The Impact of Energy and Environmental Policy Choices on U.S. Manufacturing, U.S. Economic Growth and Energy Markets

Executive Summary

The energy outlook for the U.S. has changed substantially over the last few years as the outlook for natural gas supplies has undergone an about-face. There has been little growth in U.S. lower-48 supplies, and imports from Canada have leveled off and may have peaked. LNG is now expected to play a much larger role in meeting the growing demand for natural gas, but its development is subject to myriad regulatory hurdles that may derail many planned projects.

Against the backdrop of a tighter supply picture for natural gas, the fuel substitution option is severely constrained as a mechanism for meeting the steady tightening of emission limits. During the 1990s, it was forecast that the low cost of low-emission gas combined cycle plants combined with the low cost of natural gas would make gas the option of choice for meeting emission limits. As gas supplies have tightened (and gas prices have risen), power generators and large manufacturers are facing tightening emission limits with fewer, more expensive choices.

Manufacturing is a linchpin of the U.S. economy, generating nearly 15 million jobs in a wide range of industries from semiconductors to chemicals to food, pharmaceuticals and transportation. In the past two years, as well as in the prosperous 1990s, manufacturing made large contribution to real GDP. It is responsible for nearly two-thirds of all private sector R&D and pays its employees 22 percent more than the average employee in the rest of the economy. It is also the largest consumer of energy in the country, accounting for nearly a third of all energy use and more if the transportation of manufacturing goods is included. So how energy policy is managed has a direct and immediate impact on the outlook for the future of U.S. manufacturing.

Looking forward, there are policy options to improve economic performance for manufacturing and other sectors by ensuring adequate supplies of energy at globally competitive prices and improve air quality. Likewise, there are policies that would restrict energy supplies and lead to lower economic performance and loss of well-paying manufacturing jobs without a notable gain in air quality. Two scenarios are presented in this study that demonstrate the impact of various policy options on U.S. economic performance.

Under the Promoting Energy Supplies scenario policies are formulated to: • encourage domestic production of natural gas offshore by the removal of restrictions and moratoriums

  • encourage domestic production of natural gas onshore by increasing access and reducing permitting costs and delays
  • encourage the building of a pipeline to bring Alaskan natural gas to the Lower 48 states
  • encourage the development of much needed LNG terminals
  • encourage the building of new nuclear capacity
  • limit the control of mercury emissions to levels that can be achieved with co-benefits from the control of NOx and SO2 emissions under CAIR and all ongoing regulatory programs for the short-term
  • mandate a reduction in mercury emissions that can be achieved at a marginal cost that does not create an economic barrier to the continued use of all domestic coals for the long-term.

The Promoting Energy Supplies scenario is similar to Global Insight’s base case. Increasing domestic natural gas by easing restrictions on access, the siting of LNG, the building of the Alaskan pipeline, and a tempered pace in tightening emission limits through CAIR which encourages the use of all domestic coals and petroleum coke are assumptions that underpin the Global Insight outlook for the energy sector. The Global Insight base case assumes a continuation of current policies and implementation of these policies as evident under the Bush administration.

Under the Restricting Energy Supplies scenario, policies are formulated to: • impede the development of natural gas supplies by restricting leasing in offshore areas

  • raise the barriers to access to new gas producing areas onshore
  • impede the development of the Alaskan natural gas pipeline
  • restrict the development of new LNG terminals
  • discourage nuclear capacity expansion
  • implement tight mercury emission limits before control technologies are commercially available
  • enact both phases of the McCain/Lieberman bill (S. 139) to limit carbon dioxide emissions
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