Climate and Energy Policies that Threaten Manufacturing

Competitiveness

Paul CicioPresident

Industrial Energy Consumers of America October, 2008

IECA- Testified Before Congress & Federal Energy Agencies

(3) Climate policy

(3) Increase domestic supply of natural gas

(4) Excessive energy speculation

(1) Industrial energy efficiency

(2) Federal Energy Regulatory Commission

(2) Commodity Futures Trading Commission

IECA Appointments Department of Interior, Outer Continental

Shelf Advisory Committee Department of Energy, National Coal Council Commodity Futures Trading Commission,

Energy Market Oversight Committee Department of Energy, Ulta Deep Drilling

Advisory Committee

Who Are Energy Price Sensitive Industries?

Commercial &Consumer Products

Food Production Detergents Automobiles Computers Construction Medical Supplies Paint Pharmaceuticals Cosmetics Telecommunication

Convert to

Building Block Industries

Chemicals Plastics Fertilizer Glass / ceramics Brick Steel Aluminum Pulp and Paper Cement Food Processing

Energy Competitiveness Issues Climate change mandates Supply of natural gas / exports of LNG Power sector demand for natural gas Excessive energy speculation T. Boone Pickens - Financial incentives for

use of natural gas in motor vehicles Electricity decoupling

Natural Gas Production(Volumes in Trillion Cubic Feet)

2000 2001 2002 2003 2004 2005 2006 2007 Difference

Dry Production

19.2 19.6 18.9 19.1 18.6 18.1 18.5 19.3 0%

Source: EIA

Natural Gas Production-2008(Volumes in Trillion Cubic Feet)

Jan Feb Mar Apr May June July

Dry Production

1.70 1.62 1.75 1.68 1.73 1.71 1.78

Source: EIA

Natural Gas Consumption by End Use(TCF)

2000 2001 2002 2003 2004 2005 2006 2007 Difference

Total Consumption

21.5 22.2 23.0 22.3 22.4 22.2 21.9 23.6 +9.8%

Residential 5.0 4.8 4.9 5.1 4.9 4.8 4.4 4.9 -2%

Commercial 3.2 3.0 3.1 3.2 3.1 3.1 2.9 3.1 -3%

Industrial 8.1 7.3 7.5 7.2 7.2 6.7 6.6 6.8 -16%

Electric Power 5.2 5.3 5.7 5.1 5.5 5.9 6.2 7.0 +35%

Source: EIA

Natural Gas Prices-(NYMEX Prices mmBTU)

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Great Concern- Continued Increased Use of Natural Gas by Power Sector

It raises the price of both natural gas and electricity for all consumers

Natural gas fired power is increasingly setting the marginal price for electricity

For the next 10 years or so, there is no other short term low-carbon fuel other than natural gas

Electric Power Research Institute

“Even though natural gas is used to produce

only 20 percent of the electricity, it accounts

for 55% of the electric industry’s entire fuel

expense ($50B out of $91B).”

Relationship of High Natural Gas Prices to Lost Manufacturing Jobs

2000 2001 2002 2003 2004 2005 2006 2007 %

Employment (MM)

17.2 16.4 15.2 14.5 14.3 14.2 14.1 13.9 -19.2%

Natural Gas

Wholesale Price ($ per MCF)4.50 5.20 4.00 5.90 6.50 8.60 7.90 6.85 +52%

Natural Gas

Consumption (TCF)8.1 7.3 7.5 7.2 7.2 6.7 6.6 6.8 -16%

Lost Manufacturing Jobs YTD 2008 losses are 344,000

US manufacturing is already under siege by energy intensive imports Analyzed sixteen energy intensive product

categories under the “Industrial Supplies and Materials” of the U.S. Census Bureau

Imports from 2000 to 2003 were about unchanged while imports from 2003 to 2007 rose a staggering 78.3%. Imports rose from $87.3 billion in 2003 to $155.7 billion in 2007.

Timing is consistent with rise in US natural gas price

Planned Nameplate Capacity Additions from New Generation (MW)

Energy Source 2006 2007 2008

Coal 602 1589 1056

Petroleum 269 78 168

Natural Gas 10657 16892 15050

Other gases 0 391 1160

Nuclear 0 0 0

Hydro 8 3 4

Other Renewable

3027 2454 695

Total 14573 21407 18133

Source: EIA

Existing Electricity Generation Capacity 2006 (MW)- Would Consume 22 TCF

Energy Source Nameplate Capacity

Coal 335,830

Petroleum 64,318

Natural Gas 442,945

Other Gases 2,563

Nuclear 105,585

Hydro 77,419

Other Renewable 26,470

Pumped Storage 19,569

Other 976

Total 1,075,677 Source: EIA

Climate Change Mandates

Climate Change Policies are Complex

Climate change is an environmental issue…but the policies to deal with it are energy, trade

and economic policy issues.

Climate Change Regulations The single most important issue that the

manufacturing sector has ever faced. Will determine manufacturing’s

competitiveness for years to come. Unfortunately, the US Congress, key states

and many countries are focused only on “cap & trade” as the policy of choice.

1990 2006 Difference

Residential 953.7 1253.8 +31.4%

Commercial 780.7 1050.6 +34.6%

Industrial 1683.6 1682.3 < 0%

Transportation 1566.8 1958.6 +25%

Electricity 1803.1 2375 +31.7%

Total Carbon Dioxide Emission(Million Metric Tons of Carbon Dioxide)

Source: EIA

Energy Purchasing Managers Carbon management is an essential element to

managing total energy cost risk. Understanding carbon regulation and

management options is now a competitive advantage for companies.

Climate Change Regulations

What will it cost my company?

Allowance Prices in 2007$ through 2030

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

CRA

MIT L-W w/15% Offsets & CCS Subsidy

MIT L-W w/ CCS Subsidy

MIT L-W w/ 15% Offsets

MIT L-W w/o 15% Offsets, w/o CCS Subsidy

EPA Scen 2 ADAGE

EPA Scen 2 IGEM

EPA Scen 5 (No Offsets) IGEM

EPA Scen 7 (Less Nucl/Bio/CCS) ADAGE

Calculate Your Cost Increase. CO2 Allowance Prices

CO2 Allowance Price $40 $50 $75 $100

Gasoline/gallon.35 .44 .67 .89

Natural Gas/MCF2.19 2.74 4.10 5.47

Short Ton

Bituminous Coal89.44 111.80 167.70 223.60

Sub-bituminous

Coal67.40 84.25 126.38 168.50

Anthricite Coal69.88 87.35 131.03 174.70

Source: EIA

Cap & Trade Increases Energy Costs

Example:

Senator Lieberman “Cap and Trade” Bill - On average, would have increased natural gas, electricity and transportation fuels by about 33% in 2012 and increase from there.

Cap & Trade – Impacts energy prices in four ways It increases the cost of energy when the price

of carbon is added. Increases natural gas costs by increasing

demand. Compliance costs. (Management of ghg

accounting; offsets; third party verification)

Cap & Trade – Distorts Markets It will impact relative competitiveness between: Companies in your business. Companies in the same sector and other

competing products. US industry and imported products that is not

equally regulated.

Cap & Trade- Requires Absolute Reduction Energy efficiency improvements do not result

in absolute ghg reductions.

Key Question: Can you reduce absolute ghg emissions if your production of steel is increasing?

Cap & Trade- Other issues There is no effective border adjustment

policy. No reward for past energy efficiency. Capital spending will be centered on

compliance deadlines. Must compete with electric utilities to

purchase carbon allowances.

Alternative Policy Options Carbon tax

Sector Approaches: Energy efficiency improvement mandates GHG intensity improvement mandates Best available technology (BAT) Some combination of above policy coupled

with tax incentives to speed capital stock turnover

Alternative Policy OptionsIECA favors these alternatives. Greater transparency and predictability Carbon tax is border adjustable to deal with

imports Lower costs to reduce ghg emissions More consistent with how and when we spend

capital Less energy and product market distortions

Call to Action !

Paul N. Cicio

President

Industrial Energy Consumers of America

202-223-1661

www.ieca-us.org