Energy Efficiency and Economic Development in the Midwest

Skip Laitner, John DeCicco, Neal Elliott, Howard Geller, and Marshall Goldberg, Robert Mowris, and Steven Nadel

1995

Summary

Energy is the lifeblood of the economy. It is needed to power office equipment and production machinery, and to transport both people and freight. It provides light, heat and air conditioning for homes, schools and businesses. Energy is also a critical ingredient for a diverse set of consumer goods that range from medicines and children's toys to food and automobiles.

But energy that is inefficiently or inappropriately used can constrain the economic activity of a state or region and thereby limit the job creation process. With abundant opportunities for energy efficiency improvements as well as the development of renewable resources, the Midwest region of Illinois, Indiana, Michigan and Ohio is seemingly well-positioned to move from a heavy reliance on fossil and nuclear fuels towards a more sustainable energy future.

In 1992 the region as a whole spent approximately $70.8 billion to provide heat, light, power and transportation for residents and businesses alike. The annual energy bill is 8.2 percent of the region's combined Gross State Product (GSP) while the United States as a whole spent only 7.8 percent. The total energy expenditure is also 1.6 times greater than the combined annual tax collections by state governments in the region.

Concern about both economic development and environmental degradation has stimulated interest in improving energy efficiency. Policy makers and business leaders are seeking strategies that enhance economic growth while providing environmental benefits. Improving energy efficiency is one such strategy. Interest in energy efficiency continues in spite of dramatic reductions in real energy prices in the past decade.

This reports examines current energy consumption patterns in the four-state Midwest region and projects energy consumption through 2010 assuming business-as-usual policies and trends. It then develops a high energy efficiency scenario assuming more aggressive implementation of cost-effective energy efficiency measures, and it analyzes the potential economic benefits of the high efficiency scenario.

The energy and macroeconomic analyses build on previous efforts undertaken by the American Council for an Energy-Efficient Economy (and others) in such studies as America's Energy Choices: Investing in a Strong Economy and a Clean Environment, and also Energy Efficiency and Job Creation: The Employment and Income Benefits from Investing in Energy Conserving Technologies.

The major findings of the Midwest analysis include:

• In 1992, the region consumed a total of 12,410 trillion Btus of energy for all end-uses, 329 million Btus per capita. If we were to think of this energy use in terms of an equivalent amount of gasoline, the region's economy requires the equivalent of 2,630 gallons of gasoline per capita per year. This is about two percent greater than for the United States as a whole.
• The accelerated energy efficiency scenario developed in this study would lower the region's energy requirements in 2010 to 7 percent below the 1992 consumption level, and 26 percent below energy consumption projected for 2010 in the baseline scenario, without reducing energy services or standards of living. In terms of Btus per dollar of GSP, this implies a 2.3 percent annual reduction in the Midwest's energy intensity. Without accelerated energy efficiency investments, the region's energy intensity would decline at a rate of only 0.4 percent per year.
• The high efficiency scenario would also have positive environmental impacts in the region. Energy-related carbon emissions, for example, would be reduced by at least 66 million metric tons in the year 2010, a 26 percent reduction compared to emissions in 2010 in the baseline scenario.
• A $104 billion investment in energy efficiency technologies between 1995 and 2010 would yield a cumulative energy bill savings of $183 billion over that same period (all values in 1990 dollars). This implies a benefit-cost ratio of 1.75 over the 16-year period of analysis. But this understates the cost-effectiveness of the energy efficiency investments since energy savings will continue for many years after 2010.
• The investment in energy efficiency technologies would increase net employment in the region from a modest increase of 3,000 jobs in 1995 to 205,000 jobs by 2010. The latter figure is equivalent to the number of jobs supported by the output, expansion, or relocation to the region of 1,367 small manufacturing plants.
• The employment benefits from energy efficiency investments could reduce the region's unemployment level in 2010 by nearly one percentage point from the recent level of 4.7 percent, for example, to about 3.8 percent.
• Looking only at electricity, implementing the high efficiency scenario in the region would result in a net increase of 132,400 jobs by the year 2010. This is about 65 percent of the total employment gain for that year from the high efficiency scenario for all sectors. Improvements only in the fuel efficiency of automobiles and other light duty vehicles would yield a net employment gain of 14,100 jobs in 2010.
• To help residents of the Midwest capture the full benefits of the high efficiency scenario, we suggest that a number of policies be adopted at the state or regional level, including:
  
  
  1. State-of-the-art building energy codes plus training and support for effective implementation of residential and commercial building codes;
  2. Greatly expanded demand-side management programs by both natural gas and electric utilities, along with greater support from utility regulators for cost-effective DSM programs;
  3. Expanded technical and financial support to accelerate both energy and process efficiency improvements in the industrial sector;
  4. Policies which improve the fuel economy of cars and light trucks;
  5. Improved energy price signals including a revenue-neutral energy or carbon tax to encourage investments in energy efficiency in all sectors; and
  6. Creation of a Sustainable Energy Development Agency in the region, or in each state, that would fund research, development, demonstration, and promotion activities in support of energy efficiency and renewable energy implementation.

These initiatives, along with other actions that can be taken to increase energy efficiency, would result in a stronger economy and a cleaner environment in the Midwest in the coming decades.

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135 pp., 1995, $25.00, ED951