In its analysis of The American Power Act, a proposal to impose a carbon cap-and-trade system on most of the US economy, EIA said the plan, which was unveiled in May be Senators John Kerry, a Massachusetts Democrat, and Joseph Lieberman, a Connecticut Independent, would increase the need for new electricity capacity over the the next 25 years.

Electricity prices in most cases under the Kerry-Lieberman proposal would range from 9.4 to 9.8 cents/kWh in 2020, 4% to 9% above current projections, EIA said.

The draft bill would cap the power sector emissions starting in 2013 and would create an emissions allowance market to aid utilities' compliance. It sets reduction of 17% below 2005 levels by 2020, 42% by 2030 and 83% by 2050. Other industrial emission sources would also be subject to emission caps.

Regulated utilities or local distribution companies would receive a large share of free tradable emissions allowances while oil refineries would buy allowances linked to the market price.

"The analysis shows that the free allocation of allowances to electricity and natural gas distributors significantly dampens impacts on consumer electricity and natural gas prices prior to 2025, after which it starts to be phased out," EIA said.

By 2025, electricity prices under the Kerry-Lieberman approach could range from 12.1 cents to 14.5 cents -- 18% to 42% above current forecasts -- in most scenarios analyzed, EIA said.

"Average impacts on electricity prices in 2035 are substantially greater, reflecting both higher allowance prices and the phase-out of the free allocation of allowances to distributors between 2025 and 2030," EIA said.

The Kerry-Lieberman plan would not only force a change in the nation's electricity mix to lower-emission generation but also "significantly increase the total amount of new electric capacity that must be added between now and 2035," EIA said.

"This is due to the retirement of many existing coal-fired power plants that would otherwise continue to operate beyond 2035," the agency said.

But the Kerry-Lieberman plan may never be considered by lawmakers. Senate Majority Leader Harry Reid, a Nevada Democrat, said earlier this week that he he plans to bring a narrower energy and climate change bill -- one that only targets power sector carbon emissions -- to the full Senate at the end of July.

In terms of carbon dioxide allowance prices under the cap-and-trade system, the study found that prices would remain below the ceiling, reaching $32/mt in 2020 and $66/mt in 2035.

The calculation assumes the availability of low-cost emissions offsets as well as low- and no-carbon electricity generation technologies.

Prices could be higher or lower depending on more extreme scenarios involving offsets and technology costs, the study states.

The Kerry-Lieberman bill allows entities to buy a total of 2 billion mt of CO2-equivalent of offset credits each year, generated from GHG reduction projects at home and abroad, to meet compliance obligations.

Offset credits should put downward pressure on CO2 allowance prices, the study notes, as would technological breakthroughs for key low-emissions technologies, including nuclear, fossil fuels with carbon capture and sequestration, and renewable energy.

Regulated entities must hold allowances or offset credits to cover their past year's GHG emissions. Like in any cap-and-trade system, a carbon price is the key incentive for polluters to cut their emissions.

Estimates vary on the actual price level above which entities would reduce their pollution by slashing output or investing in cleaner technologies, but EIA's study did not address this matter.

A recent study by two Rice University researchers looked at the impact of carbon prices on coal-fired power plants, a major source of GHG emissions. The Rice study found that a carbon price of about $30/mt will close 10% of coal-generated capacity, while $45/mt would result in a 90% shutdown.

--Cathy Cash, cathy_cash@platts.com

--Geoffrey Craig, geoffrey_craig@platts.com