Issues: Air

This report examines and compares the air pollutant emissions of the 100 largest power producers in the U.S. based on 2006 plant ownership and emissions data. Table ES.1 lists the 100 largest power producers featured in this report ranked by their total electricity generation from fossil fuel, nuclear, and renewable energy facilities. These producers include public and private entities (collectively referred to as "companies" or "producers" in this report) that own nearly 2,300 power plants and account for 85 percent of reported electric generation and 86 percent of the industry's reported emissions in the U.S.

The report focuses on four power plant pollutants for which public emissions data are available: sulfur dioxide (SO2), nitrogen oxides (NOx), mercury, and carbon dioxide (CO2). These pollutants are associated with significant environmental and public health problems, including acid deposition, global warming, fine particle air pollution, mercury deposition, nitrogen deposition, ozone smog, and regional haze. The report benchmarks, or ranks, each company's absolute emissions and its emission rate (determined by dividing emissions by electricity produced) for each pollutant against the emissions of the other companies.

A key focus of the report is CO2 emissions, which are under increased scrutiny due to growing national and international concern about the threat of climate change. The U.S. Congress is currently considering the establishment of a national "cap-and-trade" system for regulating CO2 emissions from power plants and other industrial sources. Under a cap-and-trade system, a limit is placed on the overall emissions from covered sources by requiring power plant operators and other regulated sources to surrender "allowances" for the greenhouse gases they release to the atmosphere, and by limiting the number of allowances available each year. An allowance is a permit to emit a discrete quantity of greenhouse gases (e.g., one ton of CO2). Companies can trade or hold allowances for future use, but at the end of each compliance period they must surrender allowances equal to their emissions.

This report evaluates different options for allocating emissions allowances within the electric power sector, including options for distributing allowances to electric power producers and local electric utilities for consumer benefit. This analysis is intended to help inform the ongoing policy debate, as well as educate investors and companies which face potential financial risks from foreseeable CO2-reducing regulations.

Major Findings

Electric Industry Emission Trends

Since 1990, power plant emissions of SO2 and NOx have decreased and CO2 emissions have increased.

• SO2 and NOx emissions from power plants have decreased since 1990 due in large part to pollution-reducing regulatory programs implemented under the 1990 Clean Air Act Amendments. In 2006 power plant SO2 emissions were 40 percent lower and NOx emissions were 46 percent lower than they were in 1990.



• CO2 emissions from power plants are not currently regulated at the federal level. According to EPA's greenhouse gas inventory, in 2006, power plant CO2 emissions were 29 percent higher than they were in 1990. Congress is currently considering legislation that would limit CO2 emissions from power plants and other sources of greenhouse gas emissions, and the U.S. Supreme Court found in April 2007 that the U.S. Environmental Protection Agency (EPA) has clear statutory authority to regulate greenhouse gases (Massachusetts v. EPA), opening up the possibility for regulation of power plant greenhouse gas emissions under existing Clean Air Act authority.

Power plants have only recently begun to report their mercury emissions; therefore, long-term emissions trends are not available.

Overall Emissions from Electricity

The electric industry in the U.S. is a major source of air pollution.

• In 2006, power plants were responsible for 70 percent of SO2 emissions, 20 percent of NOx emissions, 68 percent of mercury air emissions, and 40 percent of CO2 emissions in the U.S..



• The electric industry accounts for more CO2 emissions than any other sector, including the transportation and industrial sectors.

Air Pollution Rankings and Comparisons

The 100 largest power producers generated 85 percent of electric power in the U.S. in 2006. The 100 largest producers generated 96 percent of all nuclear power, 90 percent of all coal-fired power, 84 percent of all hydroelectric power, 73 percent of all natural gas-fired power, and 47 percent of all non-hydroelectric renewable power.

Air pollution emissions from power plants are highly concentrated among a small number of producers. For example, the three largest producers are responsible for 25 percent of the electric power industry's SO2 emissions and six producers contribute 25 percent of CO2 emissions. Figure ES.1 summarizes the distribution of emissions among electric power producers.

Electric power producers' emission levels and emission rates vary significantly due to the amount of power produced, the efficiency of the technology used in producing the power, the fuel used to generate the power, and installed pollution controls. CO2 emission levels and emission rates are an important factor in evaluating the potential exposure that power companies and shareholders face from emerging federal CO2 limits. In 2006 total generation among the 100 largest power producers varied from 6 million MWh to nearly 202 million MWh and:

• SO2 emissions ranged from 0 to 1 million tons, and SO2 emission rates ranged from 0.0 lbs/MWh to 18.2 lbs/MWh;



• NOx emissions ranged from 0 to 294,262 tons, and NOx emission rates ranged from 0.0 lbs/MWh to 5.0 lbs/MWh;



• CO2 emissions ranged from 0 to 170 million tons, and CO2 emission rates ranged from 0.0 lbs/MWh to 2,492 lbs/MWh.

Electric power producers' mercury emissions from coal plants ranged from 0 to 8,719 pounds, and mercury emission rates ranged from 0.0 lbs/GWh to 0.105 lbs/GWh.

Allowance Distribution Scenarios

There are several options for distributing emissions allowances to power plant operators subject to a cap-and-trade program. The government can sell the allowances to companies through an auction; the government can give the allowances to companies at no cost; or the government can give the allowances to third party entities such as state governments or local electric utilities (distribution companies), which would in turn sell the allowances to facility owners covered by the emissions cap. The revenues could then be used to reduce consumer electricity bills, either through direct subsidies or enhanced energy efficiency programs.

Economists generally agree that the auctioning of allowances is the most efficient method for distributing emissions allowances. The auction approach is consistent with the principle that polluting facilities should pay for the costs of their emissions. The auctioning of allowances also provides resources to fund public initiatives that will be important in responding to climate change. Several bills in Congress propose auctioning a growing share of allowances with the proceeds dedicated to various public purposes, including clean technology research and development, incentives for the deployment of energy efficiency and renewable energy technologies, low income energy assistance, adaptation to climate change, and worker retraining.

This report provides some analysis of two additional options for distributing emissions allowances within the electric power sector: (1) a free allocation of allowances to electric generating facilities, and (2) an allocation to local electric utilities (distribution companies) for consumer benefit. Most Congressional bills have proposed a combination of methods for distributing allowances, including allocations to electric power producers, allocations to local electric utilities, the auctioning of allowances, allocations to states, and allocations to other regulated sources. Throughout the analysis we assume an allowance price of $10 per ton. This price is intended for illustrative purposes only, and is not a prediction of future CO2 allowance costs. Allowance prices will depend on the stringency of the emissions cap, cost containment provisions, and other program features.

Industry stakeholders often favor a free allocation of allowances to electric generating facilities as a way of mitigating their CO2 compliance costs. In this report, we present estimates of the number of allowances and the value of the allowances that individual electric power producers would receive under several allocation scenarios. The overall allocation quantities are based on two recent legislative proposals--the Lieberman-Warner Climate Security Act and the Low Carbon Economy Act. We focus on these two proposals because they are economy-wide bills that provide detailed specifications of how their emissions allowances are to be allocated. Other economy wide bills simply delegate that responsibility to EPA or the President. These allocation scenarios were developed in an effort to isolate the effect of the different allocation options available to Congress, including the overall quantity of allowances allocated to electricity producers and the metrics used for apportioning the allowances among the companies.

The Lieberman-Warner Climate Security Act (the Lieberman-Warner bill) proposes to distribute 1.21 billion tons (1.097 billion metric tons) of free CO2 allowances to power plant operators in 2012. (The Lieberman-Warner bill also allocates 573 million tons of allowances to regulated electric distribution companies, which can then auction them off to companies regulated by the program to raise money for consumer programs, as described below.) The Low Carbon Economy Act, sponsored by Senators Bingaman and Specter, provides a larger allocation to electric power producers of 2.126 billion tons (1.929 billion metric tons) in 2012. Both bills propose allocating the majority of allowances to electric power producers based on their historic CO2 emissions. For example, a company whose power plants produce five percent of total electric sector CO2 emissions would receive five percent of the allowances allocated to the electricity generators. This report also apportions allowances to electric power producers based on their total electricity output (megawatt hours), using both the Lieberman-Warner bill and Low Carbon Economy Act proposed allowance reserves.

• The total annual value of the allowances allocated to the 100 largest electric power producers under the Emissions Based Scenario 1--with a total allowance pool equivalent to the Lieberman- Warner Climate Security Act in 2012--is close to $10.4 billion assuming a price of $10 per ton of CO2. Allocations to power plant operators phase out under the Lieberman-Warner bill over a period of 19 years. The Lieberman-Warner bill also directs allowance value to regulated electric distribution companies, which is specifically directed to consumer benefit. These consumer allocations are provided through 2050.



• The total annual value of the allowances allocated to the 100 largest electric power producers under the Emissions Based Scenario 2--with a total allowance pool equivalent to the Low Carbon Economy Act in 2012--is close to $18.3 billion assuming a price of $10 per ton of CO2. The Low Carbon Economy Act caps allowance prices at $10.89 per ton ($12 per metric ton) in 2012, and the price cap escalates by five percent above the rate of inflation each year after 2012. Allocations to power plant operators phase out under the Low Carbon Economy Act over a period of 32 years.



• The potential value of the allowances allocated to individual electric generating companies can be substantial. The ten largest investor owned utilities would receive an annual allocation valued at $6.2 billion, assuming a CO2 allowance price of $10 per ton, under Emissions Based Scenario 2. To provide a sense of the magnitude of this value, this is equivalent to 16 percent of the companies' total earnings in 2006.



• Research indicates that an over allocation of free allowances to electricity generators can lead to excessive profits for companies, while providing limited benefits in terms of reducing electricity price impacts for consumers and funding energy efficiency and other programs that reduce overall greenhouse gas emissions. The European Union's Emissions Trading Scheme (EU ETS) experienced such problems because the program's pilot phase was overly generous in allocating free allowances to electric generating companies. Europe's program is now being redesigned with a larger reliance on the auctioning of allowances.

The Lieberman-Warner bill also allocates a portion of allowances to local electric utilities (distribution companies), including a provision mandating that the allowance value be returned to low- and middle-income electricity consumers through customer rebates, or proceeds from the sale of allowances can be used to fund consumer energy efficiency programs. (The Low Carbon Economy Act provides no allowances to local electric utilities for consumer benefits.)

This report calculates the CO2 allowance allocations for the largest electric distribution companies based on the methodology proposed by the Lieberman-Warner Climate Security Act. Individual company allocations are calculated based on their proportionate share of electricity sales (measured in megawatt hours) in 2006 and an allowance pool of 573 million tons (520 million metric tons).

• This report calculates the average value to consumers if the allowance proceeds are divided among residential, residential and commercial, or all customer classes (including industrial), assuming an allowance price of $10 per ton of CO2. If the allowance value were distributed among low- and middle-income households only--one of the options proposed by the Lieberman-Warner bill--the value per low- and middle-income consumer would be even higher than presented here.



• The median financial benefit to residential electricity consumers under Distribution Company Scenario 1--with a total allowance pool equivalent to the Lieberman-Warner Climate Security Act in 2012--is estimated at 0.45 cents per kilowatt hour, assuming a CO2 price of $10 per ton.



• An example is provided of how the Lieberman-Warner bill's combination allocation approach--giving 1.21 billion tons of free allowances to electric power producers based on their historic CO2 emissions and 573 million tons to local electric utilities for the benefit of their customers--might impact an average household in Indiana. Assuming a CO2 price of $10 per ton, the cost of producing electricity with a coal-fired power plant will increase by about 1.05 cents per kilowatt hour. The Lieberman-Warner free allocation to electric power producers would reduce this increase to 0.6 cents per kilowatt hour assuming that the generator is fully regulated in a way that ensures that the value of these allowances are passed on to customers. Indiana's average residential customer would pay an additional $6 per month in CO2 costs on their electricity bill (0.6 cents per kilowatt hour x 993 kilowatt hours per month). The allocation to local electric distribution companies is proposed as a method to help mitigate this extra cost to consumers. Indiana's average residential customer would receive $4.21 per month in allowance value in the form of rebates or energy efficiency incentives (assuming the allowance value is reserved for residential customers only). As a result, their net CO2 costs would be reduced from $6 per month to $1.52 per month. Households could further mitigate these price impacts by installing compact fluorescent lighting and other energy saving devices.

Using this Report

The information in this report supports informed decision-making in several areas:

• It can be used by policymakers who are addressing the public health and environmental risks of SO2, NOx, mercury, and CO2 emissions.



• It can be used by the investment community to assess the costs and business risks associated with compliance with future additional emission reduction requirements.



• It can be used by electric power companies and the public to assess corporate performance relative to key competitors, prior years, and industry benchmarks.