Climate and Energy Policies that Threaten Manufacturing Competitiveness Paul Cicio President Industrial Energy Consumers of America October, 2008

IECA- Testified Before Congress & Federal Energy Agencies (3) Climate policy (3) Increase domestic supply of natural gas (4) Excessive energy speculation (1) Industrial energy efficiency (2) Federal Energy Regulatory Commission (2) Commodity Futures Trading Commission

IECA Appointments  Department of Interior, Outer Continental Shelf Advisory Committee  Department of Energy, National Coal Council  Commodity Futures Trading Commission, Energy Market Oversight Committee  Department of Energy, Ulta Deep Drilling Advisory Committee

Who Are Energy Price Sensitive Industries? Commercial & Consumer Products  Food Production  Detergents  Automobiles  Computers  Construction  Medical Supplies  Paint  Pharmaceuticals  Cosmetics  Telecommunication Convert to Building Block Industries  Chemicals  Plastics  Fertilizer  Glass / ceramics  Brick  Steel  Aluminum  Pulp and Paper  Cement  Food Processing

Energy Competitiveness Issues  Climate change mandates  Supply of natural gas / exports of LNG  Power sector demand for natural gas  Excessive energy speculation  T. Boone Pickens - Financial incentives for use of natural gas in motor vehicles  Electricity decoupling

Natural Gas Production (Volumes in Trillion Cubic Feet) Difference Dry Production % Source: EIA

Natural Gas Production-2008 (Volumes in Trillion Cubic Feet) JanFebMarAprMayJuneJuly Dry Production Source: EIA

Natural Gas Consumption by End Use (TCF) Difference Total Consumption % Residential % Commercial % Industrial % Electric Power % Source: EIA

Great Concern- Continued Increased Use of Natural Gas by Power Sector  It raises the price of both natural gas and electricity for all consumers  Natural gas fired power is increasingly setting the marginal price for electricity  For the next 10 years or so, there is no other short term low-carbon fuel other than natural gas

Electric Power Research Institute “Even though natural gas is used to produce only 20 percent of the electricity, it accounts for 55% of the electric industry’s entire fuel expense ($50B out of $91B).”

Relationship of High Natural Gas Prices to Lost Manufacturing Jobs % Employment (MM) % Natural Gas Wholesale Price ($ per MCF) % Natural Gas Consumption (TCF) %

Lost Manufacturing Jobs  YTD 2008 losses are 344,000

US manufacturing is already under siege by energy intensive imports  Analyzed sixteen energy intensive product categories under the “Industrial Supplies and Materials” of the U.S. Census Bureau  Imports from 2000 to 2003 were about unchanged while imports from 2003 to 2007 rose a staggering 78.3%. Imports rose from $87.3 billion in 2003 to $155.7 billion in  Timing is consistent with rise in US natural gas price

Planned Nameplate Capacity Additions from New Generation (MW) Energy Source Coal Petroleum Natural Gas Other gases Nuclear000 Hydro834 Other Renewable Total Source: EIA

Existing Electricity Generation Capacity 2006 (MW)- Would Consume 22 TCF Energy SourceNameplate Capacity Coal335,830 Petroleum 64,318 Natural Gas442,945 Other Gases 2,563 Nuclear105,585 Hydro 77,419 Other Renewable 26,470 Pumped Storage 19,569 Other 976 Total1,075,677 Source: EIA

Climate Change Mandates

Climate Change Policies are Complex Climate change is an environmental issue…but the policies to deal with it are energy, trade and economic policy issues.

Climate Change Regulations The single most important issue that the manufacturing sector has ever faced.  Will determine manufacturing’s competitiveness for years to come.  Unfortunately, the US Congress, key states and many countries are focused only on “cap & trade” as the policy of choice.

Difference Residential % Commercial % Industrial < 0% Transportation % Electricity % Total Carbon Dioxide Emission (Million Metric Tons of Carbon Dioxide) Source: EIA

Energy Purchasing Managers  Carbon management is an essential element to managing total energy cost risk.  Understanding carbon regulation and management options is now a competitive advantage for companies.

Climate Change Regulations What will it cost my company?

Calculate Your Cost Increase. CO2 Allowance Prices CO2 Allowance Price $40$50$75$100 Gasoline/gallon Natural Gas/MCF Short Ton Bituminous Coal Sub-bituminous Coal Anthricite Coal Source: EIA

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

Cap & Trade – Impacts energy prices in four ways  It increases the cost of energy when the price of carbon is added.  Increases natural gas costs by increasing demand.  Compliance costs. (Management of ghg accounting; offsets; third party verification)

Cap & Trade – Distorts Markets It will impact relative competitiveness between:  Companies in your business.  Companies in the same sector and other competing products.  US industry and imported products that is not equally regulated.

Cap & Trade- Requires Absolute Reduction  Energy efficiency improvements do not result in absolute ghg reductions. Key Question: Can you reduce absolute ghg emissions if your production of steel is increasing?

Cap & Trade- Other issues  There is no effective border adjustment policy.  No reward for past energy efficiency.  Capital spending will be centered on compliance deadlines.  Must compete with electric utilities to purchase carbon allowances.

Alternative Policy Options  Carbon tax Sector Approaches:  Energy efficiency improvement mandates  GHG intensity improvement mandates  Best available technology (BAT)  Some combination of above policy coupled with tax incentives to speed capital stock turnover

Alternative Policy Options IECA favors these alternatives.  Greater transparency and predictability  Carbon tax is border adjustable to deal with imports  Lower costs to reduce ghg emissions  More consistent with how and when we spend capital  Less energy and product market distortions

Call to Action ! Paul N. Cicio President Industrial Energy Consumers of America