understanding model estimates of the economic...

Understanding Model Estimates of the Economic Costs of Climate Policy

EPRI Modeling WorkshopMay 8, 2008

Tom WilsonSenior Program Manager

2© 2007 Electric Power Research Institute, Inc. All rights reserved.

U.S. Climate Policy Proposals Focused on Cutting Emissions Significantly Below Historic Levels


Elements of Lieberman-Warner Climate Security Act of 2007

• Economy-wide Coverage – about 87% of 2005 emissions– Downstream on coal (units > 5,000 tons/yr)– Upstream on oil, gas, F-gases, N2O

• Targets for Covered Sectors (in MtCO2e)2012: 5,7752020: 4,9242030: 3,8602050: 1,732 (~ 70% below 2005 level)

• Cap-and-trade system– 22.5% auction phasing to 69.5% by 2030– Permits/auction revenues designated for a wide array of uses

• Provisions for limited use of offsets• Cost containment via a Carbon Market Efficiency Board


And the Cost of Lieberman-Warner 2007 is ….(Draft)

0

50

100

150

200

250

300

350

400

450

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

$/to

n C

O2e

CRA, banking

MIT, 15% offsets, CCS subs

MIT, no offsets, CCS subs

MIT, 15% offsets, no CCS subs

MIT, no offsets, no CCS subs

EPA, ADAGE core

EPA, ADAGE low intl

EPA, ADAGE constrained N&B

EPA, ADAGE constrained N,B,CCS

EPA, ADAGE constrained N,B,CCS,NG cartel

EPA, ADAGE alt ref

EPA, IGEM core

EPA, IGEM unlim

EPA, IGEM no offset

EPA, IGEM alt ref

CATF

ACCF, low

ACCF, high

EIA, core

EIA, high cost

EIA, lim alt

EIA, no intl offsets

EIA, lim/no intl


Topics

• A Digression – A Perspective on Using Models• Models Here Today• Different Assumptions Often Make the Biggest Differences• Concluding Thoughts


Part I:What Are Models Good For?

“It’s hard to make predictions, especially about the future”

-Yogi BerraFamous American philosopher (and baseball player)


The Challenge of Modeling (Thanks to Jae Edmonds)

“I’m amused year after year by your high emissions scenarios – and happy to see others now chuckle at them too!”

– Note Jae got from a friend in 1983

Examine Jae and John’s Forecasts of 2000 CO2Emissions + Oil Prices

… Made in 1982


Projected and Actual 2000 Global CO2Emissions

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1975 1980 1985 1990 1995 2000

Mill

ions

of M

etric

Ton

s of

Car

bon

Per Y

ear

ForecastCDIAC Historical Global CO2 EmissionsExpon. (CDIAC Historical Global CO2 Emissions)

Source: Edmonds and Reilly -- Global Energy Production And Use To The Year 2050. Institute for Energy Analysis, Oak Ridge Universities, 1982


Projected and Actual 2000 World Oil Prices

$0.00$10.00$20.00$30.00$40.00$50.00$60.00$70.00$80.00$90.00

$100.00

1975 1980 1985 1990 1995 2000

Cru

de O

il D

omes

tic F

irst P

urch

ase

Rea

l Pric

e 96

$$/

barr

el

Actual PriceER 1982 Scenario

Conventional Wisdom

Source: Edmonds and Reilly -- Global Energy Production And Use To The Year 2050. Institute for Energy Analysis, Oak Ridge Universities, 1982


The Magic of Countervailing Errors –Geographic

Year 2000 Global Primary Energy

0

20

40

60

80

100

120

ER 2000 scenario Est. 2000 historical

Exa

joul

es p

er Y

ear

US

Canada & Western Europe

EE&FSU

China, South & East Asis,& Africa

Japan, Australia & NZ

Latin America

China, South & East Asia,& Africa

Exa

joul

espe

r Yea

r


The Magic of Countervailing Errors – Technology Choice

2000 Global Energy Consumption by Fuel (ER

Scenario)

32%

17%

31%

12%

8%

OilGasCoalNuclearHydro

`

2000 Global Energy Consumption by Fuel (EIA

Historical)

39%

23%

24%

6%

8%

OilGasCoalNuclearHydro


Insights from This Example

• Important stuff happens, especially over 10, 20, or 40 year time horizons– Models can provide very useful insights … but are less

useful for providing “predictions”– Some things are easier to “predict” than others

• What could happen to change “predictions” dramatically?– Extended recession?– Rebound of the US$?– Technology accident?– Technology breakthrough?

• What modeling insights seem robust?


Part II: Modelers and Models


Models to Be Discussed Today

• EIA NEMS=National Energy Modeling System• CATF NEMS• ACCF NEMS

• EPA ADAGE = Applied Dynamic Analysis of the Global EconomyIGEM = Intertemporal General Equilibrium ModelIPM = Integrated Planning ModelOthers

• MIT EPPA = Emissions Prediction and Policy Analysis Model• CRAI MRN-NEEM = Multi-Region National Model +

North American Electricity and Environment Model


Selected Model Characteristics(Draft)

Geographic Time ElectricModel/Modeling Effort Scope Sectors Horizon Foresight Sector Detail–––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––EIA/CATF/ACCF

• NEMS US-regional All, Process 2030 Recursive Plant type

EPA

• ADAGE Global(?) All, Trade1 2050 Perfect Production function

• IGEM US All, Trade1 2050 Perfect Production function

• IPM US-regional Electric 2025 Perfect Plant type/unit

MIT-EPPA Global All, Trade1 2050 Recursive Production function

CRAI- MRN-NEEM U.S.- regional All, Trade1 2050 Perfect Plant type/unit

1Based on IMPLAN state-level, SIC code trade data with energy trade adjusted to match EIA physical trade data and reference scenario calibrated to EIA-AEO projections.


Part IIIDifferent Assumptions Often Make the Biggest Differences


Recall the Cost of Lieberman-Warner 2007 is ….(Draft)

0

50

100

150

200

250

300

350

400

450

2010 2015 2020 2025 2030 2035 2040 2045 2050 2055

$/to

n C

O2e

CRA, banking

MIT, 15% offsets, CCS subsMIT, no offsets, CCS subs

MIT, 15% offsets, no CCS subsMIT, no offsets, no CCS subs

EPA, ADAGE core

EPA, ADAGE low intlEPA, ADAGE constrained N&B

EPA, ADAGE constrained N,B,CCSEPA, ADAGE constrained N,B,CCS,NG cartel

EPA, ADAGE alt ref

EPA, IGEM coreEPA, IGEM unlim

EPA, IGEM no offsetEPA, IGEM alt ref

CATF

ACCF, lowACCF, high

EIA, coreEIA, high cost

EIA, lim alt

EIA, no intl offsetsEIA, lim/no intl


Cost Estimates from Application of NEMS by EIA, CATF, and NAM/ACCF

0

50

100

150

200

250

300

2010 2015 2020 2025 2030 2035

$/to

n C

O2e

CATFACCF, low costACCF, high costEIA, coreEIA, high costEIA, limited alternativesEIA, no intl offsetsEIA, limited/no intl offsets


Key Assumptions IncludeUncertainties and Policy Levers

I will talk about three uncertainties• Reference Case• Technology Cost• Non-economic limits on technology deployment

Later speakers will address• Price Sensitivity• Other Energy Policies• Offsets• Technology Policies• Etc


Policy Cost Depends on the Reference Case…Reference Cases Change Over Time

4000

4500

5000

5500

6000

6500

7000

7500

8000

8500

1985 1990 1995 2000 2005 2010 2015 2020 2025 2030

CO2-

e (M

MT)

AEO 1998

AEO 1999

AEO 2000

AEO 2001

AEO 2002

AEO 2003

AEO 2004

AEO 2005

AEO 2006

AEO 2007

AEO 2008

Actual

EIA Annual Energy Outlook Projected CO2 Emissions (AEO 1998 – AEO 2008)


Energy Technology Costs Are Highly Uncertain:All Nuclear and CCS Costs are Engineering Estimates

Pleasant Prairie Chilled Ammonia, Post-Combustion Capture Demo

Late 2007 photo, courtesy of Alstom


Energy Technology Costs Are Highly Uncertain:Are Today’s Costs a New “Plateau” or a “Bubble”

100

110

120

130

140

150

160

170

2000 2001 2002 2003 2004 2005 2006 2007 2008

Mid-Year

Inde

x Va

lue

GDP Deflator

EIA Generation Data –PC & IGCC

Chemical Engineering Plant Cost Index -CEPCI

Marshall & Swift Equipment Cost Index

Handy-Whitman –Electricity Utility Construction

RS Means Construction Cost Index

IHS-CERA Downstream Construction Cost Index -DCCI

Nelson Farrar Refinery Construction Inflation Index

Construction Cost Escalation Continues

(Comparison of Several Cost Indices, Mid-2000 = 100)


Reported and Guesstimated Technology Cost Estimates for Analyses you Will See Today

Overnight Capital Cost (2008$/kW)

0500

100015002000250030003500400045005000

Nuclear Coal CCS

$/kW

EIA

CATF

ACCF

EPA

MIT

CRAI

Caveats: Converted to 2008$

CATF= AEO2007, EPA/IPM= AEO2005, CRAI= updated AEO2007

Some costs decline rapidly over time, e.g., CRAI Coal CCS to $3203/kW by 2050


Technology Deployment is Even More Uncertain

PublicPerception

Cost

Leakage

Regulation

LegalLiability


Cumulative Capacity Additions of Coal CCS, Nuclear and Renewables (preliminary)

Cumulative Capacity Additions by 2030

0

100

200

300

400

500

600

CRA EPAIPM

CATF ACCF,low

LIMIT

ACCF,highLIMIT

EIA,core

EIA,highcost

EIA,lim alt

EIA, nointl

offsets

EIA,lim/no

intl

GW

RenewNuclearCoal CCS


Concluding Thoughts

• US climate policy analyses likely to be released frequently over the next few years

• All of the models here are credible• None are great predictors; but all can provide important

insights about policy• Differences in cost estimates appear to represent true

uncertainties (e.g., technology deployment) and effects of policy choices (e.g., use of offsets) more than differences in models

I would be more worried and feel less-informed if there were little diversity in the cost estimates


Questions?

See EPRI Journal, Summer 2007

Contacts

Palo Alto –Tom Wilson – [email protected]

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