Potential Directions for Federal Energy Efficiency Legislation
February 26, 2013 - 7:58 pm

By R. Neal Elliott, Associate Director for Research

Today I have the privilege of testifying before the House Energy and Commerce Committee. My hope is that this is the beginning of a discussion that will lead to federal energy efficiency legislation later this year. Congress has a unique opportunity to strengthen our economy through energy efficiency, save the nation millions of dollars, and curb pollution. My testimony will illustrate the powerful benefits of this essential energy resource and discuss five areas of potential legislative action.

Appliance and equipment standards have been one of the greatest energy efficiency policy success stories of the last quarter-century. These standards have resulted in cumulative energy savings since 1987 of 3.4 quads in 2010, with the net present value of consumer savings from standards already in place set to save about $1.1 trillion through 2035.

Building energy codes are universally recognized as the easiest and most cost-effective way to help consumers save energy and money, making housing more affordable and reducing air pollution. DOE provides technical assistance to consumers and also assists states that are considering adopting these codes. We recommend that DOE set energy savings goals for model codes and expand its work to encourage and assist states to adopt and successfully implement these codes.

Building labeling and disclosure informs consumers so that they can make sound choices. Providing information about energy use in buildings, whether they are homes or commercial spaces, would not only allow consumers to make economically sound choices about ownership costs, but would also encourage investments that improve the energy efficiency of existing and new buildings.

A trained workforce is critical to the success of energy efficiency. Presently DOE has a very successful program, the Industrial Assessment Centers (IAC), to help train new energy efficiency engineers by working with university professors and their students to conduct energy audits of small to medium-sized manufacturing facilities. This program has been successfully operated since 1976. ACEEE has proposed expanding the IAC program in both size and scope to better meet the workforce and energy assessment needs of U.S. manufacturers. This program should also be expanded beyond the training of industrial engineers to include building engineers as well. ACEEE has developed a proposal, which we detailed in a conference paper in 2010.

Until recently, energy use in the industrial sector has received little policy attention. This situation has changed with the signing last August of President Obama’s executive order on industrial energy efficiency and combined heat and power plus the inclusion of manufacturing provisions in American Energy Manufacturing Technical Corrections Act of 2012 (H.R. 6582), which was enacted last December. We recommend three areas for action:

  • Future of Industry: The industrial program at DOE has been the leading federal program focused on manufacturing and among the most successful federal research and deployment programs. This program, now renamed the Advanced Manufacturing Office (AMO), has unfortunately experienced a lack of leadership for over a decade. To help get this important program back on track, we suggest that an industrial technologies steering committee be created to build a strong working relationship between AMO and stakeholders, and AMO efforts should focus on an even mix of research and development and deployment programs that are responsive to the needs of the manufacturing sector.
  • Smart Manufacturing: Opportunities in industrial energy efficiency will come increasingly from the application of “intelligence” in manufacturing systems, as we discussed in our 2012 report on long-term energy efficiency trends. These developments are referred to as Smart Manufacturing. We suggest that a smart manufacturing program be established at DOE and that the program focus on developing the infrastructure needed to enable smart manufacturing across the country.
  • Energy Efficiency in Supply Chains: There is a growing consensus in the manufacturing community that it is important to deal with supply chain issues. Companies that are successful in making their supply chain more efficient would be rewarded with the Supply Star label, thus helping consumers make more informed purchasing decisions.

In addition to these topics, other witnesses will be talking about important potential areas of policy action including combined heat and power and energy efficiency in federal facilities.

It is exciting to consider the prospect of energy efficiency legislation in this new Congress.  I am encouraged that there is hope, particularly since the committee has taken the unusual step of inviting Senators Murkowski and Shaheen, both strong supporters of energy efficiency, to testify at the same hearing. This overture suggests perhaps that both houses of Congress are prepared to work together to help realize the opportunities that would result from greater energy efficiency.

Capitalizing on Where Water and Energy Meet
February 16, 2013 - 12:29 am

By Rachel Young, Senior Research Analyst, National Policy

Cross-posted from the blog of the U.S. Green Building Council, Northern California Chapter

The President’s inauguration speech sparked renewed dialogue about the need for a comprehensive energy plan to address climate change. Recent decreases in lake levels in Texas is causing the city of Wichita Falls to look for new ways to stabilize their water supplies. Frequently missing from both of these discussions is the inherent relationship between water and energy.  This relationship should be capitalized on when crafting programs and policies aimed at solving these tough issues at the national and municipal level.

Energy is needed to transport, treat, heat, cool, and recycle water and, conversely, water is needed in energy extraction, production, and processing. As a result, saving water saves energy and saving energy saves water. This overlap between energy and water has come to be known as the “energy-water nexus.” Recognizing and taking advantage of the energy-water nexus is beneficial to both the energy and water communities because when they coordinate they can simultaneously reduce consumption of these two resources through accounting for those embedded savings.

Saving electricity at the end-use (customer) level saves water because it avoids additional baseload electricity generation and water required for that generation process. The U.S. Geological Survey estimates thermoelectric-power withdrawals account for 49 percent of total water use and 53 percent of fresh surface-water withdrawals; an average of 23 gallons of water used per kilowatt-hour. This is a large amount of water saving potential that could be captured simply through increased energy efficiency.

In addition, reducing the use of all fossil fuels also saves water needed for resource extraction, production, processing, etc. The recent increase in hydraulic fracturing (“fracking”) to access natural gas has brought a significant amount of attention to the impacts natural gas extraction has on water. Fracking uses large volumes of pressurized water to create fractures in the rock layer and releases the natural gas. Furthermore, some observers are also worried about underground water pollution from gas leaks during fracking. Despite these concerns, little attention has been given to the fact that if we utilize natural gas and electricity generated by natural gas more efficiently we not only reduce energy consumption and extend the life of our domestic natural gas resources, but we also save significant amounts of water and potential pollution of water sources.

Saving water at the end-use (customer) level and throughout the distribution system can save energy because it reduces the energy needed for water withdrawal, transportation, and treatment. Water supply and wastewater treatment are often provided by municipal governments and the energy required for these services is one of the largest energy expenditures for a local government, according to the Environmental Protection Agency. Increasing water efficiency can greatly reduce operating costs for local governments. Without proper water-energy nexus planning in government and in the private sector, embedded savings can go unnoticed or uncalculated and the full benefits of efficiency are underestimated.

Energy and water utilities have worked together to implement efficiency measures that save both energy and water (e.g., efficient clothes washers and better cooling towers), but experience has been limited. In addition to expanded cooperation between the water and energy sectors, utilities can undertake numerous other activities to promote demand-side reductions at the residential and commercial level, such as offering education and outreach programs, combined energy and water audits, energy and water efficiency kits, and rebate and installation programs. However, in order to reach greater, more sustained dual savings, utilities, policymakers, and the private sector should focus on creating programs that implant the energy-water nexus into their operation and planning.

Programs that work collaboratively to reduce energy and water often involve partnerships among government, utilities, and companies. These collaborations can be challenging, but they are ultimately mutually beneficial and can result in enhanced outreach capabilities and customer contacts, increased staff, and financial resources, and a greater body of knowledge to draw from. 

ACEEE and Alliance for Water Efficiency (AWE) recently released a report, titled Tackling the Nexus: Exemplary Programs that Save Both Energy and Water, detailing some of the exemplary programs that save both energy and water. The successful programs profiled in the report, and also in the ACEEE online Water-Energy Directory, help highlight the value of the energy-water nexus and designing innovative energy-water efficiency programs.

Rachel Young will be presenting at the 10th Annual Water Conservation Showcase, March 19, 2013 at the Pacific Energy Center. The event is free to attend, and you can register and learn more at

President Obama’s Commitment Lights the Way to a Cheaper, Cleaner Energy Future
February 13, 2013 - 8:18 pm

By Steven Nadel , Executive Director

Last night during his State of the Union address President Obama embraced a variety of policy proposals including several addressing energy efficiency. Most importantly for energy efficiency, the President issued “a new goal for America: let’s cut in half the energy wasted by our homes and businesses over the next twenty years.” By supporting energy efficiency, the President has made a smart investment that will pay off immediately and down the line for future generations. There’s a good reason why energy efficiency has broad support among business and legislators across the aisle, it’s one of the great cost saving success stories for the nation in the last three decades and still has large untapped potential.

To help achieve this goal the President noted that “states with the best ideas to create jobs and lower energy bills by constructing more efficient buildings will receive federal support to help make it happen.”  In supplementary material, the White House discusses “race to the top” awards in which states compete “to implement effective policies to increase energy efficiency and help reduce waste.” At ACEEE, we released a study; last year showing that such a goal is achievable and what it might require. The President also discussed tax reform in his speech.  We urge the President and Congress to include several tax reforms we’ve suggested as a vehicle for increasing the nation’s energy efficiency; not only do they save money and create jobs, but they also pay for themselves.  

The inspiring goal President Obama has set clearly indicates that he understands the importance of energy efficiency, and that he is committed to pursuing both administrative and legislative steps to tap this essential resource that will save the nation billions, create domestic jobs and reduce harmful pollution. We applaud Obama’s initiative and look forward to working with the Administration and Congress to achieve the President’s goal.

New Report Finds Utilities Don't Need a Free Lunch, a Cup of Coffee Will Do
February 07, 2013 - 4:00 am

By Sara Hayes, Sr. Manager and Researcher, Air and Climate Policy

Energy efficiency is good for the environment, electric reliability, and customers’ pocketbooks, and yet some utilities continue to balk. A new report on decoupling shows that utilities can collect revenues lost due to energy efficiency measures without harming customers. First, a bit of background is helpful….

The bulk of most people’s energy bills is based on the volume of electricity or gas they buy. In most cases, that volume—in kilowatt hours (kwh) or therms—is multiplied by an electric or gas rate. Energy efficiency helps customers to reduce the kwh or therms they need to operate their homes and businesses, reducing their utility bills.

Meanwhile, most utilities have shareholders and with that comes an obligation to try and make a profit. One can quickly see how reducing customers’ consumption might be at odds with utilities that want to sell more product. Since utilities often implement and fund energy efficiency programs, this isn’t good news for saving energy. 

Fortunately, regulators can take action to properly align utility financial incentives so that energy efficiency doesn’t hurt the utility’s bottom line. These policies include program cost recovery, performance incentives, and decoupling. ACEEE refers to this combination of policies as the “three legged stool.” Implementing all three of these policy solutions creates a balanced approach that aligns the financial interests of a utility and utility shareholders with the interests of utility customers. Aligning these multiple interests helps the utility evolve from a power generator to a more dynamic and diversified energy services provider, able to meet the needs of customers and succeed in a competitive financial market.   

These policies have now been implemented by a majority of states, many of which have decades of experience. Almost every state allows utilities to collect back the money they invest in energy efficiency. Twenty-eight states allow performance incentives for natural gas utilities, electric utilities or both, and twenty-five states currently allow decoupling for natural gas utilities, electric utilities, or both.

Decoupling works by allowing a utility to adjust its rates so that it doesn’t experience a shortfall in revenues needed to cover fixed costs if its energy efficiency programs result in significant savings. Decoupling may require a utility to return an over-collection or windfall, or it may allow the utility to adjust rates upward and recover a shortfall. A new report looked closely at the financial impacts decoupling policies might have on customers. The report, by Pamela Lesh, a former utility executive and author of earlier definitive research on decoupling, looked at over 1,200 such rate adjustments between 2005 and 2012 to see how the policies were impacting customers’ bills. The author found that most rate adjustments made as part of a traditional decoupling policy have been very small—changing customers’ bills by plus or minus two percent. Two percent of an average American utility bill amounts to about $2.30 per month for electricity and about $1.40 per month for natural gas.

That’s less than a cup of coffee. Since these adjustments go both ways, some months customers will pay a little bit extra and other months they will pay a little less. There are no free lunches, but a free cup of coffee now and then isn’t so bad.  

Lost Savings from Obama’s Delay on New Energy-Saving Standards Is $3.7 Billion and Counting
January 31, 2013 - 8:31 pm

By Andrew deLaski, Executive Director, Appliance Standards Awareness Project (ASAP)

In his Inaugural Speech last week, President Obama described action to limit climate change as both a moral imperative and smart economic policy. Calling for American leadership, he said, “We cannot cede to other nations the technology that will power new jobs and new industries—we must claim its promise.”

Unfortunately, of late, the administration has failed to lead in one area that is firmly in the President’s hands: saving energy and cutting pollution through improved appliance and equipment energy-efficiency standards.

Over the past two years, the administration has missed deadline after deadline for completing new or updated standards for products ranging from microwave ovens to commercial refrigerators to industrial motors. These delays impose a steep cost. 

In a new analysis completed this week by ASAP and ACEEE, we found that the delays to date for eight overdue standards will result in about 40 million metric tons of excess carbon dioxide emissions.  Consumers and businesses will also lose—about $3.7 billion so far.

Our analysis shows that each additional month of delay means consumers and businesses will lose another $300 million in savings and another 4.4 million metric tons of CO2 will be loaded into the atmosphere. Based on EPA’s climate change calculator, that’s like needlessly burning 19,000 rail cars of coal each month.

Efficiency standards save consumers and businesses money by ensuring that cost-effective technological improvements become the norm in new products. Raising standards spurs innovation as manufacturers 1) strive to both provide products meeting new standards at the lowest possible cost, and 2) stretch to differentiate profitable new super-efficient products that exceed the new minimum. 

The cost of delayed standards adds up quickly. Each month of delay means millions of needlessly inefficient products will be sold. Some of these products have very long lifespans, so unnecessarily inefficient products will be wasting energy for years to come.

So, why the delay? 

The Department of Energy (DOE) is responsible for developing new and updated standards. But, at least some of the blame lies with the White House’s Office of Management and Budget, the OMB. Within OMB lies the Office of Information and Regulatory Affairs (OIRA), charged with reviewing all significant new rules. OIRA takes pride in ensuring that the benefits of new regulations exceed their costs. The former chief of OIRA, Cass Sunstein, who left the office in August, has been touting appliance standards as an example of smart regulations for which “the monetary benefits dwarf the costs.”

Despite Mr. Sunstein’s praise, OIRA has been a roadblock. According to OIRA’s website, it has been reviewing some of DOE’s appliance standards for a year or more. It gets worse. A Freedom of Information Act request filed by the Natural Resources Defense Council (NRDC) in 2012 revealed that several standards had been sent to the White House for review months before OIRA publicly acknowledged receiving them. Not surprisingly, OIRA logged the rules as received soon after NRDC requested the records.

The glacial pace of review at OIRA has had a cascading effect on other important efficiency standards.  With at least five new standards already stuck at OMB, DOE is now falling behind on other important standards.

It wasn’t always this way. Soon after taking office in 2009, President Obama declared that the Administration would prioritize new efficiency standards. He announced historic new standards for commercial lighting products just a few months later. DOE Secretary Steven Chu has been a vocal and engaged proponent of improved standards. Under his leadership, DOE fulfilled a 2006 court order to catch up on 22 overdue standards dating from prior administrations.

As we showed in a report last March, standards completed between 2009 and 2011 will save consumers and business about $77 billion. These standards will reduce annual U.S. electricity use by about 125 billion kilowatt hours (kWh) by 2025, growing to an annual rate of nearly 150 billion kWh by 2035. For the sake of comparison, all the homes and businesses in Colorado use about 50 billion kWh per year. 

But much more can be done. Potential new or updated standards could cover about 30 products, including the eight which are overdue. These standards could reduce U.S. annual electricity use by another 200 billion kWh in 2025, growing to an annual rate of nearly 300 billion kWh by 2035, while saving consumers more than $150 billion. For the climate, those savings translate into nearly 100 million metric tons less CO2 emitted in 2025 and 150 million less in 2035. Using EPA’s calculator again, those emissions are equal to the annual output of more than 30 million passenger vehicles.

Those are big savings that will make a meaningful contribution to reducing energy bills and addressing the climate change threat. But, unless the backlog of overdue standards can be cleared, those savings are out of reach.

For President Obama, leadership should start by taking actions firmly in his control. Whatever the reasons for the missed deadlines—bureaucratic bungling at OIRA, political expedience during an election year or just administrative drift—it’s time for President Obama to put a stop to the delays. 

Tapping the Abundant Reserves of Domestic Energy Efficiency Through Innovative Programs
January 17, 2013 - 8:41 pm

By Dan York, Utilities, State, and Local Policy Program Fellow

The impact that hydraulic fracturing, or fracking, has had on the energy picture in the U.S. has been profound. Natural gas prices have plummeted. Supplies have increased sharply. The long-term outlook for natural gas is a radical departure from historic trends, with apparently abundant supplies and low costs forecast, rather than scarcity and high prices. It’s no wonder that natural gas fracking has overshadowed almost all other energy news of the past year. But it’s not the only energy story of importance.

Over the past decade, many states have established policies intended to push the envelope of what is possible through improved energy efficiency to lower energy costs, improve the environment, and promote economic development. A primary means to achieve these objectives has been energy efficiency programs serving electric and natural gas customers. With over three decades of experience in some states, these programs have reaped tremendous energy savings over the years.

This past success has been the driver behind state policies that have set high savings targets for these programs. The energy efficiency envelope has been pushed from a number of other policy directions. Higher appliance and equipment standards are in place for an ever wider range of consumer and business products. Numerous states are strengthening building codes that greatly increase minimum energy performance of new homes and commercial buildings. The rapid advance of data, communications, and controls technologies is creating new potential for “smart” technologies, appliances, and customer applications affecting energy use,

The confluence of all these dynamic forces driving energy efficiency higher raises a fundamental question: “Are we reaching the limits of energy efficiency?” ACEEE has just published research that answers a resounding No! to this question. Our report, Frontiers of Energy Efficiency: Next Generation Programs Reach for High Savings, examines how “next generation” programs are responding to the challenge of achieving high savings amidst dynamic and rapidly changing policy, program, and market environments. Programs are drawing upon a wide set of innovations in technologies, marketing, and program designs to push the frontiers of energy efficiency.

Our research reveals a highly engaged and motivated community of professionals involved in all aspects of energy efficiency technologies and programs, a community that is pushing the frontiers of energy efficiency in multiple directions, heading wherever there are opportunities to advance. I can’t help but draw the analogy to fracking—in the case of energy efficiency, though, fracking means using innovation to open up new markets and new opportunities for cost-effective savings. These next generation programs are a great tool that will help us revisit existing pools of resources and apply new methods to extract greater savings. 

Why DOE's Cave on Furnace Standards Is Such a Big Deal
January 15, 2013 - 11:56 pm

By Andrew deLaski, Executive Director, Appliance Standards Awareness Project (ASAP)

In a dose of bad news yesterday, the [no-glossary]U.S. Department of Energy (DOE)[/no-glossary] proposed to settle a lawsuit brought by the American Public Gas Association (APGA) that seeks to roll back gas [no-glossary]furnace[/no-glossary] efficiency standards. As a result, the new standards, completed in 2011 and slated to take effect this May, would be eliminated in favor of yet another round of DOE hearings and studies. The losers: consumers and the environment. The bill: more than $10 billion in lost savings and an extra 80 to 130 million metric tons of completely unnecessary [no-glossary]global warming[/no-glossary] emissions, according to DOE’s analysis.

With new evidence piling up confirming that we need to be seriously ramping up efforts to stave off the worst effects of climate change, now is a lousy time to go backwards on simple steps like improved home heating energy efficiency. Space heating remains the single largest home energy use. The standards would have required that gas furnaces installed in the northern half of the country reach 90% or better efficiency. Today’s basic furnaces have an efficiency of just 80%, so the standards would have yielded about 11% savings for consumers.

DOE based the new standards on a compromise struck between efficiency supporters (including consumer groups and environmental advocates) and furnace manufacturers. Some gas utilities, especially in the northernmost states, supported the standards, while others were less enthralled. The nation’s investor-owned gas utilities, represented by the American Gas Association (AGA), were concerned that some consumers might face high incremental costs to install 90% or better furnaces. Together, AGA, the Natural Resources Defense Council, the American Council for an Energy-Efficient Economy, the Appliance Standards Awareness Project, the Alliance to Save Energy, and others developed a proposal to allow exemptions in those rare cases where a consumer might face extraordinary costs to install a high-efficiency furnace compared to an 80% efficient unit. This proposal satisfied AGA, which decided it could live with the new standards.

But APGA could not be satisfied. They argued that consumers would flock to electric resistance furnaces rather than install high-efficiency gas furnaces. However, electric resistance furnaces have a smidgen of current market share (about 5% according to the Energy Information Administration) and given the huge (and improving) operating cost advantage for gas over electric furnaces, no homeowner or landlord in their right mind would install an electric furnace to replace gas heating.

The proposed DOE-APGA settlement document does not provide any clues as to why DOE caved. DOE had built a strong record supporting the new standards, finding them to be solidly cost-effective for consumers and had refuted claims about exorbitant incremental costs and fuel-switching risks. The standard’s main vulnerability concerned the process by which DOE adopted the final rule rather than its substance. The 2007 energy law created a new process allowing for “direct final rules” when diverse parties provide a consensus recommendation. Unfortunately, APGA’s vocal objections to the “consensus” may have spooked DOE, raising concerns that a court would overturn the rule.

A new furnace rulemaking would be the latest chapter in a tortuous history. By law, the revised furnace standard was due in 1994 and should have taken effect in 2002. But DOE botched its first attempt for a new standard in 2007, and now with this proposed settlement, it looks unlikely that new furnace standards will take effect until sometime after 2020, almost twenty years late. That’s no way to make saving energy a priority.

Harvey Sachs of ACEEE and Joanna Mauer and Marianne DiMascio of ASAP contributed to this blog.

Efficiency Tax Credits Are Back Just in Time
January 10, 2013 - 10:45 pm

By Rachel Young, Senior Research Analyst, National Policy

Just in time for tax season, Congress has given American homeowners and businesses a chance to keep a little more of their hard-earned money. Late on January 1, 2013, the “fiscal cliff showdown” ended with the House passing a bill to avert income tax increases for Americans and large cuts in spending for government programs. What many might not have noticed is that the bill, titled the American Taxpayer Relief Act of 2012, includes extensions for energy efficiency tax incentives that had expired at the end of 2011.

The bill extends tax credits for energy efficiency upgrades to existing homes, including purchases made in 2012 and 2013. These residential tax credits cover up to 10% of the cost for energy-efficient new central air conditioners, heat pumps, water heaters, windows, insulation, ENERGY STAR metal roofs, and other products. These credits are available for products and upgrades that meet minimum efficiency levels. The credit is capped at $50–500 depending on the type of equipment installed.

Businesses also benefit from this tax extension. Home builders who construct new energy-efficient homes and appliance manufacturers who increase production of very efficient refrigerators, clothes washers, and dishwashers can earn tax credits. The Tax Incentives Assistance Project (TIAP) website has more information on how to qualify for each of these credits.

There were also a few changes to the tax credits. For new homes, the baseline was revised to the 2006 International Energy Conservation Code, instead of the 2003 Code, which increases the energy savings per home by a modest amount. For dishwashers and clothes washers, the least stringent efficiency tiers were dropped—only higher efficiency equipment is eligible.

Tax season is looming and these extended tax incentives will provide some relief to consumers and businesses that invested in efficiency improvements in 2012 and plan to invest in 2013.

Beyond 2013, the outlook is unclear but at a recent Senate Finance Committee hearing on energy efficiency tax incentives, multiple Senators expressed support for continuing some type of incentives. They stipulated that qualification levels should be regularly revised so that only the most efficient products are eligible for credit. If the incentives are renewed for 2014 and beyond, we expect many of the qualification levels to increase. As ACEEE Executive Director Steve Nadel testified during this hearing, future credit extensions will help advance long-term energy savings and give some assistance to businesses and consumers, all while minimizing the cost to government. 

Harnessing Energy Efficiency to Overcome a Bleak World Energy Outlook
December 20, 2012 - 8:22 pm

By Sara Hayes, Sr. Manager and Researcher, Air and Climate Policy

Last month the International Energy Agency (IEA) released its World Energy Outlook 2012 and unfortunately the world outlook is not so good. To be more precise, a key conclusion of the report is that “Taking all new developments and policies into account, the world is still failing to put the global energy system onto a more sustainable path.” The report forecasts dramatic increases in global energy consumption and found that subsidies for fossil fuels increased by almost 30% from 2010, amounting to $523 billion in 2011. All of this in spite of a long-term global effort to find a solution to climate change. 

Unfortunately, this version of the future doesn’t depart much from what we’ve seen in the past. Certainly there are new findings, but a future where global energy consumption increases dramatically as China, India, and other non-OECD countries develop has been on the horizon for a while. However, the really critical findings in this latest version of the Outlook relate to an opportunity for global leaders to take control of this future by balancing the world’s energy needs with sustainable energy consumption.

The solution?  Energy efficiency.

The Outlook finds that in a future where economically viable energy efficiency measures are implemented, the rate of energy demand growth is halved. The report goes on to describe six areas that need to be addressed if we are going to put all this energy efficiency to work. (The Alliance to Save Energy has also created this helpful fact sheet). IEA recommends raising people’s awareness of energy efficiency and improving its visibility and credibility. The report suggests that improved testing, disclosure, monitoring, and verification would help. The report also observes that there is an uneven playing field in energy markets contributing to a perception that energy efficiency isn’t affordable. To overcome these barriers, the IEA suggests policies to eliminate energy subsidies that encourage consumption and the adoption of policies that incentivize energy efficiency investments.

These steps can help world leaders move our collective futures in the right direction. And as the report points out, without a significant change in business-as-usual, most of the energy efficiency potential in the buildings sector and more than half of the potential in industry will continue to be wasted and we’ll lose the race to meet our climate goals. My takeaway from the World Energy Outlook 2012: It’s time to harness energy efficiency and take the reins of our future.

Three Tax Reforms to Encourage Modernization of the Manufacturing Sector
December 20, 2012 - 3:48 am

By Steven Nadel , Executive Director

Much of the equipment and production processes in America’s factories are decades old and not as efficient as modern equipment and processes in use by many of our international competitors. While some factories have been modernized, many have not. Modernizing these factories will allow them to better compete in world markets by improving product quality and reducing product costs, including savings through reduced energy use. Modernization of our factories will build on several competitive advantages the U.S. now has—low electric and natural gas prices (relative to the rest of the world) and lower labor costs due to higher productivity.

As we emerge from the Great Recession, many industrial firms have capital to invest, but a nudge from the tax code could spur substantial additional investments here in the U.S.  We suggest three possible tax policies that could spur investment in a new ACEEE working paper. The paper recognizes that any incentives need to be low cost because of concerns about the federal budget deficit and a desire by many tax reform proponents to reduce tax rates by reducing tax expenditures.

The first policy we examine would allow repatriation of company profits at a low tax rate, provided these repatriated profits are used to increase a company’s capital investments relative to their average capital investments in recent years. This provision would apply to multinational firms with substantial profits now parked abroad. Since this taps funds now overseas and not yet subject to taxes, the cost to the U.S. Treasury would be low.

The second policy approach would allow accelerated depreciation on increased capital investments in production capacity, allowing companies to reduce their near-term taxes. The federal government would recoup these expenses in the long term since this proposal would only affect the timing of depreciation and not the amount of depreciation. If depreciation periods were cut in half, the amount of the incentive would be similar to the incentive on repatriated profits discussed above.

A third approach would provide repayable tax incentives for increased capital investments. The credit would be taken on taxes in the year the expenses were made, but the credit would then be paid back to the Treasury in subsequent years.  A credit of 35% of the amount of the capital investment increase that is repaid over ten years would provide about the same incentive as the other two approaches.

We recommend that at least two of these approaches be enacted. The first approach would benefit only large multinational firms, while the second and/or third approach should be included in order to benefit firms that primarily serve the domestic market. A firm would only be able to use one of the approaches.

For the commercial sector, a different approach is needed since much of capital investment is for land and buildings and not for energy-consuming systems. Our paper discusses an option to provide accelerated depreciation for purchases of high-efficiency equipment in the commercial sector. We suggest applying the accelerated depreciation to equipment that meets energy efficiency specifications set by the Federal Energy Management Program (FEMP).

For all of these incentives, the costs to the Treasury are low, but the advantages in terms of energy savings and more competitive U.S. manufacturers would be substantial for years to come.

R. Neal Elliott contributed to this blog post.