
more detailed discussion, see CRS Report RL34489, p. 35.

Figure 6. Percentage Change in GDP per Capita From Each
Scenario Under S. 1766 and S. 2191


0%
-1%i t a
-2%r Cap
e
-3%P p
D
-4% G
in
-5%n g e
a
-6%Ch
-7%
2010 2020 2030 2040 2050
S. 2191 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
S. 1766 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
0%
-1%t a
pi
-2%r Ca
e
-3%P p
D
-4%n G
i
-5%nge
a
-6%C h
-7%
2010 2020 2030 2040 2050
S. 2191 CasesEPA/IGEM-REFEPA/IGEM-TECH
S. 1766 CasesEPA/IGEM-REFEPA/IGEM-TECH
0%
-1%i t a
p
-2%r Ca
e
-3%P p
D
-4%n G
i
-5%n g e
a
-6%Ch
-7%
2010 2020 2030 2040 2050
S. 2191 CasesEIA/NEMS
S. 1766 CasesEIA/NEMS

Allowance Prices
Figures 7 and 8 present the estimated allowance prices for S. 1766 and S. 2191.
Generally, the figures indicate that S. 1766’s TAP price is the controlling price,
achieving the cost certainty for which the safety valve is designed. As expected, the
allowance prices for S. 2191 slowly spread in the out-years, as evident in the figures.
It should be noted that the EIA/NEMS case for S. 2191 mimics the extension of S.
2191 to 2050 by requiring the model to have a 5 billion allowance bank at the end of
2030. In the case of S. 1766, by 2030, the bank has been exhausted and covered
entities are making TAP payments in lieu of additional reductions.
Figure 7. Projected Allowance Prices Under S. 1766 and S. 2191


250
200
05$)
150e (20
ric
100wance P
lo
Al
50
0
2010 2020 2030 2040 2050
S. 2191 CasesEPA/ADAGE-REFEPA/ADAGE-TECH
EP A/ IGEM-R E F EP A/IGEM-TEC H EIA/NEMS
S. 1766 CasesEPA/All CasesEIA/NEMS
Sources for Figures 7 and 8: U.S. Environmental Protection Agency (EPA), EPA Analysis of the
Low Carbon Economy Act of 2007: S. 1766 in the 110th Congress (January 15, 2008); EPA, EPA
Analysis of the Lieberman-Warner Climate Security Act of 2008: S. 2191 in 110th Congress (March
14, 2008); U.S. Energy Information Administration (EIA), Energy Market and Economic Impacts of
S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April 2008).
Notes: Estimates beyond 2030 are speculative for three reasons: 1) Beyond 2030, S. 1766 requires
additional congressional action to further tighten the emissions cap; 2) EIAs NEMS model does not
extend beyond 2030; and 3) projecting economic and environmental effects long-term is a very
uncertain enterprise. For a discussion of those uncertainties, see CRS Report RL34489, Climate
Change: Costs and Benefits of S. 2191/S. 3036, by Larry Parker and Brent Yacobucci. For S. 1766,
in both EPA models and in all cases presented, the allowance price is equal to the TAP (safety
valve”) price for that year.

Auction Revenues
Both S. 2191 and S. 1766 would auction a significant portion of allowances,
although auction revenues would be significantly higher in S. 2191 for two reasons:
1) S. 2191 allocates more allowances for auction; and 2) S. 2191’s allowance prices
are higher. Starting in 2012, both bills would auction roughly a quarter of all
allowances. In later years, S. 2191 auctions a larger share of allowances than S.
1766: in 2030, S. 2191 would auction roughly 68% of allowances, while S. 1766
would auction 53%. Also, as shown in Figures 7 and 8, in all models, S. 2191 has
higher prices than S. 1766 (in some cases two to three times as high). Figure 9
shows estimated auction revenues based on allowance prices in the EPA/ADAGE-
TECH case. Using allowance prices from the other scenarios would show an even
wider discrepancy between auction revenues, as the EPA/ADAGE-TECH case
presents the lowest allowance price for S. 2191, while all of the models peg S. 1766
allowance prices at or near the TAP price.
Figure 8. Estimated Annual Revenues From Allowance
Auctions Under S. 1766 and S. 2191


$140,000
$120,000
5$)
$100,000n 200
illio
m
$80,000e (
evenu
$60,000n R
tio
uc
$40,000al A
nu
An
$20,000
$0
2012 2017 2022 2027
S. 2191S. 1766
Source: CRS Analysis of S. 2191 and S. 1766 using allowance price estimates from EPA/ADAGE-
TECH case.

CRS has chosen to present auction revenues only to 2030 for two reasons. First,
S. 1766 requires a new congressional vote (under special procedures) in order to
continue beyond 2030. Second, based on the analyses available, the TAP becomes
the dominant compliance strategy after about 2030, suggesting Congress may want
to reassess its level at that time, if additional reductions are considered warranted.
Analysis: Addressing the
Price versus Quantity Issue
S. 1766 and S. 2191 represent different answers to the choice between
controlling the price and the quantity of emissions under a market-based control
strategy. In general, market-based mechanisms to reduce greenhouse gas emissions
focus on specifying either the acceptable emissions level (quantity) or compliance
costs (price), allowing the marketplace to determine the economically efficient
solution for the other variable. If one is more concerned about the possible economic
cost (price) of the program, then use of a safety valve to limit costs could appear to
some more appropriate, even through it introduces some uncertainty about the
amount of reduction achieved (quantity). In contrast, if one is more concerned about
achieving a specific emission reduction level (quantity), with costs handled
efficiently, but not capped, a tradeable permit program without a safety valve may be
viewed as more appropriate. In the case of these alternatives, S. 2191 leans toward
the quantity (total emissions) side of the equation; S. 1766 leans toward the price side
of the equation.
Uncertainty in Emissions Reductions
The projected emission reductions under S. 2191 are more certain than under
S. 1766. There are two key sources of uncertainty for S. 2191: (1) the precise number
of covered entities that must meet the reduction requirements and the future
emissions growth from non-covered entities, and (2) the availability and use of
international allowances that meet the bill’s compliance requirement but do not
reduce domestic emissions. S. 2191 is estimated to cover about 85% of the country’s
greenhouse gas emissions. In addition, the analyses presented here assume that
international credits that meet S. 2191’s eligibility requirements would be available
at reasonable prices. In other analyses of S. 2191, this assumption is disputed.
S. 1766 has these uncertainties, plus an additional one in the form of the safety
valve. As indicated in the Results section, the cases reviewed here generally assume
that the allowance price equals the safety valve price or is very close. This results in
banking in the early years of the program and use of that bank later. As the program
approaches 2030, the bank is exhausted and covered entities begin making TAP
payments. As illustrated in Figure 10, the result is an actual emissions level that is
higher than the level targeted by the bill.18


18 In early years, as the bank is built up, both annual emissions and cumulative emissions are
below the targets in the bill. As the bank is used up, annual emissions exceed the targets, and
(continued...)

Because the TAP price becomes the allowance price over time in all cases under
S. 1766, projected emissions exceed the bill’s target once the TAP is triggered. This
situation reveals the emissions uncertainty that a safety value introduces. The TAP
price is a compliance strategy independent of the cap-and-trade compliance strategy.
Thus, the actual emissions reduction under S. 1766 depends on the interplay between
allowance prices and TAP prices. For example, EPA/IGEM-REF sensitivity analysis
indicates unlimited availability of international credits would keep allowance prices
below the TAP price.19 EIA/NEMS does not project beyond 2030; however, none
of the sensitivity analyses from EIA’s previous analysis resulted in an allowance
price below the TAP price in 2030. The result could change if the sensitivity analyses
were updated to the 2008 Annual Energy Outlook (AEO) baseline (with lower
projected baseline emissions and thus, presumably, lower compliance costs).
Figure 9. EPA/ADAGE Analysis of S. 1766


10, 000
)
9, 000q .
8,000O2 EUsing Bank
C
7,000Paying TAP
6,000ns (MMT
5, 000i ssi o
Ba n k i n g
4,000 Em
G
3, 000G H
2, 000
2012 2017 2022 2027 2032 2037 2042 2047
Reference CaseEmissions TargetActual Covered Emissions
Source: CRS Analysis of data from EPA/ADAGE-REF S. 1766 case.
Uncertainty in Cost Estimates
The projected cost effects under S. 2191 are more uncertain than under S. 1766.
A major source of uncertainty for S. 2191 is future business-as-usual growth in
greenhouse gas emissions by covered entities. Because S. 2191 establishes a strict
cap on greenhouse gas emissions from covered entities based on limits specified in
the bill, any increased emissions resulting from continuing economic growth would
have to be reduced or offset. The more robust the economic growth, the greater
18 (...continued)
cumulative emissions approach and eventually equal the bill target. When the TAP is
included, once the bank is exhausted (and cumulative emissions are equal to the target)
annual and cumulative emissions exceed the targets in all future years.
19 However, S. 1766 allows covered entities to meet only 10% of allowance requirements
through international offsets.

potential for higher emissions that would have to be offset to maintain the cap. In
general, greater emissions reduction leads to higher costs. If economic growth is less
robust, fewer reductions would be necessary and costs would be less.20
S. 2191 cost estimates are affected by several other uncertainties. As noted
earlier, the span of estimated allowance prices under S. 2191 is significant. The
differing estimates are based on varied assumptions about the availability of the
following: (1) cost-effective energy efficiency improvements, (2) cost-effective non-
CO2 greenhouse gas reductions and other offsets, (3) cost-effective carbon capture
and storage technology (CCS) and other low-carbon emitting technology, and (4)
cost-effective international allowances and/or credits. With a program designed to
achieve a least-cost solution through a market-based allowance trading system,
restricting the availability of options — be they emissions reduction opportunities
(i.e., offsets) or new technology — increases projected costs. Hence, the incentives
and funding for new technology and the availability of offsets and credits under S.

2191 are critical to its long-term success.


S. 1766 cost estimates are not as sensitive to the factors identified above. Partly
this is by design, and partly this is because S. 1766 targets less emission reductions
than S. 2191. The reduction targets under S. 1766 are not as stringent as the
emissions cap under S. 2191, as discussed earlier. Fewer emissions reductions
required translates into lower costs. This is reinforced by the TAP price, which is
projected to become the dominant compliance strategy in the long-term.
The effect of lower emission reduction targets is illustrated by the impact of the
two bills on projected 2030 electric generation, as illustrated in Table 2. As
discussed in CRS Report RL34489, in some ways, the interplay between nuclear
power, renewables, and coal-fired capacity with CCS is a proxy for the need for a21
low-carbon source of electric generation in the mid- to long-term. As indicated, a
considerable amount of low-carbon generation will have to be built under S. 2191 in
order to meet the reduction requirement. The amount of capacity constructed depends
on the models’ base case assumptions about future supply and demand and need for
capacity replacement/retirement under S. 2191, along with the degree of consumer
response to rising prices and incentives contained in S. 2191. The amount necessary
under S. 1766 is substantially less as fewer existing facilities are retired or replaced.
For example, EPA/IPM estimates that for 2025, about 193 gigawatts (GW) of oil-
fired, natural gas-fired, and coal-fired capacity would be retired under S. 2191; it
estimates only 95 GW of such capacity would be retired under S. 1766.


20 For more information, see CRS Report RL33970, Greenhouse Gas Emission Drivers:
Population, Economic Development and Growth, and Energy Use, by John Blodgett and
Larry Parker.
21 CRS Report RL34489, Climate Change: Costs and Benefits of S. 2191/S. 3036, by Larry
Parker and Brent Yacobucci, p. 47.

Table 2. Assumptions about the Availability of Current Electric
Generating Technologies and CCS in 2030
NuclearRenewableNaturalCoal with
Pow er Pow er Ga s - f i r e d CCS
S. 1766
EPA/ADAGE-REFabout 65about 58 GWlittleabout 39 GW
GW (built)(built)(built)
EPA/ADAGE-about 65about 59 GWlittleabout 33 GW
TECHGW (built)(built)(built)
EPA/IPM (2025)44 GW11 GW6 GW99 GW (built)
(limit and(built)(built)
built)
EIA/NEMS57 GW45 GW76 GW232 GW (built)
(built)(built)(built)(plus 19 GW
no CCS)
S. 2191
EPA/ADAGE-REFabout 71about 58 GWlittle165 GW (built)
GW (built)(built)
EPA/ADAGE-about 70about 61 GWlittle89 GW (built)
TECHGW (built)(built)
EPA/IPM (2025)44 GW61 GW6 GW80 GW (built)
(limit and(built)(built)
built)
EIA/NEMS264 GW112 GW77 GW64 GW (built)
(built) (built) (built)
AEO 2007 baseline12.5 GW12.4 GW88.2 GW145 GW (no
CCS)
Source: EPA cases: “Data Annex available on the EPA website at
[http://www.epa.gov/climatechange/economics/economicanalyses.html] EIA/NEMS: EIA, Energy
Market and Economic Impacts of S. 2191, the Lieberman-Warner Climate Security Act of 2007 (April
2008).
Note:Limit” is the maximum amount the model assumes can be built — it is not necessarily the
amount the model determined would be built. “Built” is the amount the model determined needed to
be built. “About is an estimate by CRS of the additional capacity necessary for the increased
electricity production projected by the model between 2010 and 2030 under S. 1766 and S. 2191 in
the absence of capacity data being provided. The estimates are calculated assuming an 80% capacity
factor for biomass, 90% for nuclear power and coal, 48% for renewables, and 85% for natural gas.



To put these numbers into historical context, from 1963 to 1985, 78 GW of
nuclear power were ordered, constructed, and began operation.22 For the 19-year
period of 1966 through 1984, the country added 464 GW of generating capacity,
including 210 GW of coal-fired capacity, 38 GW of hydropower, 27 GW of natural
gas capacity (steam technology), 46 GW of oil-fired capacity, and 54 GW of peaking
capacity to improve system reliability after the 1965 blackout. In addition to new
additions, between 1965 and 1972, about 400 coal-fired generating units were
converted to oil to meet environmental requirements. After the 1973 oil embargo,
this trend was reversed, with 11 GW of capacity converted back to coal by 1983.23
For a more recent example, from 2001 through 2005, the United States added about

180 GW of new capacity — almost all natural gas-fired.24


Like S. 2191, S. 1766’s projected cost is affected by the assumed availability of
cost-effective control measures, such as those noted above — energy efficiency
improvements, non-CO2 greenhouse gas reductions and other offsets, carbon capture
and storage technology and other low-carbon emitting technology, and cost-effective
international credits. However, S. 1766 does not represent as much of a shift in
generation supply as does S. 2191. This is evident from the projected impact of S.
1766 on coal production for electricity generation, where the model results indicate
stable production under S. 1766; under S. 2191, future coal production is heavily
dependent on the models’ assumptions about the availability and cost-effectiveness
of CCS technology compared with alternatives, such as nuclear power.
Combined with a more modest reduction requirement, S. 1766’s safety valve
caps the upside risk of costs and ensures its costs would be lower than S. 2191.
Although there are uncertainties in S. 1766’s potential costs, its safety valve puts a
strict upper limit on compliance cost — $12 a ton (nominal 2012$), increasing 5%
annually in real terms. Besides putting an upper bound on cost, S. 1766’s safety
valve narrows the band of potential costs substantially; the remaining cost uncertainty
is only with respect to the lower bound of costs.
Price versus Quantity: The Safety Valve
The purpose of a safety valve price is to bound the costs of any climate change
control program (price) at the expense of reductions achieved (quantity).25 In general,
market-based mechanisms to reduce greenhouse gas emissions focus on specifying
either the acceptable emissions level (quantity), or compliance costs (price), and
allowing the marketplace to determine the economically efficient solution for the
other variable. For example, a tradeable permit program sets the amount of
emissions allowable under the program (i.e., the number of permits allocated caps


22 Compiled from EIA’s Reactor Status List available from EIA’s website.
23 Energy Information Administration, Fuel Choice in Steam Electric Generation: Historical
Overview, DOE/EIA-0472 (August 1985), pp. 5 and 7.
24 Environmental Protection Agency, EPA Analysis of the Low Carbon Economy Act of

2007: S. 1766 in the 110th Congress (January 15, 2008), p. 49.


25 See CRS Report RL33799, Climate Change: Design Approaches for a Greenhouse Gas
Reduction Program, by Larry Parker.

allowable emissions), while letting the marketplace determine what each permit will
be worth. Likewise, a carbon tax (or the safety valve contained in S. 1766) sets the
maximum unit cost (per ton of CO2) that one should pay for reducing emissions,
while the marketplace determines how much actually gets reduced. In one sense,
preference for a pure tradeable permit system or inclusion of a safety valve depends
on how one views the uncertainty of costs involved and benefits to be received.26
For those confident that achieving a specific level of greenhouse gas reduction
will yield significant benefits — enough so that even the potentially very high end
of the marginal cost curve is not a concern — a pure tradeable permit program may
be most appropriate. Greenhouse gas emissions would be reduced to a specific level,
and in the case of a tradeable permit program, the cost involved would be handled
efficiently, though not controlled at a specific cost level. This efficiency occurs
because through the trading of permits, emission reduction efforts concentrate at
sources at which controls can be achieved at least cost.
However, if one is more concerned about the potential downside risk of
substantial control costs to the economy than of the benefits of a specific level of
reduction, then including a safety valve may be most appropriate. In this approach,
the level of the safety valve effectively caps the marginal cost of control that affected
entities would pay under the reduction scheme, but the precise level of greenhouse
gas reductions achieved is less certain. Emitters of greenhouse gases would spend
money controlling greenhouse gas emissions up to the level of the safety valve.
However, since the marginal cost of control among millions of emitters is not well
known, the overall emissions reductions for a given safety valve level on greenhouse
gas emissions cannot be accurately forecast. In essence, the safety valve contained
in S. 1766 could be seen as a contingent carbon tax.
Conclusion
The two proposals — S. 1766 and S. 2191 — would establish market-based
systems to limit emissions of greenhouse gases. However, the proposals differ in
how those systems would work. S. 2191 would establish an absolute cap on
emissions from covered entities, and would allow entities to trade emissions under
that cap. S. 1766 would establish emissions targets on covered entities and allow
those entities to meet those targets, either through trading program or by making a
safety valve payment in lieu of reducing emissions. Under both proposals, short-
term U.S. emissions would likely be below a business-as-usual scenario, although
reductions under S. 2191 are guaranteed and projected to be larger, particularly over
the long-term. In contrast, the cost of S. 1766 is likely to be less and more predictable
than S. 2191.
Hence, a major policy question is whether one is more concerned about the
possible economic cost of the program and therefore willing to accept some


26 For another discussion of this trade-off, see EPA, Tools of the Trade: A Guide to
Designing and Operating a Cap and Trade Program for Pollution Control (June 2003), p.

2-5.



uncertainty about the amount of reduction received (i.e., a safety valve); or one is
more concerned about achieving a specific emission reduction level with costs
handled efficiently, but not capped (i.e., pure tradeable permits). S. 2191 leans
toward the quantity (total emissions) side of the equation; S. 1766 leans toward the
price side of the equation.