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Issue Brief #4158 on Energy and Environment

March 4, 2014

EPA’s Climate Regulations Will Harm American Manufacturing

By and

The Environmental Protection Agency’s (EPA) forthcoming climate change regulations for new and existing electricity generating units have been appropriately labeled the “war on coal,”[1] because the proposed limits for carbon dioxide emissions would essentially prohibit the construction of new coal-fired power plants and force existing ones into early retirement.

However, the casualties will extend well beyond the coal industry, hurting families and businesses and taking a significant toll on American manufacturing across the nation. Congress should stop the EPA and all other federal agencies from regulating carbon dioxide and other greenhouse gas emissions.

Driving Energy Prices Up, Economic Activity Down

Coal provides approximately 40 percent of America’s electricity generation.[2] By significantly limiting the use of an affordable energy source, the EPA’s regulations will increase electricity prices for American households. Since low-income families spend a larger proportion of their income on energy, a tax that increases energy prices would disproportionately affect the budgets of the poorest American families.

Higher energy prices as a result of the regulations will squeeze both production and consumption. Since energy is a critical input for most goods and services, Americans will be hit repeatedly with higher prices as businesses pass higher costs onto consumers. However, if a company had to absorb the costs, high energy costs would shrink profit margins and prevent businesses from investing and expanding. The cutbacks result in less output, fewer new jobs, and less income.

Heritage Foundation analysts modeled the economic effects of a phase-out of coal between the years 2015 and 2038. Using the Heritage Foundation Energy Model, a derivative of the federal government’s National Energy Model System, we found that by the end of 2023, nearly 600,000 jobs will be lost, a family of four’s income will drop by $1,200 per year, and aggregate gross domestic product decreases by $2.23 trillion over the entire period of the analysis.[3 ]

Manufacturing Hit Hard

America’s manufacturing base will be particularly harmed by the EPA’s climate regulations. Manufacturing accounts for over 330,000 of the jobs lost.[4] This occurs for a number of reasons.

As more coal generation is taken offline, the marketplace must find a way to make up for that lost supply. The Heritage Energy Model builds in the most cost-effective means of replacing the lost coal through a combination of consumers decreasing energy use as an adjustment to higher prices and increased power generation from other sources.

Manufacturing is an energy-intensive industry, and the impact of the higher energy prices on manufacturing averages to more than 770 jobs losses per congressional district. However, not all regions are affected the same, as districts in Wisconsin, Ohio, Indiana, Michigan, and Illinois are especially hit hard. In fact, 19 out of the top 20 worse off congressional districts from the Administration’s war on coal are located in the Midwest region. In those districts, the manufacturing industry, on average, will slash more than 1,600 jobs by 2023. The table at the end of the paper shows the estimates of the decrease of manufacturing employment per congressional district by 2023.

Furthermore, manufacturing growth will be harmed as a result of the fuel switching that will occur to make up for lost coal generation. Natural gas will be diverted away from manufacturing and to power generation. As a result, the Heritage Energy model projects that natural gas prices will increase 28 percent by 2030.

Natural gas and liquids produced with natural gas provide a feedstock for fertilizers, chemicals and pharmaceuticals, waste treatment, food processing, fuel for industrial boilers, transportation fuel, and much more. The chemical-manufacturing base alone is building 148 new operations topping over $100 billion in response to current and projected low natural gas prices from the shale gas boom.[5] As the U.S. is experiencing a renaissance in manufacturing and energy-intensive industries, the Administration’s war on coal could adversely affect America’s competitive advantage.

Availability of Carbon Capture and Sequestration

The primary reason the EPA’s regulations will ban the construction of coal-fired electricity generating units is that to meet the thresholds, new plants will have to install carbon capture and sequestration (CCS) technology. As identified by the Obama Administration’s Interagency Task Force on Carbon Capture and Storage 2010 report, implementation of CCS has a number of extremely difficult obstacles to overcome. There are questions of technical scalability, regulatory challenges, long-term liability of storing the captured carbon dioxide, and above all, cost.[6 ]

No credible basis exists to state that CCS is adequately demonstrated today, since no large-scale power plant in the U.S. has CCS. One large-scale CCS project is currently under contract—the Kemper County Integrated Gasification Combined Cycle (IGCC) plant—but it is hardly a model for new coal-fired plants for the rest of the country. Setting aside the fact that the project has had nearly half a billion dollars in cost overruns and received over $400 million in Department of Energy grants and preferential tax credits,[7] the plant is using a lower-grade lignite coal rather than higher-grade bituminous and subbituminous coal found in many parts of the rest of the country.

The Kemper plant will use IGCC technology that turns coal into gas as opposed to pulverized combustion and the captured carbon dioxide will serve a purpose for enhanced oil recovery to help finance the plant. New coal-fired plants in other parts of the country will not have those opportunities, so the Kemper plant is not an indicator of adequate demonstration. Further, the fact that the plant is not actually operating disqualifies it as the model. CCS should be pursued only if companies believe it is in their economic interest to do so—for instance, if profitable opportunities for enhanced oil recovery exist nearby.

Congress Stepping In

Senator Joe Manchin (D–WV) and Representative Ed Whitfield (R–KY) have introduced the Electricity Security and Affordability Act (H.R. 3826) that would require that greenhouse gas regulations for electricity generating units meet certain standards that prove they are economically feasible to achieve and have a demonstrated positive environmental benefit. Any imposed standards to limit or contain emissions cannot have been tested in isolation and with special treatment like the Kemper plant but must have been used commercially for a year by multiple plants (at least six) in multiple regions in order to be representative of the industry.

To truly ensure that the technology is cost-effective, Congress should strip away all subsidies and Department of Energy spending for CCS in order to prevent the federal government from presenting a handful of fundamentally uneconomic CCS plants as proof that the standards are legitimate. However, the most effective policy solution would be to prohibit the EPA and all agencies from regulating greenhouse gas emissions.

—Nicolas D. Loris is Herbert and Joyce Morgan Fellow in the Thomas A. Roe Institute for Economic Policy Studies and Filip Jolevski is a Research Assistant in the Center for Data Analysis at The Heritage Foundation.

Show references in this report

[1] Zack Coleman, “White House adviser: ‘War on coal is exactly what’s needed’” The Hill, June 25, 2013, http://thehill.com/blogs/e2-wire/e2-wire/307571-white-house-adviser-war-on-coal-is-exactly-whats-needed (accessed February 28, 2014).

[2] U.S. Energy Information Agency, “Short Term Outlook—February 2014,” Table 7d, http://www.eia.gov/forecasts/steo/tables/pdf/7dtab.pdf (accessed February 26, 2014).

[3] See Nicolas D. Loris, Kevin D. Dayaratna, and David W. Kreutzer, “EPA Power Plant Regulations: A Backdoor Energy Tax,” Heritage Foundation Backgrounder No 2683, December 5, 2013, http://www.heritage.org/research/reports/2013/12/epa-power-plant-regulations-a-backdoor-energy-tax (accessed February 26, 2014).

[4] Out of a total of 670,000 jobs lost. This differs from the estimates referred to earlier (600,000 jobs lost), which are calculated from the Heritage Foundation Energy Model using employment figures from the Current Population Survey. These new estimates are calculated from the same Heritage Foundation Energy Model but use employment data from the American Community Survey in order to illustrate the impact in various congressional districts. Other coal dependent states that are not heavy manufacturers will also be significantly impacted by the EPA’s regulations. For instance, although West Virginia and Wyoming are relatively low on manufacturing jobs lost, Heritage estimates these will be the two hardest hit states in terms of overall job losses per 100,000 employed. For a more detailed explanation of the overall job losses and methodology, see ibid.

[5] Business Standard, “U.S. Chemical Industry Invest $100 Bn Due to Shale Gas Boom,” February 22, 2014, http://www.business-standard.com/content/b2b-chemicals/us-chemical-industry-invest-100-bn-due-to-shale-gas-boom-114022400678_1.html (accessed February 26, 2014).

[6] Environmental Protection Agency, “Report of the Interagency Task Force on Carbon Capture and Storage,” August 2010, http://www.epa.gov/climatechange/Downloads/ccs/CCS-Task-Force-Report-2010.pdf (accessed February 26, 2014).

[7] Massachusetts Institute of Technology, “Kemper County IGCC Fact Sheet: Carbon Dioxide Capture and Storage Project,” http://sequestration.mit.edu/tools/projects/kemper.html (accessed February 26, 2014).

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