aota report updated july 2014



2 The Of - The - Above Energy Strategy as a Path All - to Sustainable Economic Growth ... ... Executive Summary ... 2 ... Introduction: Elements of the All - of - the - Above Energy Strategy ... ... 5 I. The Energy Revolution and the Economic Recovery ... ... . 9 II. ... 9 ... ... The Energy Revolution in Historical Perspective GDP, Jobs, and the Trade Deficit ... ... ... 15 ... ... ... ... 18 Energy Prices, Households, and Manufacturers III. The Energy Revolution and Energy Security: A Macroeconomic Perspective ... 20 Trends in Oil Import Prices and Shares ... ... ... ... 21 ks ... ... ... 22 Macroeconomic Channels of Oil Price Shoc Empirical Analysis of Energy Price Shocks ... ... ... 24 ... The changing sensitivity of the U.S. economy to oil price shocks ... 24 Energy supply diversification and falling correlations among U.S. energy prices 29 ... ... Discussion ... ... ... 29 ... IV. A Path to a Low - Carbon Future ... ... ... 31 Reducing Emissions through Improved Efficiency ... ... ... 32 Natural Gas as a Transitional Fuel ... ... ... ... 34 Supporting Renewables, Nuclear, and Clean Coal ... ... ... 35 Electricity from Wind and Solar Energy ... ... ... 36 Other Renewables ... ... ... 37 ... ... ... ... ... 37 Nuclear and Clean Coal Meeting the Challenge of the Transportation Sector ... ... ... 38 International Leadership ... ... ... ... 39 References ... ... ... ... ... 41 1

3 Executive Summary he transformation. The United States is producing T U.S. energy sector is undergoing a profound more oil and natural gas, is generating more electricity from renewables such as wind and solar, petroleum and while holding electricity consumption constant . These is consuming less energy security benefits, and they are helping developments have had substantial economic and sector and thereby tackl e the challenge posed by to reduce carbon emissions in the energy climate change. To build on this progress, to foster economic growth, and to protect the planet for future - of - the - Above strategy on energy. Some generations, the President has set out an aggressive All the recent trends in the energy sector predate the Administration and stem from technological of - taking by American entrepreneurs and businesses advances and risk , as well as from energy strategy government . The All - of - the - Above supported research and other public policies - supports these trends through environmentally responsible production of oil and natural gas . In addition, the Administration has advanced the growth of energy sources with low or zero carbon emissions through programs that support wind, sol ar, other renewable s , and nuclear, and has also helped to reduce energy demand by promoting The Administration is also energy efficiency. supporting an ambitious program of carbon capture, utilization and storage for coal and natural gas power plants and f or industrial facilities. The All - of - the - Above energy strategy has three key elements: to support economic growth and lay job creation, to enhance energy security, and to deploy low - carbon energy technologies and the foundation for - of a clean energy future. This report lays out the se three elements of the All - the - Above energy strategy, and takes stock of the progress that has been made to date and the work that remains to be done. The recent transformation in the domestic energy sector has been historic .  Decades - long trends in energy use are being reversed. N atural gas consumption has risen 18 percent since 2005 . In addition, total energy obtained from wind, solar, and geothermal sources has more than doubled since 2009. largely  Many of t hese changes are unforeseen . Only eight years ago, baseline projections showed well into the future. But the Energy steadily increasing petroleum consumption Information Administration now projects petroleum consumption to decline starting after 2019 . In fact, since its peak in 2007, U.S. gasoline consumption has fallen by 5.5 percent , or million barrels per day . half a The energy sector has provided key support to the recovery from the Great Recession, and the U.S. economy’s exposure to abrupt adverse changes in world oil markets should continue to decline. 2

4  contribution to GDP growth Rising domestic energy production has made a significant The production oil and natural gas alone contributed more increases in and job creation. age point to real GDP growth in both 2012 and 2013, and employment in than 0.2 percent these sectors increased by 133,000 between 2010 and 2013. Tens of thousands more jobs T hese figures do not account for all have been created in the solar and wind industries. economic , so the overall impact on the economy of this growth in oil and spillovers the gas production is even greater . Excluding the crisis - affected year of 2009, the U.S. trade deficit as a percent of GDP is  . since the 1990s Since its 2006 peak the lowest , m ore than a fifth of the narrowing of the trade deficit can be directly attributed to a shrinking trade deficit in as a percent of GDP and declining domestic consumption petroleum products, as rising domestic production imports. have combined to cut oil  The resilience of the economy to international supply shocks — macroeco no mic energy security i s enhanced by reducing spending on net petroleum imports and by — reducing oil dependence . The factors that have reduced net oil imports — decreased domestic petroleum demand, increased domestic oil production, more efficient the vulnerability of the U.S. economy to vehicles, and increased use of biofuels — reduce oil price shocks stemming from inte rnational supply disruptions. Although international oil supply shocks and oil price volatility will always present risks, empirical evidence presented in this report suggests that further reductions in net petroleum imports will reduce those risks. The U nited States has emerged as  world’s leading producer of petroleum and the natural gas . In 2013, combined production of petroleum, natural gas, and other liquid fuels in the United States exceeded that of Saudi Arabia and Russia. The United States leads in natural gas and is predicted by the International Energy Agency to lead in oil as well within a few years. The President’s All - of - the - Above Energy Strategy will sustain and strengthen this carbon technologies and la important progress, while deploying low - ying the foundation for a future. clean energy  T he United States has reduced its total carbon pollution since 2005 more than any other nation on Earth. While energy - related CO from their emissions have fallen 10 percent 2 peak in 2007, recent projections suggest that emissions could begin to increase again, and more work remains to address this critical imperative. In his 2013 State of the Union address, the President again called on Congress to pass legislation that would provide a market - based mechanism for reducing emissions. Absent a market - based solution, a central goal of national energy policy is to develop and to deploy low - carbon technologies xternality of greenhouse that the market would not otherwise undertake because of the e gas emissions. 3

5  of - the - Above Energy Strategy embraces natural gas as a transition al - The President’s All done responsibly. is fuel, and includes steps to ensure that natural gas development N atural gas is comparatively cleaner than many other sources of energy . And the is supporting safe and responsible development including a strategy to Administration , reduce “upstream” methane to address gaps in current data on methane emissions , and — as part of the Quadrennial Energy Rev iew — to identify “downstream” emissions . methane reduction opportunities - The All of  - the - Above Energy Strategy supports renewables, nuclear, and other zero - carbon energy sources through research , development , and deployment, and also invests in energy efficiency. The Interior Department is on track to permit enough renewable energy projects on public lands by 2020 to power more than six million homes; the Defense Department has set a goal to deploy three gigawatts of renewable energy — including solar, wind, biomass , and geothermal — on Army, Navy, and Air Force installations by 2025; as part of the Climate Action Plan, the Federal Government percent of the energy consumed in Federal buildings from committed to sourcing 20 renewable sources by 2020 ; a nd the Energy Depa rtment supports clean energy technology development and cost reduction across the innovation chain, including through significant loan guarantees and demonstration projects to promote nuclear , and clean coal technologies. renewables, efficiency, 4

6 t I. Elements of the All - o f - tion: he - Above Energy Strategy Introduc Over the past ten years, the U.S. economy has undergone a revolution in the production and natural gas extraction consumption of energy. Breakthroughs in nonconventional oil and ed the decades - long decline in domestic oil and natural gas production. technology have revers he composition of energy sources has begun to shift: petroleum and coal are now T being replaced by natural gas and renewables, cleaner sources with low or zero carbon emissions . energy President’s All - of - the - Above Some of these trends predate the Administration, and the strategy supports these trends and aims to accelerate them in an environmentally responsible way. Other trends are newer, and are driven in part by the President’s policies. has three key elements: to support economic T he President’s All - of - the - Above energy strategy growth and job creation, to enhance energy security, and to carbon technologies and - deploy low lay the foundation for a clean energy future. This repo - rt lays out these three elements of the All nergy - - of E the S trategy, and takes stock of the progress that has been made to date and Above the work that remains to be done. The energy sector has provided key support to the recovery from the Great Recession . Today, as shown in Figure 1 - 1, the United States produces more crude oil than it imports. Natural gas production has climbed sharply and natural gas prices have fallen, to the benefit of industry and consumers. increased by 133,000 from mployment in the oil and natural gas extra ction sector E 2010 to 2013 that support activity in extractive . M any more jobs have been added in sectors industries like manufacturing, transportation, construction, restaurants and lodging , as well as jobs in schools, grocery stores, hospitals, and other establishments in drilling regions . local And even more jobs have been induced by the extra spending created by these jobs, given the elevated rate of unemployment during the recovery. The CEA estimates that o il and gas extra ction alone contributed 0. 2 percentage point to GDP growth in 2012 and 2013 — and this large contribution does not include all the economic spillovers. The decline in net petroleum in renewable imports has helped to reduce the U.S. trade deficit. And the dramatic growth electricity generating capacity, especially in wind and solar, has also boosted employment and output during the recovery. 5

7 1 - Figure 1 U.S. Crude Oil Production and Net Imports Million barrels per day 12 Projected Actual Net Imports 10 8 - 14 Apr 6 4 Production 2 0 2005 2009 1997 1999 2001 2003 1995 2007 2017 2015 2013 2011 Source: EIA The energy revolution is also making the United States more energy secure. eclining net imports D macroec vulnerability of the United States to foreign oil supply disruptions. onomic reduce the I n globally integrated oil market, an today’s deregulated domestic liquid fuels market and international supply disruption means a jump in prices because of the inelastic short - n demand ru consumption, increasing domestic crude oil for oil. But the combination of declining gasoline enhances , increasing fuel economy, and increasing use of biofuels production the resilience of national oil supply shocks and oil price the U.S. economy to these oil price shocks. Although inter volatility will always present risks, empirical evidence presented in this report suggests that reductions in net petroleum imports will reduce those risks. Ultimately, term reductions of - long net oil imports must come from reduced demand and increased use of biofuels , electric vehicles, In addition, the diversification and other substitutes for petroleum in transportation natural gas, . the link of energy sources through the growth of natural gas and renewables has softened between world oil prices and domestic energy prices . - The President’s All - of is also developing and deploying low the - Above energy strategy carbon - technologies and laying the foundation for a clean energy From 2005 through 2011 (the future. last y ear of data), the United States reduced its total carbon pollution more than any other nation in the United States on Earth , in part because of a shift towards cleaner natural gas and an emissi ons so far are an historic CO increasing role for renewables. Although the reductions in 2 - as - usual projections still suggest that shift from past trends, more work remains, and business emissions will increase over the rest of this decade as the economy grows. These increasing CO 2 osts on generations to come emissions impose economic and other c in other words, carbon - — intensive energy consumption generates a negative externality that affects the welfare of today’s population and their children. Imposing these costs on future generations is irresponsible and usual path is unacceptable. as - business our current - Above energy strategy makes progress on addressing this critical issue. The President’s All - of - the - of any fossil fuel emissions per unit of usable energy produced . CO tural gas has the lowest Na 2 6

8 S witching from fuels with a greater carbon footprint to natural gas has played a vital role in decarbonizing the energy sector, and will continue to do so for the coming decades. To ensure a Administration is working with States and small greenhouse gas footprint for natural gas, the industry to address the challenges of fugitive emissions of methane (a potent greenhouse gas) and flaring. In addition, through the Department of Energy and the Quadrennial Energy Review, the Administration will identify “downst ream” methane reduction opportunities. Renewables will play a central role in a low - carbon energy future. The All - of - the - Above energy strategy help to bring down costs of those renewables approaching market supports programs that readiness, for example thr ough solar programs such as the Department of Energy’s SunShot based solution that internalizes the externality posed - initiative. Absent a comprehensive market - by carbon emissions, the All - of the - Above strategy also entails working towards the outcomes of such a solution through policies that include new energy efficiency standards, a continuation of Renewable Electricity the Production Tax Credit, an extended cellulosic fuel tax credit, and direct regulation of carbon emissions. - Above energy The Box summarizes some key Administration initiatives under the All - of - the strategy. 7

9 S LECTED A DMINISTRATION I NITIATIVES UNDER THE E LL TRATEGY OF - THE - A BOVE E NERGY S A - Electricity Issued about $30B in DOE loan guarantees: kickstarted utility - scale solar; supported “first mover” advanced nuclear reactors  in Georgia; enabled auto industry to retool for very efficient and electric vehicles. with enhanced safety features  In partnership with industry, invested in four commercial - scale and 24 industrial - scale clean coal projects that will store more than 15 million metric tons of CO per year. 2  Under the American Recovery and Reinvestment Act, supported more than 90,000 projects by leveraging nearly $50 billion in e dollars to deploy enough renewable electricity to power 6.5 million homes annually. private, regional, and stat  As part of a commitment to improvements in permitting and transmission for renewables, approved 50 utility - scale renewable energy proposals and associated transmission, i ncluding 27 solar, 11 wind, and 12 geothermal projects since 2009, enough to power 4.8 million homes. Thirteen of the projects are already in operation. Transportation  In 2011, finalized national standards to double the efficiency of light - duty cars and tr ucks by 2025, reducing oil consumption by 2.2 million barrels a day in 2025 and slashing greenhouse gas emissions by 6 billion metric tons over the lifetime of the vehicles sold during this period . egan collaborating with  - ever medium - and heavy - duty vehicle fuel economy standards released in 2011, b Building on the first industry to develop standards for vehicles beyond model year 2018 , which will lead to large savings in fuel, lower CO 2 emissions, and health benefits from reduced particulate matter and ozon e. Energy Efficiency Since June 2013 alone, issued proposed or final energy conservation standards for eleven products through the Department  of Energy. These standards that — when taken together with the final rules already issued under this Administration — mean more than 70 percent of the President's goal of reducing carbon pollution through appliance efficiency standards will be achieved. As a result, by 2030, CO emissions will fall by at least 3 billion metric tons cumulatively and save hundreds of billi ons 2 of dollars in energy costs. Launched the Better Buildings Challenge in 2011 to help American commercial and industrial buildings become at least 20  More than 190 diverse organizations, representing over 3 billion percent more energy efficient by 2020. square feet, 600 r, manufacturing plants and close to $2 billion in energy efficiency financing stepped up to the President’s Challenge. This yea 25 new states, cities, school districts, multifamily housing, retailers, food service, hospitality and manufac turing announced they are joining as partners. organizations Set an additional $2 billion goal in federal energy efficiency upgrades to Federal buildings over the next 3 years. This challenge,  in combination with the initial commitment of $2 billion in 20 11, will result in a total of $4 billion in energy efficiency performance contracts in the Federal sector through 2016. Beginning in 2009, created weatherization programs that helped low - income households save $250 - $500 a year on their  energy bills and hav e provided energy efficiency improvements to nearly 2 million homes. Oil and Natural Gas Worked to reduce processing time for onshore drilling permits, now at the lowest it has been in eight years. In FY 2013, onsh  ore production on Federal and Indian lands increased 37% compared with FY 2008. This year, the Interior Department has already hel d eight onshore lease sales, generating over $78 million in revenue for States, Tribes, and the American taxpayer. Promoted environmentally responsible development of offshore resources through the Interior Department’s Five  Year Outer - Continental Shelf O il & Gas Leasing Program. Since the implementation of new safety standards following the Deepwater Horizon incident in 2010, the Interior Department has issued 260 new shallow - water well permits and 229 new deep water well permits. In addition to policie s already undertaken, the President, as part of his FY 2015 Budget, has proposed new initiatives including:  Investing $5.2 billion in funding for clean energy technology activities at the Department of Energy, including $860 million for programs and infras tructure that support nuclear energy technologies, $700 million to increase affordability and convenience of advanced vehicles and renewable fuels, and $400 million in cleaner energy from fossil fuels.  Establishing an Energy Security Trust to help fund ef forts to shift cars and trucks off of petroleum products, a $2 billion investment over 10 years that will support R&D into a range of cost - effective technologies. Putting $839 million towards advancing the goals of the Global Climate Change Initiative (GCC  I) and the President’s Climate Action Plan by supporting bilateral and multilateral engagement with major and emerging economies. 8

10 II. The Energy Revolution and the Economic Recovery ir The recent changes in the energy sector and the consequences for economic growth have been remarkable. Increasing production of oil, natural gas, and renewable energy has contributed to employment and GDP growth during the recovery, and declining net petroleum imports have reduce the U.S. tra de deficit. helped to The Energy Revolution in Historical Perspective Over the past two centuries, the amount of energy consumed in the United States has increased dramatically and its mix has changed to sources of energy that are more potent and more Figure 2 - convenient. As 1 shows, through the middle of the nineteenth century, the main energy source in the U.S. was wood. The use of coal rose sharply through the early twentieth century, ration. For most of then reached a plateau until its use increased in the 1970s for electricity gene the twentieth century, petroleum consumption grew sharply, dropping off temporarily after the oil crises of the 1970s but then resuming its growth. Natural gas consumption grew during the second half of the twentieth century and has bee n used increasingly in homes and industry, and to meet peak electricity demand. During the last quarter of the twentieth century, nuclear electricity generation increased to the point that it now supplies 19 percent of electricity, and iofuel, saw a small regional resurgence (primarily for home heating) as a wood, the original b result of the increases in home heating oil prices in the 1970s. Meanwhile, renewables and geothermal wind, production – which include s biomass and biofuels, hydroelectric , solar , has surpassed nuclear energy production . – ergy en Figure 2 1 - Consumption by Source, 1775 Energy 2012 - Quadrillion Btu 45 Petroleum 40 35 30 Natural Gas 25 20 Coal 15 Renewable Nuclear 10 Wood 5 0 2000 1975 1775 1800 1825 1850 1875 1900 1925 1950 Source: EIA These trends have shifted dramatically in the 21st century: the use of coal has declined by 21 since its peak in 2005 and total petroleum consumption has declined by 13 percent since percent its peak in 2005. Because of the revolution in nonconventional natural gas extraction through horizontal drilling and hydraulic fracturing, natural gas consumption has increased sharply, with 9

11 much of this increase displacing coal for electricity gen eration. In addition, total energy obtained 5 - fold since 200 five . has increased sources from wind, solar, and geothermal 2006 was unexpected. A standard way to The decline in petroleum consumption starting in unforeseen quantify developments is to look at revisions to forecasts , because those revisions information. In the case of energy, industry - , unforeseen represent the contribution of new standard benchmark forecasts are produced annually by the Energy Information Administration gy Outlook, so revisions to those forecasts quantify the effect of (EIA) in its Annual Ener developments on the energy sector. Figure 2 - unforeseen 2a shows U.S. petroleum consumption since 1950 and forecasted consumption from the 2006, 2010, and 2014 Annual Energy Outlook s . ight years ago, these benchmark forecasts projected increasing petroleum consumption Only e events a thirty - year forecast horizon. But over , including the Great Recession — unforeseen at the time of the EIA’s 2006 forecasts — unfolded rapidly: b y 2010, EIA had reduced both the level and rate of growth of the forecast, and its 2014 outlook now projects petroleum consumption to in petroleum five years. This unforeseen reversal decline after a slight increase over the next demand is led by the rever sal in gasoline demand, which is shown in Figure 2 - 2b: the 2014 EIA projection of consumption in 2030 is 45 percent below the EIA projection made in 2006. The initial decline in the level of consumption is due in part to the recession, but much of the lowe r projection for the coming decades reflect s unforeseen efficiency improvements stemming from the 2012 light - duty vehicle fuel economy standards , along with some projected switching to diesel in the light - duty fleet . - 2a Figure 2 2a - Figure 2 Figure 2 - 2b - 2040 U.S.Petroleum Consumption, 1950 U.S.Petroleum Consumption, 1950 2040 - of Motor Gasoline, 1950 U.S. Consumption - 2040 Million barrels per day Million barrels per day barrels per day Million 30 Actual Projected 14 30 Actual Projected Actual Projected 2006 AEO 12 25 2006 AEO 25 2006 AEO 10 2010 AEO 20 2010 AEO 20 2010 AEO 8 2014 AEO 2014 AEO 15 15 6 2014 AEO 10 10 4 5 5 2 0 0 0 2020 1970 1960 1950 2030 2040 2010 2000 1990 1980 2030 2000 1970 1960 1950 2010 1990 1980 2020 2040 2030 2020 2010 2000 2040 1980 1970 1960 1950 1990 Source: EIA Source: EIA Source: EIA The recent increase in petroleum production was equally unforeseen . As Figure 2 - 3 shows, domestic petroleum production peaked in 1972 at 11 million barrels per day (bpd). Production plateaued through the mid - 1980s and then declined steadily through the lat e 2000s as a conventional domestic deposits were depleted. Since then, however, entrepreneurs ad pted that had been more widely used for y horizontal drilling and hydraulic fracturing technolog enabl , ing natural gas t hem to extract oil within the rocky formations of plays once considered exhausted, as in the Eagle Ford in West and South Texas, and to develop new plays as in the 10

12 Bakken in North Dakota. unforeseen and recent: m ost of the These developments are both revision to EIA’s forecast occurred since 2010, and now EIA projects production to surpass its earlier peak in 2015 . EIA projects production to decline slowly after 2019 , although because the technology is still advancing there is considerable uncertainty about the e conomically recoverable resource potential. 3 Figure 2 - U.S. Petroleum Production, 1950 - 2040 barrels per day Million 15.0 Actual Projected 12.5 2014 AEO 10.0 2010 AEO 7.5 2006 AEO 5.0 2.5 0.0 1980 2010 1970 1950 1990 2000 1960 2020 2030 2040 Source: EIA unforeseen decline in demand production has led to a sharp oil and increase in The for petroleum turnaround in net petroleum imports (Figure 2 - 4), which fell from a peak of over 12 million bpd in 200 5 to 6.2 m illion bpd in 2013 — a drop of more than million bpd in 2013, relative to EIA’s 6 1 roughly 2006 forecast of 2013 imports . Of this unforeseen fall in net imports, 4 million bpd, or , is due to the unforeseen fall in consumption, and 2 million bpd, or 35 percent , is due 65 percent to the unforeseen increase in production, relative to the respective 2006 EIA forecasts. 1 Throughout the focus is on net imports. Although crude exports are restricted by law and have been historically small quantities, the United States has long exported refined petroleum products, for example averaging approximately 750,000 bpd in the 1990s. Refined product exports have grown sharply since 2006, reaching 2.8 million bpd in 2013. 11

13 Figure 2 - 4 - U.S. Petroleum Net Imports, 1950 2040 per day barrels Million 20 Actual Projected 15 2006 AEO 10 2010 AEO 5 2014 AEO 0 1990 2040 1950 1960 1980 1970 2030 2020 2010 2000 Source: EIA The increase in nonconventional natural gas production preceded the increase in nonconventional oil production. Figure 2 - estic natural gas production and 5, which presents dom historical EIA forecasts, shows that the EIA’s 2014 projections indicate increasing natural gas production through 2040. Already, well over half of natural gas production is from as), a fraction that is projected to increase as the nonconventional plays (tight gas and shale g conventional resource base becomes less productive and competitive. Figure 2 - 5 - 2040 U.S. Natural Gas Production, 1950 Trillion cubic feet 40 History Actual 35 30 2014 AEO 2010 AEO 25 20 2006 AEO 15 10 5 0 2040 1980 1970 1960 2000 1990 1950 2010 2030 2020 Source: EIA - Figure 2 Domestic use of renewable energy sources has also increased substantially since 2000. the use of liquid biof shows that 6 primarily ethanol from corn and biodiesel from various — uels grew sharply in the mid sources including waste oil and soy oil — - 2000s as ethanol replaced MTBE as an oxygenate to boost octane reduce emissions of aromatic hydrocarbons to , further and supported b y the Renewable Fuel Standard mandates under the Energy Independence and Security Act of 2007. The combined effect of increased production of natural gas, oil, and liquid 12

14 biofuels has resulted in the United States being the leading petroleum s producer and natural ga - in the world (Figure 2 7). - Figure 2 6 U.S. Fuel Ethanol and Biodiesel Consumption, 1981 - 2013 (Annual Rate) Million gallons 16,000 14,000 12,000 10,000 Fuel Ethanol 8,000 6,000 4,000 2,000 Biodiesel 0 2010 1980 1985 1990 1995 2005 2000 Source: EIA Figure 2 - 7 2013 - Petroleum, Natural Gas and Biofuels Production, 2008 Quadrillion Btu U.S. 50 Russia Russia U.S. 40 Saudi Arabia 30 Saudi Arabia NG 20 - Petro 10 leum 0 2008 2013 Petroleum production includes crude oil, natural gas liquids, Note: condensates, refinery processing gains and other liquids including biofuels. Source: EIA . The energy revolution also includes a dramatic increase in the use of renewables At the end of totaled 61 gigawatts, an increase of 140 2013, w ind over electricity percent generation capacity its 2008 level. In 2012 alone, a record 13 gigawatts of new wind power capacity was installed, roughly double the amount of newly installed capacity in 2011. These 13 gigawatts of new wind le fuel source to total U.S. electric capacity represented the largest share of additions by a sing generation capacity in 2012. Altogether between 2010 and 2013, total installed wind power generation capacity grew by over 20 gigawatts or 50 percent , with construction throughout the - 8 As a result, annual electricity (Figure 2 ). d New England Midwest, Southwest, West Coast, an hours to , from 55,363 million kilowatt production from wind energy tripled from 2008 to 2013 - - scale electricity production from solar power 167,567 million kilowatt - hours . Similarly, utility 13

15 - fold from 2008 to 2013, from 864 million kilowatt - hours to 8,91 8 million more than ten grew (which - hours . T otal energy from solar includes in addition to electricity generation kilowatt heating, hot water, and other uses) nearly quadrupled from a monthly rate of 8 trillion Btu to 29 trillion Btu over the same period (Figure 2 - 9) . 9 - Figure 2 Total Monthly Wind and Solar Energy Production Trillion Btu 2014 - Jan 180 160 140 Wind 120 100 80 60 40 Solar 20 0 2010 2012 2014 2000 2002 2004 2006 2008 Source: EIA 14

16 GDP, Jobs, and the Trade Deficit is U.S. energy revolution has contributed to the growth of the economy — both in terms of Th output as measured by gross domestic product ( GDP ) and overall employment — and economic CEA the decline of the trade deficit, as the economy recovered from the Great Recession. he increase in oil and natural gas production estimates that t alone contributed more than 0.2 , in contrast to a slight negative percentage point to real GDP growth in both 2012 and 2013 . This 0.2 percentage point contribution, (Figure 2 - 1 0 ) contribution on average from 1995 to 2005 which does not count all the economic spillovers, added annual substantially to the 2.3 percent rate of growth of the economy as a whole over these two years. Figure 2 10 - Oil and Natural Gas Contributions of Production to GDP Growth Percent 0.22 0.22 0.25 0.20 0.15 0.09 0.08 0.10 0.04 0.04 0.03 0.05 0.01 0.00 -0.05 - 0.02 '95-'05 2010 2008 2007 2006 2009 2011 2013 2012 Note: CEA calculations use physical quantity data for oil and natural gas production. Source: EIA; CEA calculations. over the past jobs created both directly and indirectly The growth in oil and gas production has - several years. As Figure 2 sector extraction the oil and natural gas shows, employment in 1 1 increased by 133,000 between 2010 and 2013, and continues to grow into 2014. Much of this job growth has been concentrated in a handful of states like Texas, Pennsylvania, Louisiana and e forefront of developing their energy resources (see Cruz, Smith and North Dakota that are at th Stanley [2014]) . In addition to direct employment in resource extraction, jobs have been created , in the companies that provide goods and services to those industries and to their workers Local jobs in schools, retail, including manufacturing, transportation, and leisure and hospitality. health care, and other sectors have also been created in oil and gas development regions. Because of the elevated unemployment rate during the recovery, the number of indirect jobs, including those created through aggregate demand spillovers, could be quite large: one private estimate holds that nonconventional oil and gas activity contributed a total of 1.7 million jobs in 2012 (IHS CERA [201 in mployment lling nearly continuously since the early 1980s, e After fa ]). 2 coal mining also edged up slightly over this period and in 2012 stood at approximately 90,000 employees . 15

17 - 11 Figure 2 Natural Resource Extraction Employment, 1949 2013 - Jobs (thousands) 400 350 Oil and Natural Gas 300 Coal 250 2012) (through 200 150 100 50 0 1985 1975 2005 2015 1965 1955 1945 1995 Source: EIA; BLS. Expansion of renewable energy capacity has also contributed to economic growth. E mployment in the renewable sector spans several categories in Federal data collection systems, which direct estimation of employment and output in the sector. However, trade complicates association data suggest that, n addition t o rapid expansion in outpu t, there has also been a i - the solar in shows, from 2010 to 2013, employment 2 1 sharp rise in employment. As Figure 2 Moreover 50 percent to almost 143,000 jobs. , employment more than energy industry grew by 2 Similarly, wind industry in the solar industry is projected to increase by another 20,000 in 2014. 3 employment in 2013 totaled in the tens of thousands. 2 2013 National Estimates of national employment related to the solar energy industry from the Solar Foundation ’s Sol ar Jobs Census . The National Solar Jobs Census uses a statistical survey methodology aligned with the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages and Current Employment Statistics surveys. 3 to the wind power sector from the 2013 American Wind Energy’s Estimates of national employment related Association U.S. Wind Industry Annual Market Report. 16

18 12 - Figure 2 Solar 2014 - Related Employment, 2010 - Jobs 164,938 175,000 142,698 150,000 119,016 125,000 105,145 93,502 100,000 75,000 50,000 25,000 0 2011 2014 2010 2012 2013 figure is a projection. Note: 2014 Source: The Solar Foundation led to The increase in domestic oil production, combined with reduced demand for oil, has also In 2006, the a sharp drop in net petroleum imports and, as a result, a decline in the trade deficit. total trade deficit was 5.4 percent of GDP, the highest recorded for the United States. By the end cent of GDP, which, excluding the crisis - of 2013, the trade deficit had fallen to 2.8 per affected year of 2009, was the lowest since 1999 (Figure 2 - 1 3 ). While the U.S. trade balance is subject to a number of influences and depends in large part on economic conditions in other parts of the world, the ris e in domestic energy production has been a substantial factor in the recent improvement. Of the 2.6 percentage point decline in the trade deficit since 2006, about 0.6 or just over one fifth ( ) is due to a shrinking trade deficit in petrole um products. percentage point 13 - Figure 2 - , 1995 Total and Petroleum Trade Deficits 2013 Percent of GDP 6.0 Total 5.0 4.0 3.0 Petroleum 2.0 1.0 0.0 2007 2009 2011 2013 1999 1997 1995 2003 2001 2005 Source: Census Bureau and BEA . 17

19 Energy Prices, Households, and Manufacturers on an energy - equivalent Since 2006, natural gas prices have fallen well below crude oil prices basis , providing a cheaper source of energy to consumers and businesses in the United States - 1 4 a). Domestic natural gas prices are also well below those in other countries (Figure (Figu re 2 1 4 b). Today, one million British thermal units (mmBtu) of wholesale natural gas costs around 2 - $4.50, roughly half the price paid in Western Europe, a quarter of the price paid in Japan, and a 4 quarter of the price of a comparable amount of crude oil. Figure 2 - 14b 14a Figure 2 - Prices a World Natural Gas Spot nd Import 2015 - Prices, 1995 Annual Crude Oil and Natural Gas S pot Btu Dollars per Million Dollars per million Btu May 27 18 20 (Mar 2014) Japan LNG Brent 16 18 14 16 UK (NBP) 12 WTI 14 10 8 12 2014) Russia/German border (April 6 Projected 10 4 8 2 Hub) US (Henry 6 0 2014 2011 2010 2013 2012 4 Note: UK's prices do not include natural gas imported from Russia which is 2 Hub Henry predominately indexed to oil prices. Japan and Russia/German border 0 prices are monthly averages. 1995 2000 2005 2010 2015 Source: Bloomberg Source: EIA the Residential natural gas prices have followed the decline in wholesale natural gas prices, and - month average price has declined by 20 percent from twelve its 200 9 high (Figure 2 - 1 5 a). Low wholesale natural gas prices have also supported switching fuels in the electric power sector from coal to natural gas. With natural gas prices falling from 2007 to 2012, retail electricity prices have the slowest rate of increase in almost 15 ver this period, been essentially constant o showing - 1 5 b). years (Figure 2 4 The low cost of domestic natural gas relative to other countries reflects the undeveloped nature of international gas markets combined wit h the expense of transportation. Liquefaction, transportation from the United States to Europe, and regasification have been estimated to add $6 - 9 per mmBtu, roughly tripling the price of gas entering the pipeline at Europe relative to its Henry Hub price. Currently approximately 9 billion cubic feet per day of liquefied natural gas (LNG) export capacity has been conditionally approved by the Department of Energy, although the that some of this capacity might not enormous capital expenditures required for LNG facilities raises the possibility actually be built. Because of large transport costs, even if a global market for LNG were to develop, domestic natural time. gas prices are likely to remain well below prices in the rest of the world for an extended period of 18

20 Figure 2 15b - 15a - Figure 2 Retail 2014 - Electricity Prices and Fuel Costs, 1995 2014 - Wholesale and Residential Natural Gas Prices, 1995 Dollars per Million Btu Dollars per Million Btu Dollars per Million Btu 35 15 24 Retail Electricity (left axis) 2014 - Apr 20 Natural Gas (right axis) 30 10 Residential 16 Apr 2014 - 25 12 5 8 20 axis) Coal (right 4 Wholesale 15 0 0 1995 2010 2005 2000 2010 2005 2000 1995 Note: Dashed line represents twelve month moving average. - month moving average. - Note: Dashed line represents twelve Source: EIA Source: EIA 19

21 III. The Energy Revolution and Energy Security: A Macroeconomic Perspective The term energy security is used to mean different things in different contexts, and broadly 5 covers energy supply availability, reliability, affordability, and geopolitical considerations. This focuses on macroeconomic energy security, by which we mean the extent to which a section country’s economic welfare is exp osed to energy supply risks, specifically, international energy This concept of supply disruptions that lead to product unavailability or price shocks or both. macroeconomic energy security encompasses domestic risks as well as international supply risks s uch as disruptions to foreign oil production. In the United States, domestic energy security considerations are important and domestic supply breakdowns can have large costs. For example, the Council of Economic Advisers and the Department of Energy, as we ll as others, have estimated substantial costs of electricity grid outages associated with storms (CEA/DOE 2013). In its Quadrennial Energy Review, the Department of Energy is broadly examining the U.S. energy infrastructure to identify potential threats, risks, and opportunities for improvement. Historically, however, energy supply disruptions of foreign origin have had the greatest overall macroeconomic impact, notably international oil supply disruptions played a role in the recessions of the 1970s, alth ough disagreement remains about the magnitude of that role. For this reason, this report focuses on the vulnerability of the U.S. economy to international energy supply disruptions. Because 95 percent of U.S. energy import dollars are spent on petroleum, the main threats to U.S. macroeconomic energy security come from international oil supply disruptions. During the OPEC oil embargo of 1973 - 74 , price controls and lack of product led to rationing of gas oline and long queues at service stations. But in today’s global oil market with many producers and s domestically deregulated petroleum prices in the U.S. , petroleum product will still be available in the event of a foreign supply disruption , her price. Today, macroeconomic energy just at a hig — price security concerns the resilience of the U.S. economy to temporary unexpected price hikes of foreign origin. shocks — Historically, temporarily high oil price shocks arising from foreign supply disruptions have c ut GDP growth and reduced employment. These events have been studied and debated in depth in the economics literature (starting with Hamilton [1983]; see Hamilton [ 2009 ] and Kilian [2008b, - 1 presents a 2014] for surveys). Table 3 ly disruptions from 19 73 - 200 5 list of the major oil supp 5 In a joint statement released May 6, 2014, the G7 energy ministers stated: “We believe that the path to energy Development of flexible, transparent and competitive energy security is built on a number of core principles: markets, including gas ma ; Diversification of energy fuels, sources and routes, and encouragement of rkets indigenous sources of energy supply ; Reducing our greenhouse gas emissions, and accelerating the transition to a low carbon economy, as a key contribution to enduring energy s ecurity ; Enhancing energy efficiency in demand and supply, and demand response management Promoting deployment of clean and sustainable energy technologies ; and continued investment in research and innovation ; Improving energy systems resilience by promoti ng infrastructure modernization and supply and demand policies that help withstand systemic shocks ; [and] Putting in place emergency response systems, including reserves and fuel substitution for importing countries, in case of major energy disruptions. ” 20

22 , and the percentage change in gross peak supply loss (2008a) identified in Kilian , the estimated oil prices in the aftermath of the disruption. For example, in the months following the Iranian 1978, oil prices increased by 53 percent . This link is not perfect, and not Revolution in November every oil price shock has led to an economic slowdown, but as is discussed below in more detail, a negative link between oil price spikes and economic activi ty. points to the empirical evidence Table 3-1: Major Oil Disruptions, 1973-2005 Duration Gross Peak Supply Loss Percent Change (months) (millions of barrels per day) Date Event Name in Oil Prices 4.3 6 Oct-73 to Mar-74 45% Arab Oil Embargo & Arab-Israeli War 53% 6 Iranian Revolution Nov-78 to Apr-79 5.6 4.1 3 Oct-80 to Jan-81 Iran-Iraq War 40% Persian Gulf War Aug-90 to Jan-91 6 4.3 32% 4 Dec-02 to Mar-03 Civil Unrest in Venezuela 2.6 28% 10 Iraq War Mar-03 to Dec-03 28% 2.3 Note: Events as identified in Kilian (2008a) and Hamilton (2005). Dates and gross peak supply loss figures as identified in IEA(2012). Price changes for events over select windows as specified in Hamilton (2005) and price changes before 1982 measured using crude petroleum PPI as in Hamilton (2005). Trends in Oil Import Prices and Shares T he price of oil play s 1 shows the price - Figure 3 central roles in macroeconomic energy security. of oil in nominal (current dollars) and in 2013 dollars (deflated by the price index for consumer spending ). Jumps in the price of oil - 1, as well as more are visible around the disruptions of Table 3 , today’s oil prices of roughly $100 per barrel gradual increases such as in 2007 - 08. I n real terms roughly three times the real are t with are comparable those in the late 1970s and early 1980s, bu price s of the 1990s. Figure 3 - 1 $) Nominal and Real Oil Prices (2013 WTI spot price, $/barrel 160 140 120 Real 100 80 60 40 Nominal 20 0 1970 2000 2010 1990 1980 Note: Nominal prices deflated using overall PCE price index. Source: EIA; Bureau of Economic Analysis. The expenditure share of net petroleum imports measures the fraction of GDP that is spent on net imports of petroleum. Ignoring compositional differences, this share is the product of net 21

23 barrels Figure 3 - 2 presents two of petroleum imports times the price per barrel, divided by GDP. measures of the expenditure share of GDP of net crude imports. The first uses a narrow definition net imports of crude, gasoline, distillates, and fuel oil. The sec ond, which is only available since of ( naphtha , jet fuel, etc.) which 1973, uses a broader definition that includes other refined products slightly increases the share relative to the narrow measure but does not materially change the overall time series patte rn. In order to observe longer - term movements, the figure also presents a time series trend of the two measures, which reduces the influence of the high frequency fluctuations in these series that arise from short - term price volatility. For example, during the 1990s the price of oil was low even though physical imports were high, so the expenditure share was relatively low. In contrast, the high oil prices of the past few years have produced a relatively high expenditure share, although this share has decli ned noticeably over the past few years as domestic demand has declined and domestic oil production has increased. Figure 3 - 2 Net Import Shares of Petroleum Products Percent of GDP 4 Broader Definition 3 2 1 Definition Narrow 0 2010 2000 1990 1980 1970 1960 1950 Source: EIA; CEA calculations. Macroeconomic Channels of Oil Price Shocks Oil price shocks can affect the economy through several channels, including consumer demand, e supply of goods and services (production), and physical product rationing. As Kilian (2009) th and Blinder (2009) point out, these channels are both conceptually distinct and can have different macroeconomic effects. Because the demand for petroleum produc ts is inelastic, especially in the short run, the share of 6 expenditures by consumers and firms on petroleum goes up when the oil price increases. when the Because the Unites States is a net importer of oil, expenditures on net imports increase . If the oil shock is known to be temporary, the life cycle theory of consumption oil price increases suggests that consumers would make minimal adjustments to the rest of their spending and 6 a For example, Kilian and Murphy (2014) estimate the short - run price elasticity of demand for oil to be pproximately - 0.2, and earlier estimates show even smaller elasticities. 22

24 would temporarily finance the additional oil consumption through savings. However, in practice do not know the duration of price hike and many or most would instead reduce consumers a their spending on other goods and services to pay for the more expensive fuel needed for daily life. Because expenditures on oil imports go abroad and not to the domestic economy, they do not count towards GDP, so the immediate effect of an increase in the price of an imported good which, like oil, has inelastic demand, is to decrease consumption of domestic goods and services and thus to decrease GDP. This effect on reducing domestic demand is as if the wealth of consumers were reduced, so this channel is sometimes referred to as the wealth channel. his T can be large. For example, if net oil imports are 2 channel percent of GDP, as they were in the late 70s and late 2000s, a 10 percent increase in the price of oil causes a reduction in spending on everything else and reduces GDP by 0.2 percent . T he extent to which this channel is offset e. For example , an increase in overall world depends on the source of the oil price increas economic activity that drives up the demand for and price of oil would expand U.S. exports, at least partially offsetting the increased price of oil imports. An oil price increase, like a change in the relative price of any other good, also changes the composition of demand as consumers shift spending from items that are indirectly affected by the price increase (like air travel and cars with low fuel efficiency ) to goods and services that are less energy - ive. Thus, products of energy - intensive sectors become relatively more intens expensive and those sectors will see a reduction in demand, and even within sectors demand can shift across products, such as to cars with fuel efficiency. Moreover, to the exte nt that greater shifting from energy - intensive goods reduces purchases of durables such as automobiles or refrigerators, spending today is shifted into the future, depressing aggregate demand. Although - inten sive sectors, it takes time for this compositional shift increases demand in less energy displaced workers to find alternative employment so incomes decline and unemployment rises (see for example Hamilton [1988]). An oil price increase can also depress domestic demand if it increases uncertainty. Uncertainty a bout the economic future can lead consumers to postpone major purchases and lead firms can to postpone investment and hiring, thereby slowing the economy (e.g. Bernanke [1983], Bloom [2009], and for oil investment specifically, Kellogg [2010]). In this cha nnel, oil price volatility can be causal (the volatility creates uncertainty that postpones investment, hiring, or durables consumption), or the volatility can simply reflect broader market uncertainty about future is a fall in aggregate r - side channel economic or geopolitical events. Anothe potential demand consumption because an oil price rise is regressive and transfers income from individuals with a high marginal propensity to consume to individuals with a lower marginal propensity to consume (e.g. Nordh aus [2007]). Oil price increases can also reduce economic activity through the supply side of the economy. To the extent that energy prices more broadly move with oil prices, an increase in oil prices makes energy a more expensive factor of production, so firms will strive to reduce energy consumption and expenditures. Although capital and labor substitute for energy in the long run, in the short run they can be complements in production because of fixed technologies, so higher energy costs - ayoffs in energy intensive firms and industries. Because it takes time for displaced can result in l 23

25 workers to find jobs, incomes decline and unemployment rises. This supply - matte r s side channel price increases are long - capital and labor are being used less most if lasting, and because ould also be associated with a slowdown or decline in productivity growth. c efficiently, and assume that The channels discussed so far all concern changes in the relative price of oil oil is available. If, however, prices are not flexible and instead oil or petroleum products are rationed, the effect on the economy can be severe. On the production side, because energy and labor are complements in the short run, many workers cannot do th eir jobs without oil. Time spent queuing for gasoline is time not spent productively. In such cases, output falls, and even relatively small dollar volumes of unavailable supply can have an outsized influence on the global crude oil markets and deregulated domestic economy. Fortunately, the development of retail markets have made widespread petroleum product rationing a thing of the past, outside of occasional temporary regional events stemming from weather related supply chain disruptions. - have significant, even life - Such events can threatening impacts on the individuals involved, and ing e is an important goal (and minimizing those impacts through improv supply chain resilienc , indeed is a central topic of the Department of Energy’s Quadrennial Energy Review) but their temporary nature and regional scope means that the macroeconomic impact of the resulting petroleum product unavailability is limited. Empirical Analysis of Energy Price Shocks This section presents reduced form empirical evidence on the relati ve importance of the - different channels of energy supply shocks on the U.S. economy and on the changing correlations among energy prices. of this analysis suggest that a lower share of net oil import s in The results my to oil price shocks. GDP enhances the resilience of the econo The changing sensitivity of the U.S. economy to oil price shocks wealth channel makes the concrete prediction that the effect of an oil price shock on GDP The growth scales with the share of GDP spent on net oil imports. The scaling of the other channels arguably scale either is less clear without a formal model, but generally those channels would for example , with the consumption expenditure share with the importance of oil in the economy ( as examined by Edelstein and Kilian [2009] ) or simply a ffect output directly. For example, the supply - side channels associated with temporary changes in factor prices would depend on among elasticities of substitution their shares in production, not shares factors of production and of net imports, while the uncertainty channel could depend on the overall importance of energy in the economy. If net imports were zero, the wealth effect channel would disappear , but the other channels would . still exist These observations suggest an empirical strategy in which the effect of the shock is allowed to depend flexibly on the net oil import share, where the degree of dependence is estimated. In addition, the empirical strategy needs to take account of the fact that the effect of an oil shock plays out over a period of many quarters, not all at once. Accordingly, we consider a family of specifications in which an oil price shock has an effect on GDP over several quarters or, equivalently, GDP is affected by current and past values of the oil shock. This suggest s the distributed lag model, 24

26 k u    p s      c y c (1 )   (1) ,   0 t t t i t i i 0 i  where y is the percentage growth of GDP, p is the oil price shock expressed as percent change, t t s to be is the net oil import expenditure share and μ is its mean, c ,..., c are parameters and α k 0 t k denotes the other factors determining GDP growth that is the number of lags, and u estimated, t are not considered in the model. If = 1, then the price shock scales by the share, consistent with α the wealth channel, whereas if α = 0 then the price shock does not vary over time with the share, consistent with the other channels being more important. Note that in the specification (1), if α = 1 and the net import share is zero, oil price shocks have no effect on GDP growth. To est imate specification (1), we use quarterly data from 1960Q1 – 2006Q4 on real GDP growth, 7 - concept expenditure share trend in Figure 3 - 2 , and five measures of oil price shocks. the narrow Because the oil price increased through out 2007, peaking in July 2008 just months before the financial crisis, the estimation end s in 2006Q4 so as to avoid overstating oil price effects. The first variables two oil price shock are the quarterly percent change in two oil price measures: the crude producer price inde 2009 ) (quarterly average of x as used by Hamilton (1996, 2003, petroleum WTI ” monthly data) and the spot price of West Texas Intermediate crude ( “ , collected by the Energy Information Administration; quarterly average of monthly data). Although movements in oil price s are sometimes conveniently treated as exogenous, oil prices respond to economic , conditions and there is a large thoughtful literature that tackles the problems posed by this potential endogeneity (see for example Bernanke, Gertler, and Watson [1997], Ba rsky and Kilian [ ] , Kilian [2008b, 2009], and Ramey and Vine [2010]). The next two [2002], Hamilton 2009 measures therefore aim to isolate exogenous movements in oil prices, thereby to reduce the p in specification (1): Hamilton’s being correlated with the other shock that compr chance of u ise t t (1996) net oil price increase variable, which is the percent by which the crude oil producer price index surpasses its previous 12 - quarter peak, and zero if it does not (aggregated to the quarterly level as in Hamilt on [ 2009 ]), and Ramey and Vine’s (2010) oil shock variable, which is the residual from a regression of time adjusted gasoline prices on four current and past macroeconomic - variables and thereby aims to capture the exogenous gasoline expenditure shock assoc iated with a potentially endogenous oil price hike (monthly shocks aggregated to quarterly; available 1964 - 2013). ex - ante volatility of oil prices, not the level, and thus pertains The final shock variable measures - side and uncertainty chann els; specifically, this series measures volatility as to the supply estimated using a GARCH(1,1) model of the percentage change of the monthly WTI spot price 8 - 2013, aggregated to quarterly by averaging). (estimated on monthly data 1947 This measure, 7 The narrow - concept share is available for the full time span, whereas the bro ader - concept share is available only since 1973. The trend shown in in Figure 3 - 2 is used to avoid conflating the share with the oil price shock variable with which it is interacted in equation (1). 8 Time series investigations into the macroeconomic effect of oil price volatility using GARCH and/or stochastic volatility approaches include Elder and Serletis (2010) and Jo (2014). 25

27 plotted in Figure 3 - 3, shows considerable variation, with the greatest percentage volatility occurring in the 1970s and before and during the 2007 recession, and relative quiescence during mid - - 1990s. the and late 3 - Figure 3 Volatility of Oil Prices Ante - Estimated Ex Variance of WTI spot price in $/barrel 2,000 Arab Oil Embargo & Persian Iraq War 1,800 War Israeli - Arab Gulf War 1,600 Venezuela Iranian Revolution 1,400 Civil Unrest 1,200 Iraq War - Iran 1,000 800 600 400 200 0 2010 1990 1980 1970 2000 1960 1950 Source: EIA; CEA calculations The results of estimation of the distributed lag specification (1) for GDP growth and consumption - α , a growth using eight lags are summarized in Table 3 2. The table presents estimated values of ients, and a test of the significance of test of the joint significance of the distributed lag coeffic quarter cumulative effect; the coefficients themselves are not reported to save space. For - the 6 GDP growth, for all oil variables except for the Hamilton net oil price increase, the estimated is one, so α that for the oil variables and the Ramey value of - Vine shock the effect of an oil price In all cases, the shock on GDP is proportional to the net import share, which varies over time. 6 - estimated effects are negative as expected, typically increasing in magnitude ove r the first 3 In addition, the dynamic effects are jointly statistically significant and the cumulative 6 - quarters. quarter effect is individually statistically significant for all dependent variables. The results are similar for consumption growth. 26

28 Table 3-2: Empirical Results Dependent Variable: Real GDP PPI-Crude WTI Hamilton (1996) Ramey-Vine Price Shock Variable (%change) Price Shock (%change) Shock WTI Volatility Shock Scale Parameter, α 1 0.224 1 1 1 -- -- -- 0.346 -- Standard Error <0.0001 P-value of F-test of all lag coefficients <0.0001 <0.0001 <0.0001 <0.0001 T-test of 6-quarter Cumulative Effect -2.14 -2.62 -3.17 -1.87 -2.45 0.002 0.063 P-value 0.034 0.009 0.015 Dependent Variable: Real PCE Hamilton (1996) WTI Ramey-Vine PPI-Crude Price Shock Variable (%change) Price Shock Shock WTI Volatility (%change) 1 1 1 0.342 1 Shock Scale Parameter, α -- -- Standard Error -- -- 0.332 P-value of F-test of all lag coefficients <0.0001 <0.0001 <0.0001 <0.0001 <0.0001 -3.61 -2.30 T-test of 6-quarter Cumulative Effect -3.34 -1.25 -3.91 0.001 <0.0001 0.0001 0.212 0.022 P-value Note: Entries are results from estimation of the distributed lag model in Equation (1) by by nonlinear least squares, where α was parameterized using a logistic transformation to impose 0 ≤ α ≤ 1. Standard errors in the distributed lag specifications are autocorrelation robust. Standard errors for α are given only for interior estimates because of changes in sampling distributions at the boundary. In economic terms, the variation over time of the effect of an oil shock on GDP growth implied by the estimated share specifications is substantial. Figure 3 4 shows the estimated dynamic - real GDP effect on a ten percent increase in the WTI spot price, estimated over the full data of set (this is the so - called impulse response function associated with the estimated specification for WTI summarized in Table 3 2). For example, when the expenditure share is 2.2 percent , - a ten 1980 and 2007, the time - series estimates imply that approximately its value at its peaks in fall percent increase in the pri ce of oil is associated with a 0. 5 percent in GDP after 6 quarters. In percent , approximately its value in the mid - 1990s, contrast, when the expenditure share is 0.9 was roughly - 0.2 percent . Because the net petroleum import share this effect on GDP is than in the late 1970s and early 1980s substantially lower in second half of 1980s through 1990s , GDP found from the mid findings are consistent with the reduced effect of oil shocks on se - the 1980s through the end of the century ( for example, Hooker [1996], Nordhaus [2007], Blanchard - Gal í [2010]). 27

29 4 - Figure 3 Price Shock on GDP Estimated Cumulative Effect a 10% Oil Quarters after shock 5 0 1 2 3 8 7 6 4 0 -0.1 1% Net Import Share -0.2 -0.3 -0.4 -0.5 2% Net Import Share -0.6 -0.7 change in GDP Percent CEA calculations. Source: EIA; , they are somewhat larger than would be for the moment Taking these estimates at face value channel alone suggested by the wealth : for a net oil import share of 2.2 percent, the direct wealth of a 10 percent increase in oil prices would be to reduce GDP by 0.22 percent. Even with a effect - Keynesian demand multiplier of 1.5, the reduction would be only 0.33 percent, or r oughly two thirds of the estimated 0.5 percent reduction. Although the estimated 0.5 percent reduction is within a 95% confidence interval of 0.33, these estimates are consistent with meaningful channels s beyond the wealth effect. contribution by T currently relatively high in historical terms, at 1.8 percent , but is he net expenditure share is declining sharply. Because of declining demand for transportation fuel and increasing domestic percent production, the net expenditure share is projected to fall to t he historically low level of 1 by 2017 under the AEO 2014 reference case. For the oil price specifications re ported in Table 3 - 2 , this projected decline in the net oil import share corresponds to large reductions of the sensitivity of the U.S. econ omy to oil price shocks. These results are robust to changes in the estimation sample and to alternative econometric net oil price increase specifications, and aside from the Hamilton are robust to alternative shock 9 number of caveats. Most importantly, oil price changes can measures. Still, they are subject to a occur for multiple reasons, including response to increasing demand; that is, oil price changes 4 (or those are in general not exogenous, so the impulse response functions displayed in Figure 3 - - tained using the other oil price variables in Table 3 2) should be viewed as describing dynamic ob 9 ns are robust to using instead the 2 and the corresponding impulse response functio - The results in Table 3 autoregressive lag distributed lag - distributed lag model with four lags used by Hamilton (2003, 2008), to using a 12 - model (although statistical significance suffers with the added coefficients), to starting the estimatio n sample in - 1954, to ending the estimation sample in 2013, and to using GDP and consumption growth deviated from a long term cyclically adjusted estimate of their potential growth rates. The estimated impulse response functions are also robust to using ins tead a bivariate autoregressions with oil ordered causally first as in Edelstein and Kilian (2009), in μ ] p αs using the estimated value of α reported in Table 3 - 2. which the oil price variable is [ + (1 - α ) t t 28

30 correlations and effects . Identifying causal effects of oil price shocks is a central not as causal challenge of this literature, and doing so requires a credib le strategy to isolate exogenous variation in the shocks. Identification approaches include formulating multivariate models which embed identifying assumptions (e.g. Bernanke, Gertler, and Watson [1997], Blanchard and Gal í and Peersman [2013], Kilian and Murphy [2014 ]) or using an Baumeister [2010], Kilian [2009], instrumental variables approach (Hamilton [2003], Stock and Watson [2012]). The task of - share specification with those approaches to identification is left to further merging the variable work. Ad ditionally, while the findings here point towards declining oil import shares as being an important reason for the reduced macroeconomic effect of oil price shocks, do not rule out they other factors, such as a changing mix of supply and demand shocks (e.g . Kilian [2009]), as contributing to this reduction. Finally, although the oil shock enters the specifications here nonlinearly in that it is interacted with a function of the share, this analysis does not examine whether these results resolve the findings in the literature on nonlinear oil price effects (see Kilian [2014] for a review) Hamilton [2010], Kilian and Vigfusson [2014], and . For all these reasons, the results in Table 3.2 should be viewed as suggestive. Energy supply diversification and falling correlations among U.S. energy prices This empirical work so far has focused on the role of oil in macroeconomic energy security. Another aspect of macroeconomic energy security is the extent to which oil price changes rices. Preliminary empirical evidence suggests that , for produce broader movements in energy p the boom in natural gas production has contributed to an attenuation of the the United States, link between oil price changes and other energy price changes. As discussed above, the boom in nonconve ntional gas production detached the Henry Hub wholesale natural gas price from oil prices (Figure 2 - 1 5 a). This detachment of the levels of the prices is also reflected in a reduced correlation of price changes. For the five years from 2001 - 2005, the correl ation between monthly percent changes in the Henry Hub price and the WTI spot - 2010, this correlation fell to 0.19, and for the four years from 2010 to price was 0.43. From 2006 0. 17 . Consistent with the declining correlation between oil the present it is - and natural gas prices, the correlation between oil prices and wholesale electricity prices fell from 0 .16 during - 2005 and 2000 during 20 0 6 - 2010 to - 0.10 during 2010 to the present. 0.27 Discussion O il price shocks affect the economy through channels . In addition to the wealth effect, many t shifts in the composition of domestic consumption, adjustments by firms hose channels include facing a shift in the relative costs of their inputs, and reduced demand from heightened uncertainty. As Edelstein and Kilian (2009) emphasize, oil price shocks depress consumer sentiment. And, because gasoline is needed for routine transportation, oil price shocks are regressive. Nevertheless, t hese results support the view that U.S. macroeconomic energy security is enhanced by reducing net petroleum imports , and they underscore the importance of reducing the dependence of the U.S. economy on petroleum . Recently, the net import share has been creased : declining demand for transportation fuels, in reasons declining for a combination of 29

31 domestic oil production combined with increasing refined product exports, and increasing use of biofuels. Thus further contributions to macroeconomic energy security can come from further vehicle standards improvements in fuel economy, as supported by the light - and heavy - ; from reducing petroleum demand by shifting to natural gas and electricity as transportation energy from supporting additional, environmentally responsible domestic oil production; and sources; from further use of advanced, low - greenhouse gas biofuels . 30

32 A Path to a Low Carbon Future IV. - A central challenge of energy and environmental policy is to find a responsible path that balances the economic benefits of low - cost energy, the social and environmental costs associated with ener to future generations. As part of the United Nations Climate gy production, and our duty Change Conferences in Copenhagen and Cancún, the United States pledged to cut its carbon ) and other greenhouse gas emissions in the range of 17 percent be low 2005 levels dioxide (CO 2 by 2020. Approximately 87 percent of U.S. anthropogenic emissions of all greenhouse gases and methane) are energy - (primarily CO - related, and fossil fuel combustion accounts for 2 emissions (EPA 2010). approximately 94 percent of U.S. CO 2 rom an economist’s perspective, greenhouse gas emissions impose costs on others who are not F involved in the transaction that creates the emissions; that is, greenhouse gas emissions generate . Appropriate policies to a negative externality, of which much is borne by future generati ons address this negative externality would internalize the externality, so that the price of emissions reflects their true cost, or would seek technological solutions that would similarly reduce the ntivize energy efficiency and clean energy production. externality. Such policies ince In his 2013 State of the Union address, the President called on Congress to pass legislation that would provide a market based mechanism for reducing emissions. Congress has failed to act but - to deploy low - carbon technologies , including tax the Administration has other tools with which of greenhouse incentives for investment in and production clean energy, and direct regulation of ) GHG emissions, such as the 2012 light - duty fuel economy standards and the regulation of gas ( 10 emissions by fossil fuel fired electric generators under the Clean Air Act. CO 2 - 1 shows, The United States has made important progress in reducing GHG emissions. As Figure 4 related CO emissions have fallen 10 energy - from their peak in 2007. Given a percent 2 counterfactual, or baseline, path for these variables, one can attribute the change in carbon emissions to a change in the carbon content of energy, a change in the rate of improvement of 11 e nergy efficiency, and a change in the level of GDP, relative to the baseline path. 10 Regulations have costs and benefits, and computing the monetary benefits of reducing CO emissions requires an 2 estimate of the net present value of the cost of an additional, or marginal, ton of CO emissions. This cost — which 2 covers health, property damag e, agricultural impacts, the value of ecosystem services, and other welfare costs of climate change — In 2010, a Federal interagency working is often referred to as the “social cost of carbon” (SCC). ice of Management and Budget, produced a white paper group, led by the Council of Economic Advisers and the Off that outlined a methodology for estimating the SCC and provided numeric estimates (White House 2010). Since then, the SCC has been used at various stages of rulemaking by the Department of Transportation , the Environmental Protection Agency, and the Department of Energy. The SCC estimate is updated as the science and models underlying November 2013 the SCC develop, and in s were invited on the most recent update of the SCC. public comment 11 (Btu/GDP) O emissions emissions are the product of (CO /Btu) × Specifically, C × GDP, where CO represents U.S. CO 2 2 2 2 in a given year, Btu represents energy consumption in that year, and GDP is that year’s GDP. Taking logarithms of this expression, and then subtracting the act ual values from the baseline, gives a decomposition of the CO reduction 2 into contributions from clean energy, energy efficiency, and the recession. 31

33 1 - Figure 4 Carbon Dioxide Emissions Related - Energy metric tons Billion 9.0 Actual Projected 8.5 8.0 7.5 2005 AEO 7.0 6.5 6.0 5.5 2014 AEO 5.0 4.5 4.0 3.5 2020 2010 2040 2000 1990 2030 Source: EIA The baseline path is computed using a combination of historical trends and published forecasts as of 2005. Relative to this baseline, slightly more than half of the d ecline is due to slower growth than projected in 2005, that is, because of the decline in economic activity as a result of the Great Recession. Slightly less than half the reduction is due to cleaner energy, primarily the reduction in electricity generated by coal and the increase in cleaner natural gas and zero emissions wind - and solar generation. Improvements in energy efficiency made a small contribution : although economy - wide efficiency improved over this period, it improved only slightly faster than th e rate is analysis of the reduction T projected by the Energy Information Administration in 2005. recent h that while progress has been made, much more remains to be done. s show in emissions lays the The All - of - the - Above energy strategy develops and deploys low - carb on technologies and foundation for a clean energy future . This support ranges from research and experimentation funding for new energy technologies to supporting large - scale deployment. The transition to a low - carbon future is also supported through direct regulation of carbon emissions under the authority of the Clean Air Act, and the Environmental Protection Agency is developing regulations to reduce CO emissions from fossil fuel electric generating units as part of the President’s 2 Action Plan. Climate Reducing Emissions through Improved Efficiency The amount of energy used to produce a dollar of real GDP has declined steadily over the past four decades, and today stands at less than half of what it was in 1970 (Figure 4 - 2 ). This improvemen t in overall energy efficiency, is per year since 1960, percent 5 which has averaged 1. complete the same or similar tasks, and due in part to more efficient use of energy resources to - 2 - 4 in part to shifts in the types of tasks undertaken. Figure ents the Economy Wide also pres Energy Intensity Index developed by the Department of Energy, which estimates the amount of energy needed to produce a basket of goods in one year, relative to the previous year. Between 1985 and 2011, the DOE Energy Intensity Index f ell by 14 percent. In contrast, - GDP the energy 32

34 ratio fell by 36 percent. Thus, while much of the decline in energy usage per dollar of GDP has come from improvements in energy efficiency, much of it has also come from other factors such as shifts in the co mposition of output, in particular shifts from more to less energy - intensive sectors of the economy. Figure 4 - 2 U.S. Energy Intensity, 1950 - 2011 Index, 1985=1.0 2.00 GDP 1.75 E/GDP 1.50 1.25 E DOE/EER 1.00 Energy 0.75 0.50 0.25 0.00 2010 1990 1960 2000 1950 1980 1970 Source: EIA Both market forces and government programs spur energy efficiency improvements. For - 3 a ugh the early 2000s and shows, gasoline demand per capita rose thro example, as Figure 4 As the economy - 2000s before dropping substantially during the recession. plateaued in the mid Some of this continued recovered, however, gasoline demand per capita continued to fall. relatively high real gasoline prices shown in Figure 4 decline in gasoline demand stems from the - 3 , but that is only a partial explanation. Increasing fuel efficiency brought about by Federal fuel a economy standards also played a role. In 2012, the Administration finalized fuel economy hat, together with the Administration’s first round of standards, will nearly double standards t from 2010 levels the fuel economy of light duty vehicles to the equivalent of 54.5 miles per gallon 3b ). Furthermore, beginning in model y ear 2014, medium - and by the 2025 model year (Figure 4 - heavy - duty trucks must meet new energy efficiency standards as well, which are projected to increase their fuel efficiency by 10 to 20 percent by 2018. As mentioned earlier in this report, the Administration has also undertaken a num ber of other Above Energy Strategy to boost energy efficiency in buildings, - of - the - initiatives as part of its All appliances, and its own operations. 33

35 3b - Figure 4 - 3a Figure 4 Per Capita Gasoline Consumption U.S. Corporate Average Fuel Economy Standard and Performance, 1978 - 2013 per person per day Gallons May 2014 $ Mi l es per gal l on 4.50 1.10 Pass eng er (Std) Pass eng er (P) 40 - Feb 2014 Consumption 12 - month moving Light Trucks (Std) Light Trucks (P) 4.00 1.05 (left average axis) Total F leet (P) 35 3.50 1.00 0.95 3.00 30 2.50 0.90 25 2.00 0.85 1.50 0.80 20 gasoline price (right - axis) Retail 0.75 1.00 15 0.50 0.70 2010 1995 2005 1985 2015 1990 1980 1975 2000 2010 2008 2006 2004 2002 2000 2014 2012 Source: EIA ; Census Bureau ; CEA Source: EIA calculations. Natural Gas as a Transitional Fuel clean a Natural gas is already playing a central role in the transition to According energy future. , half of the CO mentioned above to the decomposition emissions reductions from 2005 nearly 2 to 2013 came from fuel switching, primarily switching from the use of coal to natural gas, wind, ating electricity. Nonconventional natural gas development and solar for the purpose of gener , the Energy Information Administration has opened a vast resource, and, as shown in Figure 4 - 4 projects increasing quantities of natural gas production along with low prices over the coming two dec ades. Figure 4 - 4 U.S. Natural Gas Production and - 2040 Wholesale Prices, 2011 cubic feet 2012 $ per Million Btu Trillion Tight and Shale Gas (left axis) 50 9.00 Conventional Gas (left axis) 7.50 Henry Hub Spot Price (right axis) 40 6.00 30 4.50 20 3.00 10 1.50 0.00 0 2015 2020 2025 2030 2035 2040 2010 EIA Source: A leading reason for the increased use of natural gas for electricity production is that its price fell . 9 and in 2012 induced substitution - shows, the decline in natural gas prices in 2008 5 As Figure 4 - of natural gas for coal in electricity generation. In 2013, the benchmark natural gas price and as increased from $3.33 per mmBtu in January 2013 to $4.24 per mmBtu in December 2 013, 34

36 natural gas prices rose relative to coal, the use of coal for electricity generation increased while the use of natural gas decreased. Looking ahead, the relatively low price of natural gas will make el as regulation of CO and other emissions under the it an economically attractive alternative fu 2 Clean Air Act further reduces coal - fired electricity generation. Figure 4 - 5 Generation and Prices Change in Monthly Electricity change o - - Y percent Y Natural Gas prices 75 Gas generation Natural 50 25 0 Coal generation -25 -50 -75 2009 2008 2012 2011 2013 2014 2010 Source: EIA It is important that this expansion of natural gas production be done responsibly and with environmental safeguards. Environmental co ncerns associated with natural gas include fugitive methane emissions (methane is a potent greenhouse gas), flaring, and local environmental issues associated with water and land use for hydraulic fracturing operations. As part of the Climate the Administration is undertaking a strategy both to reduce methane emissions and Action Plan, to address gaps in current data on methane emissions. The regulatory structure for addressing , exists prima rily at the state local environmental concerns, especially around land and water use and local level. Research that will inform prudent local environmental regulation of hydraulic fracturing is actively under way. Looking further ahead, developing natural gas generation infrastructure now prepares for future eployment of wind and solar generation. Wind and solar are non widespread d - dispatchable because of variable wind speeds and insolation, so both need either storage or backup generation capacity. Developing base load natural gas infrastructure today facilitates its use tomorrow for peak demand and renewable backup generation. Supporting Renewables , Nuclear, and Clean Coal Low - and zero - carbon r enewable , nuclear, and clean coal energy sources have a central role to - of clean Above strategy makes a - the energy future. Consequently, the Presid ent’s All - play in a technologies. strong commitment to supporting these 35

37 Electricity from Wind and Solar Energy - emission sources of energy and thus ind and solar generation are zero W do not create a negative climate externality. If emissions were priced to internalize the climate externality, then, wind, solar, and other renewable energy sources would therefore enjoy an additional price advantage market prices. In the absence of market - based mechanisms to internalize t he beyond current externality, it is appropriate to provide support through tax incentives and other measures commensurate with the value of the GHG reductions provided by those zero emissions energy - sources. Accordingly, the Administration backs such support for renewab les, including the renewable energy production tax credit. In addition, the Administration supports early deployment projects aimed at bringing down the ultimate market price of renewables. G overnment support, increasing competitiveness of wind and photo voltaic electricity production, and renewable portfolio standards that many states have adopted have together increased the share of electricity generated by non - hydro renewables from roughly 2 percent in 2007 to 6 percent in 2013 (Figure 4 - 6 ). Since the b eginning of 2011, the average cost of solar the cost of a solar since the beginning of 2010 panels has dropped more than 60 percent and . percent photovoltaic electric system has dropped by about 50 6 Figure 4 - - Monthly Share of Non Hydro Renewables in Net Power Generation Percent 9 Jan - 14 8 7 6 5 4 3 2 1 0 2001 2003 2005 2007 2009 2011 2013 Source: EIA The Administration has also supported solar Five years ago, there were no deployment. renewable energy projects on public lands. Today, the Interior Department is on track to permit enough renewable energy projects on public lands by 2020 to power more than six million homes; the Defense Department – has set a goal to deploy three gigawatts of renewable energy – on Army, Navy, and Air Force installations by including solar, wind, biomass, and geothermal 2025; and, as part of the Climate Action Plan, the Federal Government overall has committed to percent sou of the energy consumed in Federal buildings from renewable sources by rcing 20 2020. 36

38 Other Renewables - the - Above Energy Strategy - also includes other forms of electricity and The Administration’s All of hydropower and geothermal energy. Electricity thermal generation from renewables, including production from conventional hydropower was 5 percent higher in 2013 than in 2008, although n trends in hydropower from year to year depend on water availability. I 2013, President Obama signed two laws aimed , in part through encouraging hydropower at boosting hydropower - powered dams. development at non Similarly, electricity production from geothermal power grew from 2008 to 2013, and the Department of Energy funds research in a number of areas, including en hanced geothermal systems, that hold promise for developing these resources in the future. Finally, the Energy Department funds research in energy storage for applications ranging from better batteries for electric vehicles to energy storage technologies with potential grid - scale applications. can enhance electricity system reliability and Innovations in energy storage resilience, both greater adoption of renewable energy resources and more effective and enable utilization of the existing electric system . Nuclear and Clean Coal Nuclear energy provides zero carbon base load electricity, and through the Energy Department - the Administration is supporting nuclear research and deployment. A high priority of the Department has been to help accelerate the timelines for the commercialization and deployment of small modular reactor (SMR) technologies through the SMR Licensing Technical Support program. Small modular reactors offer the advantage of lower initial capital investment, scalability, and siting flex ibility at locations unable to accommodate more traditional larger reactors. They also have the potential for enhanced safety and security, for example through - in passive safety systems. In December 2013, the Energy Department announced an award built to s upport a new project to design, certify and help commercialize SMRs. The Energy Department is also supporting deployment of advanced large scale reactors. In - February 2014, the Department of Energy issued $6.5 billion in loan guarantees to support the struction of the nation’s next generation of advanced nuclear reactors. con , 100 - The two new 1 megawatt reactors, which will be located in Georgia, feature advanced safety components and could provide a standardized design for the U.S. utilities market. The A dministration is also advancing clean coal technology. The Department of Energy’s clean coal R&D is focused on developing and demonstrating advanced power generation and carbon capture, utilization and storage technologies by increasing overall system effi ciencies and reducing capital costs. In the near - term, advanced technologies that increase the power are being developed. In the generation efficiency for new plants and technologies to capture CO 2 cies and reduce both the energy and longer term, the goal is to increase energy plant efficien capital costs of CO capture and storage from new, advanced coal plants and existing plants. As 2 part of its nearly $6 billion commitment to clean coal technology, the Administration, partnered with industry, has already invested in four commercial scale and 24 industrial - scale CCS projects - that together will store more than 15 million metric tons through oilfield per year and , of CO 2 support production of more than 37.5 million barrels of oil per year. injection, will 37

39 Meeting the Challenge of the Transportation Sector P romis ing low - Renewables also must play an important role in the transportation sector. , electric vehicles , hydrogen, natural gas, and biofuels . The emission alternatives include hybrids , and will effective emissions from an electric vehicle depend on the source of electricity fall as ifferent fuels are likely to be relatively the electric power sector reduces its CO s. D emission 2 better suited for different needs, for example natural gas for busses and heavy - duty fleet vehicles and electricity for private vehicles in urban settings. But the transformation of the transportation sector i s in its infancy, so energy policy needs to support research and development of a wide range of advanced transportation fuel options. T means that their role in the transportation he convenience of high energy content liquid fuels sector could persist for decades. If so, renewable liquid fuels with a low GHG footprint would prove important for reducing the climate impact of the transportation sector. Already, the U.S. transportation sector uses ethanol, biodies el, renewable diesel, and lesser quantities of other renewable fuels. Ethanol is used as a replacement for MT B E to boost octane and is blended into nearly all of the U.S. gasoline supply as E10, which is 10 percent ethanol by volume. Demand for renewable t ransportation fuels is further supported by the Renewable Fuel Standard (RFS). To life percent qualify under the RFS as conventional renewable fuel, the fuel must achieve a 2 0 cycle GHG emissions reduction , relative to petroleum gasoline uthorizing the . The legislation a which was expanded under Renewable Fuel Standard, the Energy Independence and Security Act of 2007, envisioned conventional fuels such as corn ethanol to be transitional and, based on EIA projections at the time, these conventional renewable s would constitute a declining share of the total fuel consumption. As Figure 4 - 7 shows, blending of ethanol into E10 has already reduced the amount of petroleum in gasoline substantially. The long - term environmental goal of the RFS opment of advanced biofuels, which have life cycle GHG emissions is to support the devel reductions of at least 50 percent , and especially to support cellulosic biofuels ( w hich use feedstocks such as corn stover) with GHG emissions reductions of at least 60 percent . 7 - Figure 4 2040 - Gasoline and Diesel Fuel Consumption, 2000 U.S. Motor Million barrels per day 12 Actual Projected 10 Motor Gasoline 8 Petroleum Content 6 Diesel 4 Content Petroleum 2 0 2010 2020 2040 2030 2000 Source: EIA 38

40 Internati onal Leadership From 2005 to 2011 (the last year of data) , the United States reduced its total carbon pollution more than any other nation on Earth. The United States is further reducing its GHG emissions through improved energy efficiency, taking advantage of nonconventional natural gas as a energy sources, and regulation , nuclear, and clean coal transitional fuel, supporting renewable under the Clean Air Act. Nevertheless, curbing GHG emissions, like climate change, is ultimately challenge. The United States currently produces approximately 1 5 percent of an international - global carbon emissions, second to China (Figure 4 ). As the economies in the developing world 8 - as expand, their energy needs will increase, and business usual projections indicate that an - increasing share of GHG emissions will come from outside the United States and from the developing world in particular. Figure 4 - 8 - 2011 World Carbon Emissions, 1980 Billion Metric Tons 35 China Rest of Asia India Japan Rest of North America United States Rest of Europe Germany 30 Rest of South America Brazil Rest of Africa South Africa Rest of Eurasia Russia Iran Rest of the Middle East 25 Saudi Arabia 20 15 10 5 0 2000 2010 1980 1985 1990 1995 2005 Source: EIA While some might suggest that the growing international share of GHG emissions means that U.S. reductions are too small to matter, in fact the opposite is true. U.S. leadership is vital to the success of international negotiations to set meaningful reduction goals. This leadership is and demonstrated multifaceted. Through low - carbon technologies developed in the United (including nonconventional natural gas technologies), the United States can help the rest States of the world reduce its dependence on coal. The President’s initiative under the Climate Action for n Plan to lead efforts to eliminate international , coal plants conventional public financing ew will further help the except in the poorest countries without economically feasible alternatives, world move towards cleaner fuels for electric power. Investing in research in new technologies 39

41 such as carbon capture and storage for clean coal, natural gas, biomass co - firing, and advanced renewable liquid fuels pushes forward these frontiers, supports U.S. technology leadership in clean energy, and advances technologies that will provide global benefits. And by taking strong the second round of step s to reduce emissions at home, through new initiatives such as heavy duty vehicle fuel economy standards, programs to reduce methane emissions, and regulation of in a much stronger position emissions from fossil fuel fired generators, the Administration is CO 2 to secure similar commitments from other nations. The combination of these efforts is laying the foundation for a cleaner energy future that is economically efficient, upholds our responsibility to future generations, and provi des positive net economic benefits. 40

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