Cap-n-Tax Maze – M. Katharine Ham Video – Bill Appendix Analysis – EPA Base Case



As a follow up to my previous posting (Cap n Trade Bill: Where Will You Be When The Lights Go Out?), I have been reading the cap n trade bill.  I know that I’m not the smartest person however I majored in Economics and I still don’t understand this bill.  How can an American be taxed on individual carbon usage based on some complex formula that depends on a tree being cut in a jungle in Brazil or how many trucks are on the road in India at any given time, not to mention the Chinese industrial output.

This bill is very complicated for the average American.  The devil is in the details and the Dems know the American population cares more about Michael Jackson’s death than carbon credits.  One day the American people will wake up and won’t be able to recognize our once great country from another euro socialist country.

Yesterday, a caller on Rush’s show mentioned that included in the cap n trade bill is a provision for a home inspector to evaluate a home’s energy efficiency and this bill includes the California mandates.  If an older home does not have upgraded appliances, green windows/insulation, etc., the home may not be sold until the “green” upgrades have been completed.  The socialist/dems cap n trade bill is nothing more than a copy cat grand experience from  the European socialist.

The dems are creating a master nanny state.  They will control every aspect of our daily lives.  They will tell us what to eat, what to drive, when to turn down our air conditioner, when to go to the doctor, and what prescriptions we can take depending on age, health, and whatever the centralized plan tells us to do.

aWarning to my younger readers:  The following post and content is beyond the 140 maximum character limit of tweeter.  Reading of this posting may require longer than the normal 2 minute attention span.

The idea that carbon dioxide is a carcinogen that is harmful to our environment is almost comical. Every time we exhale, we exhale carbon dioxide.  Every cow in the world, you know when they do what they do you’ve got more carbon dioxide.” John Boehner


There is no evidence that this is the case just computer models and scare forecasts. Neither the scientific questions, nor the cost benefit analysis has been subject to any critical independent analysis.

The Australian Cap-n-Trade Maze diagram above illustrates the sequence of decisions that should be made before  a bill is passed.If the answer to ANY ONE of the boxed questions is NO, there is no justification for Australia rushing ahead with its Cap-n-Tax Bill. This Maze, although light-hearted, has a factual basis and conveys some very serious messages.

It is highly unlikely that anyone could honestly answer Yes to every question, which is what is required to justify passage of the bill.  This suggests that there is a high likelihood that the bill will have NO CLIMATE EFFECT WHATSOEVER and thus a costly exercise in self delusion.

Mary Katharine Ham tries to explain cap n trade:


Below are the first notes/sections  that I have reviewed of the proposed socialist tax bill.  The 1st section below contains my first notes/review from the 108 page HR2454 Analysis Appendix (pdf) of the bill:


Page 56

This analysis is a cost-effectiveness analysis, not a cost-benefit analysis. As such, the benefits of reducing GHG emissions were not determined in this analysis.

Page 65

The structure of the IGEM model tends to lead to larger GDP impacts for a given allowance price than the ADAGE model.

• The compensated elasticity of labor supply is the driving force behind the relatively large economic impacts for a given allowance price in IGEM. The second stage of the household decision process is the allocation of full consumption between leisure and goods and services. The parameter that governs this decision plays a dominant role in model outcomes. Unfortunately there is not a consensus in the literature about what value this parameter should take.

In ADAGE, this consumption- leisure parameter is adopted from values of related parameters in the empirical literature. Much of the empirical literature examines the effect of a real wage increase on the willingness to supply additional labor hours without simultaneously considering the impact on labor force participation. Attempts to combine both impacts in a single parameter have yielded estimates ranging from 0.1 to 0.6 for the compensated elasticity of labor supply.

IGEM estimates the time-varying compensated elasticity of labor supply as part of a comprehensive model of household behavior and finds values ranging from 0.8 to 1.0. (Jorgenson et. al 2008).  In a sensitivity case run for a previous EPA analysis, the consumption-leisure trade off in IGEM was constrained so that the average compensated labor supply elasticity was reduced from its estimated value of 1.03 to a constrained value of 0.48. In this sensitivity the decline in GDP was reduced by approximately 20%, and the decline in consumption was reduced by 50%.

Jorgenson et. al (2008) shows an experiment reducing the compensated labor supply elasticity that reduces GDP impacts by 25 to 20 percent.

Goettle and Fawcett (2009) ran an experiment as part of the EMF-22 exercise reducing the compensated labor supply elasticity in half, and found the resulting welfare impact was also halved.

Jorgenson et al. (2009a) describes an experiment reducing the responsiveness of labor supply from 0.8 to 0.3 in IGEM reduces the impact on GDP by a third, and reduces the impact on household consumption by 70 to 80%. This bounded range of outcomes is useful in the absence of a definitive consensus on the value of the compensated elasticity of labor supply that should be used in these models.

Changes in consumption may be a better measure of the costs of H.R. 2454 than changes in GDP since utility (and thus welfare) is a direct function of consumption.


Page 91

H.R. 2454 requires EPA to establish a reverse auction that would yield an appropriate financial incentive to spur deployment of CCS, neither over- or under-incentivizing the technology.

A fixed portion of allowances are reserved for incentivizing carbon capture and storage technology (starting at 1.75% of allowances and rising to 5% through 2050).

• The reverse auction was not specifically included in IPM.  Instead, some scenarios were modeled with a range of bonus values to simulate a spectrum of incentives that could result in an actual reverse auction.

• In all scenarios, the first 3 GW of CCS capacity receive a $100 per ton bonus and the next 3 GW receive $90 per ton, since H.R. 2454 sets the bonus level for the first 6 GW of CCS deployed.

• For subsequent capacity, the core IPM H.R. 2454 scenario has a bonus of $40 per ton. The capacity assumed to be built due to other sources of funding (such as the bill’s early deployment provisions) also receives the bonus allowance value. A total of up to 72 GW of capacity is eligible for bonus allowances in this bill.

• There is significant uncertainty with regards to CCS technology availability and cost, thus making it difficult to ascertain the precise level of incentive that will lead to any given level of CCS deployment. The reverse auction approach for CCS bonus allowances is designed to elicit from market participants the minimum per-ton bonus value necessary to incentivize CCS deployment.

Key Results and Insights:

In IPM, a price of $40 per ton of CO2 sequestered resulted in the highest penetration of new CCS capacity (of the bonus values modeled). The bonus allowance pool was fully expended.

Lowering the amount to $30 per ton yields a lower deployment of CCS, with allowances remaining in the pool. Funds thus go unclaimed because the per-ton incentive is insufficient to incentivize the technology.

Raising the amount to $50 per ton reduces deployment for a different reason: it depletes the total funds earlier by spending more per ton than was necessary to make deployment economic.

These findings apply to any range of potential bonus amounts, not specifically to the values used here. A reverse auction would theoretically elicit the optimal value for maximizing deployment with dedicated funds.

The total value of financial incentive available for the CCS bonus is a function of the allowance price.

Page 95

Feasibility constraints have been updated for in IPM in order to limit the market penetration of the various electricity generating sources to ensure realistic build patterns in response to CO2 regulatory policies.

• These limits are imposed on new renewable, nuclear, and coal with CCS technology.

• The limits were determined based upon various factors, including:

1. Historical deployment patterns

2. Potential to expand domestic engineering, construction, and manufacturing base

3. Ability to educate and train workforce (this is particularly true for new coal with CCS and nuclear plants due to the highly technical nature of building these facilities)

• Because new nuclear and new coal with CCS are both complicated technologies that require sophisticated planning, engineering, and construction support, the same engineering/construction firms would be building both of these facilities and there would be a dynamic between the greater resources needed to build one technology relative to the other, in addition to the inherent limitations of increasing the skilled workforce.

To reflect this dynamic, EPA has incorporated a technology curve in the model, whereby the amount of new nuclear and coal with CCS is limited but also incorporates a trade-off between each technology (i.e., if you build more of one, you must build less of the other).

The amount of each technology that is built in IPM is determined in an economic manner, up to the limits.

• CCS retrofits to the existing coal fleet are also limited in IPM, and are constrained separately on the assumption that these projects can be handled by smaller and more specialized firms.

• In this analysis, only CCS retrofit penetration limitations were reached.

Page 99

Intertemporal General Equilibrium Model (IGEM)

IGEM is a model of the U.S. economy with an emphasis on the energy and environmental aspects.

• It is a dynamic model, which depicts growth of the economy due to capital accumulation, technical change and population change.

• It is a detailed multi-sector model covering 35 industries.

• It also depicts changes in consumption patterns due to demographic changes, price and income effects.

• The model is designed to simulate the effects of policy changes, external shocks and demographic changes on the prices, production and consumption of energy, and the emissions of pollutants.

• The main driver of economic growth in this model is capital accumulation and technological change. It also includes official projections of the population, giving us activity levels in both level and per- capita terms.

• Capital accumulation arises from savings of a household that is modeled as an economic actor with “perfect foresight.”

• This model is implemented econometrically which means that the parameters governing the behavior of producers and consumers are statistically estimated over a time series dataset that is constructed specifically for this purpose.

This is in contrast to many other multi-sector models that are calibrated to the economy of one particular year.

• These data are based on a system of national accounts developed by Jorgenson (1980) that integrates the capital accounts with the National Income Accounts.

• These capital accounts include an equation linking the price of investment goods to the stream of future rental flows, a link that is essential to modeling the dynamics of growth.

• The model is developed and run by Dale Jorgenson Associates for EPA.

• Model Homepage:


Page 100

Applied Dynamic Analysis of the Global Economy (ADAGE)

ADAGE is a dynamic computable general equilibrium (CGE) model capable of examining many types of economic, energy, environmental, climate-change mitigation, and trade policies at the international, national, U.S. regional, and U.S. state levels.

• To investigate policy effects, the CGE model combines a consistent theoretical structure with economic data covering all interactions among businesses and households.

• A classical Arrow-Debreu general equilibrium framework is used to describe economic behaviors of these agents.

ADAGE has three distinct modules: International, U.S. Regional, and Single Country.

• Each module relies on different data sources and has a different geographic scope, but all have the same theoretical structure.

• This internally consistent, integrated framework allows its components to use relevant policy findings from other modules with broader geographic coverage, thus obtaining detailed regional and state-level results that incorporate international impacts of policies.

• Economic data in ADAGE come from the GTAP and IMPLAN databases, and energy data and various growth forecasts come from the International Energy Agency and Energy Information Administration of the U.S. Department of Energy.

• Emissions estimates and associated abatement costs for six types of greenhouse gases (GHGs) are also included in the model.


Republicans point out that the Waxman-Markey bill would create a convoluted federal bureaucracy that would control key sectors of the economy and of our lives. Minority Leader John Boehner created the above graphic, showing how the bill is intended to work.  HT:  Power Line


logo_epasealEPA’s Updates to EPA Base Case 2009

Using the Integrated Planning Model (IPM). This document catalogs the list of updates in EPA Base Case 2009 from EPA Base Case2006 (v3.01) using the Integrated Planning Model (IPM).

IPM and EPA Modeling Applications Using IPM

EPA uses the Integrated Planning Model (IPM) to analyze the projected impact ofenvironmental policies on the electric power sector in the 48 contiguous states and theDistrict of Columbia. Developed by ICF Resources, Inc. and used to support public and private sector clients, IPM is a multi-regional, dynamic, deterministic linear programming model of the electric power sector.

It provides forecasts of least-cost capacity expansion,electricity dispatch, and emission control strategies for meeting electricity demand, environmental, transmission, dispatch, and reliability constraints. IPM can be used toe valuate the cost and emissions impacts of proposed policies to limit emissions of sulfurdioxide (SO2), nitrogen oxides (NOx), carbon dioxide (CO2), and mercury (Hg) from the electric power sector and is used extensively by EPA to support regulatory activities.

Among the factors that make IPM particularly well suited to model multi-emissionscontrol programs are (1) its ability to capture complex interactions among the electric power, fuel, and environmental markets; (2) its detail-rich representation of emissioncontrol options encompassing a broad array of retrofit technologies along with emissionreductions through fuel switching, changes in capacity mix and electricity dispatchstrategies; (3) its capability to model a variety of environmental market mechanisms, such as emissions caps, allowances, trading, and banking; and its ability to generate thedetailed, location-specific emission data required for air quality modeling.

IPM’s ability tocapture the dynamics of the allowance market and its provision of a wide range ofemissions reduction options are particularly important for assessing the impact of multi emissions environmental policies for the power sector.

IPM is a single sector, linear programming model that captures the economicbe havior of the power sector. By itself, IPM is limited in its ability to capture broaderenergy and environmental policy, such as an economy wide cap and trade program.However, the model is often employed by EPA in conjunction with broader macroeconomic models to help provide deeper resolution of the power sector in the shorter term, which is an inherent weakness of broader econometric models which do not have detailed technology or power sector representation.

EPA’s IPM Base Case 2006 (v3.0) and v3.01:

In the Fall of 2006, EPA released Base Case 2006 (v3.0) using IPM, whichincluded extensive updates of IPM’s assumptions, inputs, and capabilities. The modelwas again updated in the Summer of 2007 for purposes of climate modeling (v3.01). Inpreparing these base cases, EPA obtained input from nationally recognized experts infuels, technology, and power system operation. Power companies provided informationon generating resources and emission controls. EPA also obtained input from RegionalPlanning Organizations, States, and their constituent organizations. Key updates included:

  • Coal Supply and Transportation Assumptions
  • Natural Gas Assumptions
  • Federal and State Emission Regulations and Enforcement Actions
  • Cost and Performance of Generating Technologies and Emission Controls
  • Sulfur Dioxide (SO2), Nitrogen Oxide (NOx) emissions
  • Power System Operating Characteristics and Structure
  • Electric Generating Unit Inventory
  • Modeling Time Horizon and Run Years (2010, 2015, 2020, 2025)
  • Carbon capture and storage for potential (new) units
  • Biomassco-firing capability for existing coal boilers
  • Updated constraints on new nuclear and renewable capacity builds

More recently, EPA released Base Case 2009 using IPM. This version of themodel provides additional modeling capabilities, includes several important updates, andincorporates key provisions of the Energy Independence and Security Act of 2007 (EISA).Among the notable features of this base case are:

1) Revised electricity demand**

2) Updated power technology costs*

3) Carbon capture and storage for existing coal plants

4) Updated natural gas supply and price projection

5) Renewable portfolio standards and climate programs at the State level*

6) Updated constraints on new nuclear, renewable, and coal with CCS capacity

The detailed assumptions for IPM v3.0, titled “Documentation for EPA Base Case2006 (v3.0) Using the Integrated Planning Model” (November 2006), can be found at:

The following document summarizes the key features and changes found in EPA’sBase Case Base Case 2009 using IPM.

* Assumption derived from the Energy Information Administration’s (EIA) Annual Energy Outlook

(AEO) 2009 Reference Case (March version), (

1a. Electricity Demand. The electric load assumptions in EPA Base Case 2009 are shown in the table below. These values were derived based on the electricity sales forecast in EIA’s AEO2009. The revised growth rate used in the reference case is just under 1%, compared to agrowth rate of 1.5% in past IPM modeling applications.

Net Energy for Load in EPA Base Case 2009 (GWh)

2010      4,055,098

2015      4,182,129

2020      4,395,125

2025      4,619,295

1b. Demand Elasticity,EPA traditionally does not apply an endogenous demand response in IPM for electricity demand. In the context of climate analyses, EPA will include an endogenousdemand response for some scenarios when revised demand projections are not available from macroeconomic models, or when otherwise warranted to provide additional insights from IPM. EPA employs an elasticity of 0.5 within IPM to be consistent with computable general equilibrium models that the Agency employs1. Scenarios with this feature areindicated as such.

2. Potential (New) Unit Costs. All costs for potential units have been updated to reflect AEO 2009 levels, and are generally 50% higher than past IPM modeling applications employed by EPA (v3.0). The tables below show the cost and performance characteristics of the modeled potential(new) build units. In addition to the potential build units modeled in EPA Base Case v3.0, one additional potential build unit is included in EPA Base Case 2009 – an Integrated Gasification Combined Cycle (IGCC) with Carbon Capture and Sequestration (CCS)technology. Previously, an Advanced Combined Cycle (ACC) with CCS was modeled(v3.01), but this technology has since been removed from Base Case 2009. The cost andperformance characterization of IGCC with CCS is based on the characteristics of the IGCC, but also includes cost adders and heat rate penalties attributable to the CCS component. The IGCC with CCS is assumed to have a 90% CO2 capture rate and incur a$15 per metric ton of CO2 transportation and storage cost, which is added to the variable operating cost of the unit.

2 1 For more detail on the economy-wide models EPA employs, see

2 Dooley, et al. Carbon Dioxide Capture and Geologic Storage (pg 36). Battelle Memorial Institute, April 2006.

Performance and Unit Cost Assumptions for Potential (New) Capacity from Conventional Technologies in EPA Base Case 2009 (See pdf file for diagram)

Performance and Unit Cost Assumptions for Potential (New) Renewable and Non-Conventional Technology Capacity in EPA Base Case 2009 (See pdf file for diagram)

3. CCS Retrofit for Existing Units. EPA has also included a new CCS retrofit option for existing units larger than 400 MW in Base Case 2009, available to the more efficient units in the coal fleet. This assumption is based upon a 2006 study commissioned by the National Energy Technology Laboratory (NETL) and reflects the cost of the capture technology as well as the energy penalty and subsequent capacity de-rating associated with capturing carbon from a power plant.

4. Updated Natural Gas Supply and Price Projection. The natural gas supply curves are based on the same assessment of available gasresource through the U.S. and Canada as used in ICF’s Gas Market Model (GMM),including resources in Alaska and the Mackenzie Delta area of the Canadian arctic. TheBase Case assumes that pipelines will be built to transport gas from these two areas toNorth American demand markets. The curves assumes a Mackenzie Delta gas pipeline isbuilt in 2015 with a capacity of 1 Bcfd, and an Alaska pipeline is built in 2020 with an initialcapacity of 4 Bcfd, which is expanded in 2023 to 6 Bcfd. Together, gas production fromMackenzie Delta and Alaska make up roughly 11 percent of gas supplies by 2030.

The gas supply curves also assume significant growth in North American liquefiednatural gas (LNG) imports, based on projected growth in liquefaction capability and takinginto account the expect growth in gas demand in other importing countries in Europe andAsia. LNG imports are expected to grow to over 7 Bcfd, or roughly 11 percent of gassupplies by 2030.5. Renewable portfolio standards and climate programs at the State level A number of States have recently established renewable portfolio standards(RPS), and EPA has incorporated those requirements in Base Case 2009. They aremodeled based upon EIA’s updated AEO 20094 and result in considerably morerenewable energy penetration in EPA’s reference case 2009 using IPM. Although manyStates are considering RPS policies, EIA generally includes only policies that were firmlyin place and reasonably fleshed out at the time AEO 2009 was finalized.

EPA has also updated the existing stock of renewables that is assumed to be inplace at the beginning of the IPM modeling time horizon. To reflect the recent growth inrenewables, particularly wind, the existing renewable generation capacity has beencalibrated to EIA’s AEO 2008 results for 2010.A number of States have also adopted either State-level or regional climateprograms. EPA includes those State and regional programs with sufficient specificity onemission targets, applicability, coverage, and policy mechanism to allow representation in IPM. The Northeast Regional Greenhouse Gas Initiative (RGGI) was the only regionalprogram that met these criteria and was therefore included in Base Case 2009 modeling.

4 Energy Information Administration’s Annual Energy Outlook 2009, Legislation and Regulations


State programs in Oregon and Washington State, which also have sufficiently specific requirements, were carried forward from v3.0.5

6. Feasibility Constraints. EPA Base Case 2009 includes feasibility constraints, which are designed to limit the market penetration of the various electricity generating sources in order to ensure realistic build patterns from IPM as CO2 regulatory policies are modeled. These limits are imposed on all renewable potential (new) build types individually, all renewable potential build types collectively, new nuclear units, coal with CCS, and CCS retrofits for existing coal units. In addition, a 20% cap is set on the amount of electricity generation in a model region that can come from intermittent power (e.g., wind).

climateweatherNew nuclear builds are not allowed until after 2015 because of the time needed for licensing and construction, and new coal with CCS is limited in 2015 to those projects that have dedicated funding or are otherwise incentivized (this is typically dependant upon features or provisions of specific proposals that are analyzed with this version of the model). New coal with CCS can not be built in 2015 on an economic basis in this version of IPM.

The feasibility assumptions for new nuclear, new coal with CCS, and total new renewable capacity are developed using factors based on the current capacity to design, manufacture, engineer, and construct these types of power generating technologies. For new nuclear and new coal with CCS, analysis indicates that only a few large engineering and construction firms currently have the capacity to handle these very large and complicated projects. It was assumed that these firms could build either type of technology and that resources would become available to support an increase in their capacity to handle these projects by 50% over each successive 5 year time period.

The constraints on these technologies thus reflect a generating capacity limitation (in gigawatts) based upon the ability to design and construct these projects, factoring in the aforementioned growth rate over time. In addition, there is a relationship between the amount of new nuclear and new coal with CCS that can be built, depending on the relative amount of resources required by each technology. Assuming that the same firms can generally undertake and manage the design, engineering, and construction of either type of technology, they are able to design and build more of one technology and less of theother in response to the relative economics and the demand for the technologies. This relationship is captured in Production Possibility Curves for nuclear and IGCC with CCS within the model. These curves are presented at the end of this section.

A CCS retrofit option is also available for existing coal units in Base Case 2009, and this technology is also limited in the model. The CCS retrofit option is allowed after 2015 and its growth rate is similar to nuclear and new coal with CCS capacity (i.e., incrementally increasing by 50% in each successive five year period). However, unlike nuclear and new coal with CCS, it is assumed that CCS retrofit projects can be handled by smaller firms since they do not require the same magnitude of resources that the larger, new power plants require. Thus, they are constrained independently and are not affected by the extent of growth in other technologies.

5 Documentation for EPA Base Case 2006 (v3.0), Section 3: Power System Operation Assumptions


Renewable energy technologies are also limited in the model. The initial 2015 limit was derived from recent build patterns and also incorporated a 50% growth rate for every 5 year time period, the same rate for new nuclear and new coal with CCS. Wind power is constrained separately from all other renewables and also assumes a 50% growth rate every 5 years. Other renewables are limited to 10 GW in 2015 and a linear growth of 5 GW every five years thereafter.


See Also:

HotAir: Video Energy Czar hasn’t read cap & tax, eitherEnvironmental Economics

CBO:  The Distributional Consequences of a Cap-and-Trade Program for CO2 Emissions (pdf)

EPA Website For Kids: Animation of how the planet’s water cycle is likely affected by climate change

Back to business: Stop the cap-and-tax bill By Michelle Malkin • July 6, 2009