EPA Analysis Underestimates Costs of Congress’ Climate Change Legislation

May 18, 2009

EPA Analysis Underestimates Costs of Congress’ Climate Change Legislation

Washington, D.C.,  - The Environmental Protection Agency analysis of draft climate change legislation in Congress was flawed because Democratic staff of the House Energy and Commerce Committee provided the agency with data that wasn’t reflected in the bill’s language, according to a report issued today by the Republican Staff of the House Select Committee on Energy Independence and Global Warming.

“This Republican staff report shows that the EPA analysis grossly underestimates the true cost of this national energy tax,” said Rep. Jim Sensenbrenner, R-Wis., ranking Republican on the House Select Committee on Energy Independence and Global Warming.

The Republican staff report identifies several areas where the EPA improperly analyzed the effects of the draft American Clean Energy and Security Act (ACES) of 2009, which was authored by House Energy and Commerce Committee Chairman Henry Waxman, D-Calif., and Energy and Environment Subcommittee Chairman Edward Markey, D-Mass. The bill is scheduled for markup next week.

“The report shows that the analysis EPA issued of the draft ACES Act was rushed, incomplete, and relied on numerable questionable assumptions provided by the Democratic staff of the House Energy and Commerce Committee,” Sensenbrenner said. “This bill, which I call cap-and-tax, threatens to raise energy costs for all Americans and potentially cost millions of jobs. With our country mired in recession, Members of Congress need reliable, accurate information before considering this radical new energy tax.”

The most glaring flaw in the EPA analysis came from incorrect assumptions about the amount of carbon offsets called for in the draft legislation. While the EPA report assumed 2 billion tons of carbon offsets, the bill’s language on offsets doesn’t even approach these numbers, the report said.

“EPA officials told Republican staff that the offset levels were one of the biggest drivers of its cost analysis.  As the report shows, Democratic staff instructed the EPA to assume offset levels that were dramatically higher than what the draft actually allowed.  Whether they misread their own bill or deliberately mislead the EPA, I’m not sure,” Sensenbrenner said.

A report by the Heritage Foundation on ACES shows this bill could destroy as many as 1.9 million jobs and will cause electricity rates to rise by 90 percent, gasoline by 74 percent, and raise the average family’s electricity bill by $1,500 a year. 

“If the EPA didn’t have time to a thorough analysis, it should have declined to produce a report.  Instead, what we have is a document that ignores major cost-influencing factors.  That’s not the transparency the people deserve.”

The following findings are highlighted in the Select Committee Republican report:

  • EPA’s analysis relies on incorrect offset numbers.
  • EPA assumed a significantly lower GDP growth rate than the Obama Administration relied on for its recent Budget Blueprint.
  • EPA analysis did not consider the effects of the draft ACES Act’s renewable energy standard. 
  • EPA’s assumptions for carbon capture and sequestration are unrealistic.  If technological progress does not match EPA’s assumption, consumer costs will increase.
  • EPA’s analysis assumes a nationwide impact.  The actual impacts of the draft ACES Act, however, will be regional.
  • EPA assumes that nuclear energy will increase by 150% by 2050.
  • The ACES Draft is silent on many specifics of the cap-and-tax program.  EPA relied entirely on estimates from Democratic staff on the Energy and Commerce Committee to develop its analysis.

 A copy of the report is below.

# # # # 

Minority Staff Report: EPA Analysis Grossly Underestimates Costs of Waxman/Markey Climate Legislation
 
House Select Committee on Energy Independence and Global Warming, Republican Staff
Congressman F. James Sensenbrenner (WI), Ranking Member
 
 
May 14, 2009
 
Background:
 
On February 27, 2009, Democratic staff members from the House Committee on Energy and Commerce approached the Environmental Protection Agency (EPA) and requested analysis of the Committee’s draft American Clean Energy and Security (ACES) Act. As of this report’s writing, the ACES Act is a 648-page draft of legislation that purports to combat global warming and reduce energy dependence. Its most prominent feature is a carbon trading system. 
 
The draft ACES Act was released to the public on March 31, 2009.  EPA issued its analysis of the draft on April 20, 2009.
 
The House Energy and Commerce Committee held an almost week-long series of hearings on the ACES Act from April 21 to 24 and featured dozens of witnesses including Administration officials, industry representatives, and celebrities, like former Vice President Al Gore and former House Speaker Newt Gingrich.
 

During the hearings, Members and witnesses frequently cited EPA’s analysis as an estimate of the cost of the ACES Act. Vice President Gore described EPA’s analysis as the most authoritative estimate available and relied on it to dismiss the costs of a cap-and-tax program. Gore testified, “the study that I think that is most authoritative, before taking into account the savings in their energy use that this bill will occasion, is around 30 cents a day . . . about a postage stamp per day.” Why the former Vice President found this report so authoritative is unclear. When asked what study he was relying on, he stated, “I believe it’s the EPA study that was produced two days ago, three days ago.”

 
The Select Committee’s investigation, however, has found that EPA’s analysis significantly underestimated the costs of the bill.   
 
In a letter dated April 24, 2009, Representatives Jim Sensenbrenner, Darrell Issa, Candice Miller, and John Sullivan raised many of these concerns with EPA. This letter (herein April 24 letter) is attached as Appendix 1. EPA responded to the letter on May 7, 2009 and provided a staff briefing on May 8, 2009. EPA’s response letter is attached as Appendix 2.
 
Since its initial release, Democrats have privately negotiated specific provisions of the ACES Act. They are likely to release an updated draft soon. Proponents of the new bill will undoubtedly argue that EPA’s analysis is still relevant and that the costs of the new draft will be even lower—as Democrats are likely to weaken several provisions. Far from being authoritative, the Committee’s investigation has found that, in several instances, Democratic staff dictated assumptions to EPA in order to create artificially low cost estimates. 
 
Findings:
 
The Select Committee’s investigation of EPA’s analysis reveals that it was incomplete due to time constraints and inadequate information and that Democratic staff with the House Energy and Commerce Committee provided questionable assumptions.   
 
  • EPA’s analysis relies on incorrect offset numbers.
The analysis assumes that covered entities can offset up to 2 billion tons of their annual emissions through projects to reduce emissions outside the scope of the cap. The draft ACES Act, however, never allows for offsets that even approach these levels. 
 
By EPA’s own admission, the availability of offsets drastically affects the cost of compliance. In its analysis, EPA wrote, “[w]ithout international offsets the allowance price would increase 96 percent.” Further, in EPA’s briefing with Select Committee Republican staff, EPA officials stated that offsets were one of the biggest drivers of compliance costs. In other words, the offset levels that they relied on were one of the key reasons they were able to estimate such low costs.
 
Rather than allowing offsets of 2 billion tons, the draft adopts a complicated formula to determine offset levels. It allows offsets of 2 billion tons divided by the sum of 2 billion plus the number of emission allowances for each calendar year (multiplied by 100 to get a percentage).  The calendar year allowances for 2012 are 4.77 billion tons. They gradually reduce to 1.04 billion tons in 2050 and for each year thereafter.  The number of offsets is further reduced by the requirement that, for each ton of CO2 being offset, covered entities must recoup an offset credit of 1.25 tons to allow for the uncertainty of offset project successes. 
 
In practical terms, this means that the ACES draft never allows 2 billion tons of offsets in a single year. In 2012, the Act allows approximately 1.14 billion tons, or just over half of EPA’s assumption. The annual offset level then increases slightly to a high of approximately 1.19 billion tons in 2016, before steadily reducing to 0.55 billion tons in 2050 and succeeding years.
 
To its credit, EPA recognized the discrepancy in offset levels. In a footnote, the agency noted that “page 372 of WM-Draft [Waxman/Markey Draft] seems to indicate that the limit on offsets usage declines over time, however, committee staff have indicated to EPA that their intent is for the limit to be constant over time."
 
In the briefing, Select Committee Republican staff questioned why EPA assumed offsets of 2 billion tons, when the Act expressly did not allow for these levels. EPA responded that they were directed by Majority staff from the House Energy and Commerce Committee to assume offsets of 2 billion tons. It is unclear if staff misread their own bill or if they intentionally provided false information in an attempt to falsify EPA’s results. It is clear, however, that the offset levels EPA relies on grossly underestimate the costs of the ACES Act. 
 
  • EPA assumed a significantly lower GDP growth rate than the Obama Administration relied on for its recent Budget Blueprint.
 
On February 26, 2009, the President’s Fiscal Year 2010 budget assumed a growth rate of 3.3% between 2010 and 2019. EPA, however, assumed a growth rate of 2.5% for the same period. The lower growth rate is significant. EPA’s growth assumption results in a U.S. GDP that is $1.22 trillion smaller in 2019. The cumulative loss in GDP over the 10 year period would be nearly $8 trillion dollars. 
 
As the current economic downturn has proven, emissions correlate with economic growth. As economies grow, their emissions increase. Further, under a cap-and-tax program, the lower the business as usual projections for emissions, the lower the projected cost of compliance. This is because the legislation predetermines the cap (the overall allowable level of emissions) and requires industries to make reductions to meet it. If projected emissions are lower, then the necessary reductions will be lower, and the costs of compliance will decrease.
 
Thus, by assuming a low-growth rate, EPA significantly lowered its findings on the cost of complying with the draft ACES Act. EPA’s assumed growth rate is below the U.S. average and lower than the estimate that the Obama Administration used just two months before in its FY 2010 budget blueprint. 
 
In response to the April 24 letter, EPA wrote: 
 
“EPA derives its economic growth assumptions from the Energy Information Administration’s Annual Energy Outlook, because EPA also uses the AEO’s projections of energy demand and use. In December 2008, EIA released its 2009 AEO projections, which EPA used in its April 20th analysis. EPA’s understanding is that OMB [the Office of Management and Budget] does not rely as heavily on the AEO’s economic growth assumptions in preparing the President’s budget request, in part because the budget request does not focus as specifically on the energy sector as EPA’s analysis of an energy-climate bill does.”
 
EPA’s response admits that the Administration alters its assumptions to suit its areas of analysis. GDP growth is GDP growth and should remain constant whether one is developing a budget or analyzing the energy sector.
  • EPA analysis did not consider the effects of the draft ACES Act’s renewable energy standard. 
 
EPA titled its Analysis, “EPA Analysis of the Waxman-Markey Discussion Draft:  The American Clean Energy and Security Act of 2009.”  The title implies that EPA performed comprehensive analysis of the draft’s effects. However, EPA only analyzed the effects of the draft’s carbon trading scheme. Other major provisions, like the Renewable Energy Standard (RES), were ignored.  
 
The RES was the focus of considerable debate during hearings before the House Energy and Commerce Committee. The actual numbers are therefore likely to change, but the initial draft would mandate that 25% of energy be produced from renewable sources by 2025. EPA acknowledged that the RES would have an effect.  In its reply to the April 24, 2009 letter, EPA wrote, “[t]here would be a cost associated with implementing the ACES renewable energy standard.  Due to time limitations, EPA did not estimate that cost.” This would represent a drastic change in our Nation’s energy sources, forcing power plants to produce energy from more expensive sources.
  • EPA’s assumptions for carbon capture and sequestration are unrealistic. If technological progress does not match EPA’s assumption, consumer costs will increase.
 
EPA’s analysis assumes 3 gigawatts (GW) of coal generation with carbon capture and sequestration (CCS) are deployed by 2015 and 55 GW by 2030. No such CCS plants currently exist. Thus, EPA assumes that CCS plants will increase 0 to 3 GWs in the next 6 years and that 100 coal plants of 500 megawatts each will sequester 100% of their CO2 emissions by 2030.
This assumption was directly contradicted by Energy Secretary Steven Chu this March when he testified before the House Science and Technology Committee that CCS technology would take roughly ten years to prove, let alone implement.
 
If, as most experts predict, CCS technology develops more slowly than EPA assumed, power plants would have higher emissions and would be required to purchase more allowances. This would substantially increase consumer costs. Citing time constraints, EPA did not analyze any scenarios that included less ambitious assumptions. EPA’s prior analysis of the Lieberman-Warner Act, however, found that “not allowing CCS until after 2030 increased allowance prices by ~80%.”
  • EPA’s analysis assumes a nationwide impact. The actual impacts of the draft ACES Act, however, will be regional.
 
EPA’s analysis assumes one cost nationwide. Actual costs, however, would vary by region. Washington State, for example, receives only 11% of energy from coal, instead relying heavily on nuclear, wind, and hydro. Conversely, Indiana generates 95% of its energy from coal. ACES will have dramatically different effects on these two states. Citizens of coal-dependent states, like Indiana, West Virginia, Wisconsin, and Wyoming, cannot rely on nationwide estimates. The regional disparities will increase further if, as discussed above, EPA’s assumption on CCS prove too ambitious.
  • EPA assumes that nuclear energy will increase by 150% by 2050.
 
EPA’s analysis assumes a dramatic increase in the use of nuclear power. Because production of nuclear energy is carbon-free, an increase in nuclear energy will dramatically mitigate the costs under a cap-and-tax program. EPA wrote that “[i]n EPA’s S. 2191 analysis, restricting nuclear and biomass electricity to reference case levels increased allowance prices by ~30%.”
 
Representative Greg Walden (R-OR) noted this during hearings on the ACES Act. Following his testimony, Vice President Al Gore claimed that adopting a cap-and-tax scheme would cost families just 30 cents per day. Rep. Greg Walden pointed out that Gore was relying on the EPA Analysis, which assumed a 150% increase in the use of nuclear power.
 
In the staff briefing, EPA officials explained that its modeling predicted this increase. EPA considered the current cost of nuclear energy. Because nuclear energy does not create any carbon emissions, EPA assumed that cost would remain constant after legislation placed a cost on carbon. The cost of other energy, however, would increase. Under the models, this made nuclear power more attractive and its use proliferated.
 
The primary hurdle for nuclear power, however, is not cost, but political opposition. Many proponents of carbon trading schemes are long-time opponents of nuclear power. The ACES Act conspicuously lacks any provisions that specifically encourage the development of nuclear power. As a result, few energy experts predict growth in nuclear power that approaches the levels that EPA assumed. In the staff briefing, EPA officials conceded that these levels were unlikely. 
  • The ACES Draft is silent on many specifics of the cap-and-tax program. EPA relied entirely on estimates from Democratic staff on the Energy and Commerce Committee to develop its analysis. 
 
While Chairmen Henry Waxman (D-CA) and Ed Markey (D-MA) intentionally omitted key numbers to allow for negotiations, the Majority staff of the Energy and Commerce Committee provided EPA with numbers for its analysis. It is unclear what these numbers are based on or whether they bear any similarities to numbers that will be included in legislation. In its analysis, EPA stated that House Energy and Commerce Committee staff directed it to use the following assumptions: 
 
  • CCS Bonus Allowances: 2% 2012-2016; 5% 2017-2050 (Included in all scenarios.)
  • International Forest Carbon: 5% through 2025, 3% through 2030, 2% through 2050. (Included in all scenarios.)
  • Energy Efficiency: 12.5% (Included in all scenario 3.)
  • Output-Based Rebate:  15% through 2020, should decline at 10% per year after that. (Included in all scenario 4.)
  • Necessary allowances for deficit neutrality (Included in all scenarios.)
  • Remaining allowance value is recycled to households lump sum. (Included in all scenarios.)
  • The following assumptions about the CCS bonus allowance provisions were also given:
    • CCS bonus allowance provisions should be modeled as specified in the Dingell-Boucher discussion draft.
    • No set bonus allowance rate. The number of bonus allowances given for each ton sequestered is determined so that the value of the bonus allowances is equal to $90 for the first 3 GW of CCS, $70 for the second 3 GW of CCS, and $50 for the rest (values are in 2005 dollars).
    • If the program is oversubscribed, then you can borrow from future period allocations until the total pool of bonus allowances is used.”
 
Conclusion:
 
EPA’s analysis of the draft ACES Act was rushed, incomplete, and relied on numerous questionable assumptions that were provided by Democratic staff. The Select Committee Republican staff have documented several instances when the EPA acknowledged that it did not analyze aspects of the ACES Act because of time limitations. Consequently, EPA either ignored major cost-influencing factors or assumed certain figures recommended by the Democratic staff of the Energy and Commerce Committee. These assumptions and political meddling lead to a drastic underestimation of the draft ACES Act’s costs and undermine the legitimacy of EPA’s conclusions.


Select Committee on Energy Independence and Global Warming - Republicans
H2-344 Ford House Office Building
Washington, D.C. 20515
Phone: (202) 225-0110 | Fax: (202) 225-0095

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