Industrial Energy Intensiveness and Energy Costs
in the Context of Climate Change Policy

Bernard A. Gelb
Specialist in Industry Economics
Economics Division

November, 21, 1997

Summary

International negotiations are under way regarding measures to stabilize concentrations of atmospheric "greenhouse gases" in order to forestall feared changes in the global climate. In late October, President Clinton announced the U.S. negotiating position. Inasmuch as the burning of fossil fuels produces greenhouse gases, the issue of how stabilization measures would affect major energy-using industries is raised. As shown in this report, the amount, cost, and mix of energy sources used vary widely even among U.S. energy-intensive industries, suggesting a wide range of potential effects.

The Policy Context ¹

There is concern that human activities affect the energy-exchange balance between Earth, the atmosphere, and space, inducing changes in the global climate. Possible results could be seen as both positive and negative. The burning of fossil fuels in particular has increased the amount of carbon dioxide (C02) and other gases in the atmosphere. If these gases continue to accumulate at current rates, global warming could occur through intensification of the natural "greenhouse effect" that makes the Earth's climate habitable. Such warming could affect agriculture, forestry, and water resources, and, under certain scenarios, lead to rising or falling sea levels depending upon climate system responses.

Policy options to curb emissions stress energy efficiency and conservation, tree planting to offset atmospheric C02, market-oriented strategies such as carbon taxes, and substituting nuclear and renewable energy and less C02-intensive fossil fuels. But there are scientific uncertainties regarding the magnitude, timing, rate, and regional effects of the potential climatic change. Given the uncertainties and the potential unevenness of impacts, there is disagreement about what are the appropriate policy responses.

President Clinton announced on October 22, 1997, the U.S. negotiating position for the December 1997 meeting of the Framework Convention on Climate Change in Kyoto, Japan. The U.S. would commit to reducing its greenhouse gas emissions to 1990 levels by the year 2012, and cut them further in the next 5 years. Decreases would be effected through (I) $5 billion in tax cuts and spending on research and development in new technologies over five years, (2) consulting with and rewards to industries for near-term actions, (3) restructuring the electric utility industry (raising energy efficiency in electricity generation), and (4) joint implementation projects in which emission reduction credits would be shared between countries with "emission budgets" and those without, and (5) domestic and international emissions trading, to begin after 0 years. Only with developing nation participation (in the future) would the commitment become effective.

Many in U.S. business and some in labor contend that the proposal will raise energy prices, slow economic growth, and cost jobs. Some environmental groups say the proposal is insufficient, putting the world at risk of serious environmental dislocations. Other countries have proposed greater and faster emission reductions. Congress would have to ratify any treaty and fund any federal spending, but there is concern about economic effects and possible U.S. action in the absence of action by developing nations.

The possibility of reducing greenhouse gas emissions by taxation or other measures raises the issue of how energy-using industries would be affected. Removing greenhouse gases after combustion imposes severe technical difficulties and cost penalties. Industry and commercial transportation account for about half of U.S. CO2 emissions from fossil energy consumption. Such emissions by U.S. industry rose 19% between 1986 and 1996.

The Data and Comparisons

This report presents and briefly analyzes data on the amount, cost, and distribution by source of energy used by a number of U.S. energy-intensive sectors and "industries." While the report does not analyze how measures to reduce greenhouse gas emissions would affect particular industries, it indirectly provides guidance. The levels of detail for the sectors or industries included differs, with some industries constituting components of industry groups or sectors. Because energy materials used as raw materials do not undergo combustion, they are excluded from the energy measures shown. However, energy from "fuel" produced and consumed in the same establishment, such as byproducts and waste, is included inasmuch as its combustion produces greenhouse gas emissions.

Energy-intensiveness varies widely even among sectors and industries selected for energy-intensiveness. For example, energy use for heat and power ranged from 6,900 Btu ² per dollar of value added for food and kindred product manufacturing in 1994 to 46,300 Btu for commercial air transportation (Table 1). For ease of comparison, the industry groups and sectors presented in this report are ranked by ratio of energy outlays to value of shipments or revenues in Table 2. The data also show that energy producing industries also use energy intensively; coal mining and oil and natural gas extraction are more energy intensive than the average manufacturing industry.

TABLE 1. Energy Intensiveness and Relative Energy Costs of Selected Major Energy-Using Sectors and Industries, 1994

The effect on an industry's costs relative to its prices is a major criterion for judging the effect of emission reduction measures. An indication of the importance of energy in an industry's cost structure, and in the prices it charges for its products, is the ratio of energy outlays to value of shipments or revenues (Table 1)³. Affected by the relative cost of the energy source(s) it uses most and the value of its products, an industry's energy cost ratio relative to those of other industries may well differ markedly from its relative energy intensiveness in Btu per dollar of value added. Cement manufacturers are 12% more energy intensive than paperboard mills, but their energy cost ratio is about 100% greater. The latter is one of the industries that obtains large amounts of energy from materials produced on site, such as byproducts and waste materials, which they do not buy per se.

Because different energy sources yield different levels of C02 and other greenhouse gas emissions per unit of energy, differences in energy source mix also are relevant. Thus, although energy-intensiveness is nearly the same for paper and for steel mills, the latter

TABLE 2: Selected Major Energy-Using Industry Groups and Industries Ranked by Energy Intensiveness, 1994

are apt to be affected more by C02 emission reduction measures inasmuch as 38% of steel mills' energy is obtained from coal compared with 15% for paper. The Energy Information Administration (ETA), U.S. Department of Energy, estimates that full combustion of coal yields about 26 metric tons of carbon per billion Btu; most petroleum products yield 19 to 211/2 tons; and natural gas yields about 14 metric tons. The ETA does not include biofuel emissions in its estimates of C02 emissions. Because the carbon in biofuels such as wood waste was absorbed from the atmosphere during their formation, carbon emitted during their combustion does not constitute a change in the overall carbon budget in the long run. This report has included the heat content of these materials inasmuch as it is not determined how an international treaty will treat their emissions.⁴

TABLE 3. Distribution of Energy for Heat and Power by Energy Type,
Selected Major Energy-Using Industry Groups and industries, 1994 (percent of total)

Sources: Same as in table 1. Descriptions of industries and of energy use apply as in Table 1.

E - Estimated by author.
* Less than 0.05 percent. or zero
a Includes coke and breeze.
b In mining. includes fuels not specified by kind, In manufacturing. includes fuel produced and consumed in the same establishment. including waste. and byproducts.
c Data are for 1992.
d Data are for 1996.
e Nuclear and hydropower.
f Geothermal, wood, waste, wind, photovoltaic, and solar thermal energy

ENDNOTES:

1 A substantial portion of this section is taken from CR5 Issue Brief 89005, Global Climate Change, which should be consulted for more extensive coverage of global climate change issues.

2 A British thermal unit (Btu) is the heat needed to raise the temperature of a pound of water one degree Fahrenheit.

3 An industry's value of shipments or revenues is the aggregate price of its products, which includes any profit. These measures are appropriate as proxies for total costs because that portion of price accounted for by profit can be considered an opportunity cost, more or less what the capital invested would yield in another endeavor or in a financial instrument.

4 See EIA. Emissions of Greenhouse Gases in the United States 1996. Washington, DC, October 1997