Executive Summary

Designing a Climate-Friendly Energy Policy: Options for the Near Term

Energy policy and climate policy are closely linked because the majority of U.S. greenhouse gas (GHG) emissions are in the form of carbon dioxide (CO₂) emissions resulting from the combustion of fossil fuels. Energy policies can reduce CO₂ emissions by, for example, increasing energy efficiency, reducing reliance on fossil fuels, and shifting from high-carbon to lower-carbon fuels. Conversely, energy policies that miss opportunities to make such changes will leave unchecked the trend of increasing CO₂ emissions. Consequently, energy policy decisions made today can help reduce GHG emissions in the near term and can significantly affect how costly it would be to implement any future climate policy.

The federal government is in the throes of one of its periodic comprehensive reviews of U.S. energy policy. It is likely that significant federal energy policy questions will be addressed in the near term, before the development of any climate change regulatory program. Yet, there is also the distinct possibility that the United States will eventually adopt a mandatory GHG reduction program. This report considers energy policies that can be adopted in the context of the energy policy debate, short of adopting a GHG program now, to best position the nation to reduce GHG emissions and to implement future climate change policies. These are the options that make up a "climate-friendly energy policy."

In reviewing policy options, we have identified four key objectives that drive energy policy:

(1) Secure, plentiful and diverse primary energy supply,

(2) Robust, reliable infrastructure for energy conversion and delivery,

(3) Affordable and stable energy prices, and

(4) Environmentally sustainable energy production and use.

In developing a template for a climate-friendly energy policy, we have limited ourselves to a review of energy policy options, i.e., policies that serve one or more of these objectives. We have not considered climate policies that lack a direct energy policy nexus. We have also limited ourselves to relatively near-term energy policy initiatives, i.e., initiatives that could begin to produce energy policy benefits over the next decade or two.

Climate-friendly energy policies fall into one of three general categories-policies that:

(1) Reduce GHG emissions now,

(2) Promote technology advancement or infrastructure development that will reduce the costs of achieving GHG emissions reductions in the future, and

(3) Minimize the amount of new capital investment in assets that would be substantially devalued (or "stranded") if a GHG program were implemented.

Using these guidelines, the following are highlighted as key elements of a climate-friendly energy policy:

Fossil Fuels
Increased natural gas production and expanded natural gas transportation infrastructure will lower the price and increase the availability of natural gas and, in turn, support the continued use of gas in lieu of coal in new power plants.

Electricity
Deployment of efficient electricity production technologies, including combined heat and power, fuel cells, and highly efficient power plant technologies, can significantly increase the amount of useful energy gleaned from fuels, and thus reduce both energy costs and GHG emissions.

Maintaining a role for nuclear and hydroelectric power can enhance diversity of energy supply. It also will reduce growth in fossil fuel consumption for electricity generation and may reduce energy prices.

Deployment of renewable energy technologies can help diversify the nation's energy portfolio. These technologies are environmentally beneficial-most produce little or no GHG emissions.

Building and Industrial Efficiency
Enhancing end-use efficiency in buildings and industry can reduce overall consumer costs in many cases, can reduce the need for new electric power plants, and can reduce GHG emissions related to energy use.

Transportation
Enhancing efficiency of automobiles and light trucks reduces oil consumption, and thereby mitigates reliance on oil imports and reduces GHG emissions.

Research and Development
Research and development on efficient technologies in all sectors can provide options to reduce future energy costs to consumers and future energy consumption, with corresponding GHG benefits.

Research and development on non-fossil fuels and carbon sequestration can provide future alternatives to reliance on oil and could enable continued use of coal consistent with a GHG emissions limitation.

In many areas, there is a substantial convergence between energy policy objectives and climate policy objectives. In particular, climate-friendly energy policies aim to: (1) increase the efficiency of energy use; (2) increase the use of renewable (including biofuels) and other non-emitting technologies; (3) promote the use of natural gas instead of coal or oil; and (4) encourage research and development on new energy technology.

This set of climate-friendly energy policies advances energy policy objectives. Taken together, these measures would build on the policies implemented to date to: enhance energy security by reducing growth in demand for oil, increase the diversity of the country's energy mix, strengthen the energy delivery infrastructure, and contribute to improvements in air quality without significantly increasing consumer energy costs. In addition to the policies listed above, there are other energy policy options that have no significant climate change impacts but may address central energy policy concerns and, thus, should be considered for inclusion in any comprehensive energy policy. These could include policies to increase domestic production of oil, to expand electricity transmission infrastructure, and to promote competitive electricity markets.

The set of climate-friendly energy policies discussed in this report advances climate objectives, but it does not constitute a fully elaborated climate policy. It does not produce the magnitude of reductions needed, for instance, to meet the non-binding goal set forth for the United States in the 1992 Rio Framework Convention on Climate Change, i.e., to return U.S. GHG emissions to 1990 levels. Based on the U.S. Department of Energy's analysis1 of a similar set of policy elements, it appears that this package could significantly slow the projected growth of GHG emissions, but is not sufficient to reduce energy-related GHG emissions from current levels, much less return them to 1990 levels. Moreover, trying to achieve climate goals indirectly through energy policy tools will necessarily be more expensive than achieving the same climate goals through an effectively designed, market-based GHG regulatory program covering all sectors of the economy. Instead, this is a collection of near-term energy policies that stand on their own as energy policies and would help better position the U.S. economy for possible future GHG emissions limitations.