EIA stunner: By year’s end, we’ll be 8.5% below 2005 levels of CO2 — halfway to climate bill’s 2020 target.

The Energy Information Administration released its monthly Short-Term Energy Outlook (STEO) last week with a bombshell prediction for near-term carbon dioxide emissions:

Projected carbon dioxide (CO2) emissions from fossil fuels fall by 6.0 percent in 2009 because of the weak economic conditions and declines in the consumption of most fossil fuels (U.S. Carbon Dioxide Emissions Growth Chart). Coal leads the drop in 2009 CO2 emissions, falling by nearly 10 percent because of fuel switching from coal to natural gas in the electric power sector. The projected recovery in the economy contributes to an expected 0.9-percent increase in CO2 emissions in 2010.

Now that’s the perfect storm: a weak economy, low natural gas prices, state renewable energy standards, and a clean-energy-friendly stimulus (see “EIA projects wind at 5% of U.S. electricity in 2012, all renewables at 14%, thanks to Obama stimulus!”).

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This 6% drop in CO2 emissions from fossil fuels in 2009 is double the drop EIA had projected just 5 months ago in its Updated Annual Energy Outlook 2009 Reference Case Reflecting Provisions of the American Recovery and Reinvestment Act and Recent Changes in the Economic Outlook, which had this chart:

If my calculations are right, this means by year’s end we’ll actually be more than 8.5% below 2005 levels in energy-related CO2 emissions, which make up the overwhelming majority of U.S. greenhouse gases. And that is halfway to the 2020 Waxman-Markey target! And EIA doesn’t project a dramatic recovery in emissions in 2010 — just a 0.9% rise.

This has a bunch of big implications for what the Senate should do in writing its climate bill:

  1. Senator Boxer (D-CA) should strengthen the 2020 target to, say 20% below 2005 levels. If we keep using 2005 as the baseline, then EIA’s STEO analysis suggests the 2020 target of a 17% reduction just got even easier than it already was.
  2. The emissions allowances for at least the first several years also need to be reduced. We certainly don’t want to issue excess allowances, as Europe did in its experimental phase. Of course, Waxman-Markey won’t see a price collapse as the Europeans did since it has a built-in (rising) floor price and too weak targets to begin with. But the starting floor price, $10, is sufficiently low that polluters are likely to buy excess allowances in the early years so they don’t have to buy more expensive ones later.
  3. Congress should quickly task the EIA with coming up with a revised projection of CO2 emissions through at least 2020, if not 2030. In addition to the near term changes, EIA also needs to factor in CO2 reductions from Obama’s change in fuel economy standards (see “Obama to raise new car fuel efficiency standard to 39 mpg by 2016 “” The biggest step the U.S. government has ever taken to cut CO2“). It is important to note that the EIA is likely to keep overestimating CO2 emissions, since they simply will not model any national or state policies that have not been enacted into law. Thus, for instance, they assume that the wind production tax credit will be zero forever after the stimulus funding for it ends in 2012, concluding in April “wind capacity growth is projected to slow significantly after the expiration of the Federal tax credits in 2012.” Slow significantly? That’s an understatement. EIA projects U.S. wind capacity rising from about 25 GW in 2008 to 66 GW in 2014 “” but then to only 68 GW in 2030! Anybody want to bet me that wind capacity will grow 2 GW from 2015 to 2030? Didn’t think so. And EIA projects solar thermal power in 2014 will be “¦ wait for it “¦ 790 MW, and in 2030 “¦ wait even longer and longer for it “¦ 860 MW. EIA just does not like renewables “” even those with power purchase agreements (see “World’s largest solar plant with thermal storage to be built in Arizona “” total of 8500 MW of this core climate solution planned for 2014 in U.S. alone”).
  4. The CBO, EIA, and EPA should redo their cost estimates based on those new EIA CO2 projections. If the emissions baseline drops, meeting the targets will be easier — especially if, as many fear, the Senate ultimately adopts a weaker target than the House.
  5. The Senate should raise the 2012 starting point for the auction floor price to $14 (rising 5% plus inflation a year). Why? Since EIA will keep overestimating CO2 emissions, too many allowances are still likely to be issued. To discourage companies from buying excess permits in the auction for hoarding, you want to have a higher floor price. Any permits that are not sold in the auction should go into the strategic reserve.
  6. The climate bill should give the president authority for 5 years (2012 to 2017) to revise the number of allowances issued based on EIA’s short-term projection. The STEO is far more accurate and less susceptible to flawed methodology than EIA’s long-term forecast. If, as I suspect, fossil fuel companies complain that this would be changing the rules after the fact, then I suggest at least giving the president the authority to put those extra allowances into the strategic reserve directly, rather than offering them up for auction.

Getting the number of allowances right is a big deal. It is very important that Congress and the President do this right. The Senate should even consider holding a hearing on this. It would certainly be a far more useful subject than “ price volatility in the energy sector as a result of a greenhouse gas trading program.”