The United States economy’s overall carbon footprint will shrink by 3.1 percent by 2020 from where it was in 2005 even if Congress completely fails to implement any new measures to address climate change in coming months, according to leading research firm New Energy Finance. This will be driven in part by the recession, but more importantly through ongoing improvements in technology and government policies to promote renewable energy and automobile efficiency. Including the impact of the Kerry-Boxer bill would reduce domestic emissions further, reaching 7.1 percent by 2020 with an average carbon price of $21/tCO2e over the period.

While such a reduction is nowhere near sufficient to address the full problems of climate change, it does represent a fundamental shift from long-term trend. The findings by New Energy Finance also demonstrate that the US has made important first steps to address the problem - something that will no doubt be mentioned in the upcoming international climate talks in Copenhagen. We calculate that between 2005 and 2009 U.S. emissions will fall by 4.7 percent.

“It’s clear that the longstanding trend of emissions rising year after year virtually automatically has been broken,” said Milo Sjardin, head of U.S. carbon markets at New Energy Finance. “The question now is whether policymakers can accelerate that trend sufficiently to address the threat of a warming planet.”

The findings were among many produced by New Energy Finance’s new North American Carbon Model, which comprehensively maps the future of U.S. emissions and the potential impact of the various U.S. cap-and-trade proposals under consideration. New Energy Finance used the model to analyze both the “Waxman-Markey” carbon/energy bill which passed the House of Representatives in June and the new “Kerry-Boxer” bill now under consideration in the U.S. Senate. Other key findings include:

·        The vast majority of emission reductions Kerry-Boxer would create would come from activity abroad, thanks to so-called “offset” credits that would finance carbon reducing projects in the developing world and elsewhere. Such opportunities are generally lower cost than those offered in the US and as a result would be funded first. The U.S. would reduce its own domestic emissions by 7.1 percent from 2005 levels. Including expected reductions from overseas would lower its emissions to 14.1 percent below 2005 levels by 2020.

·        Carbon prices under Kerry-Boxer would be an average of $21 per emitted tonne before 2020. This is 6 percent higher than under Waxman-Markey ($19.90 during the same period). The U.S. Environmental Protection Agency has only released detailed analysis of Waxman-Markey, saying it expects prices to be an average $13.20 per tonne before 2020.

·        If Congress decides to eliminate the use of international forestry credits to meet the overall reduction goal, the price of emitting under Kerry-Boxer would rise 60 percent to $33.70 per tonne by 2020. This is because without forestry, abatement will come from more expensive options such as shifting from coal to gas-fired electricity generation. 

·        The “floor price” for carbon credits outlined in Kerry-Boxer, guaranteeing that carbon credits can be sold at a minimum price, would have a significant impact on the market. Under the legislation, the floor automatically rises by 5 percent each year in an effort to provide certainty to investors. However, codifying a rise in the price virtually guarantees traders a return simply by buying and holding credits. The knowledge that the first credits issued will have the highest potential upside will spur heavy activity early in the cap-and-trade program and artificially inflate the short-term price of credits. This, in turn, will likely get passed along to consumers in the form of higher energy prices. In addition, New Energy Finance modeling suggests that carbon prices, particularly after the early stages of the program, would be below the established floor price if they were fully left to the market. 

 

“While well intentioned, placing the floor at the levels being proposed in this legislation would undermine the concept of freely traded carbon allowances since the price of those credits would be largely dictated by the floor,” said Milo Sjardin, head of U.S. carbon markets at New Energy Finance. “A more constructive way to go about addressing the problem would be to set a more modest price floor increase or establish more aggressive overall carbon reduction goals.”

Looking ahead, the rise of clean energy policies in the U.S. is expected to have the most important impact in curbing future emissions growth longer term. Today, roughly 30 U.S. states have some form of renewable portfolio standard on their books, mandating specific levels of clean energy consumption. At the federal level, last year Congress improved federal corporate average fuel economy (CAFE) standards for vehicles and this year the Obama administration strengthened them further. Finally, the U.S. stimulus bill signed by the President in February allocates over $66 billion to clean energy and energy efficiency initiatives, according to New Energy Finance research.

These and other findings from the New Energy Finance model were the subject of much discussion and debate at the Carbon Leadership Forum held on 29/30 October in Tarrytown, N.Y. The event brought together 50 of the world’s thought-leaders on carbon to “war game” future scenarios under a U.S. cap-and-trade scheme. Among those in attendance were top executives from major U.S. power producers, oil refiners, government agencies, and non-governmental organizations. The Forum saw several potential development paths for the energy sector, each being influenced by a combination of new technologies and government policies.