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GCC [Global Climate Change] Sectors Paper
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20
5
1
1
Date: July 3, 1997
To:
Judi Greenwald
White House Climate Change Task Force
From: Jeffrey Frankel, CEA
Tom Rhoads, CEA
RE:
CEA Comments on Climate Change Sectors Summary Paper
CEA has the following concerns and editorial comments for Jeffrey Hunker's paper on the
sectoral implications of climate change policy prepared for the Assistant Secretaries
Group.
Generally: Tables 1-6.
AEO97 does not provide actual data for emissions and energy consumption for 1997. The
figures reported in the current document as 1997 data are merely estimates based on
projections in AEO97 for emissions and energy consumption growth and should be
reported as such.
Page 1: Paragraph beginning "Total U.S. greenhouse gas emissions. "
The draft U.S. Climate Action Report (U.S. CAR) indicates that U.S. GHG emissions in
1995 were 1,559 MMTCe with gross emissions of 1,676 MMTCe. The current document
reports figures inconsistent with those from U.S. CAR (1,557 MMTCe and 1,674
MMTCe, respectively). Consistent reporting of data across documents is required.
Page 2: Table 1.
The heading of the third column should read:
"Percentage of Total 1995 1997 Emissions"
Page 4: Table 4.
The title of Table 4 should read as follows:
"Total 1997 and 2015 2010 Building Energy Consumption By End-Use (in Quads)"
Page 4: Paragraph beginning "Currently, numerous opportunities exist "
"By tightening the building shell consumers can experience substantial monetary gains
through greater savings as a result of lower in their monthly utility bills."
Page 5: Barriers to Adoption section
"Despite the proven cost effectiveness of these and other energy efficiency technologies, it
is clear that they these technologies are not widely always adopted by consumers. This is
perhaps due to a number of institutional, organizational, and other barriers. The existence
or availability of a financially attractive technology sometimes does not by itself. "
Page 7: Economic Modeling Results for the Industrial Sector section
The IPCC Working Group III report details many mitigation cost studies that estimate
economic losses due to reducing CO₂ emissions. Admittedly, there is no consensus in the
economic literature regarding the effects of reducing CO₂ emissions. However, the real
possibility that a mitigation strategy will cause economic losses is an issue that must be
stressed in the current document. As it stands, the current document provides a
significantly one-sided description of the possible positive effects of reducing CO₂
emissions. Including greater detail on the available literature that estimates economic
losses from reducing CO₂ emissions will provide a more accurate picture of the current
state of economic research.
Page 8: Paragraph beginning "A second and central concern..
"
producers might lose market share to competitors from non-Annex I countries (those
countries not characterized by industrialized economies) under a climate treaty that affects
Annex I but not Annex II non-Annex I countries."
Page 19: Paragraph beginning "As state-by-state restructuring takes place..."
"Cost reduction will is expected to continue to occur through R&D advances... "
Page 20: Table 6.
The heading of the third column should read:
"Percentage of Total 1995 1997 Emissions"
will seul
Date: July 3, 1997
To:
Alicia Munnell
Jeff Frankel
From: Tom Rhoads
RE:
CEA Comments on Climate Change Sectors Summary Paper
Jeffrey Hunker wrote a paper on the sectoral implications of climate change policy for the
Assistant Secretaries Group. I have noted some concerns and various editorial comments.
I can write a memo in your names to the White House Climate Change Task Force that
provides these comments and any others that you may have. Dirk Forrister has indicated
that the deadline for comments is today.
Generally: Tables 1-6.
AEO97 does not provide actual data for emissions and energy consumption for 1997.
The figures reported in the current document as 1997 data are merely estimates based on
projections in AEO97 for emissions and energy consumption growth and should be
reported as such.
Page 1: Paragraph beginning "Total U.S. greenhouse gas emissions...'
The draft U.S. Climate Action Report (U.S. CAR) indicates that U.S. GHG emissions in
1995 were 1,559 MMTCe with gross emissions of 1,676 MMTCe. The current document
reports figures inconsistent with those from U.S. CAR (1,557 MMTCe and 1,674
MMTCe, respectively). Consistent reporting of data across documents is required.
Page 2: Table 1.
The heading of the third column should read:
"Percentage of Total 1995 1997 Emissions"
Page 4: Table 4.
The title of Table 4 should read as follows:
"Total 1997 and 2015 2010 Building Energy Consumption By End-Use (in Quads)"
Page 4: Paragraph beginning "Currently, numerous opportunities exist..."
"By tightening the building shell consumers can experience substantial monetary gains
through greater savings as a result of lower in their monthly utility bills."
Page 5: Barriers to Adoption section
"Despite the proven cost effectiveness of these and other energy efficiency technologies,
it is clear that they these technologies are not widely always adopted by consumers. This
is perhaps due to a number of institutional, organizational, and other barriers. The
existence or availability of a financially attractive technology sometimes does not by
itself.
Page 7: Economic Modeling Results for the Industrial Sector section
The IPCC Working Group III report details many mitigation cost studies that estimate
economic losses due to reducing CO₂ emissions. Admittedly, there is no consensus in the
economic literature regarding the effects of reducing CO₂ emissions. However, the real
possibility that a mitigation strategy will cause economic losses is an issue that must be
stressed in the current document. As it stands, the current document provides a one-sided
description of the possible positive effects of reducing CO₂ emissions. Including greater
detail on the available literature that estimates economic losses from reducing CO₂
emissions will provide a more accurate picture of the current state of economic research.
Page 8: Paragraph beginning "A second and central concern..."
" producers might lose market share to competitors from non-Annex I countries (those
countries not characterized by industrialized economies) under a climate treaty that
affects Annex I but not Annex 4 non-Annex I countries."
Page 19: Paragraph beginning "As state-by-state restructuring takes place..."
"Cost reduction will is expected to continue to occur through R&D advances "
Page 20: Table 6.
The heading of the third column should read:
"Percentage of Total 1995 1997 Emissions"
JUN-30-97 MON 04:50 PM
FAX NO.
P. 01/20
Climate
CC; TAF Am
55
White House Climate Change Task Force
MM
734 Jackson Place. N.W.
Washington, DC 20503
TR
MEMORANDUM TO: ASSISTANT SECRETARIES GROUP
FROM:
Dirk Forrister, Chair
White House Climate Change Task Force
SUBJECT:
ATTACHED SECTORS SUMMARY PAPER
As you may recall, the Assistant Secretaries Group charged Jeffrey Hunker to write a paper on
the sectoral implications of climate change policy. The attached paper is a much shorter version
of the Sectors paper we received H month ago. My thanks to Jeff Hunker, Skip Laitner, and the
many staff from all of the agencies who have worked on this paper over the past six weeks.
We would appreciate your review of the new draft. Please provide comments to Judi Greenwald
of our Task Force by Thursday. July 3. Our fax number is 343-1163. Judi's new e-mail address
is [email protected] My plan is to incorporate your comments and forward the paper
to Katie McGinty and Dan Tarullo for their consideration the following week. This paper will be
used as part of the discussions with individual industry and labor representatives on how we
minimize the impacts and maximize the opportunities of climate change mitigation policies. Thus
your immediate attention would be much appreciated.
OPTIONAL FORM 99 (7-90) please get this be sure tax. they Their both KS recipients
FAX TRANSMITTAL
This fax will be
To Alicia nunnell GAL
, of pages 30
transmitted iN 2 parts
Dept./Agency JeFF Frankel
From
CEA
Phone #
VIRGINIA GORSEVSKI
COVER page
P.16
Fax # 395-6958
233-9796
Fax
#
233-9583
P. 17 25.
NSN 7540-01-317-7360
5099-101
GENERAL SERVICES ADMINISTRATION
Please be sure to
combine parts one and
two.
202 343-1060
Fax 202 333-1162
JUN-30-97 MON 04:50 PM
FAX NO.
P. 02/20
SECTOR EMISSIONS AND OPPORTUNITIES FOR MITIGATION
UNDER A CLIMATE CHANGE MITIGATION STRATEGY
A Pre-Decisional Draft
Do Not Cite or Quote
June 30, 1997
:
JUN-30-97 MON 04:50 PM
FAX NO.
P. 03/20
TABLE OF CONTENTS
Introduction
I
Sources of U.S. Greenhouse Gas Emissions
1
U.S. Carbon Emissions by Fuel
I
U.S. Carbon Emissions by End-Use Sector
2
Energy End-Use Sectors
to
The Buildings Sector
2
Factors Shaping Industry Response
4
Technology Options
4
Barriers to Adoption
5
The Industrial Sector
5
Trends in the Industrial Sector
6
Economic Modeling Results for the Industrial Sector
7
Factors Shaping Industry Response
=
Aluminum
9
Petroleum Refining
9
Steel
10
Chemicals
11
Pulp and Paper
11
Cement
12
High-Growth Industries
12
Non-Energy Minerals Industry
13
Construction
13
Motor Vehicle and Related Industrics
13
Barriers to Adoption
14
The Transportation Sector
15
Trends in the Transportation Sector
15
Contribution to Greenhouse Gas Emissions
15
Factors Shaping Industry Response
15
Technology Trends and Options
16
Agriculture
17
Contribution to Greenhouse Gas Emissions
17
Factors Shaping Industry Response
17
Technology Trends and Options
18
Energy Supply Sectors
18
Electric Power Generation
18
Contribution to Greenhouse Gas Emissions
19
Factors Shaping Industry Response
20
Restructuring
20
Distributed Generation
21
Technology Trends and Options
21
Petroleum
22
Contribution to Greenhouse Gases
22
Factors Shaping Industry Response
22
Coal
22
Contribution to Greenhouse Gas Emissions
22
Factors Shaping Industry Response
22
JUN-30-97 MON 04:51 PM
FAX NO.
P. 04/20
Nuclear Energy
23
Factors Shaping Industry Response
23
Natural Gas
24
Contribution to Greenhouse Gas Emissions
24
Factors Shaping Industry Response
24
Conclusion
25
JUN-30-97 MON 04:51 PM
FAX NO.
P. 05/20
Introduction
In a June 27, 1997 speech to a United Nations environmental conference, President Clinton
acknowledged that "concentrations of greenhouse gases in the atmosphere are at their highest levels in
more than 200,000 years and climbing sharply." If that trend does not change, the President noted
that the resulting climate changes would "disrupt agriculture, cause severe droughts and floods and
the spread of infectious diseases." In underscoring the fact that no nation can escape the danger of
climate change, the President stated that: "We must create new technologies and develop new
strategies like emissions trading that will both curtail pollution and support continued economic
growth. We owe that in the developed world to ourselves, and equally to those in the developing
nations. Many of the technologies that will help us to mect the new air quality standards in America
can also help address climate change. This is a challenge we must undertake immediately."
Drawing on the guidance of the President's statement to the United Nations, it is clear that any future
climate change policies adopted by the United States should be anchored by a technology-based
investment strategy. Such a strategy will focus on the diffusion of cost-effective technologies that are
now available but underutilized, even as we continue efforts to develop new technologies. Yet, the
sectors of the economy vary widely in how they produce goods and services. For that reason, the
impact of future climate policies - as well as the technologics available to respond those policies -
will also vary widely. This is true for both the sectors as a whole and for the individual firms within
those sectors. For policy makers and for business and labor leaders, it is important to understand
these different impacts and opportunities.
Sources of U.S. Greenhouse Gas Emissions
Greenhouse gases include carbon dioxide (CO₂), methane (CH,), nitrous oxide (N₂O), and ozone (Q).
Chlorofluorocarbons (CFCs) and partially halogenated fluorocarbons (HCFCs), a family of human-
made compounds, their substitutes hydrofluorocarbons (HFCs), and other compounds such as
perfluorinated carbons (PFCs), are also greenhouse gases. Of these gases, CO2 accounts for the
largest share by far of all anthropogenic emissions and Is primarily the result of fossil fuel combustion
for energy use. The greenhouse gas emissions are typically measured in "carbon equivalents,"
according to their respective "global warming potential."
Total U.S. greenhouse gas emissions in 1995 were 1,557 MMTCe (million metric tons of carbon
equivalent), with gross emissions of 1,674 MMTCc offset by 117 MMTCe of carbon sequestered by
the nation's forests. Since 1990 energy-related carbon emissions have increased by about 10 percent
to 1,467 MMT in 1997. They are expected to grow 1.2 percent annually, reaching 1,722 MMT by
2010.
U.S. Carbon Emissions by Fuel
Petroleum products are the leading source of carbon emissions from energy use and nearly 80 percent
of the petroleum emissions result from transportation. Coal is the second leading source of carbon
emissions, with most of the projected future increases in emissions from coal result from electricity
generation.
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JUN-30-97 MON 04:51 PM
FAX NO.
P. 06/20
Table 1. U.S. Carbon Emissions by Fuel Type
1997
Percentage of
2010
Percentage of
Total 1995
Total 2010
Emissions
Emissions
Petroleum
613
42%
730
42%
Natural Gas
335
23%
412
24%
Coal
519
35%
579
34%
Other (includes
0
0%
1
0%
methanol and liquid
hydrogen)
TOTAL
1467
100%
1722
100%
Source: EIA Annual Energy Outlook 1997
U.S. Carbon Emissions by End-Use Sector
End-use sectors include the following: residential and commercial (collectively called "buildings"),
industrial, and transportation. Emissions from each of these sectors are roughly equally distributed
among the three: buildings (35%), industry (33%), and transportation (32%). These shares are
projected to remain fairly constant through the year 2010 and beyond. The most diverse of the end-
use sectors is that of industry, which consists of farming, agricultural services, fisheries, forestry,
mining, construction, and manufacturing.
Table 2. U.S. Energy-Related Carbon Emissions by Major End-Use Sector
Percentage of
Percentage of
1997
Total 1997
2010
Total 2010
Emissions
Emissions
Buildings
512
35%
576
33%
Industry
471
33%
548
32%
Transportation
485
32%
598
35%
TOTAL
1467
100%
1722
100%
Source: EIA Annual Energy Outlook 1997
Energy End-Use Sectors
The Buildings Sector
Residential and commercial end uses combined to consume 35 percent of the nation's total energy
requirements in 1997. The major components of energy use within the buildings sector are
summarized in Table 3 on the following page.
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JUN-30-97 MON 04:51 PM
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Table 3. 1997 Building Energy Consumption by End-Use
End Use
Percentage of Total
Space Heating
26%
Space Cooling
9.4%
Water Heating
10.8%
Refrigeration
4.9%
Lighting
14.9%
Cooking
2.6%
Other Appliances
31.5%
Total
100%
Source: EIA Annual Energy Outlook 1997
Residential primary energy use per household has declined only two percent in the period 1979 to
1995. According to the Energy Information Administration's Annual Energy Outlook 1997
(AEO97), total energy consumption in the residential sector is projected to increase by 9 percent
between 1997 and 2010. Most of the growth in this sector is expected occur in the "other uses"
category, which includes items such as electronic equipment and small appliances. Not surprisingly,
therefore, most of the increase in energy demand during this period is attributed to greater use of
electricity.
Measured in terms of energy use per square foot of building space, the commercial sector has
witnessed improvements in energy efficiency on the order of 30 percent between 1979 and 1992.
However, total energy consumption has been rising over the past two decades as a result of overall
growth of the commercial sector. Future energy demand is also predicted to increase by 9 percent in
the period 1997-2010. As is the case with the residential sector, end-use products such as office
equipment and consumer electronics account for the majority of net growth in energy demand through
2010.
Table 4 summarizes the category of end-use energy in the combined buildings sector for the years
1997 and 2015.
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JUN-30-97 MON 04:52 PM
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Table 4. Total 1997 and 2015 Building Energy Consumption By End-Use (in Quads)
1997
2010
Percent Change
Space Heating
8.77
8.85
0.9%
Space Cooling
3.17
3.09
-2.3%
Water Heating
3.63
3.69
1.5%
Refrigeration
1.67
1.42
-14.6%
Lighting
5.04
5.04
-0.2%
Cooking
0.87
0.89
2.3%
Other Uses/Appliances
10.62
13.84
30.3%
Total
33.77
36.81
9.0%
Source: EIA Annual Energy Outlook 1997
Table 4 shows that most of the growth in building energy demand will occur in the "other uses"
category, growing by 30 percent in the period 1997 through 2010. This category currently accounts
for nearly 32 percent of total building energy use and is expected to increase to 38 percent in 2010 as
small appliances and office equipment continue to penetrate the market. In the residential sector, this
category of end-uses includes personal computers, dishwashers, clothes washers, and dryers. For the
commercial sector this includes office equipment such as personal computers, monitors, fax machines,
copiers, printers, scanners and multifunction devices. Additional products included in the "other"
category include new telecommunications technologies, medical imaging equipment and vending
machines.
Factors Shaping Industry Response
Currently, numerous opportunities exist to improve the level of energy efficiency within the buildings
sector. By tightening the building shell and installing properly sized, energy efficient heating and
cooling equipment, consumers can experience substantial monetary gains through greater savings as a
result of lower monthly utility bills. In addition to saving money, consumers can benefit from
improved overall comfort resulting from better indoor air quality, superior lighting, and reduced noise
levels. However, the savings are often hard to verify, sometimes varying from building to building.
Although consumers have clearly accepted improved insulation levels and some other energy savings
features, it is not clear whether or when the more complicated or advanced savings opportunities will
achieve significant market penetration.
Technology Options
Cost effective technologies which are currently available in the buildings sectors Include, but are not
limited to, the following:
Better insulation of building shells
Better control systems for regulating the use of energy consuming equipment (time and
temperature controls by zone, energy-use optimizers, energy management systems)
4
JUN-30-97 MON 04:52 PM
FAX NO.
P. 09/20
High efficiency heat pumps
Heat pump water heaters
Decreased hot water requirements through better designed clothes washers and dishwashers
Increased motor/compressor efficiencies for refrigerators
High efficiency lighting - fluorescent fixtures, electronic ballasts, control systems
Substitution of lower-carbon fuels (on a full fuel-cycle basis)
Reduced air infiltration practices, including improved duct work
Energy efficient windows
Whole house design that allows for substantial equipment downsizing
Barriers to Adoption
Despite the proven cost effectiveness of these and other energy efficiency technologies, it is clear that
they are not widely adopted by consumers. This is due to a number of institutional, organizational,
and other barriers. The existence or availability of a financially attractive technology does not by
itself mean the technology will be purchased and used in sizable quantities. For high rates of market
penetration, a number of other key factors must be in place:
Potential buyers of products need to know about the technology
Potential buyers need clear, reliable information on the performance and economic benefits of the
technology
Potential buyers must be the ones to see the benefits of lower energy bills
Service providers and users of the technologies must have expertise to appropriately design for,
install, and operate the technology
Sources of capital must understand the low-risk nature of these investments
The Department of Energy (DOE), the Environmental Protection Agency (EPA), and members of the
financial community are developing innovative financing methods for energy efficiency investments.
In addition, DOE operates a program of test procedures, energy conservation standards, and labeling
for certain major energy using equipment in the residential and commercial sectors. These include
refrigerators, freezers, air conditioners, water heaters, furnaces, dishwashers, clothes washers, clothes
dryers and kitchen ranges, ovens, commercial heating and air-conditioning equipment, certain
incandescent and fluorescent lamps, distribution transformers, and electric motors. The Energy
Policy Act of 1992 (EPACT) also established maximum water flow-rate requirements for certain
plumbing products and provided for voluntary testing and consumer information programs for office
equipment, luminaires, and windows. Our nation has made significant progress in overcoming these
barriers, but more needs to be donc to meet the challenge of climate change.
The Industrial Sector
The industrial sector consists of an extremely diverse set of business enterprises - both in terms of
products and processes. It includes agriculture, mining, construction and manufacturing. Even
within individual subsectors, a range of activities exist that have vastly different energy use patterns
and carbon emission profiles. Agriculture includes, for example, both ranching and farming. Mining
includes the extraction of both energy and non-energy mincral resources. Construction ranges from
the building of new homes, offices, highways, and power plants to the maintenance and repair of
those same facilities. Finally, the manufacturing subsector incorporates a range of industries that
produce beer, paper, and clothing on the one hand, and aluminum ingots, plastic resins, cars, and
5
JUN-30-97 MON 04:52 PM
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computers on the other. Energy requirements for each of these industries are as different as the
products they produce.
Trends in the Industrial Sector
Broadly speaking, industrial activity will grow by about 2.35 percent annually in the period 1997
through 2010. Yet, from the perspective of energy use and overall carbon emissions, there are
significant differences within the many subsectors. For convenience, such activity can be categorized
into those subsectors which are energy-intensive and those which are not. Output in the energy-
intensive industries - including chemicals, petroleum refining, pulp and paper, glass, cement, iron
and steel, and aluminum - - will grow by 1.34 percent annually through 2010. The energy intensity
of those subsectors will decline by only 0.53 percent. In contrast, output in the non-energy-intensive
industries will increase by 2.65 percent annually while their energy intensity will decline 1.23 percent
per year. Despite the more rapid decline in energy intensity, the more rapid growth in economic
activity means that overall energy use ( and, hence, increases in carbon emissions) will increase more
quickly in the non-energy-intensive industrial subsectors.
Tablo 5. 1997 Comparison of Energy Intensive and Non-Intensive Industrial Subsectors
Energy Intensity
Output
Energy Use
(1000 Btus per
(Billions of
Annual Growth
(Trillion
Dollar of
Annual Change
1987 Dollars)
Rate
Btus)
Output)
in Energy
Intensity
Energy-
920
1.34%
17,197
18.7
-0.53%
Intensive
Other
2,847
2.65%
17,224
6.1
-1.23%
Total
3,767
2.35%
34,421
9.1
-1.22%
Source: EIA Annual Energy Outlook 1997
Carbon emissions in the industrial sector are the result of two different types of processes. The first
is the combustion of fossil-fuel resources while the second involves non-energy related production
processes. The energy-related emissions, estimated to be about 471 MMT in 1997, account for about
96 percent of total carbon emissions. This includes emissions from electricity generation which are
distributed across all the Industrial sectors. According to the AEO97 forccast, this is expected to
grow to 548 MMT by 2010, and 16 percent increase over 1997 levels. Unfortunately, emissions data
for individual industrial sectors are not currently reported in any published sources.
In addition to emissions resulting from the combustion of fossil fuels, the primary industrial processes
that generate carbon emissions include:
the manufacture and consumption of limestone (e.g., in iron smelting, steelmaking, glass
manufacture, flue gas desulfurization)
dolomite consumption
soda ash manufacture and consumption (e.g., in glass manufacture, flue gas desulfurization, and
chemicals production)
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carbon dioxide manufacture
aluminum production
One example of non-energy related process emission occurs in the production of cement. The
calcination reaction which converts the limestone raw material into clinker generates direct emissions
of approximately 11 MMT. This is based upon 1995 data, the latest available at this time. Total
non-energy related processes contributed a total of perhaps 21 million MMT of carbon emissions in
1995.
Economic Modeling Results for the Industrial Sector
There are a variety of models and analyses which have been used to characterize the impacts of
climate policies on the industrial sectors. A June 1997 study by a consortium of non-profit groups,
for example, estimated that carbon emissions could be stabilized below 1990 levels with an overall net
benefit to the economy. The reason is that cost-effective energy efficiency improvements and
productivity gains were shown to offset the increased energy prices stimulated by proposed climate
policies (Energy Innovations, 1997). The Interagency Analytical Team (IAT) also used aggressive
technology investment assumptions in an analysis with the Markal-Macro model to show that the cost
of energy services could actually be about 3.0 percent lower for all sectors in the year 2010 and
beyond - despite the higher energy prices resulting from a cap in carbon emissions. This result
contributed to a net positive (albeit small) GDP benefit showing up as early as the year 2000.
To analyze the impacts of climate policies on specific industries, however, the IAT employed the
DRI/McGraw-Hill Inter-Industry Model. The model calculates production, detailed inter-industry
transactions and trade for 246 industries, using production and trade data from the DRI
Macroeconomic Model and detailed projections of changes in efficiency and productivity over time.
Under the "central stabilization case," which estimates the effects of stabilizing carbon emissions at
1990 levels from the year 2010 through 2020, direct emissions reductions in the industrial sector
account for about 19 percent of total emission reductions (48 MMT) in 2010 and 21 percent (70
MMT) in 2020. Reductions in overall energy demand as well as improvements in industrial energy
efficiency account for these reductions. Also under the central stabilization case, energy intensity
across all industries initially declines at a rate of 2.6 percent per year vs. 1.5 percent in the base case
and later slows to about 1.5 percent per year versus 0.9 percent in the base case.
One major area of concern is the effect of carbon constraints on the energy-intensive industries which
account for only one-fourth of total industrial output but one-half of total industrial energy use. These
concerns reflect both domestic demand, and international competitiveness.
The impact of climate stabilization policies on the demand for energy-intensive industrial products
may be very sensitive to how the policy is implemented.
If emission permits are auctioned off and the revenues are used to reduce the budget deficit, the
reduction in government borrowing will reduce real interest rates and, in turn, stimulate demand
for consumer durables, new construction and business investment. Higher construction,
investment, and durables demand raises the demand for such encrgy-intensive goods as cement,
aluminum, and steel. Pulp and paper products, energy-intensive chemicals and other energy
intensive products more closely tied to non-durable consumer good consumption -- pulp and paper
products, and some chemicals fair less well under this scenario.
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In contrast, if emission permits are given to households (or the revenues from auctioned permits
are returned to them through income tax reductions), the main effect is to stimulate household
consumption expenditures rather than business investment. In this case, higher non-durables
consumption stimulates the demand for paper and paperboard from the pulp and paper industry.
A second and central concern is the following: as higher energy prices raise production costs, U.S.
energy-intensive producers might lose market share to competitors from non-Annex I countries under
a climate treaty that affects Annex I but not Annex II countries.
The results of the DRI model provides a midpoint in the ranges of other studies, which either tend to
predict that carbon stabilization policies would have only minimal impacts initially, and even a small
positive in later years as energy-intensive industries begin to implement offsetting productivity
investments, or which predict severe impacts that could perhaps drive large portions of these
industries overscas, with little net effect on global emissions. The results from DRI analysis show
that while a carbon stabilization policy would affect energy-Intensive industries, the most dire
predictions overstate the impacts of climate policies. For the policy cases, other than for oil and coal.
the impacts on output for energy intensive industries relative to the base case are less than 1.9 percent
assuming no international emissions trading, and less than 1.2 percent with international trading.
Geographic and regional shifts in global energy-intensive production are inevitable even without a
climate policy. For instance, according to the DRI Baseline Forecast, the carbon and energy
intensive industries in the U.S. will experience declines in their share of both U.S. employment and
output. These industries are projected to employ only 2.9 percent of the U.S. workforce by 2010.
This figure decreases to 2.3 percent by 2020. Similarly, the energy intensive industries share of
output drops from 9.1 percent of GDP or 27.9 percent manufacturing output in 2010 to 7.2 percent of
GDP or 23.3 percent of manufacturing output in 2020. Even in the baseline, emerging Asian
countries share of basic metals exports is expected to increase from 11 percent to 17 percent by the
year 2010, and chemicals and plastics exports are forecast to increase from 13 percent to 19 percent.
The IAT's DRI analysis did account for changes in terms of trade for U.S. industries. Under this
analysis, non-Annex I producers (including China Mexico, Korea and Brazil), which currently
account for about 40 percent of U.S. imports, would not be faced with energy price increases from a
stabilization. If that were to occur, there would be an increase in imports from non-Annex-I countries
and decreases of U.S. exports to the world market. Yet, the relatively rigid representation of
substitution possibilities in production that characterizes the DRI model may overstate the effect of
energy price increases on production costs. In contrast to the DRI model, models that have a more
detailed and flexible representation of production technologies (such as general equilibrium models) or
that represent technological shifts (i.e. from integrated steel mills to electrometallurgical mini-mills or
from primary aluminum to secondary aluminum) would yield lower estimates of production cost
increases. As the Markal-Macro results have shown, depending on the depth of technological
substitution that is available to industries, the overall result may even show a slightly positive GDP
benefit over time.
Factors Shaping Industry Response
Within the manufacturing subsector, several industries are substantially more energy intensive than
others. And among these energy-intensive industries, numerous differences exist in terms of the
products each industry produces and the processes they employ.
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Aluminum
The aluminum industry has three major segments primary materials, semifabricated materials, and
finished products. The U.S. aluminum industry is globally competitive in all parts of the industry and
is a net exporter of semifabricated aluminum products. The last greenfield smelter in the U.S. was
built in 1980 and there are currently no plans to build any new facilities.
Unlike other basic industries, the U.S. aluminum industry is highly dependent upon the cost of
electricity, such that any future changes due to restructuring would have major impacts on the
competitiveness of this industry. The primary aluminum industry in the U.S. purchases electricity at
approximately half the price of other industries, in part because of hydropower (Pacific Northwest)
and in part because of long-term negotiated rates. The future of U.S. primary aluminum will depend
on differences (if any) in the price and availability of hydro- and coal-generated electricity. These
differences will have substantial regional impacts. Almost all the smelters in the eastern part of the
United States rely upon coal- based electricity, whereas the smelters in the Northwest use hydro-based
electricity. Should a policy be implemented based on carbon emissions, the eastern smelters in the
United States would be impacted more than western smclters.
Technological change in the aluminum industry has been incremental. Continuous process
improvements have reduced energy consumption per ton by approximately 25 percent between 1960
and 1994 and retrofit technologies with significant improvements in existing energy efficiency levels
are expected to be in place by 2010. Increased use of recycled metal could also yield substantial
energy savings. This depends on developing advanced scrap separation and smelting processes and on
overall advances in process design.
Petroleum Refining
Petrolcum refineries distill crude oil, crack the resultant intermediate products into smaller molecules,
and then purify and blend the various fuels to produce a number of useful products. Gasoline is the
principle refinery product, accounting for over half of industry sales. U.S. refining industry is the
largest in the world with capacity at about 15 million barrels per day (bpd). However, no new
refineries have been bullt in the U.S. for more than a decade and the number of refineries has
decreased from about 285 in the late 1960s to about 175 currently.
In the petroleum refining sector, industry impacts will depend on sensitivities such as the extent to
which prices of fuel used as an input are increased as opposed to policies that affect the overall
demand for the refinery products produced. Other factors that will affect the petroleum refining
industry include the price of marine bunker fuel which can account for 25 to 55 percent of
transportation costs. The characteristics of individual refineries will also affect the response of the
industry. The refineries most vulnerable are located in highly competitive regions, they are typically
old, and they produce a standardized product subject to a high degree of competition. Many of the
old refineries are only marginally profitable under existing conditions. Less affected refineries will be
those that have been renovated and modernized in the last five years, or produce specialized products.
In the near to mid-term, process energy utilization can be reduced by 5-10 percent through utility
system modifications, monitoring and maintaining equipment/process energy efficiency through
development and adoption of advanced sensor/control technologies, and by minimizing and controlling
heat exchanger fouling. In the mid to long-term, opportunities to improve energy efficiency include
areas such as fired heaters, distillation catalytic hydrocracking, reforming and hydrotreating,
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alkylation, and hydrogen production.
Glass
The manufacture of glass and glass products in the U.S. is a large, widely diversified, energy-
intensive industry. The glass industry includes the following four segments: glass packaging,
fiberglass, flat glass, and specialty glass. The diversified nature of the glass industry highlights the
fact that competitive challenges faced by one sector will not always be applicable to the other sectors,
and solutions must be tailor-made as well.
The two most pressing challenges for the glass industry are competition from other materials such as
plastic and aluminum, and competition from foreign glass manufacturers with lower labor and
environmental compliance costs. To meet these challenges the industry will need to improve
manufacturing processes, create additional markets and uses for glass products, and reduce energy
and waste disposal costs. Reduction in energy consumption, as well as the increased use of recycled
glass, both support reduction in greenhouse gases through reductions in fuel combustion.
Options to improve energy efficiency in the glass industry include technological advances that
accomplish the following:
enable the use of oxygen rather than air to fire glass furnaces,
increase the use of waste glass, or cullet, in glass manufacturing,
lead to the new coatings and new structural components needed to enhance the performance of
manufacturing equipment, and
create new temperature sensors for furnaces to increase energy efficiency.
Steel
The U.S. steel industry is comprised of integrated producers, electric arc furnace (EAF) based mills,
and specialty steel producers. Manufacturing processes for iron and steel production have changed
considerably since the 1980s. The open hearth furnace, which was the workhorse of integrated mills
in the 1950s, is now obsolete. The basic oxygen furnace (BOF), however, held on to a relatively
constant share of total production during the same period, although this share has begun to fall
gradually since 1992 with the rise of steel mini-mills. These mini-mills use electric arc furnaces
which use 100 percent scrap metal and therefore require less energy per ton of steel produced. Mini-
mills are highly dependent on the price and availability of electricity and scrap.
Over the next five years, steelmaking capacity in the U.S. is expected to increase significantly as
many new EAF-based mills are scheduled to come on line. As the percentage of EAF-based steel
production increases, the average energy intensity of steelmaking will decrease, with associated
decreases in coal use and increases in electricity use (and corresponding changes in the amount and
type of emissions). In addition, this increase in EAF capacity will likely affect steel imports and
domestic scrap prices. Measures that increase coal prices would have a far more dramatic impact on
integrated mills than on EAF facilities, while all of the industry will he affected by increases or
decreases in electricity price. Deregulation of the electric utility industry is expected to benefit the
industry by lowering electricity prices.
After a historical record of lagging technologically, the U.S. steel industry has begun to exhibit a high
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rate of technological change, including direct smelting processes that replace the blast furnace and
coke oven, and direct strip casting processes that replace the continuous caster and hot strip mill.
Chemicals
The chemical industry is more diverse than virtually any other U.S. industry. Chemicals are the
keystone of U.S. manufacturing, essential to a wide range of industries, such as pharmaceuticals.
automobiles, textiles, paper, electronics, agriculture, construction, furniture, paint, and appliances.
The U.S. is the world's largest producer of chemicals. More than 9000 corporations develop,
manufacture, and market over 70,000 chemical products. Investments in plant and equipment have
tripled since 1985 and R&D spending has more than doubled from $8.3 to $17.7 billion.
The chemical industry has reduced energy intensity over the last decade and has made strides in
reducing the environmental impacts of chemicals production. However, to remain at the forefront of
the global market and to maintain its competitive position, the industry will need to continue to take
steps to strengthen market share, such as increased development of markets where the U.S. has a
technological advantage. Improvements to energy, resource and process efficiency will also play an
important role in the future competitiveness of the industry. The U.S. chemical industry has an
excellent opportunity to greatly reduce U.S. industrial greenhouse gas emissions through advances in
current and emerging separation technologies. Advances in separations technology and chemical
processes are anticipated to strengthen the U.S. chemical industry and ensure its competitive edge in
the increasing globalization of markets. They will allow the chemicals industry to balance and sustain
society's demands for higher environmental performance with industry's demands for increased
profitability and capital productivity.
Pulp and Paper
The U.S. has the world's largest installed pulp. paper, and paperboard production capacity, some 86
million air-dry metric tons (ADMT) per year in 1993, or about 30 percent of global capacity.
Manufactured products from the paper and allied products industry include newsprint, printing and
writing paper, tissue, paper plates, card stock, corrugated cardboard, cartons, and construction-grade
paperboard. The U.S. is home to close to 550 pulp and paper mills located in 42 states. Over the
last twenty years or so, many of the smaller, older mills have been closed down and replaced with
larger integrated mills. The integrated mills produce both pulp and paper and/or paperboard. The
trend is toward larger size (over 2000 tons/day) plants with the capability to consistently process high-
quality products at higher speeds.
The U.S. pulp and paper is both capital and energy intensive. New capital expenditures in the last
decade have averaged 10.4 percent of revenues, making paper and allied products the most capital
intensive of the manufacturing industries. This factor could conceivably restrain the ability of the
industry to install new technologies -- especially technologies that will not significantly contribute to
lowering production costs. However, because of the energy-intensive nature of the industry, rising
fossil fuel costs would create additional incentives to increase reliance on self-generated energy and
further increase the energy efficiency of pulp and paper production processes.
There are major opportunities for improving the efficiency of process energy use in the pulp and
paper industry. An number of new energy-saving process technologies such as digesters and paper or
pulp dryers, are under development or recently commercialized and process heat integration analysis
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has been applied in several mills. Most process specific changes that bring energy efficiency
improvements also bring productivity and other improvements. Advanced biomass-based
cogeneration systems, which would provide major improvements in efficiency over existing systems,
are currently undergoing rapid development.
Cement
The U.S. hydraulic cement industry consists of firms producing portland, masonry, prepared
hydraulic, natural, lime, and oil well cements. Portland cement represents more than 95 percent of
total hydraulic cement production; the remainder is mostly masonry cement. There are currently 47
cement companies operating close to 118 plants and 207 kilns in the U.S. Total industry shipments in
1995 were 75 million metric tons with total U.S. consumption of 86 million metric tons. There were
approximately 11 million metric tons of finished cement Imports and half a million metric tons of
exports the same year.
Compared to world standards, the U.S. cement industry is characterized as aging and relatively
inefficient. Plants continue to be shut down and others may be slated for closure due to technological
or competitive obsolescence. Currently, there remains a need to replace and upgrade plants in order
to increase productivity in domestic plants. Most major producers, however, are not in a good
financial position to invest in extensive and expensive additional capacity. No new greenfield plants
have been built in the U.S. in ten years.
Currently, 65-70 percent of U.S. cement capacity is foreign-owned - including three of the top five
firms. Approximately 90 percent of cement imports are handled by domestic producers, who use
imports to supplement domestic capacity, such that corporate profitability is not necessarily linked to
the health of the domestic industry.
A number of opportunities exist to reduce emissions such as increasing the share of production using
dry process technology, increasing the use of efficiency enhancing machinery such as particle
classifiers which reduce grinding loads, increasing the use of mix-ins when making concrete, and fuel
switching.
High-Growth Industries
Industries other than the energy-intensive subsectors discussed above also depend on energy and will
likely be affected by climate change mitigation policy. Among the reasons for focusing attention on
these sectors are that:
Some of these industries are growing more rapidly than the energy-intensive industries. Most of
the growth (64 percent) in industrial energy use from 1997-2010 will be by non-energy-intensive
industry subsectors (3.4 of 5.3 quads):
Service Industries employ 77% of the U.S. workforce and account for 74% of GDP. The
distinction between service and manufacturing industries is becoming increasingly blurred.
Opportunities exist for new technologies in high-growth sectors that have capital turnover rates
that are higher than those of energy-intensive Industries. With high rates of capital turnover, the
opportunities to accelerate the diffusion and acceptance of energy efficient technologies are
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substantial, and can collectively lead to significant reductions in carbon emissions.
Under a climate change mitigation policy, Industries involved in producing energy-saving products
and providing energy services will benefit as demand increases for their products and services.
Non-Energy Minerals Industry
The non-energy mining includes the extraction of industrial minerals such as crushed stone, sand and
gravel as well as metallic ores including iron, and copper. In 1992 the non-energy minerals industry
had a production of $32 billion dollars. As in coal mining (discussed more fully below), employment
has been steadily declining since the early 1980s. Projections indicate that by the year 2000 this
sector will employ 25 percent fewer people than in 1980, dropping from 236,000 to 176,000 jobs.
As with other sectors, the minerals industry will be affected by rising prices resulting from efforts to
stabilize carbon emissions. However, there are indications that the industry will be able to reduce
overall energy consumption to at least partially offset increased energy prices. Among others, using
high efficiency electric motors, incorporating new process improvements, increasing maintenance of
motor vehicles, system conveyor belts, drives, and compressed air systems can each provide savings
of 10 to 15 percent, conservatively.
Construction
The construction industry is as varied as it is large. It includes firms with thousands of employees
and firms with just one. In 1992 there were just under 2 million construction establishments
employing over 4.6 million persons. Combined, the construction industry performed business totaling
almost $582 billion in 1992. Although much of the construction industry rises and falls with
fluctuations in the economy, the industry as a whole is likely to remain stable through the next 10
years, both in terms of employment and value of business.
Much of the construction industry is labor intensive. Most construction work involves using small
trucks to transport workers and materials, and hand and power tools, and physical labor to complete
work. It is one of the least energy intensive industries in the nation. Energy costs (including
selected power, fuels, and lubricants) account for approximately 1.6 percent of each dollar of business
done in the construction industry as a whole. Nevertheless, there are important opportunities to
reduce energy costs within the industry. These opportunities range from using more efficient motor
vehicles to incorporating the use new building materials (e.g., laminated beams, recycled products,
engineered lumber products such as roof and floor trusses, insulated wall panels, and modular
components) that reduce both construction waste and costs.
Motor Vehicle and Related Industries
The motor vehicle industry is much more diverse than the mere manufacture of new cars and trucks.
It also includes road construction and maintenance, freight and passenger services, petroleum refining
and wholesale distribution, and automotive sales and services. Total employment in these related
industries approaches 7 million persons, providing about 7 percent of the nation's jobs.
Focusing only on the automobiles industry, most analysts see little or no change in the sales of cars
and trucks over the next few years. This means that competition will be fierce among the 26 firms
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that serve the major developed markets worldwide, including the so-called Big Three automakers -
Ford, Chrysler, and General Motors. Within a decade some analysts project that, either as a result of
sharing manufacturing resources, or as a result of mergers and acquisitions, as few as 10 "mega-
manufacturing alliances" may serve all of the developed countries.
Continuing productivity gains among the U.S. automakers has strengthened its overall economic
position. The number of employees per hundred vehicles sold, for example, has fallen 2.9 percent
per year in the decade ending 1994. At the same time, the industry should be fairly unaffected by
greenhousc gas emissions policies. This is due to the fact that the assembly of motor vehicles
requires only about 15 million Btu of energy per car. If carbon prices rose as high as $100 per ton,
for example, this would add between 0.1 and 0.2 percent to the cost of manufacturing a new car. On
the other hand, new car and truck sales might slip as the cost of driving increases as a result of
climate policies. But new technologies can be incorporated into the design and construction of both
light and heavy duty vehicles to reduce the overall cost of driving despite the prospect of initially
higher gasoline prices. Technology improvements include engine designs that reduce friction and
increase combustion efficiency and body designs that decrease the aerodynamic drag on the vehicle.
Meeting the PNGV goals of an 80 MPG car that costs no more than today's vehicles (see the
discussion on transportation below) will go a long way to minimize the impacts on both the auto
industry and the many related industries.
Barriers to Adoption
From the above discussion, it is clear that numerous energy-saving technologies are available in the
industrial sector many of which offer additional benefits such as improved product quality.
Despite this, however, many of these industries have historically avoided investing in energy
efficiency technologies. Several factors help to explain why this may be the case.
For most industries, energy expenditures represent a minor portion of their operating costs, averaging
less than two percent of value of shipments for the manufacturing sector. Industries such as primary
aluminum, hydraulic cement and industrial gases are notable exceptions, with energy accounting for
more than 20 percent of value of shipments. However, for some of the fastest growing industries,
such as electronics and computers, energy expenditures represent only 1.2 and 0.6 percent of
shipments respectively. In most industries, larger costs, such as labor and raw materials, receive
attention before energy. For example, employee compensation averaged 24 percent of shipments in
1994.
Opportunities for energy efficiency improvements must compete with other issues for finite resources
within a company. While capital is the most often cited resource, staff time may be of equal or
greater importance. Downsizing is common when industrial companies undergo restructuring,
resulting in fewer total personnel available to address all issues. When a choice must be made
between addressing a potential emissions-compliance, production-reliability or product-quality
problem, and identifying and implementing energy efficiency projects, the former receives the
attention since failure to do so may result in the plant being shut down. One manifestation of this
staffing constraint is the reduction in the number of corporate energy managers2
1. "Considerations in the Estimation of Costs and Benefits of Industrial Energy Efficiency Projects," ACEEE/EPA
2. Ibld.
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Many businesses operate with a tight constraint on their capital budgeting. Hence, the allocation of
capital remains a significant barrier to achieving greater levels of energy efficiency. Given a choice
between expanding existing production capability and introducing new products, and reducing energy
bills, the production-related projects will invariably win out. Hence, presenting projects based on total
benefits will likely be more effective than building a case on the energy savings alone.
The Transportation Sector
Trends in the Transportation Sector
Over the last decade, new light vehicle fuel economy has remained relatively flat in the U.S. This is
due to both an absence of increased fuel-efficiency standards and a lack of consumer demand for
greater fuel efficiency. As fuel prices declined following the oil shocks on the 1970s, consumers
began turning away from fuel economy and looked more toward amenities such as speed,
acceleration, size, and greater utility when making their purchasing decisions. Corporate average fuel
economy of the new light vehicle fleets (i.e., cars and light trucks such as minivans, sport utility
vehicles, and pickup trucks) grew along with increasing CAFE standards throughout the late 1970s
until the mid 1980s. Since 1982, however, the average horsepower rating of the combined new light
vehicle fleet (cars plus light trucks) has increased by 60 percent while the average fuel economy of
the same fleet has remained unchanged. Had new cars sold in 1996 retained the same average
acceleration performance and weight as new cars sold in 1984, the technologies actually incorporated
into the fleet during this period could have increased new car fuel economy by about five miles per
gallon, or close to 20 percent.
In addition, the share of light trucks is increasing, having gone from under 25 percent of the market
in 1982 to almost 45 percent today. Light trucks face lower CAFE standards than cars (almost 7 mpg
lower). Moreover, since light trucks tend to last longer than cars, they are likely to be driven more
miles over their lifetime than cars.
Contribution to Greenhouse Gas Emissions
Passenger cars and light-duty trucks contribute the majority of transportation emissions. Emissions
from light-duty vehicles alone accounted for 20 percent of total U.S. greenhouse gas emissions in
1990, and in the absence of new policy measures are expected to rise from about 250 MMTC in 1990
to 350-400 MMTC in 2010. Energy use in trucks used for commercial transport is only about 40
percent of energy used in passenger vehicles, but is growing significantly faster.
The major factors underlying the rapid increase in emissions from light-duty vehicles are growth in
VMT, stagnant new fleet fuel economy levels (miles per gallon, or mpg), and growth in the relative
proportion of light trucks sold, which have lower (i.e., less stringent) CAFE standards than cars.
Actual growth in VMT since 1990 has averaged 2.4 percent per year. Growth in VMT is a function
of a number of factors, including demographic changes (e.g., more women in the workforce;
immigration), land use patterns, the cost of driving each mile (now at an all-time low on an inflation-
adjusted basis), among others.
Factors Shaping Industry Response
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With consumers continuing to exhibit preferences for performance, size, and utility rather than fuel
economy, no significant increase in new fleet fuel economy is expected to occur absent a driving
force such as policy changes or fuel price increases.
Technology Trends and Options
Three principal ways exist to reduce carbon emissions from light vehicles: (1) reduce vehicle miles
traveled (VMT); (2) improve fucl economy; and (3) use fuels with lower life-cycle carbon emissions.
Work developed for the "Car Talk" committee³ suggested estimated reductions of 445 to 585 MMT
would be possible in the period 2005 to 2025 from a combined package of land-use and transit
policies as well as efforts to improve overall fuel economy and reduce the carbon content of
transportation fuels.
Reducing VMT would involve a wide mix of policies. The goals would be to encourage land use
away from auto dependency, and shift the relative (full) cost of driving versus other transportation/
communication alternatives such as workplace parking subsidy reform, and shifting of state and local
subsidies to cost-of-driving fees.
Improving fuel economy represents an important opportunity to reduce GHG emissions since only
about 15 percent of the energy in gasoline is actually used to propel a typical vehicle. The
Partnership for a New Generation of Vehicles (PNGV) builds on the prospect for an improved fuel
economy. PNGV is a Federal-industry research partnership created in 1993 to encourage innovation
in the US auto industry. The PNGV focuses on a research goal of tripling fuel economy of a typical
1994 family sedan by 2003-2004, while meeting or exceeding federal safety and emissions
requirements, and without sacrificing performance, size, utility, or affordability. Most current PNGV
work on this goal is focused on improving drive train efficiency, developing practical on-board
energy storage systems, and reducing vehicle mass through the use of light weight materials. A pre-
production prototype vehicle with a 100 percent improved fuel efficiency is expected in 2001;
vehicles with 150-200 percent improved efficiency will be available in the 2005-2010 period.
Future technological innovations would come from technologies such as multi-valve engines, lighter
materials, and next-generation tires, which have already been partially but not completely integrated
into the new vehicle fleet. An additional component of the overall fuel economy improvement would
be technologies such as direct injection engines and fully variable valve timing, still in the
development stage.
Alternative fuels - such as biofucls - are another large opportunity for reducing transportation
carbon emissions. Federal R&D has brought down the cost of biomass ethanol (from $3.60 per
gallon in 1980 to $1.20 per gallon today). Further research has the goal further cost reductions to
under $0.70 per gallon by 2005, competitive with oil at its current price. Estimated carbon savings
from use of ethanol largely as a gasoline blend is 20 MMTC in 2010.
3. The "Car-Talk" committee is the Policy Dialogue Advisory Committee to Assist the President in the
Development of Measures to Significantly Reduce Greenhouse Gas Emissions from Personal Motor Vehicles
formed in 1993 to see whether a consensus set of policies could be developed to return personal transport GITG
emissions to 1990 levels by 2005, 2015 and 2025. The committee failed to agree on such policies, but
substantial analytic results were developed by a team of government analysts working with several expert
committee members.
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Agriculture
Basic farm commodity production was about 0.9 percent of GDP in 1995 and accounted for about 1.2
percent of US employment. These numbers, however, belie the true importance of agriculture - the
farm sector and agriculturally related industries in total account for about 13.5 percent of GDP and
more labor intensive.
17.3 percent of employment. Processing and distribution is the largest component and is relatively
Contribution to Greenhouse Gas Emissions
Agricultural greenhouse emissions include methane, nitrous oxide, and carbon dioxide. Estimates of
non-energy greenhouse gas emissions are relatively imprecise. While agriculture represents less than
5 percent of total national greenhouse gas emissions, it is an large source of methane and nitrous
oxide.
The principle sources of agricultural methane are enteric fermentation (animal digestion) and manure
management associated with livestock production. Applications of synthetic and organic fertilizers
account for almost all of agriculture's N₂O emissions.
Globally, agriculture is a much more important source of GHG emissions than in the United States,
accounting for about 20 percent of all greenhouse gas emissions. Agriculture's share of world
emissions of CO2 CH₄ , and N₂O are estimated at 21-25 percent, 57 percent, and 65-80 percent
respectively (excluding emissions from natural sources). Conversion of land to farm production
(particularly tropical forests) is the major agricultural source of CO₂ emissions while rice and
livestock production are the principle sources of CH4 emissions.
Soil Carbon: Depletion or sequestration of soil carbon is a potentially important source of
agricultural greenhouse gas emissions. Plants use photosynthesis to remove CO₂ from the atmosphere
and convert it to carbon which is stored in plant biomass. Left undisturbed, soils accumulate some of
this carbon as organic matter through root growth and decay of crop plant materials. Tillage is used
to loosen surface soil and subsurface material, improve aeration and water infiltration, and control
weeds, All benefit crop growth in the short-term, Tilling, however, also increases the exposure of
soils to oxygen thereby accelerating the conversion of soil organic matter to CO₂ , which is released
into the atmosphere. Over time then, tilling reduces both soil carbon levels and soil productivity.
Reductions in soil carbon levels in U.S. agricultural soil (between 30 and 50 percent over the last 100
years) may have been a significant component of the historic increase in atmospheric CO₂ levels.
Factors Shaping Industry Response
Agricultural production is an energy intensive industry. Agricultural chemicals, particularly nitrogen
fertilizer, are energy intensive. Transportation of agricultural commodities to market would also be
affected. Some components of the food processing sector are energy intensive but, overall, the sector
is less energy intensive than overall manufacturing.
For every dollar of farm output, 12 cents is spent on energy with electricity accounting for 6 cents.
This reflects the increasing reliance on clectricity for operations such as grain handling and large-scale
confined livestock production. Agricultural chemicals embody 6 cents of energy for each dollar of
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output, spent mainly on natural gas and electricity. Nitrogen fertilizer is among the most energy
intensive chemicals and its availability is a key to high agricultural productivity. Energy cost
increases would directly Increase both agricultural production costs and agricultural chemical
manufacturing costs.
Technology Trends and Options
The Climate Change Action Plan for the U.S. identified tree planting, research and outreach to help
farmers better manage nitrogen use, methane capture from covered manure lagoons, and increased
ruminant feed efficiency as opportunities to sequester carbon and reduce emissions of agricultural
greenhouse gases.
Opportunities for further sequestering carbon in agriculture would include the following:
Conversion of marginal cropland and pasture to forest: Forest growth currently offsets about 8
percent of total annual U.S. greenhouse gas emissions on a carbon equivalent basis. A number of
studies have outlined the costs and economic benefits to U.S. agriculture resulting from strategies
to mitigate U.S. greenhouse gas emissions by paying farmers to convert cropland and pasture to
forest. Pulling the necessary quantities of land out of production, however, would raise land
prices and would increase the cost of bidding land out of production.
Promoting the use of management practices that increase the quantity of carbon stored in
agricultural soils: Studies suggest that these sinks could technically offset a majority of U.S.
greenhouse gas emissions, but economic analysis of such possibilities is limited.
Using biofuels to replace fossil fuels: Because the carbon released in the burning of biofuels
would be taken back up by the next crop, replacing fossil fuels with biofuels offers a means of
increasing the amount of carbon that is recycled in the production and use of energy. The IPCC
(1996) has estimated that for the world's temperate regions as a whole, carbon emissions could be
reduced by 85 to 493 million tons per year by allocating 8 to 11 percent of their cropland to
biofuel crops. While the United State's share of this is not addressed, the IPCC notes that the
best mitigation opportunities are in areas with good agricultural land and surplus production.
Further efforts to alter livestock management practices to reduce methane emissions: The most
promising opportunities for reducing methane emissions in U.S. agriculture are in new
management practices for the feeding of livestock and the handling of livestock waste (particularly
cattle),
Energy Supply Sectors
Electric Power Generation
Historically, demand for electricity and economic growth have been closely correlated. Over the last
twenty years, U.S. demand for electricity grew by approximately three percent per year, but this rate
of demand growth is expected to decrease between now and 2010, averaging slightly more than one
percent per year.
With several hundred billion dollars worth of combined capital investments, electric power generation
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is one of the largest and most important economic sectors in the U.S. economy. The character of this
industry has changed over time and is in the midst of another major restructuring. In 1995, FERC
required open access to transmission for the purpose of wholesale competition. Currently over 80
percent of the states are moving toward electricity industry restructuring. Two broad trends can be
noted. First, all the state decisions are leading to grcater customer choice and second, there is a
general trend to de-couple generation, transmission and distribution.
In addition to restructuring, the industry is undergoing a shift in the sources of generation. Nuclear
energy is a carbon-free source of electricity that presently provides over 20 percent of U.S.
electricity. Despite nuclear power's substantial contribution to today's electricity supply, no new
nuclear power plants have been ordered by U.S. electricity generators since 1978. Although nuclear
power generation was at an all-time high in 1995, the retirement of older plants and the lack of new
nuclear projects will reduce nuclear in the future U.S. energy mix. Nuclear power plants are due to
begin retiring in 2010 with most capacity retired by 2030. Fossil fuel power plants generated over 80
percent of U.S. electricity in 1970, but that share has fallen to about two-thirds as nuclear power's
share has risen from virtually nil to about 22%; fossil generation is expected to return to about 80
percent over the next twenty years as the existing stock of nuclear plants are phased out.
Although the overall efficiency of fossil generation - the rate at which fossil energy is converted to
electricity - has barely changed in the past 35 years, modest improvements are expected over the
next twenty years as natural gas-fired generation doubles its share of total generation from about 15
percent today to over 30 percent. New natural gas-fired "combined cycle" power plants yield very
high conversion efficiencies (> 50 percent) by generating steam from the waste heat of advanced
combustion turbines and using it to drive steam turbines.
Renewable energy is forecast to have high growth but remain a small part of the base. Excluding
hydroelectric power, whose expansion possibilities are very constrained, renewable electricity
generation is expected to double over the next twenty years but will still account for less that 2
percent of total electricity generation. The hydro share of the energy market was 4.4 percent in
1996.
As state-by-state restructuring takes place, several states have already mandated minimum levels of
renewable energy through "renewable portfolio standards," including Vermont, Maine, and Arizona.
Many other states are considering similar measures to accelerate the adoption of renewable generation
technologies. These technologies have become more competitive over the last twenty years.
Photovoltaics have dropped from 90 cents per kilowatt-hr to under 20 cents per kilowatt-hour; wind
technology has dropped from 25 to 5 cents per kilowatt-hr. Cost reduction will continue to occur
through R&D advances and through economies of scale as production rates Increase.
Contribution to Greenhouse Gas Emissions
The electric power industry is the largest direct energy consumer in the United States. Electric
generators are responsible for 35 percent of national emissions of carbon dioxide, with over 85
percent of electricity-related emissions coming from coal-fired plants.
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Table 6. Carbon Emissions from Electricity Generation (MMT)
Percentage of
Percentage of
1997
Total 1995
2010
Total 2010
Emissions
Emissions
Petroleum
13
2%
12
2%
Natural Gas
55
11%
102
16%
Coal
454
87%
512
82%
Total
522
100%
626
100%
Source: EIA Annual Energy Outlook 1997
Factors Shaping Industry Response
Restructuring
Restructuring of the electric power industry offers a unique opportunity to mitigate future emissions
of CO₂ from this sector. Many states are currently considering or adopting retail competition for
their electric power markets. This trend may be accelerated with federal legislation. Retail
competition may lower the price of electricity by as much as 20-25 percent in certain regions and
change the fuel mix of generation. Restructuring without new environmental policies is expected to
favor the expanded use of existing coal plants. These plants are largely depreciated, and hence can
generate electricity for low incremental cost. To mitigate the environmental impacts of competition
and maintain the environmental benefits of current state level renewable energy and demand side
management programs, a number of options have been adopted or are under consideration. These
include:
A "portfolio standard" for renewable energy: This would require that all generators meet a
specified level of renewable generation either by undertaking such projects themselves or
purchasing "credits" from others who have.
A social benefit fund; Revenues from a charge on transmission service are used to subsidize
energy efficiency projects, renewable, R&D, or low income consumers. California has adopted
this approach.
Information disclosure requirements: Generators could be required to disclose the emission
profiles of their generation, facilitating the marketing of "green" (or, less polluting) electricity.
Leveling of the playing field for air pollutant requirements: Many states are hesitant to adopt
retail competition because they perceive that differing regional environmental requirements put
their electric industry at a competitive disadvantage and will result in more pollution being
transported into their states. Thus, additional environmental provisions to "level the playing
field" - which could include greenhouse gas emission reductions - are currently being debated.
Adaption of fuel neutral standards would promote utilization of lower emission systems.
Special consideration for energy efficient and/or low emission technologies: This includes
advanced gas turbines and micro turbines for cogeneration and self-generation, fuel cells, and
renewable technologies.
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Distributed Generation
Distributed generation is the utilization of small power generation technologies dispersed through the
distribution system to provide local power close to customers, thereby reducing investment in
transmission and distribution resources and improving local reliability. This could include self-
generation or cogeneration by industrial and building sectors and involve power sales back to the grid.
Cost competitive technologies, such as smaller scale advanced gas turbines, are emerging which can
compete economically with central station generation when full costs, including the avoided
transmission and distribution expenditures, are considered. All of this will support the customer
choice aspect of deregulation and lead to a reduction in cost of electricity for customers. The electric
power producers will move from the concept of centralized power for cconomies of scale to providing;
energy services for customers. This will provide:
economies of mass production of units
smaller, cleaner generation
fuel security through diversity of generation portfolio
more options for customers to be green
Technology Trends and Options
Electric sector emissions can be reduced either by making generation less carbon intensive (e.g.,
conversion efficiency improvements, fuel switching, cogeneration, or renewables) or by reducing the
amount of electricity demanded through increased penetration of more energy-efficient end-use
technologies. Studies by the America Council for an Energy-Efficient Economy (ACEEE) show that
there is a long-term potential to save about 25 percent of industrial electricity consumption at a cost
that is significantly lower than the current cost of new generation units. For example, an industrial
site which purchased coal-derived electricity generated at 35 percent efficiency could self-generate
power in a cogeneration mode at 75-80 percent efficiency, selling power back to the grid and
producing their own steam.
Many of the following technologies are projected to substantially increase their market share in the
next decade.
The next generation of natural gas technologies (including gas turbines and fuel cells) are
projected to achieve energy conversion efficlencies of 70 percent or more by 2005.
High efficiency coal-fueled power plants, such as integrated gasification combined cycle, are
likely to realize efficiencies exceeding 55 percent and half the CO2 emissions of current coal
technologies.
Renewable technologies - wind power, photovoltaics, solar thermal, and geothermal - have
seen sharp cost reductions in the past two decades, some by a factor of ten.
Options such as biomass gasification offer the ability to produce power with no net increase in
CO₂ emissions. The growth of biomass offsets (sequesters) the CQ₂ released in electric power
production.
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Petroleum
Contribution to Greenhouse Gases
Petroleum products are the leading source of carbon emissions from energy use. Petroleum accounted
for 584 MMTC emissions in 1995, and this figure is predicted to increase to 718 MMTC by 2010.
The majority ( 80 percent) of petroleum emissions result from transportation use.
Factors Shaping Industry Response
Petroleum product demand is largely a function of the demand for transportation. Petroleum product
consumption has been rising even though the amount of oil energy consumed per dollar of GDP has
been falling since 1973. Oil energy per dollar consumed per dollar of GDP fell from 8,900 Btu/$ in
1973 to an estimated 5,100 Btu/$ in 1996, a drop of 43 percent. The ratio will remain at 5,100 Btu/S
of GDP in 1997.
Coal
Electric utilities are the dominant consumers of coal. Overall consumption by utilities grew from 17
percent (84 million short tons) in 1949 10 an 88 percent share (829 million short tons) in 1995.
According to industry analysts, coal energy consumption will move up 1 percent in 1997 to 20.6
quads and coal's share of the energy market will remain at 22.7 percent. Coal consumption is
expected to increase in future years along with the demand for electricity.
Contribution to Greenhouse Gas Emissions
Coal has the highest carbon content per unit of energy among fossil fuels - as well as being a
source of pollutants such as sulfur dioxide. It is used primarily in the electricity sector, where
coal-fired plants currently account for approximately 56 percent of total U.S. electricity production.
Coal is the second leading source of carbon emissions, and is projected to produce 579 MMTC in
2010, compared to 507 MMTC in 1995. Even without consideration of the issue of greenhouse gas
emissions, most analysts project that the great bulk of capacity additions to electric utility plants from
now until at least 2010 will be fueled with natural gas rather than coal. Thus, while most existing
coal-fired plants are highly competitive suppliers of power that are dispatched ahead of gas-fired
plants on the basis of lower fuel costs, fuel cost advantages cannot offset the substantially higher
capital costs of a coal plant when new capacity is needed.
Factors Shaping Industry Response
In the stabilization scenario, coal production is lower than in the baseline. In contrast, the NEMS
stabilization scenario run under assumptions that allow for substantial "overbuilding" (early
retirement) of existing coal capacity suggests a substantially greater decline in coal use than the DRI
energy model analysis. The reduction in coal use from baseline in 2010 is twice as great - 58
percent vs. 29 percent.
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Several factors contribute to the difference in perspectives. Most importantly, the large reductions in
end-use energy demand in the DRI energy model provide "room" to use more coal that is simply
unavailable in the NEMS stabilization scenario. In addition, the NEMS involves a larger reduction 10
reach stabilization, putting additional pressure on coal, the most carbon-intensive fossil fuel.
Changes in coal use due to greenhouse must be considered in the context of overall industry trends
that are projected in the absence of any climate change action - despite output growth, employment
in coal mining in 1995 is already less than half of 1980 levels. Therefore, notwithstanding rising coal
consumption in the baseline case, national coal employment is projected to fall substantially -
reflecting the fact that coal production productivity (tons per hour) rises at a much faster rate than
EIAs coal consumption in all regions. There is also a continuing shift towards increased supply from
regions where productivity is highest.
In the DRI energy model results, there is a smaller shift away from coal use (and production).
However, DRI has even higher labor productivity growth assumptions than EIAs NEMS, which by
itself reduces employment over time in both the base and mitigation policy cases.
Nuclear Energy
While the performance of existing nuclear electric power plants reached record levels in 1992, the
number of operating reactors has leveled off. High operating costs, waste disposal difficulties, and
other problems pose major challenges to the further expansion of nuclear electric power.
The future contribution of nuclear power depends on three factors: economic retirements of existing
plants prior to the end of their license period, re-licensing of existing plants to extend beyond a
40-year service life, and level of new capacity builds.
Factors Shaping Industry Response
The baseline cases in the two energy models each project a modest level of economic retirements,
operator decisions against pursuing relicensing, and no construction of new plants. As a result, the
projected contribution of nuclear power in 2020 is slightly more than half of its 1995 level. While
the base cases are similar, the two models differ substantially in the stabilization case. In the DRI
energy model stabilization case, nuclear generation follows the DRI base case path. However, in the
NEMS case, re-licensing of nuclear plants becomes economically attractive, and premature economic
retirements do not occur. As a result, nuclear generation EIAs not fall from its 1995 level. In
addition, the model suggests that new nuclear capacity could be added in the 2015 time frame given
the modeled carbon permit values in the stabilization case.
It should be noted that the model does not account for issues of public acceptability and uncertainty
regarding waste disposal that could present significant barriers to new nuclear investments. The
anticipated shift to more competitive electricity markets, in which the cost of capital for new
generation facilities will be higher than that applicable to regulated utilities, tends to make investment
in capital-intensive technologies with long lead times, such as nuclear generation, less attractive. For
these reasons, the prospects for new nuclear builds remain problematic. The models illustrate how
different policy choices can lead to differing outcomes.
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Natural Gas
Contribution to Greenhouse Gas Emissions
Of the fossil fuels, natural gas consumption and emissions are predicted to increase most rapidly
through 2015, according to AEO 97. In 1995, carbon emissions from natural gas were 267 MMTC,
and this figure is projected to increase to 310 MMTC in 2010 and 319 MMTC in 2015.
Factors Shaping Industry Response
Impacts of greenhouse gas emissions mitigation on the natural gas industry depend on the balance
between the three available strategies in reaching the emissions reduction goal. Different modeling
tools illustrate different possible futures:
The DRI energy model shows a reduction in natural gas use relative to baseline on the order of 9
to 16 percent between 2005 and 2015.
NEMS, despite simulating a somewhat larger reduction in carbon emissions from the energy
sector, shows an increase in natural gas use relative to base of between 4 and 11 percent over
this same period.
The dramatically different alternative futures illustrate the way in which emphasizing different energy
strategies to reduce carbon emissions - energy efficiency versus fuel switching - will produce
different results.
The key to cost-effective greenhouse gas reductions in 2010 lies in the large potential of developing
and implementing energy efficiency technologies in each of the economic sectors. Within the
Industries which may be required to reduce their greenhouse gas emissions, there will be opportunities
to gain competitive advantage through creatively meeting the environmental challenge. There will be
opportunities for other industries as well. For example, companies and individuals in the
architectural field can benefit as new building designs are needed to improve efficiency in both the
residential and commercial sectors. In addition, industries that manufacture items such as heating and
air conditioning equipment, office equipment, automobile parts, industrial equipment, and lighting, to
name only a small fraction of potential industries, may also benefit under a climate change policy due
to increased demand for these products. Finally, industries involved in the development of renewable
energy technologies will also be at an advantage as interest in solar, wind and other sources of energy
grows.
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Conclusion
From the above discussion, it is clear that the way in which resources are used by Individual
industries within each economic sector varies widely. This is not surprising given the vast array of
goods and services produced by these industries. Because sectors are unique, a climate change
mitigation strategy must be designed and implemented in a way that reflects a solid understanding and
appreciation of the differing circumstances faced by U.S. industries. This will give each industry the
ability to respond to Individual policies in a way that both minimizes potential impacts and maximizes
possible opportunities. In order to achieve this goal, future climate change policies must be based on
the continued development and diffusion of cost-effective, energy efficient technologies.
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CC: TAF Am
55
White House Climate Change Task Force
MM
734 Jackson Place, N.W. Washington, DC 20503
TR
MEMORANDUM TO: ASSISTANT SECRETARIES GROUP
FROM:
Dirk Forrister, Chair
White House Climate Change Task Force
SUBJECT:
ATTACHED SECTORS SUMMARY PAPER
As you may recall, the Assistant Secretaries Group charged Jeffrey Hunker to write a paper on
the sectoral implications of climate change policy. The attached paper is a much shorter version
of the Sectors paper we received H month ago. My thanks to Jeff Hunker, Skip Laitner, and the
many staff from all of the agencies who have worked on this paper over the past six weeks.
We would appreciate your review of the new draft. Please provide comments to Judi Greenwald
of our Task Force by Thursday. July 3. Our fax number is 343-1163. Judi's new e-mail address
is [email protected]. My plan is to incorporate your comments and forward the paper
to Katie McGinty and Dan Tarullo for their consideration the following week. This paper will be
used as part of the discussions with individual industry and labor representatives on how we
minimize the impacts and maximize the opportunities of climate change mitigation policies. Thus
your immediate attention would be much appreciated.
OPTIONAL FORM 99 (7-90) please get this be sure tax. they Thanks both recipients
FAX TRANSMITTAL
To Alicia nurnell GAI
transmitted IN 2 parts
This fax will be
# of pages
30
JeFF Frankel
From
Depi/Agency CEA
Phone #
VIRGINIA GORSEVEKI
COVER page
P.16
Fax # 395-6958
233-9796
Fax
NSN 7540-01-317-7368
233-9583
P. 17 25.
5099-101
GENERAL SERVICES ADMINISTRATION
Please be sure to
combine parts one and
two.
202 3-13-1060
Fax 202 393-1162
JUN-30-97 MON 04:50 PM
FAX NO.
P. 02/20
SECTOR EMISSIONS AND OPPORTUNITIES FOR MITIGATION
UNDER A CLIMATE CHANGE MITIGATION STRATEGY
A Pre-Decisional Draft
Do Not Cite or Quote
June 30, 1997
:
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TABLE OF CONTENTS
Introduction
1
Sources of U.S. Greenhouse Gas Emissions
1
U.S. Carbon Emissions by Fuel
I
U.S. Carbon Emissions by End-Use Sector
2
Energy End-Use Sectors
2
The Buildings Sector
2
Factors Shaping Industry Response
4
Technology Options
4
Barriers to Adoption
5
The Industrial Sector
5
Trends in the Industrial Sector
6
Economic Modeling Results for the Industrial Sector
/
Factors Shaping Industry Response
5:
Aluminum
9
Petroleum Refining
9
Steel
10
Chemicals
11
Pulp and Paper
11
Cement
12
High-Growth Industries
12
Non-Energy Minerals Industry
13
Construction
13
Motor Vehicle and Related Industrics
13
Barriers to Adoption
14
The Transportation Sector
15
Trends in the Transportation Sector
15
Contribution to Greenhouse Gas Emissions
15
Factors Shaping Industry Response
15
Technology Trends and Options
16
Agriculture
17
Contribution to Greenhouse Gas Emissions
17
Factors Shaping Industry Response
17
Technology Trends and Options
18
:
Energy Supply Sectors
18
Electric Power Generation
18
Contribution to Greenhouse Gas Emissions
19
Factors Shaping Industry Response
20
Restructuring
20
Distributed Generation
21
Technology Trends and Options
21
Petroleum
22
Contribution to Greenhouse Gases
22
Factors Shaping Industry Response
22
Coal
22
Contribution to Greenhouse Gas Emissions
22
Factors Shaping Industry Response
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Nuclear Energy
23
Factors Shaping Industry Response
23
Natural Gas
24
Contribution to Greenhouse Gas Emissions
24
Factors Shaping Industry Response
24
Conclusion
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Introduction
In a June 27, 1997 speech to a United Nations environmental conference, President Clinton
acknowledged that "concentrations of greenhouse gases in the atmosphere are at their highest levels in
more than 200,000 years and climbing sharply." If that trend docs not change, the President noted
that the resulting climate changes would "disrupt agriculture, cause severe droughts and floods and
the spread of infectious diseases." In underscoring the fact that no nation can escape the danger of
climate change, the President stated that: "We must create new technologies and develop new
strategies like emissions trading that will both curtail pollution and support continued economic
growth. We owe that in the developed world to ourselves, and equally to those in the developing
nations. Many of the technologies that will help us to mect the new air quality standards in America
can also help address climate change. This is a challenge we must undertake immediately."
Drawing on the guidance of the President's statement to the United Nations, it is clear that any future
climate change policies adopted by the United States should be anchored by a technology-based
investment strategy. Such a strategy will focus on the diffusion of cost-effective technologies that are
now available but underutilized, even as we continue efforts to develop new technologies. Yet, the
sectors of the economy vary widely in how they produce goods and services. For that reason, the
impact of future climate policies - as well as the technologics available to respond those policies -
will also vary widely. This is true for both the sectors as a whole and for the individual firms within
those sectors. For policy makers and for business and labor leaders, it is important to understand
these different impacts and opportunities.
Sources of U.S. Greenhouse Gas Emissions
Greenhouse gases include carbon dioxide (CO₂), methane (CH,), nitrous oxide (N₂O), and ozone (Q).
Chlorofluorocarbons (CFCs) and partially halogenated fluorocarbons (HCFCs), a family of human-
made compounds, their substitutes hydrofluorocarbons (HFCs), and other compounds such as
perfluorinated carbons (PFCs), are also greenhouse gases. Of these gases, CO2 accounts for the
largest share by far of all anthropogenic emissions and is primarily the result of fossil fuel combustion
for energy use. The greenhouse gas emissions are typically measured in "carbon equivalents,"
according to their respective "global warming potential."
Total U.S. greenhouse gas emissions in 1995 were 1,557 MMTCe (million metric tons of carbon
equivalent), with gross emissions of 1,674 MMTCc offset by 117 MMTCe of carbon sequestered by
the nation's forests. Since 1990 energy-related carbon emissions have increased by about 10 percent
to 1,467 MMT in 1997. They are expected to grow 1.2 percent annually, reaching 1,722 MMT by
2010.
U.S. Carbon Emissions by Fuel
Petroleum products are the leading source of carbon emissions from energy use and nearly 80 percent
of the petroleum emissions result from transportation. Coal is the second leading source of carbon
emissions, with most of the projected future increases in emissions from coal result from electricity
generation.
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Table 1. U.S. Carbon Emissions by Fuel Type
1997
Percentage of
2010
Percentage of
Total 1995
Total 2010
Emissions
Emissions
Petroleum
613
42%
730
42%
Natural Gas
335
23%
412
24%
Coal
519
35%
579
34%
Other (includes
0
0%
1
0%
methanol and liquid
hydrogen)
TOTAL
1467
100%
1722
100%
Source: EIA Annual Energy Outlook 1997
U.S. Carbon Emissions by End-Use Sector
End-use sectors include the following: residential and commercial (collectively called "buildings"),
industrial, and transportation. Emissions from each of these sectors are roughly equally distributed
among the three: buildings (35%), industry (33%), and transportation (32%). These shares are
projected to remain fairly constant through the year 2010 and beyond. The most diverse of the end-
usc sectors is that of industry, which consists of farming, agricultural services, fisheries, forestry,
mining, construction, and manufacturing.
Table 2. U.S. Energy-Related Carbon Emissions by Major End-Use Sector
Percentage of
Percentage of
1997
Total 1997
2010
Total 2010
Emissions
Emissions
Buildings
512
35%
576
33%
Industry
471
33%
548
32%
Transportation
485
32%
598
35%
TOTAL
1467
100%
1722
100%
Source: EIA Annual Energy Outlook 1997
Energy End-Use Sectors
The Buildings Sector
Residential and commercial end uses combined to consume 35 percent of the nation's total energy
requirements in 1997. The major components of energy use within the buildings sector are
summarized in Table 3 on the following page.
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Table 3. 1997 Building Energy Consumption by End-Use
End Use
Percentage of Total
Space Heating
26%
Space Cooling
9.4%
Water Heating
10.8%
Refrigeration
4.9%
Lighting
14.9%
Cooking
2.6%
Other Appliances
31.5%
Total
100%
Source: EIA Annual Energy Outlook 1997
Residential primary energy use per household has declined only two percent in the period 1979 to
1995. According to the Energy Information Administration's Annual Energy Outlook 1997
(AEO97), total energy consumption in the residential sector is projected to increase by 9 percent
between 1997 and 2010. Most of the growth in this sector is expected occur in the "other uses"
category, which includes items such as electronic equipment and small appliances. Not surprisingly,
therefore, most of the increase in energy demand during this period is attributed to greater use of
electricity.
Measured in terms of energy use per square foot of building space, the commercial sector has
witnessed improvements in energy efficiency on the order of 30 percent between 1979 and 1992.
However, total energy consumption has been rising over the past two decades as a result of overall
growth of the commercial sector. Future energy demand is also predicted to increase by 9 percent in
the period 1997-2010. As is the case with the residential sector, end-use products such as office
equipment and consumer electronics account for the majority of net growth in energy demand through
2010.
Table 4 summarizes the category of end-use energy in the combined buildings sector for the years
1997 and 2015.
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Table 4. Total 1997 and 2015 Building Energy Consumption By End-Use (in Quads)
1997
2010
Percent Change
Space Heating
8.77
8.85
0.9%
Space Cooling
3.17
3.09
-2.3%
Water Heating
3.63
3.69
1.5%
Refrigeration
1.67
1.42
-14.6%
Lighting
5.04
5.04
-0.2%
Cooking
0.87
0.89
2.3%
Other Uses/Appliances
10.62
13.84
30.3%
Total
33.77
36.81
9.0%
Source: EIA Annual Energy Outlook 1997
Table 4 shows that most of the growth in building energy demand will occur in the "other uses"
category, growing by 30 percent in the period 1997 through 2010. This category currently accounts
for nearly 32 percent of total building energy use and is expected to increase to 38 percent in 2010 as
small appliances and office equipment continue to penetrate the market. In the residential sector, this
category of end-uses includes personal computers, dishwashers, clothes washers, and dryers. For the
commercial sector this includes office equipment such as personal computers, monitors, fax machines,
copiers, printers, scanners and multifunction devices. Additional products included in the "other"
category include new telecommunications technologies, medical imaging equipment and vending
machines.
Factors Shaping Industry Response
Currently, numerous opportunities exist to improve the level of energy efficiency within the buildings
sector. By tightening the building shell and installing properly sized, energy efficient heating and
cooling equipment, consumers can experience substantial monetary gains through greater savings as a
result of lower monthly utility bills. In addition to saving money, consumers can benefit from
improved overall comfort resulting from better indoor air quality, superior lighting, and reduced noise
levels. However, the savings are often hard to verify, sometimes varying from building to building.
Although consumers have clearly accepted improved insulation levels and some other energy savings
features, it is not clear whether or when the more complicated or advanced savings opportunities will
achieve significant market penetration.
Technology Options
Cost effective technologies which are currently available in the buildings sectors include, but are not
limited to, the following:
Better insulation of building shells
Better control systems for regulating the use of energy consuming equipment (time and
temperature controls by zone, energy-use optimizers, energy management systems)
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High efficiency heat pumps
Heat pump water heaters
Decreased hot water requirements through better designed clothes washers and dishwashers
Increased motor/compressor efficiencies for refrigerators
High efficiency lighting - fluorescent fixtures, electronic ballasts, control systems
Substitution of lower-carbon fuels (on a full fuel-cycle basis)
Reduced air infiltration practices, including improved duct work
Energy efficient windows
Whole house design that allows for substantial equipment downsizing
Barriers to Adoption
Despite the proven cost effectiveness of these and other energy efficiency technologies, it is clear that
they are not widely adopted by consumers. This is due to a number of institutional, organizational,
and other barriers. The existence or availability of a financially attractive technology does not by
itself mean the technology will be purchased and used in sizable quantities. For high rates of market
penetration, a number of other key factors must be in place:
Potential buyers of products need to know about the technology
Potential buyers need clear, reliable information on the performance and economic benefits of the
technology
Potential buyers must be the ones to see the benefits of lower energy bills
Service providers and users of the technologies must have expertise to appropriately design for,
install, and operate the technology
Sources of capital must understand the low-risk nature of these investments
The Department of Energy (DOE), the Environmental Protection Agency (EPA), and members of the
financial community are developing innovative financing methods for energy efficiency investments.
In addition, DOE operates a program of test procedures, energy conservation standards, and labeling
for certain major energy using equipment in the residential and commercial sectors. These include
refrigerators, freezers, air conditioners, water heaters, furnaces, dishwashers, clothes washers, clothes
dryers and kitchen ranges, ovens, commercial heating and air-conditioning equipment, certain
incandescent and fluorescent lamps, distribution transformers, and electric motors. The Energy
Policy Act of 1992 (EPACT) also established maximum water flow-rate requirements for certain
plumbing products and provided for voluntary testing and consumer information programs for office
equipment, luminaires, and windows. Our nation has made significant progress in overcoming these
barriers, but more needs to be donc to meet the challenge of climate change.
The Industrial Sector
The industrial sector consists of an extremely diverse set of business enterprises - both in terms of
products and processes. It includes agriculture, mining, construction and manufacturing. Even
within individual subsectors, a range of activities exist that have vastly different energy use patterns
and carbon emission profiles. Agriculture includes, for example, both ranching and farming. Mining
includes the extraction of both energy and non-energy mincral resources. Construction ranges from
the building of new homes, offices, highways, and power plants to the maintenance and repair of
those same facilities. Finally, the manufacturing subsector incorporates a range of industries that
produce beer, paper, and clothing on the one hand, and aluminum ingots, plastic resins, cars, and
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computers on the other. Energy requirements for each of these industries are as different as the
products they produce.
Trends in the Industrial Sector
Broadly speaking, industrial activity will grow by about 2.35 percent annually in the period 1997
through 2010. Yet, from the perspective of energy use and overall carbon emissions, there are
significant differences within the many subsectors. For convenience, such activity can be categorized
into those subsectors which are energy-intensive and those which are not. Output in the energy-
intensive industries - including chemicals, petroleum refining, pulp and paper, glass, cement, iron
and steel, and aluminum - - will grow by 1.34 percent annually through 2010. The energy intensity
of those subsectors will decline by only 0.53 percent. In contrast, output in the non-energy-intensive
industries will increase by 2.65 percent annually while their energy intensity will decline 1.23 percent
per year. Despite the more rapid decline in energy intensity, the more rapid growth in economic
activity means that overall energy use ( and, hence, increases in carbon emissions) will increase more
quickly in the non-energy-intensive industrial subsectors.
Table 5. 1997 Comparison of Energy Intensive and Non-Intensive Industrial Subsectors
Energy Intensity
Output
Energy Use
(1000 Btus per
(Billions of
Annual Growth
(Trillion
Dollar of
Annual Change
1987 Dollars)
Rate
Btus)
Output)
in Energy
Intensity
Energy-
920
1.34%
17,197
18.7
-0.53%
Intensive
Other
2,847
2.65%
17,224
6.1
-1.23%
Total
3,767
2.35%
34,421
9.1
-1.22%
Source: EIA Annual Energy Outlook 1997
Carbon emissions in the industrial sector are the result of two different types of processes. The first
is the combustion of fossil-fuel resources while the second involves non-energy related production
processes. The energy-related emissions, estimated to be about 471 MMT in 1997, account for about
96 percent of total carbon emissions. This includes emissions from electricity generation which are
distributed across all the industrial sectors. According to the AE097 forccast, this is expected to
grow to 548 MMT by 2010, and 16 percent increase over 1997 levels. Unfortunately, emissions data
for individual industrial sectors are not currently reported in any published sources.
In addition to emissions resulting from the combustion of fossil fuels, the primary industrial processes
that generate carbon emissions include:
the manufacture and consumption of limestone (e.g., in iron smelting, steelmaking, glass
manufacture, flue gas desulfurization)
dolomite consumption
soda ash manufacture and consumption (e.g., in glass manufacture, flue gas desulfurization, and
chemicals production)
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carbon dioxide manufacture
aluminum production
One example of non-energy related process emission occurs in the production of cement. The
calcination reaction which converts the limestone raw material into clinker generates direct emissions
of approximately 11 MMT. This is based upon 1995 data, the latest available at this time. Total
non-energy related processes contributed a total of perhaps 21 million MMT of carbon emissions in
1995.
Economic Modeling Results for the Industrial Sector
There are a variety of models and analyses which have been used to characterize the impacts of
climate policies on the industrial sectors. A June 1997 study by a consortium of non-profit groups,
for example, estimated that carbon emissions could be stabilized below 1990 levels with an overall net
benefit to the economy. The reason is that cost-effective energy efficiency improvements and
productivity gains were shown to offset the increased energy prices stimulated by proposed climate
policies (Energy Innovations, 1997). The Interagency Analytical Team (IAT) also used aggressive
technology investment assumptions in an analysis with the Markal-Macro model to show that the cost
of energy services could actually be about 3.0 percent lower for all sectors in the year 2010 and
beyond - despite the higher energy prices resulting from a cap in carbon emissions. This result
contributed to a net positive (albeit small) GDP benefit showing up as early as the year 2000.
To analyze the impacts of climate policies on specific industries, however, the IAT employed the
DRI/McGraw-Hill Inter-Industry Model. The model calculates production, detailed inter-industry
transactions and trade for 246 industries, using production and trade data from the DRI
Macroeconomic Model and detailed projections of changes in efficiency and productivity over time.
Under the "central stabilization case," which estimates the effects of stabilizing carbon emissions at
1990 levels from the year 2010 through 2020, direct emissions reductions in the industrial sector
account for about 19 percent of total emission reductions (48 MMT) in 2010 and 21 percent (70
MMT) in 2020. Reductions in overall energy demand as well as improvements in industrial energy
efficiency account for these reductions. Also under the central stabilization case, energy Intensity
across all industries initially declines at a rate of 2.6 percent per year vs. 1.5 percent in the base case
and later slows to about 1.5 percent per year versus 0.9 percent in the base case.
One major area of concern is the effect of carbon constraints on the energy-intensive industries which
account for only one-fourth of total industrial output but one-half of total industrial energy use. These
concerns reflect both domestic demand, and international competitiveness.
The impact of climate stabilization policies on the demand for energy-intensive industrial products
may be very sensitive to how the policy is implemented.
If emission permits are auctioned off and the revenues are used to reduce the budget deficit, the
reduction in government borrowing will reduce real interest rates and, in turn, stimulate demand
for consumer durables, new construction and business investment. Higher construction,
investment, and durables demand raises the demand for such encrgy-intensive goods as cement.
aluminum, and steel. Pulp and paper products, energy-intensive chemicals and other energy
intensive products more closely tied to non-durable consumer good consumption - pulp and paper
products, and some chemicals fair less well under this scenario.
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In contrast, if emission permits are given to households (or the revenues from auctioned permits
are returned to them through income tax reductions). the main effect is to stimulate household
consumption expenditures rather than business investment. In this case, higher non-durables
consumption stimulates the demand for paper and paperboard from the pulp and paper industry.
A second and central concern is the following: as higher energy prices raise production costs, U.S.
energy-intensive producers might lose market share to competitors from non-Annex I countries under
a climate treaty that affects Annex I but not Annex II countries.
The results of the DRI model provides a midpoint in the ranges of other studies, which either tend to
predict that carbon stabilization policies would have only minimal impacts initially, and even a small
positive in later years as energy-intensive industries begin to implement offsetting productivity
investments, or which predict severe impacts that could perhaps drive large portions of these
industries overscas, with little net effect on global emissions. The results from DRI analysis show
that while a carbon stabilization policy would affect energy-Intensive industries, the most dire
predictions overstate the impacts of climate policies. For the policy cases, other than for oil and coal.
the impacts on output for energy intensive industries relative to the base case are less than 1.9 percent
assuming no international emissions trading, and less than 1.2 percent with international trading.
Geographic and regional shifts in global energy-intensive production are inevitable even without a
climate policy. For instance, according to the DRI Baseline Forecast, the carbon and energy
intensive industries in the U.S. will experience declines in their share of both U.S. employment and
output. These industries are projected to employ only 2.9 percent of the U.S. workforce by 2010.
This figure decreases to 2.3 percent by 2020. Similarly, the energy intensive industries share of
output drops from 9.1 percent of GDP or 27.9 percent manufacturing output in 2010 to 7.2 percent of
GDP or 23.3 percent of manufacturing output in 2020. Even in the baseline, emerging Asian
countries share of basic metals exports is expected to increase from 11 percent to 17 percent by the
year 2010, and chemicals and plastics exports are forecast to increase from 13 percent to 19 percent.
The IAT's DRI analysis did account for changes in terms of trade for U.S. industries. Under this
analysis, non-Annex I producers (including China Mexico, Korca and Brazil), which currently
account for about 40 percent of U.S. imports, would not be faced with energy price increases from a
stabilization. If that were to occur, there would be an increase in imports from non-Annex-I countries
and decreases of U.S. exports to the world market. Yet, the relatively rigid representation of
substitution possibilities in production that characterizes the DRI model may overstate the effect of
energy price increases on production costs. In contrast to the DRI model, models that have a more
detailed and flexible representation of production technologies (such as general equilibrium models) or
that represent technological shifts (i.e. from integrated steel mills to electrometallurgical mini-mills or
from primary aluminum to secondary aluminum) would yield lower estimates of production cost
increases. As the Markal-Macro results have shown, depending on the depth of technological
substitution that is available to industrics, the overall result may even show a slightly positive GDP
benefit over time.
Factors Shaping Industry Response
Within the manufacturing subsector, several industries are substantially more energy intensive than
others. And among these energy-intensive industries, numerous differences exist in terms of the
products each industry produces and the processes they employ.
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Aluminum
The aluminum industry has three major segments - primary materials, semifabricated materials, and
finished products. The U.S. aluminum industry is globally competitive in all parts of the industry and
is a net exporter of semifabricated aluminum products. The last greenfield smelter in the U.S. was
built in 1980 and there are currently no plans to build any new facilities.
Unlike other basic industries, the U.S. aluminum industry is highly dependent upon the cost of
electricity, such that any future changes due to restructuring would have major impacts on the
competitiveness of this industry. The primary aluminum industry in the U.S. purchases electricity at
approximately half the price of other industries, in part because of hydropower (Pacific Northwest)
and in part because of long-term negotiated rates. The future of U.S. primary aluminum will depend
on differences (if any) in the price and availability of hydro- and coal-generated electricity. These
differences will have substantial regional impacts. Almost all the smelters in the eastern part of the
United States rely upon coal- based electricity, whereas the smelters in the Northwest use hydro-based
electricity. Should a policy be implemented based on carbon emissions, the eastern smelters in the
United States would be impacted more than western smclters.
Technological change in the aluminum industry has been incremental. Continuous process
improvements have reduced energy consumption per ton by approximately 25 percent between 1960
and 1994 and retrofit technologies with significant improvements in existing energy efficiency levels
are expected to be in place by 2010. Increased use of recycled metal could also yield substantial
energy savings. This depends on developing advanced scrap separation and smelting processes and on
overall advances in process design.
Petroleum Refining
Petrolcum refineries distill crude oil, crack the resultant intermediate products into smaller molecules,
and then purify and blend the various fuels to produce a number of useful products. Gasoline is the
principle refinery product, accounting for over half of industry sales. U.S. refining industry is the
largest in the world with capacity at about 15 million barrels per day (bpd). However, no new
refineries have been bullt in the U.S. for more than a decade and the number of refineries has
decreased from about 285 in the late 1960s to about 175 currently.
In the petroleum refining sector, industry impacts will depend on sensitivities such as the extent to
which prices of fuel used as an input are increased as opposed to policies that affect the overall
demand for the refinery products produced. Other factors that will affect the petroleum refining
industry include the price of marine bunker fuel which can account for 25 to 55 percent of
transportation costs. The characteristics of individual refineries will also affect the response of the
industry. The refineries most vulnerable are located in highly competitive regions, they are typically
old, and they produce a standardized product subject to a high degree of competition. Many of the
old refineries are only marginally profitable under existing conditions. Less affected refineries will be
those that have been renovated and modernized in the last five years, or produce specialized products.
In the near to mid-term, process energy utilization can be reduced by 5-10 percent through utility
system modifications, monitoring and maintaining equipment/process energy efficiency through
development and adoption of advanced sensor/control technologies, and by minimizing and controlling
heat exchanger fouling. In the mid to long-term, opportunities to improve energy efficiency include
areas such as fired heaters, distillation catalytic hydrocracking, reforming and hydrotreating,
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alkylation, and hydrogen production.
Glass
The manufacture of glass and glass products in the U.S. is a large, widely diversified, energy-
intensive industry. The glass industry includes the following four segments: glass packaging,
fiberglass, flat glass, and specialty glass. The diversified nature of the glass industry highlights the
fact that competitive challenges faced by one sector will not always be applicable to the other sectors,
and solutions must be tailor-made as well.
The two most pressing challenges for the glass industry are competition from other materials such as
plastic and aluminum, and competition from foreign glass manufacturers with lower labor and
environmental compliance costs. To meet these challenges the industry will need to improve
manufacturing processes, create additional markets and uses for glass products, and reduce energy
and waste disposal costs. Reduction in energy consumption, as well as the increased use of recycled
glass, both support reduction in greenhouse gases through reductions in fuel combustion.
Options to improve energy efficiency in the glass industry include technological advances that
accomplish the following:
enable the use of oxygen rather than air to fire glass furnaces,
increase the use of waste glass, or cullet, in glass manufacturing,
lead to the new coatings and new structural components needed to enhance the performance of
manufacturing equipment, and
create new temperature sensors for furnaces to increase energy efficiency.
Steel
The U.S. steel industry is comprised of integrated producers, electric are furnace (EAF) based mills,
and specialty steel producers. Manufacturing processes for iron and steel production have changed
considerably since the 1980s. The open hearth furnace, which was the workhorse of integrated mills
in the 1950s, is now obsolete. The basic oxygen furnace (BOF), however, held on to a relatively
constant share of total production during the same period, although this share has begun to fall
gradually since 1992 with the rise of steel mini-mills. These mini-mills use electric arc furnaces
which use 100 percent scrap metal and therefore require less energy per ton of steel produced. Mini-
mills are highly dependent on the price and availability of electricity and scrap.
Over the next five years, steelmaking capacity in the U.S. is expected to increase significantly as
many new EAF-based mills are scheduled to come on line. As the percentage of EAF-based steel
production increases, the average energy intensity of steelmaking will decrease, with associated
decreases in coal use and increases in electricity use (and corresponding changes in the amount and
type of emissions). In addition, this increase in EAF capacity will likely affect steel imports and
domestic scrap prices. Measures that increase coal prices would have a far more dramatic impact on
integrated mills than on EAF facilities, while all of the industry will he affected by increases or
decreases in electricity price. Deregulation of the electric utility industry is expected to benefit the
industry by lowering electricity prices.
After a historical record of lagging technologically, the U.S. steel industry has begun to exhibit a high
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rate of technological change, including direct smelting processes that replace the blast furnace and
coke oven, and direct strip casting processes that replace the continuous caster and hot strip mill.
Chemicals
The chemical industry is more diverse than virtually any other U.S. industry. Chemicals are the
keystone of U.S. manufacturing, essential to a wide range of industries, such as pharmaceuticals.
automobiles, textiles, paper, electronics, agriculture, construction, furniture, paint, and appliances.
The U.S. is the world's largest producer of chemicals. More than 9000 corporations develop,
manufacture, and market over 70,000 chemical products. Investments in plant and equipment have
tripled since 1985 and R&D spending has more than doubled from $8.3 to $17.7 billion.
The chemical industry has reduced energy intensity over the last decade and has made strides in
reducing the environmental impacts of chemicals production. However, to remain at the forefront of
the global market and to maintain its competitive position, the industry will need to continue to take
steps to strengthen market share, such as increased development of markets where the U.S. has a
technological advantage. Improvements to energy, resource and process efficiency will also play an
important role in the future competitiveness of the industry. The U.S. chemical industry has an
excellent opportunity to greatly reduce U.S. industrial greenhouse gas emissions through advances in
current and emerging separation technologies. Advances In separations technology and chemical
processes are anticipated to strengthen the U.S. chemical industry and ensure its competitive edge in
the increasing globalization of markets. They will allow the chemicals industry to balance and sustain
society's demands for higher environmental performance with industry's demands for increased
profitability and capital productivity.
Pulp and Paper
The U.S. has the world's largest installed pulp, paper, and paperboard production capacity, some 86
million air-dry metric tons (ADMT) per year in 1993, or about 30 percent of global capacity.
Manufactured products from the paper and allied products industry include newsprint, printing and
writing paper, tissue, paper plates, card stock, corrugated cardboard, cartons, and construction-grade
paperboard. The U.S. is home to close to 550 pulp and paper mills located in 42 states. Over the
last twenty years or so, many of the smaller, older mills have been closed down and replaced with
larger integrated mills. The integrated mills produce both pulp and paper and/or paperboard. The
trend is toward larger size (over 2000 tons/day) plants with the capability to consistently process high-
quality products at higher speeds.
The U.S. pulp and paper is both capital and energy intensive. New capital expenditures in the last
decade have averaged 10.4 percent of revenues, making paper and allied products the most capital
intensive of the manufacturing industries. This factor could conceivably restrain the ability of the
industry to install new technologies -- especially technologies that will not significantly contribute to
lowering production costs. However, because of the energy-intensive nature of the industry, rising
fossil fuel costs would create additional incentives to increase reliance on self-generated energy and
further increase the energy efficiency of pulp and paper production processes.
There are major opportunities for improving the efficiency of process energy use in the pulp and
paper industry. An number of new energy-saving process technologies such as digesters and paper or
pulp dryers, are under development or recently commercialized and process heat integration analysis
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has been applied in several mills. Most process specific changes that bring energy efficiency
improvements also bring productivity and other improvements. Advanced biomass-based
cogeneration systems, which would provide major improvements in efficiency over existing systems,
are currently undergoing rapid development.
Cement
The U.S. hydraulic cement industry consists of firms producing portland, masonry, prepared
hydraulic, natural, lime, and oil well cements. Portland cement represents more than 95 percent of
total hydraulic cement production; the remainder is mostly masonry cement. There are currently 47
cement companies operating close to 118 plants and 207 kilns in the U.S. Total industry shipments in
1995 were 75 million metric tons with total U.S. consumption of 86 million metric tons. There were
approximately 11 million metric tons of finished cement imports and half a million metric tons of
exports the same year.
Compared to world standards, the U.S. cement industry is characterized as aging and relatively
inefficient. Plants continue to be shut down and others may be slated for closure due to technological
or competitive obsolescence. Currently, there remains a need to replace and upgrade plants in order
to increase productivity in domestic plants. Most major producers, however, are not in a good
financial position to invest in extensive and expensive additional capacity. No new greenfield plants
have been built in the U.S. in ten years.
Currently, 65-70 percent of U.S. cement capacity is foreign-owned - including three of the top five
firms. Approximately 90 percent of cement imports are handled by domestic producers, who use
imports to supplement domestic capacity, such that corporate profitability is not necessarily linked to
the health of the domestic industry.
A number of opportunities exist to reduce emissions such as increasing the share of production using
dry process technology, increasing the use of efficiency enhancing machinery such as particle
classifiers which reduce grinding loads, increasing the use of mix-ins when making concrete, and fuel
switching.
High-Growth Industries
Industries other than the energy-intensive subsectors discussed above also depend on energy and will
likely be affected by climate change mitigation policy. Among the reasons for focusing attention on
these sectors are that:
Some of these industries are growing more rapidly than the energy-intensive industries. Most of
the growth (64 percent) in industrial energy use from 1997-2010 will be by non-energy-intensive
industry subsectors (3.4 of 5.3 quads).
Service Industries employ 77% of the U.S. workforce and account for 74% of GDP. The
distinction between service and manufacturing industries is becoming increasingly blurred.
Opportunities exist for new technologies in high-growth sectors that have capital turnover rates
that are higher than those of energy-intensive Industries. With high rates of capital turnover, the
opportunities to accelerate the diffusion and acceptance of energy efficient technologies are
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substantial, and can collectively lead to significant reductions in carbon emissions.
Under a climate change mitigation policy, Industries involved in producing energy-saving products
and providing energy services will benefit as demand increases for their products and services.
Non-Energy Minerals Industry
The non-energy mining includes the extraction of industrial minerals such as crushed stone, sand and
gravel as well as metallic ores including iron, and copper. In 1992 the non-energy minerals industry
had a production of $32 billion dollars. As in coal mining (discussed more fully below), employment
has been steadily declining since the early 1980s. Projections indicate that by the year 2000 this
sector will employ 25 percent fewer people than in 1980, dropping from 236,000 10 176,000 jobs.
As with other sectors, the minerals industry will be affected by rising prices resulting from efforts to
stabilize carbon emissions. However, there are indications that the industry will be able to reduce
overall energy consumption to at least partially offset increased energy prices. Among others, using
high efficiency electric motors, incorporating new process improvements, increasing maintenance of
motor vehicles, system conveyor belts, drives, and compressed air systems can each provide savings
of 10 to 15 percent, conservatively.
Construction
The construction industry is as varied as it is large. It includes firms with thousands of employees
and firms with just one. In 1992 there were just under 2 million construction establishments
employing over 4.6 million persons. Combined, the construction industry performed business totaling
almost $582 billion in 1992. Although much of the construction industry rises and falls with
fluctuations in the economy, the industry as a whole is likely to remain stable through the next 10
years, both in terms of employment and value of business.
Much of the construction industry is labor intensive. Most construction work involves using small
trucks to transport workers and materials, and hand and power tools, and physical labor to complete
work. It is one of the least energy intensive industries in the nation. Energy costs (including
sclected power, fuels, and lubricants) account for approximately 1.6 percent of each dollar of business
done in the construction industry as a whole. Neverthcless, there are important opportunities to
reduce energy costs within the industry. These opportunities range from using more efficient motor
vehicles to incorporating the use new building materials (c.g., laminated beams, recycled products,
engineered lumber products such as roof and floor trusses, insulated wall panels, and modular
components) that reduce both construction waste and costs.
Motor Vehicle and Related Industries
The motor vehicle industry is much more diverse than the mere manufacture of new cars and trucks.
It also includes road construction and maintenance, freight and passenger services, petroleum refining
and wholesale distribution, and automotive sales and services. Total employment in these related
industries approaches 7 million persons, providing about 7 percent of the nation's jobs.
Focusing only on the automobiles industry, most analysts see little or no change in the sales of cars
and trucks over the next few years. This means that competition will be fierce among the 26 firms
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that serve the major developed markets worldwide, including the so-called Big Three automakers -
Ford, Chrysler, and General Motors. Within a decade some analysts project that, either as a result of
sharing manufacturing resources, or as a result of mergers and acquisitions, as few as 10 "mega-
manufacturing alliances" may serve all of the developed countries.
Continuing productivity gains among the U.S. automakers has strengthened its overall economic
position. The number of employees per hundred vehicles sold, for example, has fallen 2.9 percent
per year in the decade ending 1994. At the same time, the industry should be fairly unaffected by
greenhousc gas emissions policies. This is due to the fact that the assembly of motor vehicles
requires only about 15 million Btu of energy per car. If carbon prices rose as high as $100 per ton,
for example, this would add between 0.1 and 0.2 percent to the cost of manufacturing a new car. On
the other hand, new car and truck sales might slip as the cost of driving increases as a result of
climate policies. But new technologies can be incorporated into the design and construction of both
light and heavy duty vehicles to reduce the overall cost of driving despite the prospect of initially
higher gasoline prices. Technology improvements include engine designs that reduce friction and
increase combustion efficiency and body designs that decrease the aerodynamic drag on the vehicle.
Meeting the PNGV goals of an 80 MPG car that costs no more than today's vehicles (see the
discussion on transportation below) will go a long way to minimize the impacts on both the auto
industry and the many related industries.
Barriers to Adoption
From the above discussion, it is clear that numerous energy-saving technologies are available in the
industrial sector - many of which offer additional benefits such as improved product quality.
Despite this, however, many of these industries have historically avoided investing in energy
efficiency technologies. Several factors help to explain why this may be the case.
For most industries, energy expenditures represent a minor portion of their operating costs, averaging
less than two percent of value of shipments for the manufacturing sector. Industries such as primary
aluminum, hydraulic cement and industrial gases are notable exceptions, with energy accounting for
more than 20 percent of value of shipments. However, for some of the fastest growing industries,
such as electronics and computers, energy expenditures represent only 1.2 and 0.6 percent of
shipments respectively. In most industries, larger costs, such as labor and raw materials, receive
attention before energy. For example, employee compensation averaged 24 percent of shipments in
1994.'
Opportunities for energy efficiency improvements must compete with other issues for finite resources
within a company. While capital is the most often cited resource, staff time may be of equal or
greater importance. Downsizing is common when industrial companies undergo restructuring,
resulting in fewer total personnel available to address all issues. When a choice must be made
between addressing a potential emissions-compliance, productlon-reliability or product-quality
problem, and identifying and implementing energy efficiency projects, the former receives the
attention since failure to do SO may result in the plant being shut down. One manifestation of this
staffing constraint is the reduction in the number of corporate energy managers²
1. "Considerations in the Estimation of Costs and Benefits of Industrial Energy Efficiency Projects," ACEEE/EPA
2. Ibld.
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Many businesses operate with a tight constraint on their capital budgeting. Hence, the allocation of
capital remains a significant barrier to achieving greater levels of energy efficiency. Given a choice
between expanding existing production capability and introducing new products, and reducing energy
bills, the production-related projects will invariably win out. Hence, presenting projects based on total
benefits will likely be more effective than building a case on the energy savings alone.
The Transportation Sector
Trends in the Transportation Sector
Over the last decade, new light vehicle fuel economy has remained relatively flat in the U.S. This is
due to both an absence of increased fuel-efficiency standards and a lack of consumer demand for
greater fuel efficiency. As fuel prices declined following the oil shocks on the 1970s, consumers
began turning away from fuel economy and looked more toward amenities such as speed,
acceleration, size, and greater utility when making their purchasing decisions. Corporate average fuel
economy of the new light vehicle fleets (i.e., cars and light trucks such as minivans, sport utility
vehicles, and pickup trucks) grew along with increasing CAFE standards throughout the late 1970s
until the mid 1980s. Since 1982, however, the average horsepower rating of the combined new light
vehicle fleet (cars plus light trucks) has increased by 60 percent while the average fuel economy of
the same fleet has remained unchanged. Had new cars sold in 1996 retained the same average
acceleration performance and weight as new cars sold in 1984, the technologies actually incorporated
into the fleet during this period could have increased new car fuel economy by about five miles per
gallon, or close to 20 percent.
In addition, the share of light trucks is increasing, having gone from under 25 percent of the market
in 1982 to almost 45 percent today. Light trucks face lower CAFE standards than cars (almost 7 mpg
lower). Moreover, since light trucks tend to last longer than cars, they are likely to be driven more
miles over their lifetime than cars.
Contribution to Greenhouse Gas Emissions
Passenger cars and light-duty trucks contribute the majority of transportation emissions. Emissions
from light-duty vehicles alone accounted for 20 percent of total U.S. greenhouse gas emissions in
1990, and in the absence of new policy measures are expected to rise from about 250 MMTC in 1990
to 350-400 MMTC in 2010. Energy use in trucks used for commercial transport is only about 40
percent of energy used in passenger vehicles, but is growing significantly faster.
The major factors underlying the rapid increase in emissions from light-duty vehicles are growth in
VMT, stagnant new fleet fuel economy levels (miles per gallon, or mpg), and growth in the relative
proportion of light trucks sold, which have lower (i.e., less stringent) CAFE standards than cars.
Actual growth in VMT since 1990 has averaged 2.4 percent per year. Growth in VMT is a function
of a number of factors, including demographic changes (e.g., more women in the workforce;
immigration), land use patterns, the cost of driving each mile (now at an all-time low on an inflation-
adjusted basis), among others.
Factors Shaping Industry Response
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With consumers continuing to exhibit preferences for performance, size, and utility rather than fuel
economy, no significant increase in new fleet fuel economy is expected to occur absent a driving
force such as policy changes or fuel price increases.
Technology Trends and Options
Three principal ways exist to reduce carbon emissions from light vehicles: (1) reduce vehicle miles
traveled (VMT); (2) improve fucl economy; and (3) use fuels with lower life-cycle carbon emissions.
Work developed for the "Car Talk" committee³ suggested estimated reductions of 445 to 585 MMT
would be possible in the period 2005 to 2025 from a combined package of land-use and transit
policies as well as efforts to improve overall fuel economy and reduce the carbon content of
transportation fuels.
Reducing VMT would involve a wide mix of policies. The goals would be to encourage land use
away from auto dependency, and shift the relative (full) cost of driving versus other transportation/
communication alternatives such as workplace parking subsidy reform, and shifting of state and local
subsidies to cost-of-driving fees.
Improving fuel economy represents an important opportunity to reduce GHG emissions since only
about 15 percent of the energy in gasoline is actually used to propel a typical vehicle. The
Partnership for a New Generation of Vehicles (PNGV) builds on the prospect for an improved fuel
economy. PNGV is a Federal-industry research partnership created in 1993 to encourage innovation
in the US auto industry. The PNGV focuses on a research goal of tripling fuel economy of a typical
1994 family sedan by 2003-2004, while meeting or exceeding federal safety and emissions
requirements, and without sacrificing performance, size, utility, or affordability. Most current PNGV
work on this goal is focused on improving drive train efficiency, developing practical on-board
energy storage systems, and reducing vehicle mass through the use of light weight materials. A pre-
production prototype vehicle with a 100 percent improved fuel efficiency is expected in 2001;
vehicles with 150-200 percent improved efficiency will be available in the 2005-2010 period.
Future technological innovations would come from technologies such as multi-valve engines, lighter
materials, and next-generation tires, which have already been partially but not completely integrated
into the new vehicle fleet. An additional component of the overall fuel economy improvement would
be technologies such as direct injection engines and fully variable valve timing, still in the
development stage.
Alternative fuels - such as biofuels - are another large opportunity for reducing transportation
carbon emissions. Federal R&D has brought down the cost of biomass ethanol (from $3.60 per
gallon in 1980 to $1.20 per gallon today). Further research has the goal further cost reductions to
under $0.70 per gallon by 2005, competitive with oil at its current price. Estimated carbon savings
from use of ethanol largely as a gasoline blend is 20 MMTC in 2010.
3. The "Car-Talk" committee is the Policy Dialogue Advisory Committee to Assist the President in the
Development of Measures to Significantly Reduce Greenhouse Gas Emissions from Personal Motor Vehicles
formed in 1993 to see whether a consensus set of policies could bc developed to return personal transport GITG
emissions to 1990 levels by 2005, 2015 and 2025. The committee failed to agree on such policies, but
substantial analytic results were developed by a team of government analysts working with several expert
committee members.
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Agriculture
Basic farm commodity production was about 0.9 percent of GDP in 1995 and accounted for about 1.2
percent of US employment. These numbers, however, belie the true importance of agriculture - the
farm sector and agriculturally related industries in total account for about 13.5 percent of GDP and
17.3 percent of employment. Processing and distribution is the largest component and is relatively
more labor intensive.
Contribution to Greenhouse Gas Emissions
Agricultural greenhouse emissions include methane, nitrous oxide, and carbon dioxide. Estimates of
non-energy greenhouse gas emissions are relatively imprecise. While agriculture represents less than
5 percent of total national greenhouse gas emissions, it is an large source of methane and nitrous
oxide.
The principle sources of agricultural methane are enteric fermentation (animal digestion) and manure
management associated with livestock production. Applications of synthetic and organic fertilizers
account for almost all of agriculture's N₂O emissions.
Globally, agriculture is a much more important source of GHG emissions than in the United States,
accounting for about 20 percent of all greenhouse gas emissions. Agriculture's share of world
emissions of CO2 CH₄ , and N₂O are estimated at 21-25 percent, 57 percent, and 65-80 percent
respectively (excluding emissions from natural sources). Conversion of land to farm production
(particularly tropical forests) is the major agricultural source of CO₂ emissions while rice and
livestock production are the principle sources of CH4 emissions.
Soil Carbon: Depletion or sequestration of soil carbon is a potentially important source of
agricultural greenhouse gas emissions. Plants use photosynthesis to remove CO₂ from the atmosphere
and convert it to carbon which is stored in plant biomass. Left undisturbed, soils accumulate some of
this carbon as organic matter through root growth and decay of crop plant materials. Tillage is used
to loosen surface soil and subsurface material, improve aeration and water infiltration, and control
weeds, All benefit crop growth in the short-term, Tilling, however, also increases the exposure of
soils to oxygen thereby accelerating the conversion of soil organic matter to CO2 , which is released
into the atmosphere. Over time then, tilling reduces both soil carbon levels and soil productivity.
Reductions in soil carbon levels in U.S. agricultural soil (between 30 and 50 percent over the last 100
years) may have been a significant component of the historic increase in atmospheric CO₂ levels.
Factors Shaping Industry Response
Agricultural production is an energy intensive industry. Agricultural chemicals, particularly nitrogen
fertilizer, are energy intensive. Transportation of agricultural commodities to market would also be
affected. Some components of the food processing sector are energy intensive but, overall, the sector
is less energy intensive than overall manufacturing.
For every dollar of farm output, 12 cents is spent on energy with electricity accounting for 6 cents.
This reflects the increasing reliance on clectricity for operations such as grain handling and large-scale
confined livestock production. Agricultural chemicals embody 6 cents of energy for each dollar of
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output, spent mainly on natural gas and electricity. Nitrogen fertilizer is among the most energy
intensive chemicals and its availability is a key to high agricultural productivity. Energy cost
increases would directly Increase both agricultural production costs and agricultural chemical
manufacturing costs.
Technology Trends and Options
The Climate Change Action Plan for the U.S. identified tree planting, research and outreach to help
farmers better manage nitrogen use, methane capture from covered manure lagoons, and increased
ruminant feed efficiency as opportunities to sequester carbon and reduce emissions of agricultural
greenhouse gases.
Opportunities for further sequestering carbon in agriculture would include the following:
Conversion of marginal cropland and pasture to forest: Forest growth currently offsets about 8
percent of total annual U.S. greenhouse gas emissions on a carbon equivalent basis. A number of
studies have outlined the costs and economic benefits to U.S. agriculture resulting from strategies
to mitigate U.S. greenhouse gas emissions by paying farmers to convert cropland and pasture to
forest. Pulling the necessary quantities of land out of production, however, would raise land
prices and would increase the cost of bidding land out of production.
Promoting the use of management practices that increase the quantity of carbon stored in
agricultural soils: Studies suggest that these sinks could technically offset a majority of U.S.
greenhouse gas emissions, but economic analysis of such possibilities is limited.
Using biofuels to replace fossil fuels: Because the carbon released in the burning of biofucls
would be taken back up by the next crop, replacing fossil fuels with biofuels offers a means of
increasing the amount of carbon that is recycled in the production and use of energy. The IPCC
(1996) has estimated that for the world's temperate regions as a whole, carbon emissions could be
reduced by 85 to 493 million tons per year by allocating 8 to 11 percent of their cropland to
biofuel crops. While the United State's share of this is not addressed, the IPCC notes that the
best mitigation opportunities are in areas with good agricultural land and surplus production.
Further efforts to alter livestock management practices to reduce methane emissions: The most
promising opportunities for reducing methane emissions in U.S. agriculture are in new
management practices for the feeding of livestock and the handling of livestock waste (particularly
cattle).
Energy Supply Sectors
Electric Power Generation
Historically, demand for clectricity and economic growth have been closely correlated. Over the last
twenty years, U.S. demand for electricity grew by approximately three percent per year, but this rate
of demand growth is expected to decrease between now and 2010, averaging slightly more than one
percent per year.
With several hundred billion dollars worth of combined capital investments, electric power generation
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is one of the largest and most important economic sectors in the U.S. economy. The character of this
industry has changed over time and is in the midst of another major restructuring. In 1995, FERC
required open access to transmission for the purpose of wholesale competition. Currently over 80
percent of the states are moving toward electricity industry restructuring. Two broad trends can be
noted. First, all the state decisions are leading to greater customer choice and second, there is a
general trend to de-couple generation, transmission and distribution.
In addition to restructuring, the industry is undergoing a shift in the sources of generation. Nuclear
energy is a carbon-free source of electricity that presently provides over 20 percent of U.S.
electricity. Despite nuclear power's substantial contribution to today's electricity supply, no new
nuclear power plants have been ordered by U.S. electricity generators since 1978. Although nuclear
power generation was at an all-time high in 1995, the retirement of older plants and the lack of new
nuclear projects will reduce nuclear in the future U.S. energy mix. Nuclear power plants are due to
begin retiring in 2010 with most capacity retired by 2030. Fossil fuel power. plants generated over 80
percent of U.S. electricity in 1970, but that share has fallen to about two-thirds as nuclear power's
share has risen from virtually nil to about 22%; fossil generation is expected to return to about 80
percent over the next twenty years as the existing stock of nuclear plants are phased out.
Although the overall efficiency of fossil generation - the rate at which fossil energy is converted to
electricity - has barely changed in the past 35 years, modest improvements are expected over the
next twenty years as natural gas-fired generation doubles its share of total generation from about 15
percent today to over 30 percent. New natural gas-fired "combined cycle" power plants yield very
high conversion efficiencies 50 percent) by generating steam from the waste heat of advanced
combustion turbines and using it to drive steam turbines.
Renewable energy is forecast to have high growth but remain a small part of the base. Excluding
hydroelectric power, whose expansion possibilities are very constrained, renewable electricity
generation is expected to double over the next twenty years but will still account for less that 2
percent of total electricity generation. The hydro share of the energy market was 4.4 percent in
1996.
As state-by-state restructuring takes place, several states have already mandated minimum levels of
renewable energy through "renewable portfolio standards," including Vermont, Maine, and Arizona.
Many other states are considering similar measures to accelerate the adoption of renewable generation
technologies. These technologies have become more competitive over the last twenty years.
Photovoltaics have dropped from 90 cents per kilowatt-hr to under 20 cents per kilowatt-hour; wind
technology has dropped from 25 to 5 cents per kilowatt-hr. Cost reduction will continue to occur
through R&D advances and through economies of scale as production rates Increase.
Contribution to Greenhouse Gas Emissions
The electric power industry is the largest direct energy consumer in the United States. Electric
generators are responsible for 35 percent of national emissions of carbon dioxide, with over 85
percent of electricity-related emissions coming from coal-fired plants.
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Table 6. Carbon Emissions from Electricity Generation (MMT)
Percentage of
Percentage of
1997
Total 1995
2010
Total 2010
Emissions
Emissions
Petroleum
13
2%
12
2%
Natural Gas
55
11%
102
16%
Coal
454
87%
512
82%
Total
522
100%
626
100%
Source: EIA Annual Energy Outlook 1997
Factors Shaping Industry Response
Restructuring
Restructuring of the electric power industry offers a unique opportunity to mitigate future emissions
of CO₂ from this sector. Many states are currently considering or adopting retail competition for
their electric power markets. This trend may be accelcrated with federal legislation. Retail
competition may lower the price of electricity by as much as 20-25 percent in certain regions and
change the fuel mix of generation. Restructuring without new environmental policies is expected to
favor the expanded use of existing coal plants. These plants are largely depreciated, and hence can
generate electricity for low incremental cost. To mitigate the environmental impacts of competition
and maintain the environmental benefits of current state level renewable energy and demand side
management programs, a number of options have been adopted or are under consideration. These
include:
A "portfolio standard" for renewable energy: This would require that all generators meet a
specified level of renewable generation either by undertaking such projects themselves or
purchasing "credits" from others who have.
A social benefit fund: Revenues from a charge on transmission service are used to subsidize
energy efficiency projects, renewable, R&D, or low income consumers. California has adopted
this approach.
Information disclosure requirements: Generators could be required to disclose the emission
profiles of their generation, facilitating the marketing of "green" (or, less polluting) electricity.
Leveling of the playing field for air pollutant requirements: Many states are hesitant to adopt
retail competition because they perceive that differing regional environmental requirements put
their electric industry at a competitive disadvantage and will result in more pollution being
transported into their states. Thus, additional environmental provisions to "level the playing
field" - which could include greenhouse gas emission reductions - are currently being debated.
Adaption of fuel neutral standards would promote utilization of lower emission systems.
Special consideration for energy efficient and/or low emission technologies: This includes
advanced gas turbines and micro turbines for cogeneration and self-generation, fuel cells, and
renewable technologies.
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Distributed Generation
Distributed generation is the utilization of small power generation technologies dispersed through the
distribution system to provide local power close to customers, thereby reducing investment in
transmission and distribution resources and improving local rellability. This could include self-
generation or cogeneration by industrial and building sectors and involve power sales back to the grid.
Cost competitive technologies, such as smaller scale advanced gas turbines, are emerging which can
compete economically with central station generation when full costs, including the avoided
transmission and distribution expenditures, are considered. All of this will support the customer
choice aspect of deregulation and lead to a reduction in cost of electricity for customers. The electric
power producers will move from the concept of centralized power for cconomies of scale to providing
energy services for customers. This will provide:
economies of mass production of units
smaller, cleaner generation
fuel security through diversity of generation portfolio
more options for customers to be green
Technology Trends and Options
Electric sector emissions can be reduced either by making generation less carbon intensive (e.g.,
conversion efficiency improvements, fuel switching, cogeneration, or renewables) or by reducing the
amount of electricity demanded through increased penetration of more energy-efficient end-use
technologies. Studies by the America Council for an Energy-Efficient Economy (ACEEE) show that
there is a long-term potential to save about 25 percent of industrial electricity consumption at a cost
that is significantly lower than the current cost of new generation units. For example, an industrial
site which purchased coal-derived electricity generated at 35 percent efficiency could self-generate
power in a cogeneration mode at 75-80 percent efficiency, selling power back to the grid and
producing their own steam.
Many of the following technologies are projected to substantially increase their market share in the
next decade.
The next generation of natural gas technologies (including gas turbines and fuel cells) are
projected to achieve energy conversion efficiencies of 70 percent or more by 2005.
High efficiency coal-fueled power plants, such as integrated gasification combined cycle, are
likely to realize efficiencies exceeding 55 percent and half the CO2 emissions of current coal
technologies.
Renewable technologies - wind power, photovoltaics, solar thermal, and geothermal - have
seen sharp cost reductions in the past two decades, some by a factor of ten.
Options such as biomass gasification offer the ability to produce power with no net increase in
production. CO₂ emissions. The growth of biomass offsets (sequesters) the CO₂ released in electric power
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Petroleum
Contribution to Greenhouse Gases
Petroleum products are the leading source of carbon emissions from energy use. Petroleum accounted
for 584 MMTC emissions in 1995, and this figure is predicted to increase to 718 MMTC by 2010.
The majority ( 80 percent) of petroleum emissions result from transportation use.
Factors Shaping Industry Response
Petroleum product demand is largely a function of the demand for transportation. Petroleum product
consumption has been rising even though the amount of oil energy consumed per dollar of GDP has
been falling since 1973. Oil energy per dollar consumed per dollar of GDP fell from 8,900 Btu/$ in
1973 to an estimated 5,100 Btu/$ in 1996, a drop of 43 percent. The ratio will remain at 5,100 Btu/S
of GDP in 1997.
Coal
Electric utilities are the dominant consumers of coal. Overall consumption by utilities grew from 17
percent (84 million short tons) in 1949 10 an 88 percent share (829 million short tons) in 1995.
According to industry analysts, coal energy consumption will move up 1 percent in 1997 to 20.6
quads and coal's share of the energy market will remain at 22.7 percent. Coal consumption is
expected to increase in future years along with the demand for electricity.
Contribution to Greenhouse Gas Emissions
Coal has the highest carbon content per unit of energy among fossil fuels - as well as being a
source of pollutants such as sulfur dioxide. It is used primarily in the electricity sector, where
coal-fired plants currently account for approximately 56 percent of total U.S. electricity production.
Coal is the second leading source of carbon emissions, and is projected to produce 579 MMTC in
2010, compared to 507 MMTC in 1995. Even without consideration of the issue of greenhouse gas
emissions, most analysts project that the great bulk of capacity additions to electric utility plants from
now until at least 2010 will be fueled with natural gas rather than coal. Thus, while most existing
coal-fired plants are highly competitive suppliers of power that are dispatched ahead of gas-fired
plants on the basis of lower fuel costs, fuel cost advantages cannot offset the substantially higher
capital costs of a coal plant when new capacity is needed.
Factors Shaping Industry Response
In the stabilization scenario, coal production is lower than in the baseline. In contrast, the NEMS
stabilization scenario run under assumptions that allow for substantial "overbuilding" (early
retirement) of existing coal capacity suggests a substantially greater decline in coal use than the DRI
energy model analysis. The reduction in coal use from baseline in 2010 is twice as great - 58
percent vs. 29 percent.
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Several factors contribute to the difference in perspectives. Most importantly, the large reductions in
end-use energy demand in the DRI energy model provide "room" to use more coal that is simply
unavailable in the NEMS stabilization scenario. In addition, the NEMS involves a larger reduction 10
reach stabilization, putting additional pressure on coal, the most carbon-intensive fossil fuel.
Changes in coal use due to greenhouse must be considered in the context of overall industry trends
that are projected in the absence of any climate change action - despite output growth, employment
in coal mining in 1995 is already less than half of 1980 levels. Therefore, notwithstanding rising coal
consumption in the baseline case, national coal employment is projected to fall substantially -
reflecting the fact that coal production productivity (tons per hour) rises at a much faster rate than
EIAs coal consumption in all regions. There is also a continuing shift towards increased supply from
regions where productivity is highest.
In the DRI energy model results, there is a smaller shift away from coal use (and production).
However, DRI has even higher labor productivity growth assumptions than EIAs NEMS, which by
itself reduces employment over time in both the base and mitigation policy cases.
Nuclear Energy
While the performance of existing nuclear electric power plants reached record levels in 1992, the
number of operating reactors has leveled off. High operating costs, waste disposal difficulties, and
other problems pose major challenges to the further expansion of nuclear electric power.
The future contribution of nuclear power depends on three factors: economic retirements of existing
plants prior to the end of their license period, re-licensing of existing plants to extend beyond a
40-year service life, and level of new capacity builds.
Factors Shaping Industry Response
The baseline cases in the two energy models each project a modest level of economic retirements,
operator decisions against pursuing relicensing, and no construction of new plants. As a result, the
projected contribution of nuclear power in 2020 is slightly more than half of its 1995 level. While
the base cases are similar, the two models differ substantially in the stabilization case. In the DRI
energy model stabilization case, nuclear generation follows the DRI base case path. However, in the
NEMS case, re-licensing of nuclear plants becomes economically attractive, and premature economic
retirements do not occur. As a result, nuclear generation EIAs not fall from its 1995 level. In
addition, the model suggests that new nuclear capacity could be added in the 2015 time frame given
the modeled carbon permit values in the stabilization case.
It should be noted that the model does not account for issues of public acceptability and uncertainty
regarding waste disposal that could present significant barriers to new nuclear investments. The
anticipated shift to more competitive electricity markets, in which the cost of capital for new
generation facilities will be higher than that applicable to regulated utilities, tends to make investment
in capital-intensive technologies with long lead times, such as nuclear generation, less attractive. For
these reasons, the prospects for new nuclear builds remain problematic. The models illustrate how
different policy choices can lead to differing outcomes.
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Natural Gas
Contribution to Greenhouse Gas Emissions
Of the fossil fuels, natural gas consumption and emissions are predicted to increase most rapidly
through 2015, according to AEO 97. In 1995, carbon emissions from natural gas were 267 MMTC,
and this figure is projected to increase to 310 MMTC in 2010 and 319 MMTC in 2015.
Factors Shaping Industry Response
Impacts of greenhouse gas emissions mitigation on the natural gas industry depend on the balance
between the three available strategies in reaching the emissions reduction goal. Different modeling
tools illustrate different possible futures:
The DRI energy model shows a reduction in natural gas use relative to baseline on the order of 9
to 16 percent between 2005 and 2015.
NEMS, despite simulating a somewhat larger reduction in carbon emissions from the energy
sector, shows an increase in natural gas use relative to base of between 4 and 11 percent over
this same period.
The dramatically different alternative futures illustrate the way in which emphasizing different energy
strategies to reduce carbon emissions - energy efficiency versus fuel switching - will produce
different results.
The key to cost-effective greenhouse gas reductions in 2010 lies in the large potential of developing
and implementing energy efficiency technologies in each of the economic sectors. Within the
industries which may be required to reduce their greenhouse gas emissions, there will be opportunities
to gain competitive advantage through creatively meeting the environmental challenge. There will be
opportunities for other industries as well. For example, companies and individuals in the
architectural field can benefit as new building designs are needed to improve efficiency in both the
residential and commercial sectors. In addition, industries that manufacture items such as heating and
air conditioning equipment, office equipment, automobile parts, industrial equipment, and lighting, to
name only a small fraction of potential industries, may also benefit under a climate change policy due
to increased demand for these products. Finally, industries involved in the development of renewable
energy technologies will also be at an advantage as interest in solar, wind and other sources of energy
grows.
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Conclusion
From the above discussion, it is clear that the way in which resources are used by Individual
industries within each economic sector varies widely. This is not surprising given the vast array of
goods and services produced by these industries. Because sectors are unique, a climate change
mitigation strategy must be designed and implemented in a way that reflects a solid understanding and
appreciation of the differing circumstances faced by U.S. industries. This will give each industry the
ability to respond to individual policies in a way that both minimizes potential impacts and maximizes
possible opportunities. In order to achieve this goal, future climate change policies must be based on
the continued development and diffusion of cost-effective, energy efficient technologies.
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