[Updated with correction, 6/18/09: Thanks to John Larson at WRI for alerting us to an error in our data. Our data is now corrected and impacted figures and conclusions have been bolded in the text below so readers can see what has changed. An updated spreadsheet has been uploaded.
In summary: a smaller portion of economy-wide emissions were included in the emissions profile for sectors that fall under the cap starting in 2012 and a larger portion was included in the sectors that are phased into the cap starting in 2014. The result is slightly lower emissions under the ACES target scenario and CBO projected offsets scenario for the years 2012 and 2013 and slightly lower cumulative emissions between 2012-2020.
This effects the post's key result: assuming offsets are utilized at CBO's projected levels, cumulative emissions from 2012-2020 are 2.0% below BAU levels , not 0.5% as originally posted. This change has no effect on other years, on the difference between emissions at the CBO projected offsets scenario and emissions at the ACES target scenario, or on the BAU scenario. As always, we will continue to publish all of our assumptions and calculations and invite readers to look at the data and our analysis themselves. - Jesse Jenkins, Director of Energy and Climate Policy]
The Waxman-Markey climate bill (HR 2454 or the American Clean Energy and Security Act) would reduce cumulative emissions by just 2% between 2012 and 2020 in the sectors of the U.S. economy regulated under the bill's cap and trade program, according to the Congressional Budget Office's analysis of the legislation.
The CBO analysis is significant in that it is the first published predictions from a government agency about the likely actual impact on U.S. emissions resulting from the version of Waxman-Markey legislation passed by the Energy and Commerce Committee and now heading towards debate on the House floor.
CBO's analysis confirms earlier analysis by the Breakthrough Institute that revealed the climate legislation would only establish a non-binding emissions target, not a binding cap on emissions in covered sectors. Whereas Breakthrough's analysis examined the total emissions legally permitted under the legislation (without projecting likely scenarios), CBO's new analysis utilizes economic models to project what the legislation would actually accomplish under a likely set of assumptions.
The reason CBO projects that Waxman-Markey will result in such a low and arguably immeasurable reduction in emissions in supposedly capped sectors of the U.S. economy is because their models predict most regulated firms will purchase emissions offsets rather than reduce their own emissions. The legislation legally permits regulated firms to purchase up to two billion tons of offsets each year in lieu of reducing their own emissions.
CBO projects that firms regulated under Waxman-Markey's cap and trade program would utilize 230 million tons of domestic offsets and 190 million tons of international offsets in 2012 [p. 16]. By 2020, CBO projects firms will be utilizing 300 million tons of offsets from domestic sources and 425 million tons from international sources, for a total of 725 million tons of offsets [p. 16]. That's enough to offset 61% of the emissions reductions required by the ACES cap-and-trade program in 2020.
However, CBO also projects firms will purchase more offsets and emissions allowances than they need to cover their emissions in the early years of the program [p. 15]. This is because emissions permits (allowances and offsets) can be banked indefinitely under the legislation, and CBO predicts firms will purchase relatively cheap permits at the outset of the program, banking them to allow greater emissions in future years. For this reason, only an examination of cumulative emissions permitted by the legislation tells the full story of emissions reductions actually driven by the Waxman-Markey bill.
After taking into account the banking of emissions permits, Breakthrough's calculations [.xslx] reveal that if offsets are utilized at the levels projected by the CBO, Waxman-Markey will cut cumulative emissions in supposedly capped sectors of the economy by just 2% through 2020. CBO projects cumulative 2012-2020 emissions in capped sectors would be 54.5 billion metric tons, compared to cumulative emissions of 55.4 billion metric tons under the U.S. Environmental Protection Agency's business-as-usual emissions projections. If offsets are utilized at CBO's projected levels, cumulative emissions in capped sectors would be over 5 billion metric tons higher than if cumulative emissions were required to fall at the ACES target emissions trajectory (e.g. 17% below 2005 by 2020).
For comparison, if the United States was on track to reduce emissions at levels consistent with IPCC recommendations for developed nations (e.g. at least 25% below 1990 levels by 2020 on a 450 ppm stabilization track), cumulative 2012-2020 emissions would be just 43.7 billion metric tons, 20% below cumulative emissions under CBO's projections for offsets.
CBO predicts that cumulative economy-wide U.S. emissions between 2012 and 2020 would be reduced 5% under Waxman-Markey -- from 65.6 billion metric tons under the EPA's BAU baseline to 62.3 billion metric tons at CBO's projected offset levels. This analysis assumes that all domestic carbon offsets are emissions reductions that would not have occurred otherwise (i.e. 100% of domestic offsets are truly "additional").
It is worth noting that CBO's projections (like all forecasts) are based on various assumptions including the price of domestic emissions reductions, offsets, and the likely behavior of individual firms. The Waxman-Markey legislation itself does not legally require any emissions reductions below the EPA's projected emissions baseline through 2030, if offsets are available and purchased at the maximum levels permitted by the legislation.
Update, 6/15/09: An astute reader noted that CBO projects that 2 billion tons of excess emissions permits from 2012-2019 [see p. 16]. These permits are not noted in the graphics above because they will be banked and "cashed in" in future years to increase the legally-permitted emissions. For that reason, they aren't truly equivalent to real emissions reductions driven in the period examined above (2012-2020), since these emissions reductions only come at the expense of increased emissions at some later date.
However, there is something to be said for early emissions reductions, since the increased demand for early domestic emissions abatement opportunities may spur accelerated clean energy technology deployment and improvement. The following graphic therefore notes the impact of banked emissions permits on cumulative emissions from 2012-2020, based again on CBO's projections. Actual cumulative emissions in that period will be 52.5 billion metric tons, 5% lower than the 55.4 billion tons of cumulative emissions under the EPA's projected baseline. 2 billion tons of permits will be banked, allowing increased emissions in some future year after 2020.
For comparison, cumulative emissions would be cut 11% below the EPA's baseline if emissions followed the Waxman-Markey bill's target emissions trajectory (i.e. an actual cut of 17% below 2005 levels by 2020).