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CRA International: Managing the Risks of Greenhouse Gas Policies

Authors: Howard W. Pifer III, W. David Montgomery, Dean C. Maschoff, and Anne E. Smith
January 1, 2008

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Current concerns about global warming have led to several legislative proposals to limit emissions of greenhouse gases (GHG), primarily carbon dioxide. A number of analyses of these proposals and their impact on the electricity supply industry are available. However, CRA has found that recent analyses of these proposals do not provide strategic guidance for decision makers, especially those in the electricity supply industry.
In developing effective strategic responses, electricity generators need analyses and insights for several key questions:
1. What will be the expected cost per ton of carbon dioxide abatement over time?

2.What will be the costs to the economy and the electricity supply industry?

3.How will specific legislative proposals affect specific generators (and even specific assets)?

4.Can generators rely on energy efficiency initiatives and increases in electricity prices to reduce electricity demand sufficiently, and, if so, by how much?

5.Faced with the need to add new generation capacity now, what types of capacity should the electricity supply industry add in response to anticipated limits on carbon emissions?

6.How should existing generation portfolios be modified?

Answering these questions requires an integrated, market-based, analytical approach; one that specifies carbon policies explicitly and simultaneously considers the interrelated effects of carbon controls on economic growth, fuel prices, and the price of and demand for electricity. This analytical approach should not only examine big picture impacts on the economy and energy-intensive industries but also should allow a drill-down to support strategy development with market- and company-specific analyses.
This paper will briefly summarize and comment on the recent study by the consultancy McKinsey & Company to reduce GHG emissions,1 and then will outline an approach that CRA International (CRA) uses in working with our clients to develop strategic responses to carbon control legislation.

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