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APPROACHING THE KYOTO TARGETS: FIVE KEY STRATEGIES FOR THE UNITED STATES
Howard Geller, Steven Nadel, R. Neal Elliott, Martin Thomas, and John DeCicco August, 1998
Executive Summary There is compelling evidence that emissions of carbon dioxide and other greenhouse gases (GHGs) are inducing climate change at an alarming rate and are therefore posing serious environmental, economic, and social risks. Faced with this challenge, nations negotiated the Framework Convention on Climate Change in 1992 at the Rio Earth Summit. As further evidence of GHG-induced climate change and its potential impacts mounted during the 1990s, a Protocol to the Framework Convention was negotiated and completed at the Third Conference of Parties in Kyoto, Japan in December 1997. The Kyoto Protocol establishes legally binding GHG emissions limits for 38 industrialized countries starting in the 2008-2012 time period. The United States agreed to a target for this initial budget period of 7 percent below its 1990 emissions levels. The United States emitted 1,753 million metric tons (MMT) of carbon or carbon equivalent in 1996, 8.3 percent more than the 1,618 MMT emitted in 1990. These values include the six gases covered by the Kyoto protocol. Considering only carbon dioxide (which is responsible for about 85 percent of the total for these six gases), emissions increased by nearly 120 MMT (9 percent) between 1990 and 1996. Preliminary data show that emissions of carbon dioxide rose an additional 22 MMT (1.5 percent) in 1997. This situation is not expected to get much better given current policies and trends. The Energy Information Administration (EIA) projects that carbon emissions alone will reach 1,577 MMT in 2000, 1,803 MMT in 2010, and 1,956 MMT in 2020 (see Figure ES-1). Compared to the 1,346 MMT emitted in 1990, EIA is projecting an increase of 17 percent by 2000, 34 percent by 2010, and 45 percent by 2020. Thus, the United States will have to take vigorous and effective action in order to meet its Kyoto target. This report presents and analyzes five major energy efficiency policy initiatives that could greatly help the United States achieve its Kyoto target. These policies would stimulate widespread energy efficiency improvements in all key sectors of the economy—buildings, transport, industry and electricity supply. By doing so, the initiatives yield energy bill savings that exceed the cost of the measures on a net present value basis. Thus, the initiatives reduce GHG emissions at an economic benefit rather than cost to the nation. Our proposals build on ongoing efforts and the new climate technology initiatives recently proposed by the Clinton Administration. In some areas, we combine elements of the Administration's proposal with additional policies that are needed to overcome the full range of barriers inhibiting greater energy efficiency in the marketplace. In other areas, we recommend a combination of market incentives, regulatory reforms, and efficiency standards in order to transform energy use patterns and maximize economic and environmental benefits. Methodology For each strategy, we analyze potential energy savings, carbon emissions reductions, costs, and energy bill savings for investments made during 2000-2020. Our analysis uses the Reference Case Forecast in the EIA's Annual Energy Outlook 1998 as a baseline projection. This is the most recent official energy supply and demand forecast by the U.S. Department of Energy (DOE). It assumes continuation of existing energy efficiency policies and programs, but no additional policies and programs. In our analysis, we tried to exclude any efficiency improvements explicitly or implicitly included in this forecast. Key assumptions used in our analysis, including energy price projections, economic growth, growth in the housing, appliance, vehicle and power plant stocks, and emissions coefficients per unit of energy supplied, also are derived from the Annual Energy Outlook 1998. Our analysis of the cost effectiveness of various energy efficiency measures utilizes a 6 percent real discount rate. This value is roughly equivalent to the cost of capital averaged over time and is similar to the discount rate used by DOE to analyze policies such as prospective appliance efficiency standards. Policy Proposals Appliance and Equipment Efficiency Standards and Related Voluntary Programs Federal legislation has established minimum efficiency standards on a wide range of residential appliances, lighting products, motors, and other mass-produced products. Minimum efficiency standards remove the least efficient products from the market, thereby increasing the scale and reducing the cost for more efficient products. The appliance standards legislation directs DOE to periodically review and strengthen the minimum efficiency standards where technically and economically feasible. Our strategy consists of: (1) rapidly completing ongoing efficiency standards rulemakings that have been labeled as "high priority" (i.e., clothes washers, ballasts, residential central air conditioners, residential water heaters, and distribution transformers); (2) issuing new standards on other currently regulated products for which rulemakings are behind schedule (i.e., commercial heating and cooling equipment, furnaces and boilers, dishwashers, and reflector lamps); and (3) continuing with the next round of standards for products that were the subject of past rulemakings (i.e., refrigerators and room air conditioners). Complementing efficiency standards, we also recommend that DOE, EPA, and utilities continue to develop and implement voluntary programs to promote products that are significantly more efficient than the minimum requirements, as well as high-efficiency equipment not covered by the standards. Our analysis includes energy savings from low-cost improvements to home electronics and packaged commercial refrigeration equipment, two areas where we believe voluntary programs could have a significant impact, in addition to energy savings from new minimum efficiency standards on a wide range of products. Public Benefit Trust Fund as Part of Electric Utility Industry Restructuring Electric utilities historically have funded a variety of activities that benefit the public but are not directly tied to electricity production and supply. These activities include programs to encourage customers to use energy more efficiently, assist low-income families with home weatherization and energy bill payment, promote the development of renewable energy sources, and undertake research and development. However, increasing competition and restructuring have led to a decline in utility "public benefit expenditures" over the past five years. In order to ensure that public benefit activities continue to take place following restructuring, several states have established public benefit trust funds through a small charge on all electricity providers who use the transmission and distribution grid (whether traditional utilities, independent power producers, or others). As of June 1998, nine states have adopted utility public benefit funds. Our strategy is to create a national public benefits trust fund modeled on the proposal made by Chairman Richard Cowart of the Vermont Public Service Board and included in the Clinton Administration's utility restructuring proposal released in March 1998. Specifically, the Administration has proposed a $3 billion per year public benefits trust fund that would provide matching funds to states for eligible public benefits expenditures. This proposal would encourage states and utilities to continue or in some cases expand energy efficiency and other public benefits activities. Our analysis estimates the incremental investment in and savings from energy efficiency measures as a result of the federal public benefits fund. We do not include savings from utility energy efficiency programs already underway or likely to occur in the absence of a federal fund. We estimate that energy efficiency improvements resulting from the federal fund would cut national electricity use about 7 percent by 2010 and 11 percent by 2020. Vehicle Fuel Economy Improvement The average fuel economy of new light vehicles (cars and light trucks) has remained nearly constant for more than a decade and is not expected to increase in the future given current policies and trends. This is in spite of a wide range of technologies that are already available for increasing fuel economy as well as the emergence of advanced, ultra-efficient designs with hybrid- electric or fuel cell drivetrains that can substantially reduce energy use and pollutant emissions (e.g., the Toyota Prius, a five-passenger hybrid-electric sedan now manufactured in Japan that is expected to be available in the United States by 2000). Our vehicle fuel economy strategy combines mutually reinforcing policies for improving the energy and emissions performance of cars and light trucks. Elements of this strategy include: (1) tougher CAFE standards on cars and light trucks in order to achieve a new-fleet average fuel economy of about 42 mpg by 2010 and 59 mpg by 2020; (2) a revenue-neutral fee and rebate (feebate) system to motivate sales of cleaner and more efficient vehicles in all classes; (3) tax incentives plus voluntary fleet purchasing commitments to stimulate the introduction and sales of highly efficient vehicles; and (4) continued R&D on next-generation vehicle technologies. This strategy will stimulate widespread adoption of incremental energy efficiency improvements (i.e., engine improvements and weight reduction) as well as "leapfrog" technologies when they become available. Within this package, stronger CAFE standards act as the determining factor for inducing fleet-wide efficiency improvements. Combined Heat and Power Combined heat and power (CHP) systems convert as much as 90 percent of fuel input into useful energy, compared to 30-35 percent for a conventional power plant. Recent advances in combustion turbines and reciprocating engines are reducing CHP system costs, enabling much smaller CHP systems, and increasing potential electricity output per unit of fuel input. In spite of these advances, implementation of CHP systems is slowing in the United States due to barriers such as burdensome environmental permitting, environmental regulations that do not recognize overall CHP impacts, utility policies that discourage CHP installation, and unfavorable tax treatment. Our strategy addresses all of the major barriers to CHP deployment. It includes: (1) providing expedited permitting for CHP systems; (2) implementing output-based air pollution regulations; (3) removing utility-driven barriers through national restructuring legislation, FERC authority, and actions by individual states; and (4) establishing a standard depreciation period of seven years for all new CHP systems. We estimate that taking these actions would result in a doubling in installed CHP capacity by 2010, adding 50 GWe to the 49 GWe of capacity projected in the Reference Case. Furthermore, we estimate that the installed capacity could reach 192 GWe by 2020 as technologies for CHP continue to improve and barriers are removed. The incremental CHP capacity would displace about 5 percent of projected conventional power generation in 2010 and 13 percent of projected conventional generation in 2020 in the Reference Case. Reducing Power Sector Carbon Emissions Apart from greater end-use efficiency and expanded use of CHP, power sector carbon emissions can be reduced by: (1) improving the efficiency of electric generating plants and using less fuel per kWh produced; and (2) switching to less carbon-intensive fuels (e.g., towards renewable energy and natural gas, and away from coal and oil). The average efficiency of fossil fuel power plants will rise as older power plants are retired and new combined cycle and other higher efficiency power plants are added. The Reference Case forecast projects that the average efficiency of all fossil fuel power plants will increase from 32 percent (an average heat rate of 10,600 Btu/kWh) in 1996 to about 36 percent (average heat rate of 9,600 Btu/kWh) in 2010 and 38 percent (average heat rate of 9,100 Btu/kWh) in 2020. Further efficiency improvements could be made given that the most efficient combined cycle plants now being sold commercially have efficiencies on the order of 52 percent (heat rate of 6,600 Btu/kWh). However, barriers such as different environmental standards for old and new power plants, pressures to minimize capital expenditures, and political obstacles to large-scale fuel switching are limiting the turnover and replacement of the power plant stock. Our strategy calls for a heat rate "cap and trade" system for fossil fuel power plants with the cap progressively reduced over time. The trading system would provide credits to generators that are below the prevailing heat rate cap. The credits could be sold to less efficient generators, allowing the market to determine the most economically efficient way to meet the caps. Specifically, we suggest caps of 8,600 Btu/kWh in 2010 and 7,700 Btu/kWh in 2020, 10 percent below levels projected for those years in the Reference Case forecast. Power sector carbon emissions would decline as a result of improving power plant efficiency as well as stimulating some fuel switching from coal to natural gas. Unlike the other energy efficiency strategies, this initiative is likely to have a net positive cost as it would not result in energy bill savings. However, this cost is likely to be relatively modest and offset many times over by the net economic benefits from the other strategies. Overall Results Table ES-1 summarizes the potential impacts of the five energy efficiency strategies. Taken together, the five initiatives could lower carbon emissions in 2010 by about 310 MMT. This level of reduction is equivalent to about 21 percent of total U.S. carbon emissions as of 1997 and 17 percent of the 1803 MMT of carbon emissions projected in 2010 in the Reference Case Forecast (see Figure ES-1). This level of reduction is also about 61 percent of the estimated carbon reduction needed to meet the U.S. target in the Kyoto Protocol. Among the strategies, vehicle fuel economy improvements provide about 35 percent of the total carbon reductions, followed by the federal public benefits fund at 22 percent of the total, power supply improvements at 21 percent, CHP promotion at 14 percent, and appliance standards and related voluntary programs at 8 percent. The carbon emissions reductions could increase substantially by 2020 as efficiency improvements continue to be made and more appliances, buildings, vehicles, and power plants are replaced. Specifically, we estimate that the five initiatives could lower carbon emissions in 2020 by around 603 MMT, 31 percent of projected emissions of 1,956 MMT that year in the EIA's Reference Case Forecast. By 2020, the five energy efficiency initiatives alone could return U.S. carbon emissions to nearly their level in 1990. Table ES-1 also summarizes the estimated economic impacts of the five energy efficiency initiatives. Investments in efficiency measures through 2010 are estimated to cost $181 billion, but the net present value of energy cost savings over the lifetime of these measures is estimated to equal $344 billion (all values in 1996 dollars). Thus, energy bill savings exceed the costs of the measures by nearly a factor of two, resulting in a net economic benefit of around $163 billion. The positive economic results in our study, and others like it, contradict the results of a number of "top-down" economic modeling studies that indicate reducing GHG emissions and/or achieving the Kyoto target will harm the U.S. economy. These studies contain unfavorable assumptions that lead to economic losses, such as no recycling of carbon tax revenue, no consideration of technological response, no-cost savings from energy efficiency improvements, no economic benefits from pollution abatement, and no international trading. Our analysis shows that if we are intelligent about the policies and measures used to reduce GHG emissions, we can achieve substantial reductions with a net economic gain, not a penalty. Furthermore, our analysis is conservative in that it does not consider non-energy benefits (e.g., reduced damages from air pollution abatement or reduced vulnerability to oil price shocks from lower oil imports), the downward pressure on energy prices resulting from lowering energy demand, or potential capital cost reductions as markets for the energy efficiency measures grow. In summary, the five initiatives presented in this report should play a central role in the U.S. strategy for achieving our Kyoto target and for making further GHG emissions reductions over the longer term. For a few of our recommended initiatives, partial efforts are underway or proposed. This is the case for appliance efficiency standards and related voluntary programs, the federal public benefits trust fund, and the combined heat and power initiative. However, further actions are needed to fully implement these initiatives and achieve the maximum emissions and economic benefit. In the case of the vehicle fuel economy and power supply efficiency initiatives, little or no effort is being made at the present time to implement the policies we recommend. Action on vehicle fuel economy in particular is long overdue and is essential for achieving our GHG emissions reductions goals.
(1)The net present value of energy savings over the lifetime of energy efficiency measures installed during 1999-2010 Click here to order in hard copy. 52 pp., 1998, $13.00, E981
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