Slide 1

Evaluating Climate Policy Impacts on U.S. Manufacturing CompetitivenessTransatlantic Research on Policy Modeling WorkshopSession 5: Energy & Environmental Policy Analysis: ApplicationsNew America Foundation, Washington, DC January 29, 2013

Joel Yudken, Ph.D.Principal, High Road Strategies, LLC104 N. Columbus Street, Arlington, VA 22203(703) 528-7896 jyudken@highroadstrategies.comwww.highroadstrategies.com

THANKS TO:1Evaluating Federal climate PoliciesJanuary 29, 2013High Road Strategies, LLCHRS-MI Climate Policy & EITE Manufacturing TrilogyClimate Policy and Energy Intensive Manufacturing: Impacts and Options (June 2009)National Commission on Energy Policy (NCEP)/Bipartisan Policy Center-sponsoredHigh Road Strategies (HRS)-Millennium Institute (MI) performed workExamined impacts of Lieberman-Warner Climate Security Act of 2007 (S. 2191)Competitiveness Impacts of American Energy & Security Act (ACESA) of 2009 (February 26, 2010)Environmental Defense Fund (EDF)-sponsored; HRS-MI performedExamined impacts of ACESA (Waxman-Markey bill; H.R. 2454), focus on output-based rebate measureEvaluation of ACESA Cost Mitigation Measures (November 24, 2010)NCEP, AFL-CIO WAI-sponsored; HRS-MI performedEvaluates alternative scenarios, output-rebates, border-adjustment measures

January 29, 2013High Road Strategies, LLC3Study FrameworkJanuary 29, 2013High Road Strategies, LLC

NCEP Climate Policy-EITE Manufacturing Study: Impacts & OptionsWhat are climate policy impacts on the competitiveness of energy-intensive manufacturing industriesIron & steel, primary & secondary aluminum, paper & paperboard, petrochemicals, chorine-alkalies manufacturingWhat policies are needed to maintain manufacturing competitiveness and retain jobs, while cutting emissions?To mitigate cost impacts and level the playing field in international tradeEnable and encourage industry investments in new technology

January 29, 2013High Road Strategies, LLC5L-W Study MethodologyData collectionASM, MECS, USGS, USITCAISI, Aluminum Association, AF&PA, ACCSystem Dynamics modelingComputer-based SW platform: VensimIntegrated Industry-Climate Policy Model (II-CPM)Group modeling sessionsIndustry groups (AISI, Aluminum Assoc., ACC, AF&PA); Labor unions (USW, AFL-CIO IUC)Characterize policy casesEIA/NEMS, GIModel runsCost pass-along scenarios (NCPA, CPA)Sensitivity and alternative scenariosJanuary 29, 2013High Road Strategies, LLCClimate Policy CasesBusiness As Usual (BAU) Case No GHG-emissions pricing policiesBased on AEO 2008 Reference CaseMid-CO2 Price Case Based on Lieberman-Warner Climate Security Act (S. 2191)Emissions allowance price: 2020-2030, $30-$61/mt CO2-equivalent30% emissions below 2005 by 2030; 70% below by 2050EIA NEMS Fossil-Energy Price ScenariosElectricity, natural gas, metallurgical coal, coal coke, liquid petroleum gas, residual fuel oil, distillate fuel oil

January 29, 2013High Road Strategies, LLCL-W Production Cost ImpactsJanuary 29, 2013High Road Strategies, LLC

Production cost componentsMaterials and capital + labor + energy costsEnergy costs: fuel, electricity, feedstock (EIA, MECS)

Operating Surplus DefinedJanuary 29, 2013High Road Strategies, LLC

Operating Surplus: Domestic Market Price Minus Unit Production Cost (Revenues-PCs)Sales, General and Administrative costsDepreciation, interest on capitalOther fixed costsProfits, taxesReduced OS means lower profitsOperating Margin: Ratio of total OS and total revenues L-W Operating Surplus ImpactsJanuary 29, 2013High Road Strategies, LLC

10EDF ACESA-EITE Industry StudyUpdated financial, energy, industry, other dataCharacterized Reference and ACES CasesEIA-generated energy prices, allowance costsCalculated industry GHG-emissionsCalculated production-based emissions allowance costsCalculated output-based rebate allocationsUp to 15% total allowances to EITE industries, starting 2014, declining rapidly after 2015 to zero, 2035Industry rebates based on prior 2-year emissions; yearly shares of total (direct, indirect) emissions of all EITE industriesIndustry simulations (NCPA only)Energy-efficiency requirements to offset cost impactsEstimates of required gains for a given year, for energy types, assuming 0.5% annual energy efficiency improvementsJanuary 29, 2013High Road Strategies, LLCProduction Cost StructureJanuary 29, 2013High Road Strategies, LLCIron & Steel IndustryACESA Basic CaseProduction Costs With Allowances

Allowance Rebate EffectivenessJanuary 29, 2013

ACESA BasicProduction Costs With RebatesACESA BasicOperating Surplus With RebatesHigh Road Strategies, LLC13ACESA-EITE Industry Study (II)Output-based emission allowance rebatesAlternative Policy CasesHigh Cost CaseNo International Offsets CaseInternational reserve allowance program (border adjustment)Presidential determination if allowance rebates no sufficient to mitigate EITE costsEITE and compliance criteria; start year; fee calculationCountries with 85% or less of imports are compliant or has energy/emissions intensity equal or less than U.S. industry sectorLegal and effectiveness issuesIs it WTO compliant? Will in encourage other nations comparability? Will it adequately mitigate costs? Will it encourage low-carbon technology investments?

January 29, 2013High Road Strategies, LLCAlternative Policy CasesACESA High Offsets CaseCosts of nuclear, fossil with CCS, biomass generating technologies assumed to be 50% higher than Basic CaseGreat uncertainty about costs, feasibility of rapid introduction on large scaleJanuary 29, 2013High Road Strategies, LLCACESA No International CaseInternational offsets severely limited by cost, regulation, slow progress reaching international agreements re offsetsSignificant portion of international offsets might not meet all requirementsSource: EIA analysis of H.R. 2454

Electric Power Fuel MixesAlternative Cases

Emission Allowance PricesAlternative Cases

Alternative Case ImpactsJanuary 29, 2013High Road Strategies, LLC5-EITE Industries Production Costs5-EITE Industries Operating Surplus

Border Adjustment ScenariosDifferent Start Dates: 2020 & 2025Cost Pass-Along ScenariosNo Cost Pass-Along (NCPA BA) BA Fees on Non-Compliant Countries Fees based on total emissions costs of U.S. industriesCost Pass-Along (CPA US BA)BA Fees on Non-Compliant CountriesU.S. Manufacturers Pass Along Costs Total emissions costs less rebatesJanuary 29, 2013High Road Strategies, LLCBorder Adjustment FindingsJanuary 29, 2013Iron & Steel Operating SurplusBorder Adjustment ScenariosHigh Road Strategies, LLC

Border Adjustments-ComparisonsJanuary 29, 2013High Road Strategies, LLC

EITE Industries Operating SurplusesCPA BA Scenarios Starting 2020 and 2025 BA Caveats and IssuesCompliant countries dominate importsFuture non-compliant import shares may growDifferent bases for BA calculationsExport market impacts not assessedDownstream industry impactsElasticities of import substitutionJanuary 29, 2013High Road Strategies, LLCEnergy efficiency & Investment OptionsJanuary 29, 2013High Road Strategies, LLC21Energy Savings Potential?

January 29, 2013High Road Strategies, LLC22Energy Efficiency RequirementsJanuary 29, 2013High Road Strategies, LLCACESATotal Energy Efficiency Gains RequiredIron & Steel IndustryTotal Energy Efficiency Gains Required

Technology Investment OptionsLow-hanging fruit Heat recovery, CHP, sensors and process controls, more efficient pumping, motor, compressed air systems, etc. Improved recycling (steel, aluminum, paper)

Advanced and alternative process technologies:Low-carbon iron-making technology (iron & steel)Wetted drained cathode/inert anodes (aluminum)Black-liquor gasification; efficient drying technology; biorefineries (paper)Shift to membrane technology (chlor-alkali)Advanced furnaces, CHP, biomass-based systems (petrochemicals)

Barriers to Adoption: Costs; timing (technical feasibility, vintage); lack of capital

January 29, 2013High Road Strategies, LLC24Summary of FindingsWith no cost mitigation measures, modest to high impacts on production costs, operating surplus (profits), market shares from higher energy pricesContingent on energy mix, cost-pass along assumptions, market conditionsPressure on industries to take actions to reduce costs and prevent profits from decreasing to undesired levelsOver short-to-mid term, output-based rebates would substantially mitigate the emissions costs on PC and OSCost mitigation would diminish and costs rise as the allowance rebates phases out after 2020, accelerating after 2025 but extent and nature of impacts vary by industryUnless Presidential discretionary measures put in place or industries invest sufficiently in low-carbon, energy-efficient technologies

January 29, 2013High Road Strategies, LLC25Summary of Findings (contd)International offsets have strong cost containment effectwithout, cost impacts much higher after 2025 than Basic caseIf non-carbon alternatives are higher cost (nuclear, CCS, biomass), cost impacts after 2025 also higherBAs mixed cost mitigation impactsuncertainties and caveats Rebate measure/BAs only buy time for industry adjustmentTechnology investment options necessary and available, but timing, costs critical Other policies may be needed to encourage long-term investment in advanced energy-saving technologies

January 29, 2013High Road Strategies, LLC26Evaluating Energy & Climate Policy Impacts on Ohios EconomyJanuary 29, 2013High Road Strategies, LLCOhio Energy & Climate Policy ProjectReport to Ohio Department of Development (now JobsOhio): Assuring Ohios Competitiveness in a Carbon Constrained WorldCo-led by Ohio University Voinovich School of Leadership and Public Affairs and The Ohio State UniversityOther Partners: Millennium Institute and High Road StrategiesPrincipal Tasks:Carbon Inventory for the State of OhioRisk and Opportunity Analysis for Ohio Manufacturing SectorReview of Climate and Energy Policy Options for OhioEconomic Analysis of Climate and Energy Policy AnalysisSee project website: www.ohioenergyresources.comJanuary 29, 2013High Road Strategies, LLC

January 29, 2013High Road Strategies, LLCTask 1GHG emissions inventory for OhioTask 1 (contd)Web-based analysis and reporting system

Task 2Sectoral risk and opportunity analysisTask 3Information sharing and evaluation

Task 5Policy tool requirementsTask 4Evaluation of climate policy optionsResults:Analysis of economic benefits for chosen policy scenariosTask 5 (contd)Dynamic simulation of policy impactsDEEPStoolProject OverviewDynamic Energy-Economic Policy Simulation (DEEPS)Designed to help the State of Ohio analyze the economic impacts of possible climate change, energy and GHG emission reduction policy scenariosEnd-user interface designed for ease of use and operabilityUses System Dynamics (SD) modeling methodologySD=integrated evaluation of policy options related to a variety of issues that arise in complex social, managerial, economic, and ecological systemsBased on a previous SD model, called T21-Ohio*, which integrates social, economic and environmental factors into one coherent framework* Developed by OSU in collaboration with MI, funded by EPA

January 29, 2013High Road Strategies, LLCSoftware CapabilitiesJanuary 29, 2013High Road Strategies, LLCOhio GHG EmissionsInventory DatabaseOhio EconomicIndicators Database

DynamicEnergy-EconomicPolicy SimulationGeographic Emissions Analysis and Reporting SystemBaseline EmissionsInteractive GHG Analysis & Policy EvaluationDEEPSExisting T21-Ohio Model StructureJanuary 29, 2013High Road Strategies, LLC32Government investmentDisposable incomePrivate investmentCapitalProductionGDPEmploymentTotal factor productivityHousehold revenuesGovernment revenueGovernment purchasesTax revenueOther revenueTax rateExpendituresPopulationExpenditure tableNet hiringIndicated level of employmentTotal sectoral labor demandTechnologyInvestmentDesired level of tech. for the new capitalElectricity priceRelative gasoline priceLabor force availabilityLife expectancyElectricity gen. capacityShare of renewablesElectricity gen.Electricity demandElectricity gen. costbirthsGHG em.GDPGDPTotal populationOther energy priceOther energy consumptionDisposable incomeQuality of lifemigrationQuality of lifeLife expectancydeathsSocietyEducationEconomyEnergy & EnvironmentRange of Policies ConsideredJanuary 29, 2013High Road Strategies, LLCFederal PoliciesState Policies Renewable portfolio standards EPA greenhouse gas standards Accelerated coal power plant retirement Renewable portfolio standards Feed-in tariff Carbon capture and sequestration Smart grid Energy efficiency standards (buildings, industry) Transportation technologies (biofuels, electric vehicles) Non renewable energy investments (nuclear, natural gas)Waste utilizationForestryPolicy ScenariosBusiness as usual (BAU) or base case: Continuation of current policies in OhioEPA GHG Standards2-year U.S. EPA plan establishing GHG emission standards for fossil-fuel power plants and oil refineriesOhio SB 221 (effective 7/30/08)Key energy provisions: RPS; ee portfolio standards; new alternative energy policy; GHG reporting requirementsOhio Energy, Jobs, and Progress Plan (August 2008)Specifies ee and renewable targets until 2025; larger RPS including clean coal and nuclearJanuary 29, 2013High Road Strategies, LLCEITE Industry CO2e EmissionsJanuary 29, 2013High Road Strategies, LLCManufacturing Sectors (6-digit NAICS)Top 10 Ranked by Direct EmissionsRankIndustryNAICSDirect CO2e emissions (MMTCO2e)% Total Manuf.No. Establish-mentsEmployees1Iron and Steel Mills*3311118.2436.85511,9032Petroleum Refineries*3241104.4519.9161,6533Lime*3274101.968.884374Paper (except Newsprint)*3221211.295.8294,4235Nitrogenous Fertilizer*3253110.512.3331,6096Paperboard*3221300.401.87Plastics Materials and Resins*3252110.321.4633,5628All Other Misc. Chemical Products 3259980.271.2922,2979Turbines and Turbine Generators 3336110.271.210ND10Cements*3273100.261.27391Top 10 Subtotals17.9880.331321,852TOTALMANUFACTURING31-3322.38100.017,413738,817 * Energy-intensive trade-exposed (EITE) industries as designated by the U.S. EPA ND=NotDisclosabledoesnt meet BLS or State disclosure standards. Source: BLS Quarterly Census of Employment and Wages (QCEW) Combined pulp, paper and paperboard industries Emission Data Source: OU-OSU Ohio Point Source DatabaseFor more informationJanuary 29, 2013

www.highroadstrategies.com

High Road Strategies, LLCwww.millenniuminstitute.net