[Economic Report of the President (2013)]
[Administration of Barack H. Obama]
[Online through the Government Publishing Office, www.gpo.gov]



The Administration is committed to a comprehensive energy strategy
that supports economic and job growth, bolsters energy security,
positions the United States to lead the world in clean energy, and
addresses the global challenge of climate change. Finding a
responsible path that balances the economic benefits of low-cost
energy, the social and environmental costs associated with energy
production, and our duty to future generations is a central
challenge of energy and environmental policy.

The most significant long-term pollution challenge facing America
and the world is the anthropogenic emissions of greenhouse gases.
The scientific consensus, as reflected in the 2009 assessment by
the U.S. Global Change Research Program (USGCRP) on behalf of the
National Science and Technology Council, is that anthropogenic
emissions of greenhouse gases are causing changes in the climate
that include rising average national and global temperatures,
warming oceans, rising average sea levels, more extreme heat waves
and storms, and extinctions of species and loss of biodi�versity.
A multitude of other impacts have been observed in every region of
the country and virtually all economic sectors.

As part of the United Nations Climate Change Conferences in Copenhagen
and Canc�n, the United States pledged to cut its carbon diox�ide (CO2)
and other human-induced greenhouse gas emissions in the range of 17
percent below 2005 levels by 2020, and to meet its long-term goal
of reducing emissions by 83 percent by 2050. Approximately 87 percent
of U.S. anthropogenic emissions of all greenhouse gases (primarily
CO2 and methane) are energy-related, and fossil-fuel combustion
accounts for approximately 94 percent of U.S. CO2 emissions (EPA 2010a).

Climate change is often described in terms of changes in background
conditions that unfold over decades, but extreme events superimposed
on, and possibly amplified by, those background changes can cause severe
dam�age. For example, storm surges superimposed on higher sea levels
will cause greater flooding, heat waves superimposed on already warmer
temperatures will cause greater damage to crops, and a warmer atmosphere
amplifies the potential for both droughts and floods. From an economist's
perspective, greenhouse gas emissions impose costs on others who are not
involved in the transaction resulting in the emissions; that is, greenhouse
gas emissions generate a negative externality. Appropriate policies to
address this negative externality would internalize the externality, so
that the price of emissions reflects their true cost, or would seek
technological solutions that would similarly reduce the externality.
Such policies encourage energy efficiency and clean energy production.
In addition, prudence mandates that the Nation prepare now for the
consequences of climate change.

Consequences and Costs of Climate Change

The clear scientific consensus is that anthropogenic greenhouse gas
emissions are causing our climate to change. These changes include
increasing temperatures, rising sea levels, changing weather patterns,
and increas�ingly severe heat waves, with negative consequences for
human health, property, and ecosystems.1

The Changing Climate

Projections using a wide variety of climate models paint a broadly
similar picture of how global temperatures can be expected to rise in
response to emissions--a picture that is also consistent with observed
temperature changes (Rohling et al. 2012). Likely temperature paths,
from a comparison of models by the USGCRP (2009), predict that the
average global temperature under a low-emissions scenario will increase
by approximately 4�F by the end of this century; under the medium and
high emissions scenarios, end-of-century increases are 7�F and 8�F,
respectively. Some regions are projected to experience greater
temperature increases than others. The Arctic has warmed by almost
twice the global average in recent decades, in part because warming
melts snow and ice, leading to less reflected sunlight, which causes
yet more warming (Arctic Monitoring and Assessment Programme 2011).

1 The scientific consensus on the effects of greenhouse gas emissions
on climate is summarized in reports by the USGCRP (2009) and the
International Panel on Climate Change (IPCC 2012). The draft Third
National Climate Assessment report, prepared by the National Climate
Assessment Development Advisory Committee, was issued for public
comment in January 2013.

Warming temperatures raise sea levels because of expanding ocean
water, melting mountain glaciers and ice caps, and partial melting of
the Greenland and continental Antarctic ice sheets. Since 1880, the
global sea level has risen about 20 centimeters, more than half of
which has occurred since 1950. Projections by the National Oceanographic
and Atmospheric Administration show sea levels rising over the 21st
century by 19 to 200 centimeters (NOAA 2012).

Increasingly common extreme events, such as heat waves, droughts,
floods, and storms, pose some of the most significant risks of climate
change. In its assessment of the current scientific literature, the
IPCC (2012) concluded that increases in greenhouse gases will almost
certainly increase the frequency and magnitude of hot daily
temperature extremes during the 21st century, while episodes of cold
extremes will decrease. In addition, the length, frequency, and
intensity of heat waves are very likely to increase over most land areas,
and droughts may intensify (Hansen, Sato, and Ruedy 2012; Rhines and
Huybers 2013). In fact, an increase in the mean temperature implies
more very hot days and fewer very cold days, even if the variability
of daily temperatures around the mean remains unchanged. This phenomenon-a
disproportionate increase in previously extreme tempera�tures as the mean
temperature increases--is illustrated in Figure 6-1, which displays a shift
in a hypothetical distribution of possible daily temperatures. The
implications of Figure 6-1 accord with observed changes over the past decades
and centuries as well as with climate model simulations. For exam�ple,
according to the USGCRP estimates, under a high-emissions scenario, areas
of the Southeast and Southwest that currently experience an average of 60
days a year with a high temperature above 90�F will experience 150 or more
such days by the end of the century.

Patterns of precipitation and storms are also likely to change,
although the nature of these changes currently is more uncertain
than those for temperature. Northern areas of the United States are
projected to become wetter, especially in the winter and spring;
southern areas, especially the Southwest, are projected to become
drier. Moreover, heavy precipitation events will likely be more
frequent: downpours that currently occur about once every 20 years
are projected to occur every 4 to 15 years by 2100, depending on
location. The strongest cold-season storms are projected to become
stronger, more frequent, and more costly. For more on the costs of
storms, see Box 6-1.

Estimating the Economic Cost of Climate Change: The Social Cost of Carbon

Because greenhouse gas emissions cause climate change, policies
to reduce climate change must focus on reducing anthropogenic greenhouse
gas emissions. An important step in informing a policy response is
knowing precisely where carbon emissions are coming from, and that
is the purpose of the Environmental Protection Agency (EPA) Greenhouse
Gas Reporting Program discussed in Data Watch 6-1.

Another critical step in formulating policy responses to climate
change is to estimate the economic costs induced by emitting an
additional, or marginal, ton of CO2. This cost�which covers health,
property damage, agricultural impacts, the value of ecosystem services,
and other welfare costs of climate change-is often referred to as the
''social cost of carbon'' (SCC). Having a range for the SCC provides
a benchmark that policymak�ers and the public can use to assess the
net benefits of emissions reductions stemming from a proposed policy.
Although various studies, notably Stern (2006), have estimated the
cost of climate change, until recently the Federal Government did
not generate its own unique set of estimates of the SCC.

In 2010, a Federal interagency working group, led by the Council
of Economic Advisers and the Office of Management and Budget, produced
a white paper that outlined a methodology for estimating the SCC and

Box 6-1: The Cost of Hurricanes
Hurricanes draw energy from the temperature difference between
the surface ocean and mid-level atmosphere. Although no one hurricane
or storm can be attributed to global warming, there is some expectation
that warming surface waters will increase the maximum intensity of
hurricanes, and a trend toward increasing hurricane intensity has been
observed in the North Atlantic over the past three decades (Kossin
et al. 2007). As the figure shows, insured losses from storms have also
been increasing over the past 20 years, a trend that is driven by
losses from recent large hurricanes. Because many of the losses from
hurricanes are uninsured, total costs can substantially exceed insured costs.

Development near vulnerable coasts, increasing intensity of storms,
and rising sea levels point toward hurricane winds, precipitation, and
storm surges that are increasingly destructive. In fact, several studies
project substantial increases in hurricane-related costs because of
climate change.1 It is difficult to isolate the contribution of climate
change to the historical increase in hurricane costs. Nonetheless,
from the perspective of social cost, the relevant facts are that the
total cost is increasing, and that storm costs will increase with
coastal development and could well also increase in response to greater
storm severity.



Data Watch 6-1: Tracking Sources of Emissions:
The Greenhouse Gas Reporting Program

In October 2009, the Environmental Protection Agency (EPA) launched
its Greenhouse Gas Reporting Program, an ambitious effort to collect and
make publicly available facility-level data on greenhouse gas emissions
across the United States. Today, experts and non-experts alike can view,
explore, and download comprehensive information on greenhouse gas emissions
using the EPA's convenient online data tool. The program is a leap forward
for greenhouse gas data collection and the first of its kind in its scale and
''bottom-up'' approach. It will be an important piece of administrative
infrastructure for any future effort to regulate or price greenhouse gas

Since 1990, the EPA has reported estimates of greenhouse gas emissions
in its annual Inventory of U.S. Greenhouse Gas Emissions and Sinks, in
compliance with the U.S. commitment under the United Nations Framework
Convention on Climate Change. These estimates, however, are mostly
''top-down,'' in that the EPA estimates national emissions using
aggregate data on fuel production, imports and exports, and inventories.
In 2008, Congress instructed the agency to begin to collect facility-level
data, and the EPA developed the Greenhouse Gas Reporting Program to
augment the data collected through the National Greenhouse Gas Inventory.
The first wave of data, which covers emis�sions in 2010, was made
publicly available in January 2012. More than 6,000 facilities-refineries,
power plants, chemical plants, landfills, and more-were required to
report their emissions, which amounted to 3.2 billion tons of carbon dioxide
equivalent (CO2e) that year alone.1 The EPA will release data on 2011
emissions in early 2013.

The EPA provides its database of facility-level greenhouse gas
emissions online (http://ghgdata.epa.gov), and visitors can view data by
sector or geography or both. The site's rich interface and powerful maps
software permits easy spatial analysis of emissions, and built-in charts
help users glean useful information from what might otherwise be an
unwieldy dataset. Although the Greenhouse Gas Reporting Program is an
important step forward for greenhouse gas data collection, there are a
few limitations: only facilities that emit more than 25,000 tons of
green�house gases (measured in CO2e) a year are required to report
(although some sectors are ''all in,'' meaning even emitters below
the 25,000-ton threshold report for the first three to five years),
and the program does not cover emissions from agriculture or land use.
1 http://www.epa.gov/ghgreporting/ghgdata/reported/index.html

provided numeric estimates (White House 2010). The SCC calculation
estimates the cost of a small, or marginal, increase in global
emissions. This process was the first Federal Government effort to
consistently calculate the social benefits of reducing CO2 emissions
for use in policy assessment. To date, the 2010 interagency SCC
values have been used to evaluate at least 17 rules at various
stages in the rulemaking process by the EPA, the Department of
Transportation (DOT), and the Department of Energy (DOE).�

To estimate the SCC, the working group used three different
peer-reviewed models from the academic literature of the economic
costs of climate change and tackled some key issues in computing
those costs. One issue is the choice of the discount rate used to
compute the present value of future costs: because many of the costs
occur in the distant future, the SCC is sensitive to the weight
placed on the welfare of future generations. Another issue is how
to handle some of the uncertainty surrounding climate projec�tions.
Box 6-2 explains how the working group dealt with uncertainty about
the equilibrium climate sensitivity, which serves as a proxy for the
climate system's response to greenhouse gas emissions.

The working group report provided four values for the social
cost of emitting a ton of CO2 in 2011: $5, $22, $36, and $67,
in 2007 dollars. The first three estimates, which average the
cost of carbon across various models and scenarios, differ
depending on the rate at which future costs and benefits are
discounted (5, 3, and 2.5 percent, respectively). The fourth
value, $67, comes from focusing on the worst 5 percent of modeled
outcomes, discounted at 3 percent. All four values rise over time
because the marginal damages increase as atmospheric CO2
concentrations rise.

The SCC study acknowledged that these estimates, while a
substantial step forward, need refinement, for example by a more
complete treatment of some damage categories. A detailed discussion
of the methodology can be found in Greenstone, Kopits, and Wolverton
(2013). The interagency work�ing group has committed to update its
estimates of the SCC as the literature evolves and as new scientific
and economic evidence become available.

Policy Implications of Scientific and Economic Uncertainty

As a general matter, policy decisions must commonly be made in
the presence of uncertainty. A standard approach for cost estimation
or policy evaluation in the presence of uncertainty is to consider
different scenarios and to compute a weighted average (expected value)
over those scenarios. But in some cases it is difficult to quantify this
uncertainty. In particular, some of the unknowns about climate change
concern extreme scenarios that are far outside recorded human experience.
Although such events are

Box 6-2: Handling Uncertainty About Equilibrium Climate Sensitivity

The 2010 Federal study on the social cost of carbon (SCC) used
three integrated economic-geophysical models to estimate the cost
of climate change: the DICE model, the PAGE5 model, and the FUND
model.1 The costs estimated by each model are sensitive to climatic,
economic, and emissions parameters. A key input parameter for each
model is the equilibrium climate sensitivity, defined as the increase
in the long-term annual global-average surface temperature increase
associated with a doubling of atmospheric carbon dioxide (CO2)
concentration relative to pre-industrial levels.

The Intergovernmental Panel on Climate Change (IPCC 2012) suggests
a range for the equilibrium climate sensitivity of 2-4.5�C (3.2-7.2�F),
but the scientific uncertainty extends outside this range. The figure
shows distributions of possible values of this parameter arising from
different studies; each line in the figure corresponds to a given
study, and the higher the line, the greater the chances (according to
that study) of the corresponding value of the equilibrium climate
1 The DICE model was developed by William Nordhaus, David Popp,
Zili Yang, Joseph Boyer, and colleagues. The PAGE model was developed
by Chris Hope with John Anderson, Paul Wenman, and Erica Plambeck.
The FUND model was developed by David Anthoff and Richard Tol.

Although the distributions from different studies differ, each holds
open the possibility that the value of this parameter might be very large.

This range of uncertainty over the equilibrium climate sensitivity
matters for estimating the economic costs of carbon emissions: a higher
value implies a more amplified response of temperature to carbon
emissions, which would be associated with greater human consequences.
To handle this uncertainty, the task force adopted a standard approach
used by economists, which is to compute a weighted average--technically,
an expected value--where the weighting reflects the uncertainty in the
scientific literature. Specifically, simulations were run for many
values of the equilibrium climate sensitivity drawn randomly from
an assumed probability distribution and the results were averaged,
producing the expected value for the SCC. The resulting SCC estimate
incorporates the uncertainty in the equilibrium climate sensitivity.

therefore difficult to quantify, the possibility of very severe
outcomes can and should inform policy.

One principle of policy design under uncertainty is that the policy
should be able to adapt as more is learned and the uncertainty is
resolved; another is that a policy should be robust to uncertainty.
2 A robust policy aims to give acceptable outcomes no matter what
happens, within a given range of possible outcomes. As applied to
climate change, this idea of robust policy in the face of uncertainty
leads to policies that avoid worst-case out�comes. Such an approach
has been advocated by Weitzman (2009, 2011), who argues that, when
considering the expected damages of unmitigated global climate change,
it is important to consider low probability but potentially catastrophic
impacts that could occur. By focusing on avoiding the most costly
climate outcomes, a climate change policy that is robust to scientific
uncertainty would be more aggressive than a policy that simply focuses
on quantifiable uncertainty or a consensus temperature path. If future
scientific knowledge were to determine that the worst outcomes could
be ruled out, then a robust policy could be adjusted. Thus, although
uncertainty complicates the task of computing costs, it is not in
itself a reason for inaction or delay.

2 An important early paper on policymaking under uncertainty is Brainard
(1967). Recent work in economics on robust policy in the face of model
uncertainty includes Hansen and Sargent (2001, 2007), Giannoni (2002),
Onatski and Stock (2002), and Funke and Paetz (2011).

Carbon Emissions: Progress and Projections
The past five years have seen a remarkable turnaround in U.S.
emissions of carbon dioxide. As can be seen in Figure 6-2, from the
early 1980s through the mid-2000s, energy-related CO2 emissions
increased from approximately 4,500 million metric tons (MMT) to a
peak of just over 6,000 MMT in 2007. Since 2007, however, emissions
have fallen sharply to approximately 5,500 MMT in 2011, the most
recent year for which there is complete data. Indeed, as shown in the
figure, this reduction in emissions makes significant progress toward
achieving the Copenhagen Accord target of a 17 percent reduction in
greenhouse gas emissions below 2005 levels by 2020.3

A natural question is what set of new events or initiatives led to
the sharp reduction in emissions. There are a number of candidate
explanations: reductions in the carbon content of energy, most notably
the substitution of natural gas and renewables for coal; improvements
in economy-wide energy efficiency; and unexpectedly low energy demand
because of the recession. To estimate the contribution of these
factors to the decline in emissions, one needs to posit a counterfactual
path for these three variables, that is, for the carbon content of energy
(CO2 per British thermal unit, or Btu), energy use per dollar of gross
domestic product (Btu/GDP), and GDP. Given a counterfactual, or baseline,
path for these variables, one can decompose the decline in carbon
emissions to a decline in the carbon content of energy, an accelerated
improvement in energy efficiency, or a shortfall of GDP, relative to the
baseline path.4  Because the question focuses on the role of new
developments, a natural approach is for the baseline to be a
business-as-usual projection from a given starting point. For the purpose
of this exercise, the starting point is taken to be the 2005 values of
the carbon content of energy, energy efficiency, and GDP; the
business-as-usual projections are made either by using historical
published forecasts or by extrapolating historical trends.

The results of this decomposition estimate that actual 2012 carbon
emissions are approximately 17 percent below the ''business as usual''
baseline. As shown in Figure 6-3, of this reduction, 52 percent was due
to the recession (the shortfall of GDP, relative to trend growth), 40 percent came
3 United Nations Framework Convention on Climate Change, Appendix I,
http://unfccc.int/ meetings/copenhagen_dec_2009/items/5264.php.

4 Specifically, CO2 emissions are the product of (CO2/Btu)�(Btu/GDP)�GDP,
where CO2 represents U.S. CO2 emissions in a given year, Btu represents
energy consumption in that year, and GDP is that year's GDP. Taking
logarithms of this expression, and then subtracting the baseline from
the actual values, gives a decomposition of the CO2 reduction into
contributions from clean energy, energy efficiency, and the recession.

from cleaner energy (fuel switching), and 8 percent came from
accelerated improvements in energy efficiency, relative to trend.
Of the cleaner energy improvements, most (approximately two-thirds)
came from reductions in emissions from burning coal. Reductions in
emissions from petroleum combustion also made important
contributions (approximately one-third), as these high-carbon content
fuels were replaced by lower carbon-content natural gas and clean
renewable energy sources, notably wind and biofuels. The contribution
from energy efficiency stems from efficiency improve�ments over the
2005-12 period that were faster than projected; in particular, the
Energy Information Administration (EIA 2005) forecast a reduction
in the energy content of GDP of 1.6 percent per year, but energy
efficiency improved by more than this forecast.5
As the economy improves, GDP will rise, and the weakness of the
economy in 2007-09 will no longer restrain energy consumption. Thus
if the recent reductions in emissions are to be continued, a greater
share will need to be borne by fuel switching into natural gas and
into zero-emissions renewables, and by accelerating improvement in
economy-wide energy efficiency.
/5/ Houser and Mohan (forthcoming) undertake a similar decomposition.
They use different assumptions for the baseline, including somewhat
stronger post-2005 GDP growth in the "business as usual" case than
is assumed here, and as a result attribute slightly more of the
post-2005 reduction in CO2 emissions to slower economic growth.

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Policy Responses to the Challenge
of Climate Change

As a general matter, government intervention may be warranted
if an individual's action produces a negative externality; that is,
if the action imposes costs on another person and those costs are
not borne by the person taking the action. As with many
environmental problems, the impacts of pollution are broadly shared
by society, and individuals emitting pollution do not bear the
full, direct costs of their individual action (or reap the full
benefits individually of reducing pollution). In the case of
anthropogenic emissions of greenhouse gases, the costs of climate
change are borne by others, including future generations, and those
costs are not reflected in the price of greenhouse gas emissions.
This market failure is also present in reverse: an entrepreneur with
a clever idea for reducing greenhouse gas emissions, such as a novel
energy conservation technology, cannot recoup the full benefit of
her innovation because there is no way she can charge those who
will benefit from the abatement of those emissions.
This diagnosis of the market failure underlying climate
change clarifies the need for government to protect future
generations that will be affected by today's emissions. Responding
to the challenge of climate change leads to a multipronged approach
to policy. Four such responses are implementing market-based
solutions; technology-based regulation of

196 | Chapter 6

greenhouse gas emissions; supporting the transition of the U.S.
energy sec�tor to technologies, such as renewables and energy
efficiency, that reduce our overall carbon footprint; and taking
actions now to prepare for those impacts that are by now

Market-Based Solutions

In his 2013 State of the Union Address, President Obama urged
Congress to pursue a bipartisan, market-based solution to climate
change. Market-based solutions to greenhouse gas emissions provide
economic incentives so that the cost of polluting reflects the
economic harm caused to others by that pollution. In this sense,
market-based solutions are said to "internalize" the externality
caused by the pollution. Under the standard assumptions of economic
theory, market-based solutions to pollution are economically
efficient because those who create the externality can choose the
least costly and disruptive way to reduce their emissions. Under
market-based solutions, the effective price of the activity
producing the negative externality is adjusted so that it reflects
the cost of that externality. There are various ways that
market-based solutions can be implemented, one of which is a
cap-and-trade system like the one Senators McCain and Lieberman
worked on /6/

Another example of a market-based solution is a Clean Energy
Standard that would require electric utilities to obtain an
increasing share of delivered electricity from clean sources but
would allow them to meet the standard by trading clean-energy
credits. By allowing trading in credits, electric utilities that
produce renewable energy at relatively low cost can sell credits
to those for which renewable production would be high-cost. Thus
the total cost across all utilities of meeting the standard is
reduced, relative to the cost were each utility required to meet
the standard without tradable credits.  In this way, a market for
clean energy credits harnesses private-sector incentives to
minimize the cost of generating electricity from clean energy
sources. /7/

Direct Regulation of Carbon Emissions and the Vehicle Greenhouse
Gas / Corporate Average Fuel Economy (CAFE) Standards

Another way to address the externality of carbon emissions is
by direct regulation. In 2007, the Supreme Court ruled in
Massachusetts v. EPA that it is incumbent upon the EPA to determine
whether greenhouse gases

/6/ For a more detailed discussion of cap-and-trade, see the 2010
Economic Report of the
President, chapter 9.
/7/ For further discussion of a Clean Energy Standard, see the 2012
Economic Report of the
President, chapter 6.

| 197

pose a risk to public health or welfare and, if so, to regulate
greenhouse gas emissions under the Clean Air Act. In 2012, the
U.S. Court of Appeals for the District of Columbia Circuit upheld
the EPA's authority to regulate greenhouse gas emissions.

The Administration's corporate average fuel economy (CAFE) and
greenhouse gas regulations, released in 2012 jointly by the EPA and
the DOT, require automakers to increase the fuel economy of
passenger cars and light trucks so that they are estimated to
achieve 54.5 miles per gallon by 2025, approximately doubling the
previous mileage standards.8 The new fuel economy standards are
expected to save more than 2 million barrels of oil a day by
2025--more than we import from any country other than Canada--and
to reduce consumer expenditures on gasoline. The standards are
projected to reduce annual CO2 emissions by over 6 billion metric
tons over the life of the program, roughly equivalent to the
emissions from the United States in 2010 (White House 2011a).
The new fuel economy standards help to correct the externality
that the cost of carbon emissions is not accounted for in the price
of gasoline. The standards also provide a clear signal to the
thousands of firms in the auto supply chain that investments in
fuel-saving innovation will pay off. These innovations range from
large (batteries for electric cars) to small (lighter-weight bolts),
and often require suppliers to coordinate with each other.
For example, use of innovative high-strength steels can reduce the
overall weight of a vehicle, but only if firms making automotive
parts and those making tooling for the parts each invest in new
production processes (Helper, Krueger, and Wial 2012). The new
standards ensure demand for fuel-saving innovations and thus
provide an incentive for such investments.

Energy Efficiency
An important way to reduce greenhouse gas emissions is to use
energy more efficiently, that is, to use less energy to provide a
given service outcome. For example, weatherizing a home improves
efficiency by requiring less energy to maintain a given inside
temperature. Using less energy, in turn, reduces greenhouse gas
The Administration has made energy efficiency initiatives an
important component of its energy plan./9/ These initiatives include
major research

/8/ Because the standards regulate greenhouse gas emissions, they can
be met in part in ways that do not improve fuel economy. In
particular, if improvements are made by reducing leakage of
greenhouse gases in auto air conditioners, or by replacing
refrigerants with non-greenhouse gases, then the goal of reducing
greenhouse gas emissions is achieved without improving fleet fuel
/9/ http://www.whitehouse.gov/sites/default/files/email-files/the_blueprint_for_a_secure_energy_ future_oneyear_

198 | Chapter 6

investments to improve the efficiency of building designs and components
such as lighting, heating, and air conditioning, along with smart
building controls. Other important initiatives include the
weatherization of more than 1 million homes across the country,
the President's Better Buildings Challenge with $2 billion in
private-sector commitments to energy efficiency retrofits, new
standards for residential and commercial appliances, and the
Rural Energy for America Program. The Administration has also
introduced a variety of programs to help consumers learn about
developments in energy efficiency; one such example is the Home
Energy Score, a new voluntary program from the DOE to help
homeowners make cost-effective decisions about energy improvements.
Additionally, as part of a broader manufactur�ing strategy, the
Administration has partnered with manufacturing compa�nies
representing more than 1,400 plants that plan to make investments
that will improve energy efficiency by 25 percent over 10 years.
An overall measure of economy-wide energy use is the amount of
energy needed to generate a dollar's worth of goods and services
("energy intensity"). As is shown in Figure 6-4, the energy intensity
of the U.S. econ�omy has fallen steadily over the past quarter
century, with an annual average rate of decline of 1.7 percent from
1990 through 2011. However, U.S. energy intensity is still
one-third higher than that of Germany and Japan, in part because
Germany and Japan have automobiles and building codes that are more
energy efficient, as well as smaller homes set more densely. /10/
One reason for the decline in the energy intensity of the
U.S. economy is the increasing importance of services as a share
of U.S. GDP. Manufacturing is more energy-intensive than is the
production of services, and for decades the share of U.S. GDP
derived from services has been growing while the share derived
from manufacturing has been declining. This shift from
manufacturing to services therefore has reduced the energy intensity
of the U.S. economy.
To control for changes in the energy-GDP ratio driven by
changes in the sectoral composition of output, the DOE developed an
"Economy-wide Energy Intensity Index." This index estimates the
amount of energy needed to produce a basket of goods in one year,
relative to the previous year. As indicated in Figure 6-5, between
1985 and 2010, the DOE Energy Intensity Index fell by 14 percent.
In contrast, the energy-GDP ratio fell by 33 percent. Thus, while
much of the decline in energy usage per dollar of GDP has come
from improvements in energy efficiency, much of it has also come from

/10/ In neither Germany nor Japan is the lower energy intensity due
to having less manufacturing than the United States. In fact,
manufacturing (an energy-intensive sector) is almost twice as high
as a share of GDP in Germany as it is in the United States.

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factors other than improved efficiency such as shifts in the
composition of output.
The energy intensity index measures the energy footprint of
U.S. production, not of U.S. consumption. This distinction arises
because energy intensity includes energy used to produce exported
goods and services (which are not consumed domestically) and
excludes energy used to pro�duce imports. To estimate the CO2
intensity of consumption, as opposed to the CO2 intensity of
production, one needs to adjust U.S. CO2 emissions for the
difference of foreign emissions in the production of imports less
domestic emissions in the production of exports.
Technical developments that use less energy to provide a
service, such as maintaining a room at a comfortable temperature,
can both reduce energy consumption and improve consumer welfare.
Because technical improve�ments in energy efficiency reduce the
energy cost of the service, consumers are better off, and because
the price of the service declines, they might use more of it.
For example, weatherizing a home might tempt the homeowner to bump
up the thermostat a couple of degrees. This consumer response of
using more of the newly efficient service is known as the rebound
effect. The magnitude of the rebound effect depends on the
particular service, more specifically on the elasticity of demand
for the service. Viewed solely through the lens of CO2 reduction--a
lens that is appropriate because CO2 emissions are underpriced--the
rebound effect suggests that government efforts on energy efficiency
should emphasize services with inelastic demand, so that price
changes do not substantially alter service consumption and actual
energy savings approach the technically feasible energy savings.
One such example is the services derived from automobiles.
In the context of the vehicle greenhouse gas-CAFE standard discussed
earlier, the EPA assumes a rebound effect of about 10 percent11,
that is, consumers will drive about 10 percent more than if the
efficiency of their vehicles had not increased (EPA 2010b). In their
reviews of the rebound effect, Greening, Greene, and Difiglio
(2000) and Gillingham et al. (2013) suggest more generally that
the rebound effect tends to range between 10 percent and 30
percent. Although much has been written on the rebound effect,
the base of original research is limited, and more research is
needed concerning the rebound effect (and the associated price
elasticities) empirically, both in the short and long run.

/11/ The EPA rebound estimate draws on the literature, for example,
Small and Van Dender (2007).
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Energy Production in Transition

The United States is in a period of swift and profound change
in the way that energy is produced and consumed. Thanks to recent
advances in technology, more of the country's domestic oil and gas
resources are now accessible. As a result, U.S. oil production
has climbed to the highest level in 15 years and natural gas
production reached an all-time high. This increase in domestic
oil production enhances energy security, and increased natural
gas production has substituted for coal, which reduces CO2 emissions
per unit of energy produced. At the same time, the Obama
Administration has taken historic steps to promote greater energy
efficiency and the deploy�ment of renewable energy across the U.S.
economy. In the past five years, the United States has more than
doubled non-hydroelectric renewable elec�tricity generation.
The Administration is working to continue these trends through a
comprehensive "all of the above" approach to energy policy that
takes advantage of all domestic energy resources, while also
igniting the innovation needed to lead the world in clean energy.
The transformation of the U.S. energy sector to one with a
smaller carbon footprint is central to climate change policy.
As Figure 6-6 shows, approximately 77 percent of U.S. energy
production in 2011 came from burning fossil fuels, and the
remaining 23 percent was approximately evenly split between
nuclear and renewables. In broad terms, the share of natural
gas (the fossil fuel with the lowest carbon content) and the
share of renew�ables have been expanding, displacing the share of
coal (the fossil fuel with the highest carbon content).

Oil and Natural Gas
New developments in exploration and production techniques and
technology have made the extraction of new sources of oil and
natural gas economically viable, resulting in a U.S. production
boom. Figure 6-7 shows the changing consumption and production
trends of natural gas in the United States, along with the U.S.
share of global production since 2000. As a result of the
developments in shale gas production, total U.S. natural gas
production rose 27 percent, from 18.1 trillion cubic feet in
2005 to 23.0 tril�lion cubic feet in 2011, and wellhead prices
fell 46 percent, from $7.33 per thousand cubic feet to $3.95 per
thousand cubic feet. In 2011, for the first time in 30 years,
energy production from dry natural gas exceeded energy production
from coal.
The benefits of increased production of natural gas are
observed throughout the U.S. economy. In recent years, low energy
costs have become a competitive advantage to the U.S. industrial
sector. Additionally, low

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prices for byproducts of natural gas such as methane, ethane,
and propane spur growth in agriculture, petrochemical manufacturing,
and other industries that use these byproducts.
In the power sector, burning natural gas produces nitrogen
oxides, carbon dioxide, and other pollutants, but in lower
quantities than burning coal or oil. The life-cycle emissions of
greenhouse gases from a combined-cycle natural gas plant is roughly
half that of a typical coal-fired power plant per kilowatt hour
(Logan et al. 2012). On the other hand, methane, a primary
component of natural gas and a greenhouse gas, can be emitted from
natural gas systems into the atmosphere through production
processes, component leaks, losses in transportation, or
incomplete combustion. Measuring fugi�tive methane emissions from
the U.S. natural gas supply chain and, more generally, understanding
the potential impacts of natural gas development on water quality,
air quality, ecosystems, and induced seismicity, are critical to
understanding the impact on the environment of the increasing use
of natural gas.

Renewable Energy
In the long run, large reductions in carbon emissions require
large increases in energy production from zero-emissions sources,
especially renewable energy. In the beginning of his Administration,
President Obama set a goal of doubling U.S. renewable energy
generation capacity from wind, solar, and geothermal sources by
2012. This ambitious goal has been achieved, thanks both to
the Administration's historic investments in clean energy
technologies and to decades of government-funded research and
development (R&D) aimed at driving costs down to the point where
renewable energy is competitive with traditional fossil-fuel
Since 2008, the most significant increase in renewable energy
produc�tion has been in wind energy. The dramatic increase in
wind generating capacity is shown in Figure 6-8. In 2011, wind
power constituted more than 30 percent of new additions to U.S.
electric generating capacity: close to 6.8 gigawatts of new wind
generating capacity was installed in the United States,
representing an investment of $14 billion. Wind energy supplies
20 percent of electricity consumption in some states, including
Iowa and South Dakota. As a nation, the United States accounts for
20 percent of total global wind power generation and 16 percent of
global installed capacity. In 2012, wind power provided more than 3
percent of the nation's electricity generation (EIA 2013b).
The Administration also continues a strong commitment to the
development and promotion of solar energy. An important aim is
bringing the cost of solar photovoltaics down closer to grid parity
with traditional,

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fossil sources of energy, including natural gas. The Administration's
support for solar energy has included more than $13 billion since
September 2009 through DOE programs for solar-related projects,
including applied R&D, demonstrations, and the DOE clean energy
loan guarantee program. In 2011, the DOE launched an ambitious
new effort, the Sunshot Initiative, aimed at reducing the installed
costs of solar energy systems of all sizes (residential,
commercial, and utility) by an additional 75 percent by the end of
the decade.
Solar photovoltaic capacity is growing rapidly, with current
installed capacity estimated to be approximately 4 gigawatts.12 The
Interstate Renewable Energy Council estimates that grid-connected
photovoltaic capacity increased more than tenfold between 2007 and
President Obama has set a goal of once again doubling
generation from wind, solar, and geothermal sources by 2020, and has
called on Congress to make the renewable energy Production Tax
Credit permanent and refundable, as part of comprehensive corporate
tax reform, providing incentives and certainty for investments in
clean energy. /13/
/12/ The Interstate Renewable Energy Council (IREC), the Solar
Energy Industries Association (SEIA), and the National Renewable
Energy Lab (NREL).

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Advanced Technologies and R&D
The Federal Government also has an important role to play in
R&D involving frontier fossil-fuel technologies. Notably, the
Administration has invested nearly $6 billion in clean coal
technology R&D--the largest such investment in U.S. history--and this
strategy has attracted more than $10 billion in additional
private sector capital investment. Clean coal technology involves
removing CO2 from flue gases released from burning coal, then
preventing its escape into the atmosphere by injecting it
underground, a process known as carbon capture and sequestration.
The recovered CO2 can potentially be used to recover hard-to-reach
oil reserves, partially offset�ting the carbon capture costs.
Another clean coal technology in the R&D stage is hydrogen
production from coal, in which the highly concentrated CO2 stream
is captured and sequestered. Advanced technologies also have the
potential to make natural gas burn even cleaner by capturing and
stor�ing CO2 emissions, and the government has a role to play in
encouraging research into these technologies.
Federal research efforts on zero- and reduced-emissions energy
sources extend into other domains as well, including research toward
shift�ing cars and trucks to nonpetroleum fuels.

Preparing for Climate Change
The policies discussed so far aim to reduce emissions of greenhouse
gases and thereby to stem future costs of climate change. But the
climate has not yet fully adjusted to current levels of greenhouse
gases, and ongoing anthropogenic emissions will continue to
increase greenhouse gas concen�trations because CO2 remains in the
atmosphere for centuries. Thus, while it is important for all
countries to sharply reduce CO2 emissions to limit the extent of
further climate change, even with the most concerted international
efforts additional climate change is inevitable. We therefore face
a world with an unavoidably changing climate for which we need to
Policies to prepare for climate change occur at many scales.
At the local level, preparing for climate change can entail changing
building codes to make structures more storm- and flood-resistant
and investing in stronger community planning and response. More
substantially, destructive effects of coastal storms can be
partially dissipated by restoring natural storm barriers such as
tidal wetlands, sand dunes, and coastal barrier landforms.
National policies to prepare for climate change range from
providing information about likely changes in local climates and
weather patterns, to supporting further research on and monitoring
of climate change and its consequences, to providing proper
incentives for individuals to prepare

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for climate change. For example, federal insurance programs, such as
the Agriculture Department's crop insurance program and the Federal
Emergency Management Agency's flood insurance program, provide
insurance either with a subsidy or where there is no private market
(that is, the price a private insurer would charge would exceed what a
purchaser would be willing to pay). Revisiting federal insurance
subsidies could encourage practices that could be increasingly
important in the face of accelerating climate changes, such as
farmers planting drought-resistant varietals or homeowners
building or renovating away from flood plains.
Preparing for climate change will also entail larger-scale
infrastructure investments. Some of these investments involve
maintaining existing infra�structure. For example, a 2007
investigation by the American Society of Civil Engineers reported
that chronic underfunding of the New Orleans hurricane protection
system was one of the principal causes of the levee failures after
Hurricane Katrina, a storm that inflicted over $110 billion of
Other investments involve enhancing or extending existin
g infra�structure. For example, the electric power grid can be made
more resilient to increasingly severe storms and rising sea levels
by using smart grid technol�ogy, which pinpoints outage locations
and helps to isolate outages, reducing the risk of widespread power
shutdowns. The Recovery Act provided the single largest smart grid
investment in U.S. history ($4.5 billion matched by an additional
$5.5 billion from the private sector), funding both the Smart Grid
Investment Grant and Smart Grid Demonstration programs, among others,
to spur the Nation's transition to a smarter, stronger, more
efficient, and more reliable electricity system (White House 2011b).


The scientific consensus is that the anthropogenic emission
of green�house gases is causing climate change. The results can be
seen already in higher temperatures and extreme weather, and these
are but precursors of what lies ahead. Although greenhouse gas
emissions and climate change are global problems, the United States
is in a unique position to tackle these challenges and to provide
global leadership.
The Nation has made substantial progress toward the
Administration's ambitious short-term Copenhagen targets for
reducing emissions of carbon dioxide, but much difficult work lies
ahead. Undertaking this work, which reflects the Administration's
commitment to future generations, entails many policy steps that
are economically justified by the negative exter�nalities imposed
by greenhouse gas emissions. Policies to reduce emissions of
greenhouse gases include market-based policies; encouraging energy

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efficiency; direct regulation; encouraging fuel switching to
reduced-emis�sions fuels; and supporting the development and
widespread adoption of zero-emissions energy sources such as wind
and solar. And, as the country reduces emissions along this path,
it also needs to prepare for the climate change that is occurring
and will continue to occur. Together these policies pave the way
toward a sustainable energy future.