Congressional Budget Office
Douglas W. Elmendorf
Director’s Blog

CBO issued a study today examining possible future private investment in new nuclear power plants. The extent of such investment depends not only on possible charges for carbon dioxide (if the Congress adopts climate change legislation) but also on existing incentives provided for such plants in the Energy Policy Act (EPAct) of 2005.

The Energy Information Administration (EIA) projects that demand for electricity in the United States will increase by 20 percent by the end of the next decade. Most of the additional demand would likely be met by conventional fossil-fuel technologies without the incentives in EPAct or the prospects of a market price on carbon emissions.

• Carbon dioxide charges of about $45 per metric ton would probably make nuclear generation competitive with conventional fossil fuel technologies as a source of new capacity and could lead utilities to build new nuclear plants that would eventually replace existing coal power plants. At charges below that threshold, conventional gas technology would probably be a more economic source of baseload capacity than coal technology. Below about $5 per metric ton, conventional coal technology would probably be the lowest cost source of new capacity.
• EPAct incentives would probably make nuclear generation a competitive technology for limited additions to base-load capacity, even in the absence of carbon dioxide charges. However, because some of those incentives are backed by a fixed amount of funding, they would be diluted as the number of nuclear projects increased; consequently, CBO anticipates that only a few of the currently proposed plants would be built if utilities did not expect carbon dioxide charges to be imposed.
• Uncertainties about future construction costs or natural gas prices could deter investment in nuclear power. In particular, if construction costs for new nuclear power plants proved to be as high as the average cost of nuclear plants built in the 1970s and 1980s (adjusted for inflation), or if natural gas prices fell back to the levels seen in the 1990s, then new nuclear capacity would not be competitive, regardless of the incentives provided by EPAct. Such variations in construction or fuel costs would be less likely to deter investment in new nuclear capacity if investors anticipate a carbon dioxide charge, but those charges would probably have to exceed $80 per metric ton in order for nuclear technology to remain competitive under a scenario with high construction costs and low natural gas prices.

The study was written by Justin Falk of our Microeconomic Studies Division.

CBO released a study today on consumers’ responses to the substantial upward trend in gasoline prices that began in 2003.

Many drivers have responded to higher gasoline prices in the way that they drive, but overall the response has been very small.

• Freeway-driving motorists have adjusted to higher prices by making somewhat fewer trips and by driving somewhat more slowly.
  • CBO used data collected at a dozen metropolitan highway locations in California, along with data on gasoline prices in California, to identify changes in driving patterns: On weekdays in the study period, for every 50 cent increase in the price of gasoline, the number of freeway trips declined by about 0.7 percent in areas where rail transit is a nearby substitute for driving; transit ridership on the corresponding systems increased by a commensurate amount; and on weekends median speeds on uncongested freeways declined by about 0.75 miles per hour.

• After increasing steadily for more than 20 years, the market share of light trucks (including SUVs and minivans), relative to all new passenger vehicles, began to decline in 2004. As a result, the average fuel economy of new vehicles has increased by more than half a mile per gallon since 2004 (because light trucks tend to be less fuel efficient than cars). Stricter fuel economy standards for light trucks have also contributed to that increase

• Used-vehicle prices have shifted, reflecting changing demand, particularly with respect to fuel economy: The average prices for larger, less-fuel-efficient models have declined over the past five years as average prices for the most fuel efficient automobiles have risen.

• Total U.S. sales of midgrade and premium gasoline have declined gradually since 2000, even as consumption of the less expensive regular formulations has increased. Although consumption of the different grades of gasoline depends strongly on what kinds of vehicles consumers drive (and on manufacturers’ fuel octane recommendations for those vehicles), it also might have been influenced by the general increase in gasoline prices since 2003.

The study notes that the response of consumers to higher gasoline prices has important implications for policies that affect gasoline consumption, including CAFE (Corporate Average Fuel Economy) standards for cars and light trucks. Because higher gasoline prices increase the demand for vehicles with better fuel economy ratings, they reduce the economic costs (and fuel savings) of adopting more-stringent CAFE standards. At the same time, to the extent stricter CAFE standards improve fuel efficiency beyond what consumers would choose in the absence of such standards, they reduce the per-mile costs of driving — which would partially reverse some of the effects of higher gasoline prices discussed in this study. The federal tax on gasoline, by contrast, reinforces rather than neutralizes the behavioral and vehicle choice effects of higher gasoline prices. It also immediately affects all motorists’ incentives to reduce gasoline consumption, whereas CAFE standards primarily affect motorists only after they replace the vehicles they were driving at the time the standards were implemented.

David Austin, an economist in CBO’s Microeconomic Studies Division, wrote the report. In addition to his work on gas prices and CAFE, David has done research in the areas of liability policy and toxic emissions; Clean Air Act regulations; consumer benefits of new technologies; and allocation of emissions controls, and research and development in the pharmaceutical industry. He has been at CBO for six years; prior to that was at Resources for the Future for eight years. He received his undergraduate degree from Stanford University and his economics Ph.D. from UC Berkeley. He also has a master’s degree in statistics from Yale University. And he has an impressive track-and-field record, including a mile best of 4:19.