Kevin Leahy - Managing Director, Climate Policy Emissions Trading Workshop

1. Misc points re climate policies -- Energy Security, Benefits to Ag from Legislation, & Impacts on Economy Kevin Leahy - Managing Director, Climate Policy Emissions Trading Workshop Purdue Climate Change Research Center April 30, 2010

2. Climate Regulation is Coming Apr. 20, 2010

3. Hidden Upside of Climate legislation for U.S. Agriculture Natural Forest (Melillo, Gurgel, et al. 2008) Natural Forest (“deforestation” scenario) Maps from Tim Searchinger presentation (Princeton) • Offset policies that include international forest preservation boost U.S. ag by putting value on existing forest (otherwise slated for conversion to crops or grazing) • Reflected in higher ag product price projections (small impact on retail food price in rich world) (John Reilly) Apr. 30, 2010

4. Apr. 20, 2010

5. The risk for industry • CAA: If new source has Potential to Emit (PTE) above the Prevention of Significant Deterioration (PSD) threshold, becomes a major source (of pollutant) and potentially subject to PSD permitting requirements. Statute defines major source threshold at 100 or 250 tons/year. (for CO2 emissions -- about $21K of natural gas used/year) • If move forward with project that emits > 250 tons ($21K/year of nat gas)based on tailoring rule (no air permit), but court vacates rules in future and threshold still 250 tons, you could be held liable for not having obeyed the law – “should have anticipated” • See DC Circuit CAMR decision, 2008 • Who might push this? Local environmentalists/activists? NIMBY issue? Competitor? Anyone with the time and money and an ax to grind against you or your operation. Apr. 30, 2010

6. How much overlap between these two? Apr. 30, 2010

7. Overlap is larger than expected, but the two issues not identical • Hybrid Electric/Plug in vehicles • Improve Energy Efficiency • Long transition times Energy Security Climate Change • Renewable Energy Drill baby drill Carbon capture on coal • Nuclear • Each side must compromise • Emissions trading aligns the incentives for both in same direction Apr. 30, 2010

8. Hitting the competitiveness issue • For energy intensive firms or trade exposed, all costs covered by allocation • Updated with production levels – all opportunity, no stick • If can reduce, can cash in. If can’t, direct and indirect costs (electricity price increases) are covered via allocation. • Give time to apply pressure to China – remind them of the stick in the closet (border tax adjustment) • This is an approach that could actually encourage production to stay in U.S. • Border tax adjustment on imports from countries with no climate fee for longer term transition – may be WTO compliant Apr. 30, 2010

9. Coal New CCS Oil Hydro Demand with No Policy Biomass Solar Retrofit Gas Nuclear Wind Demand Reduction The technology future for electricity – EPRI’s 2009 update Limited Portfolio Full Portfolio Demand Reduction Demand Reduction Biomass Wind Solar Hydro Wind Biomass Nuclear Hydro Gas Nuclear Gas Coal New Coal + CCS Coal CCS Retrofit Apr. 30, 2010

10. NAM’s Analysis of Climate Legislation (House passed version) • “U.S. jobs decline by 1.8 million under the low cost case and by 2.4 million under the high cost case” • “would impose a financial cost on households of $118 to $250 by 2020 and $730 to $1,248 by 2030” • “reduce U.S. Gross Domestic Product (GDP) by between $419 billion and $571 billion by 2030 GDP falls by 1.8% under the low cost case and by 2.4% under the high cost case in 2030.” Source: NAM/ACCP Economic Impact of Waxman Markey Bill -- http://www.accf.org/media/docs/nam/2009/National.pdf Apr. 30, 2010

11. Heritage Foundation’s Analysis of Waxman Markey Apr. 30, 2010

12. Same NAM analysis with more complete context Answer: NAM – using same dataset used for previous page’s graphs. Source data: http://www.accf.org/media/dynamic/3/media_381.pdf, page 5 Apr. 30, 2010

13. Heritage just another organization overwhelmed by optimism? Employment (1000s) GDP (billions $) Source for above data: Heritage Foundation analysis of Waxman Markey -- http://www.heritage.org/research/energyandenvironment/images/CDA-waxman-markey-appendix-table-2_1.gif Apr. 30, 2010

14. The long and the short • Enhanced Energy Security and lower CO2 emissions are compatible policy objectives & can efficiently use the same market mechanism • Must have an “all the above” mentality when considering energy • Beware those projecting economic collapse or “no costs” proclamations • There will be a costs, but should be affordable – most existing capital stock still good (manufacturing and vehicles) • The economy still grows throughout the transition • Year on year price changes should be small but with clear upward trend for future Apr. 30, 2010