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    "ocrText": "FOIA Number: 2017-1095-F\nFOIA\nMARKER\nThis is not a textual record. This is used as an\nadministrative marker by the William J. Clinton\nPresidential Library Staff.\nCollection/Record Group:\nClinton Presidential Records\nSubgroup/Office of Origin:\nCouncil of Economic Advisers\nSeries/Staff Member:\nAlicia Munnell\nSubseries:\nOA/ID Number:\n10102\nFolderID:\nFolder Title:\nNEC / CEQ Climate Change Deputies Mtg, Wed, 3/19/97, 1:30pm, Rm. 472 w/ JAF\nStack:\nRow:\nSection:\nShelf:\nPosition:\nS\n20\n3\n2\n2\n02/14/97\n20:38\n202 252 0275\nOPPE Wed, 3/19/971 MUNNELL 30pm 1/01/010\ncc: Am\nJAF\nFAX TRANSMISSION\nJS\nU.S. ENVIRONMENTAL PROTECTION AGENCY\nOFFICE OF POLICY, PLANNING AND\nEVALUATION\n40 I M STREET SW\nWASHINGTON, DC 20460\n202-260-4332\nFAX: 202-260-0275\nTo:\nAssistant Secretaries Group\nDate:\nMarch 14, 1997\nFax #:\nSee attached list\nPages:\nincluding this cover sheet.\nFrom:\nWilliam N. White\nSpecial Assistant to David\n10\nGardiner\nSubject:\nPapers on Trading and Regulation\nCOMMENTS:\nPlease find attached two for discussion\npapers at the Assistant Secretaries Climate Change Group\nmeeting on Tuesday. The first is Domestic Greenhouse Gas Emissions Trading, the second is\nUsing Standards and Regulations to Reduce Greenhouse Gas Emissions. Please contact me at\n260-1345 if you have questions or do not receive a complete transmission.\nsecond transmi Heal separately!\nWL with\nwho were\naddress hear So with 50, to Ideal\n03/14/97\n20:40\n202 252 0275\nOPPE\n+++ MUNNELL\n4.\n003/010\nDomestic Greenhouse Gas Emissions Trading\nIntroduction\nThis paper describes options for a domestic emissions trading program to meet an\ninternational agreement on an emissions target for greenhouse gases. Emissions trading\ninvolves allocating or auctioning emissions allowances, and allowing the trading of\nallowances in a market with sufficient mechanisms to ensure compliance with targeted\nlevels. Emission trading creates new, marketable assets that can have substantial value,\nso distributional issues will be an important component of program design. Allocation\ndesigns or auction revenues can be used to address these distributional issues.\nEmissions trading offers two advantages over a system of emission taxes. First,\nby setting overall quantity targets, emissions trading programs offer greater certainty that\nnational emission targets will be achieved. Under a tax system, the quantity of total\nemissions is the result of individual polluters' decisions in response to the incentive\nprovided by the tax. In principle, if the entire cost structure is known, any quantity target\nattained by a tradable permit system could also be attained by an appropriately calculated\ntax. In so far as forecasting in practice is difficult, however, the resulting level of\nemissions can be greater or less than the level targeted when the tax rate is set. Second,\nunder an allowance system, the government has greater flexibility in deciding whether to\ncollect revenues. It can auction permits, allocate them based on historical emissions, or\nundertake some combination of the two. This flexibility can affect the public acceptance\nof the mitigation program. Emission tax systems always involve revenues accruing to the\ngovernment (although they can be rebated).\nEmission Trading of Greenhouse Gases\nAn emissions trading program, like any program designed to limit greenhouse\ngases, must contain certain elements. First, an agreed upon emissions budget, and any\nrules governing provision for the project-specific crediting of reductions made in\nactivities not explicitly covered by the budget, must be established. A central authority\nmust be given the domestic responsibility for verifying compliance and must be provided\nsufficient information to do so. Finally, noncompliance with allowance limitations or\nreporting requirements must generate real consequences, such as penalties or subtraction\nof allowances.\nA program would have to establish permit lifetimes, monitoring and enforcement\nprovisions, as well as rules for permit banking, borrowing, and trading. Consideration\nshould also be given to transaction costs, which should be kept as low as possible.\nHowever, particularly difficult issues involve determining what types of activities require\na permit and how permits should be allocated.\nPRE-DECISIONAL DRAFT DO NOT CITE OR QUOTE\n1\n03/14/97\n20:41\n202 252 0275\nOPPE\nMUNNELL\n004/010\nWhat types of Activities Should Require a Permit\nSources of greenhouse gases include not only those emitting carbon dioxide, but\nother gases such as methane, nitrous oxides, hydrofluorocarbons (HFCs),\nperfluorocarbons (PFCs), and sulfur hexafluoride (SF6). Gases differ both in their\natmospheric lifetimes and in their ability to trap heat in the atmosphere. In addition,\ncarbon is not only emitted through the combustion of fossil fuels, but is also absorbed by\n\"sinks\" such as trees and soils.\nThe decision for determining permit holders should consider the following:\nCoverage: While it may not be necessary to ensure that every ton of greenhouse gas\nis accounted for within an emission trading regime, the scope of coverage of the\ntrading program should be sufficient to ensure compliance with targets set in\naccordance with an international agreement.\nAdministrative and compliance feasibility: The number of sources involved in the\ntrading program should be small enough to be administratively feasible and large\nenough to ensure market competition. In addition, monitoring and verification of\npermit compliance must be possible for those included in the program.\nPotential to Diffuse Low Greenhouse Gas Technologies: Alternative points of\nintervention should be evaluated for their ability to provide incentives for research,\ndevelopment, adoption and diffusion of low greenhouse gas technologies.\nMarket Impacts: Any program that limits emissions will affect the bottom line of\nfirms. The permit program will have economic impacts that vary depending on\nprogram design. For example, exempting certain sizes or categories of sources from\npermit requirements because of administrative or equity concerns (e.g., small boilers\nor home heating oil) has competitive implications within the energy market.\nPublic Acceptance: The program must consider the ease or difficulty with which\nvarious allocation approaches would be accepted by the public.\nConsistency with the international trading system: The domestic program should be\nconsistent with any international prescriptions concerning the coverage of sources and\ngases.\nCarbon Sources\nCarbon dioxide currently accounts for about 85% of U.S. greenhouse gas\nemissions and number in the hundreds of millions since they include sources such as\nautomobiles and residential gas water heaters. However, since virtually all of the carbon\ncontained in fossil fuel extracted from the ground (with the possible exception of certain\nfeedstocks) is eventually released to the atmosphere, a trading program need not focus\nPRE-DECISIONAL DRAFT\nDO NOT CITE OR QUOTE\n2\n03/14/97\n20:42\n202 252 0275\nOPPE\nMUNNELL\n005/010\nuniquely on direct emitters, but can be implemented through other points in the energy\nmarket. These include fuel imports, fuel extraction, processing, refining, distribution, and\nsecondary conversion (e.g., coal to electricity). In addition, these points could vary by\nsector. For example, an emission trading program could focus on the point of final\ncombustion for coal, but on refining for oil, or distribution for natural gas. Given the\nwide variety of options available for including energy sources in a trading program, a few\nalternative programs are described below for illustration:\nA Program Targeting Primary Fuel Producers\nThe primary fuel producing sector - extraction, processing, refining, and\ndistribution - has many levels where a permit program could be implemented. One\noption would be to require permits at the point of first sale (a permit is surrendered with\nthe first inter- or intra- company transaction). Such a system would include transactions\nbetween a coal company and an electric utility, between a natural gas producer and its\nmarketing arm, between a natural gas producer and a broker, or between an oil extraction\ncompany and its refinery operations. Fuel importers would also require permits to import\nfuel. This would capture the carbon from fuel consumed in the refining process. The\nnumber of market actors under this program design would be under 5000 and virtually all\ncarbon in the energy sector would be included in the program.\nA Program of Emission Trading at the Sectoral Level\nAn emissions trading program could also be applied at the point of combustion,\nallowing trading among affected sources. This system would be most comparable to the\ncurrent SO₂ emission allowance trading system.\nTargeting the six largest industrial CO₂ emitting sectors (electric utilities, cement,\nprimary metals, pulp and paper, petroleum refining and chemicals) in a sectoral trading\nprogram could encompass as many as 20,000 market participants and 90 percent of\nindustrial CO₂ emissions. Mobile source emissions could either bc indirectly included in\nthe system by allocating transportation equipment manufacturers permits for emissions\nassociated with their automobile fleets or by including refiners in the program.\nResidential and commercial emissions could be similarly addressed by focusing upstream\nin the energy system.\nOther Greenhouse Gases and Sinks\nOther gases account for the remaining 15% of greenhouse gas emissions (on a\ncarbon-equivalent basis). Most important among these is methane, which accounts for\n11% of national emissions. Since gases differ in their lifetimes and in their potential to\ntrap heat in the atmosphere, an \"exchange rate\" or trading ratio must be established to\nconvert all gases into common units for inclusion in a trading program. Such ratios have\nbeen developed by climate researchers and could be applied here. These should be\nconsistent with the rules established in the international protocol.\nPRE-DECISIONAL DRAFT\nDO NOT CITE OR QUOTE\n3\n03/14/97\n20:43\n202 252 0275\nOPPE\nMUNNELL\n006/010\nSeveral, although not all, of the many sources of non-carbon greenhouse gases\ncould likely be included in a trading system. For example, methane emitting coal mines,\nlandfills, livestock manure management facilities and potentially natural gas distribution\nsystems may meet the criteria described above for inclusion in a greenhouse gas trading\nprogram. These sources account for 7% of national greenhouse gas emissions. Similarly,\nemissions of some sources of other gases could potentially be included (e.g., magnesium\nproduction).\nForests in the United States currently remove an amount of carbon equal to 8% of\nnational emissions from the atmosphere. Their inclusion in the trading program would\ntheoretically enhance the system's flexibility. However, translating the potential of sinks\ninto monitorable, verifiable, and cost effective emission reductions would require the\ndevelopment of a national accounting system for sinks. Such a system is needed to\nensure that the planting of trees and preservation of forests in a given area would not\nresult in offsetting losses elsewhere. The decision on whether to include sinks in the\ntrading system will be influenced by the outcome of the international negotiations.\nAllocating Permits\nIn an emission trading system, some mechanism must be provided for allocating\npermits to sources. This could be done on the basis of baseline/historical emissions\n(where permits are given to those currently emitting) or through an auction (where\nrevenues accrue to the government). These two mechanisms might also be combined: a\nportion of permits could be allocated on the basis of historical emissions while the rest\nare auctioned. In any case, the value of these assets could be large depending on the\npermit price, which is determined by the emissions target and the costs of substitutes.\nGiven that an auction could produce substantial revenues, some decision would have to\nbe made with respect to what to do with the proceeds. These could be used to redress\ninequities in the distribution of control costs, fund R&D for less carbon intensive energy\nsources and end uses, or to reduce taxes or the deficit.\nFor example, a reserve of allowances or a portion of auction revenues could be\nset aside to encourage more rapid development and diffusion of low greenhouse gas\nemitting technologies. Manufacturers of energy consuming equipment could compete for\nthe set aside based on the degree to which they produce equipment more efficient than the\naverage in use or than required by current mandatory efficiency standards. Such a\nprogram could yield reductions in energy demand and help buffer the consumer from the\nimpact of higher energy costs.\nAlternatively, permit allocation formulae could take into account the market\nimpacts of the mitigation program. \"Set asides\" could be made available to those\nindustries, workers, or consumers who experience a grossly disproportional share of the\ncosts of control. A set aside could also be auctioned, with the revenues used to redress\ngross inequities in the distribution of control costs.\nPRE-DECISIONAL DRAFT\nDO NOT CITE OR QUOTE\n4\n03/14/97\n20:44\n202 252 0275\nOPPE\nMUNNELL\n007/010\nAllocation Based On Baseline/Historical Emissions\nUnder this approach, sources are given a number of permits based on baseline fuel\nproduction or emissions and an allocation formula. Various allocation formulae can be\ndevised, weighted to greater or lesser degrees in favor of sources with high historical\nemissions. Emissions allowances are endowed to facility operators for no cost and would\nbe transferable. Those receiving permits thus obtain assets of potentially large value from\nthe government at no cost.\nSuch an allocation mechanism could create entry barriers. In a capital intensive\nsector like primary fuel production, where entry barriers are already substantial, new\nentrants would be further disadvantaged if they had to purchase permits - especially if\nexisting holders hoard permits. This problem could be mitigated by withholding a\nnumber of permits for purchase by new entrants or by auctioning a portion on the open\nmarket. Such an auction would also facilitate price discovery in a new market. Although\nnew firms will still be disadvantaged (as they will pay for all of their permits), they would\nbe able to enter the market. The pool of permits would need to be withheld from existing\nsources to ensure compliance with budgeted national emission levels - unless there are\nspecific international provisions for early banking.\nIt may be desirable to design an allocation that would allow credit for early\nemissions reductions (those achieved prior to the start of the program, but after the\nbaseline period) in particular for those that reduced greenhouse gas emissions as part\nof government sponsored voluntary programs. If credits for past actions are given, the\ntotal credits allowed would need to be deducted from the overall permit allocation in\norder not to exceed national greenhouse gas emissions target.\nAuction\nAlternatively, an auction could be used to allocate permits. In this case, permit\nholders would pay the market clearing price for every unit of greenhouse gas released.\nAuctions ensure that permits are available for trade, and would serve to inform potential\ntraders about current price levels. All participants have equal access to permits, placing\nnew entrants on the same footing as existing emitters. As discussed earlier, since an\nauction could produce substantial revenues, some decision would have to be made with\nrespect to what to do with the procceds.\nRelationship to an International Trading System\nBecause control costs differ substantially among countries, international trading\noffers the potential of large, global efficiency gains. The current U.S. position calls for\nthe international agreement on greenhouse gases to incorporate the trading of reduction\nobligations. While such obligations are the responsibility of governments, the creation of\na domestic trading program reduces transaction costs and increases the likelihood that the\ntheoretical gains of international trading will be realized.\nPRE-DECISIONAL DRAFT\nDO NOT CITE OR QUOTE\n5\n93/14/97\n20:45\n202 252 0275\nOPPE\nMUNNELL\n008/010\nWithout a domestic trading system, some mechanism for effecting an\ninternational transaction between governments would need to be created. That is, once\ngovernments trade international obligations, some means to allocate the change in\nnational \"allowable\" emission levels to sources within the country must be created.\nWithout a domestic trading program, this is likely to require government intervention.\nWith a program, sources of greenhouse gases could themselves become agents in the\ninternational market and undertake this function, thereby lowering transactions costs.\nConsistency among the rules of domestic and international trading is therefore\nimportant. The International Agreement will specify the time dimension of national\nobligations, the coverage of gases, as well as the rules for banking and borrowing. If the\ndomestic specifications for emissions trading are consistent with those for the trading of\nobligations among countries, the potential efficiency gains of international trading are\nmore likely to be realized.\nPRE-DECISIONAL DRAFT\nDO NOT CITE OR QUOTE\n6\n03/14/97\n20:45\n202 252 0275\nOPPE\nMUNNELL\n009/010\nAttachment: US Experience with Emissions Trading\nThe US has had more experience with emissions trading than any other country in\nthe world. Specific programs include:\nSulfur Dioxide (SO₂) Allowance Trading: The Clean Air Act Amendments of 1990\nrequired a 50% reduction in SO₂ emissions from electric utility boilers. To\naccomplish this goal, a fixed number of emission allowances were allocated to\nelectric utilities based on a formula reflecting historical emissions. In addition, a\nsmall portion of allowances are auctioned every year to facilitate price discovery and\nnew entrants. Allowances are specifically excluded from being defined as rights to\npollute, may be traded to any party anywhere within the continental U.S., and may be\n\"banked\" for use in future years. Participants need to conduct regular monitoring of\nemissions and make an annual accounting of their emissions. Penaltics are imposed if\nemissions exceed the number of allowances held by a source.\nA functioning market in SO₂ allowances now exists, involving both bilateral\nexchanges between companies, and brokered exchanges through third parties. This\nmarket, along with other factors,¹ has helped to dramatically reduce the cost of the\nabatement program. Initially, forecasters claimed that a 50% reduction (10 million\ntons) in SO2 would correspond to allowance prices in the range of $400 to $1000.2\nHowever, prices for allowances that would be needed in the next decade to achieve\nthis level of emission reduction currently range between $90 to $100. In addition,\n1995 emissions were actually 40% below the legally required levels for that year.\nWater Effluent Trading: The US generally has regulated surface water quality\nthrough a system of discharge limits for large sources of water pollution. In addition,\nstates have standards for ambient water quality which are often not attained even after\nlarge dischargers apply \"best technology.\" The reason is that small (\"nonpoint\")\nsources (such as runoff from farms) contribute significantly to water pollution. A\nnumber of state and local governments are employing trading systems for watersheds\nthat either permit trading among large dischargers, or allow large dischargers to fulfill\ntheir requirements by controlling nonpoint sources. These include the Fox River in\nWisconsin, the Dillon Reservoir in Colorado, and the Tar-Pamlico River in North\nCarolina. The latter two programs are designed to manage future economic growth.\nThus, the quantity of effluent allowances allocated exceeds current discharge levels.\nOnce growth consumes this excess, trading is expected to reduce compliance costs.\nI These include the fact that the bill that was actually adpted was not as onerous as many in industry had\nfeared, the low price and widespread availability of low sulfur coal, the awarding of \"bonus allowances,\"\nthe postponement of capital investments, and lower than expected transportation costs.\n2 Hahn, Robert W., and Carol May, \"The Behavior of the Allowance Market: Theory and Evidence,\" The\nElectricity Journal, March, 1994.\nPRE-DECISIONAL DRAFT\nDO NOT CITE OR QUOTE\n7\n03/14/97\n20:46\n202 252 0275\nOPPE\nMUNNELL\n010/010\nInter-refinery Lead Trading: EPA operated a lead trading program from 1983 to\n1987 as it phased out lead from gasoline. Lead trading allowed refiners and importers\nto trade lead reduction credits in order to meet limits for the lead content of gasoline.\nThe quantity of allowances to which a firm was entitled was determined by the\namount of leaded fuel produced by the firm and the contemporancous EPA standard.\nThose who bettered the standard could sell their credits to others. Some 10 billion\ngrams of lead were traded during the course of the program at prices ranging from\n0.75 to 5 cents per gram. Allowing the trading of lead credits reduced the costs of the\nprogram by approximately 20 percent.\nCriteria Air Pollutant Trading: EPA first began incorporating aspects of emissions\ntrading in its air program in 1974, when it allowed a modified source to use \"credits\"\nearned by another source within the same plant to avoid additional regulatory\nrequirements. Since then, emission trading has substantially expanded. Trades have\nnumbered in the thousands and have been estimated by Hahn and Hester (1986) to\nhave achieved savings between $525 million and $12 billion.\nMarket Mechanisms for Chlorofluorocarbon (CFC) Phaseout: Under the 1987\nMontreal Protocol to limit stratospheric ozone depletion, the U.S. required the phase\nout of the production of CFCs by 1996. As part of its program, the U.S. adopted a\ntradeable permit regime covering CFC manufacturers and importers. These\nallowances were allocated based on each firm's 1986 market share. As the market for\nCFCs declined, the system allowed firms to allocate production among different\nfacilities according to the least-cost pattern of supply. It also gave CFC users the\nflexibility to switch between different CFC compounds, within the overall limit on\nallowances. This program helped reduce the costs of the phaseout. In 1988, EPA\nestimated that the cost to halve CFC use would be $3.55 per kilogram. By 1993, it\nbecame clear that all uses could be eliminated by 1996 at a cost of $2.45 per\nkilogram.\nPRE-DECISIONAL DRAFT\nDO NOT CITE OR QUOTE\n8\n002/010\nMUNNELL\n03/14/97\n20:39\n202 252 0275\nOPPE\nDISTRIBUTION:\nOrganiz.\nName\nFax #\nState\nEileen Claussen\n647-0217\nRafe Pomerance\nCommerce\nEverett Erhlich\n482-0432\nJeffrey Hunker\n482-4636\nOSTP\nRosina Bierbaum\n456-6025\nCEA\nAlicia Munnell\n395-6958\nJeff Frankel\nTreasury\nJoshua Gotbaum\n622-2633\nJustice\nLois Schiffer\n514-0557\nInterior\nBrooks Yeager\n208-4561\nNOAA\nTerry Garcia\n482-6318\nOMB\nT.J. Glauthier\n395-4639\nUSTR\nJennifer Haverkamp\n395-4579\nAgric\nCharlie Rawls\n720-5437\nDOE\nDirk Forrister\n586-9987\nMark Chupka\n586-0861\nEPA\nMary Nichols\n260-5155\nDavid Doniger\nDavid Gardiner\n260-0275\nDOT\nFrank Kruesi\n366-7127\nOVP\nPete Jordan\n456-9500\nCEQ\nSteve Seidel\n456-6546\nUSAID\nDavid Hales\n703-875-4639\nDOL\nAndrew Samet\n219-5980\nAssistant Secretaries' Meeting\n19 March 97 1:30pm\nREVIEW OF CLIMATE CHANGE PAPERS FROM THE EPA\n1.\nTrading paper\nIssue: sign off? Yes, this paper is in good shape.\n2.\nTechnology diffusion paper\nIssue: sign off? No, A. Ask that the quote by the 2001 economists be removed. The quote is\nout of context and subject to wide interpretation.\nB. Ask the authors to justify why they continue to blur market failure\nand non-market barriers (e.g., high discount rates, risk\naversion, incomplete information). The reasons for slow diffusion\ndiffer, and policies should reflect this difference.\nThe EPA claims that this \"text-book\" distinction has no added\nvalue to actual policy analysis. This is untenable. For example,\ntradable pollution permits were \"textbook\" economics a few years\nago but have gone on the save the economy billions of dollars.\nDoes the EPA have evidence to suggest that no additional\nbenefits are gain when a policy accounts for the distinction\nbetween market failure and non-market barriers?\nC. Effectiveness rates of programs are debatable. I calculated that the\nimplied rate of return to a $200 m/yr CCAP program with their\n1.25 E/GDP goal was about 2000 percent.\n3.\nRegulation and Standards\nIssue: sign off? No, this paper needs a good edit. I will send my comments over directly.\nII. IAT UPDATE\n1. Rates of technological change remain an issue. The implied 2000% rate of return for\nCCAP seems high to me. We need to ask for rates of return on tax payer dollars\nand ask whether these rates are reasonable.\n2. Tax reform with and without carbon policy. We asked for but have yet to receive the\nbaselines with tax reform and no carbon policy?\nyear\ngdp\n%energy\n%improve\ngdp gain\ndisc factor\ndisc gdp disc prog CO\n0.25%\n5%\n2E+08\n1\n7E+12\n0.04\n0.0025\n700000000\n1.05\n666666667\n171428571\n2\n0.005\n1.40E+09\n1.1025\n1.27E+09\n163265306\n3\n0.0075\n2.10E+09\n1.157625\n1.81E+09\n155490768\n4\n0.01\n2.80E+09\n1.2155062\n2.30E+09\n148086445\n5\n0.0125\n3.50E+09\n1.2762816\n2.74E+09\n141034710\n6\n0.015\n4.20E+09\n1.3400956\n3.13E+09\n134318771\n7\n0.0175\n4.90E+09\n1.4071004\n3.48E+09\n127922639\n8\n0.02\n5.60E+09\n1.4774554\n3.79E+09\n121831085\n9\n0.0225\n6.30E+09\n1.5513282\n4.06E+09\n116029605\n10\n0.025\n7.00E+09\n1.6288946\n4.30E+09\n110504386\ntotals\n2.76E+10\n1.39E+09\nrate of return\n1982.98%\n200 mulice\n1.25 in onlisy\nimpluencent to\n6DP ratio\nwhy cell we quin\nfrom 1.00 to\n1.25\nhistory\nInternational Impact Assessment Model - Free Trade\nMarch 17, 1997\nCarbon Tax\nCRA\n600\n500\n400\nS/Ton\n300\n200\n100\n0\n2000\n2010\n2020\n2030\n+\nX\n111\n112\nID\nCountry\nPolicy\nOil Response\nImport Subt\nBackstop\nRef Scene\n111\nUnited States\nUS1\nL\nM\nH\nIS92A\n112\nUnited States\nUS2\nL\nM\nH\nIS92A\nFor further information, contact: Dr. W. David Montgomery (202) 662-3840 [email protected]\n1.25 Extrapolated Stabilization Path\n1,650\n1,600\nCarbon Emissions (Million Metric Tons)\n1,550\n1,500\n1,450\n1,400\n1,350\n1,300\n1990 1995 2000 2005 2010 2015 2020\nYear\nYear\n1990 1995 2000 2005 2010 2015 2020\n1,300\n1,350\n1,400\n1,450\n1,500\n1,550\nCarbon Emissions (Million Metric Tons)\n1,600\n1,650\n1.25 Stabilization Path\nRole of Technology Policies in Limiting Greenhouse Gas Emissions\n\"Economics studies have found that there are many potential policies to reduce\nhas\ngreenhouse gas emissions for which the total benefits outweigh the total costs. For the\nUnited States in particular, sound economic analysis shows that there are policy options\nthat would slow climate changé without harming American living standards, and these\nmeasures may in fact improve U.S. productivity in the long run.\"\nThe Economists' Statement on Climate Change, Feb 13, 1997 (signed by more\nTHE den YO A\nthan 2,000 economists, including six Nobel Laureates)\nstrategy to accelerate the diffusion of existing technologies and the research, development and\ndeployment of more advanced technologies is a critical component of any U.S. policy to stabilize\ngreenhouse gas emissions. A cap and trade system alone - without such a technology strategy\n- would result in higher prices for carbon allowances than would otherwise be the case. Analysis\nsuggests than an accelerated technology effort has a large potential for bringing down this price,\nand thus the cost to the economy. In addition to major studies in the early 1990s, forthcoming\nanalysis by five leading National Laboratories finds that a large potential remains for reducing U.S.\nenergy consumption and greenhouse gas emissions while meeting the full energy needs of U.S.\nbusinesses and families. In the long term, stabilizing concentrations at even twice pre-industrial\nlevels, which will likely still have severe national and global environmental impact, poses an\nunprecedented challenge that can only be met with superior technology brought about by\naggressive diffusion and significantly higher levels of R&D. at what cat ?\nTwo types of technology provide significant opportunities to reduce greenhouse gas emissions\nwhile providing our full energy needs. First, energy-efficient technologies are currently\nunderutilized in all sectors of the economy. These technologies allow us to do more while\nconsuming less energy and reducing pollution. Through increased energy efficiency, we can\nwhy\nmaintain GDP growth while cutting energy usage and associated greenhouse gas and other air\nAt\nwhat\n?\npollution Second, technologies using a variety of energy sources, such as solar, wind, and\nbiomass, are becoming increasingly competitive. These technologies can supply energy with little cust?\nor no carbon emissions, allowing us to sever the link between GDP and greenhouse gas\nemissions and other air pollution. Working together, energy efficiency and low-pollution\ntechnologies provide the means of sustaining economic growth while meeting medium- and long-\nterm limits on greenhouse gas emissions.\nIn addition to reducing greenhouse gas emissions, these technologies provide other benefits to the\nnation that have long been the basis of national policy, including: achieving major reductions in\ncriteria air pollutants, decreasing dependence on foreign oil, increasing productivity of domestic\nindustries, and promoting U.S. leadership in the large and growing international market for\nadvanced technologies.\nBy the year 2010, existing energy-efficient technologies comprise the bulk of the potential to\nsubstantially reduce greenhouse gas emissions in the U.S. The development of some additional\nkey technologies, particularly in the transportation and energy supply sectors, can provide\nadditional opportunities for economically beneficial reductions. Studies by the National Academy\nof Sciences, the Office of Technology Assessment, and the American Council for an Energy-\nEfficient Economy (jointly with the Union of Concerned Scientists and others) have all\ndemonstrated that the technological potential exists to cut energy consumption and greenhouse\ngas emissions in the medium-term (by 20% or more at a net economic benefit. (Significant\nPRE-DECISIONAL DRAFT Do Not Cite or Quote\nMarch 10, 1997\nCamments COB Friday\n2\nreductions before 2010 are more difficult to achieve cost-effectively because sufficient time must\nbe allowed for the natural turnover of energy consuming equipment.)\nA clear policy on limiting U.S. greenhouse gas emissions will help to focus attention on energy\nconsumption and will provide important incentives for the diffusion of existing technologies and the\ndevelopment of even more advanced technologies. The technological response to past\nenvironmental policies, such as acid rain controls and the ban on CFCs, has been dramatic. In\nboth cases, the actual cost of control has been dramatically less than early projections.\nUnfortunately, even with a clearer market signal, the technology response to a greenhouse gas\npolicy will continue to be restrained. A host of market barriers contribute to today's large energy\nefficiency gap - the significant underutilization of existing, cost-effective energy-efficient\ntechnologies.\ndoe to har sand\nreason\nFederal policies that can unleash more of the technology potential are important because they\nallow a smoother and less costly transition to meeting a carbon constraint. Several federal\nprograms, many of which were launched in the President's Climate Change Action Plan, are\nsuccessfully overcoming market barriers to key energy-efficient technologies through partnerships\nwith the private sector. These programs need to be fully supported, and additional initiatives need\nto be put in place to target the remaining barriers to energy efficiency.\nmeaning what?\nLOI\n1.25\nTo achieve a sustainable emissions pathway/beyond the year 2010, there is an inavoidable need\nfor advances in low-pollution energy supply technologies as well as continued improvements in the\nefficiency of energy using technologies. As global population and affluence continue to rise,\ntechnological advances provide the key to stabilizing global concentrations of greenhouse gases at\nsafe levels without jeopardizing our quality of life. In order to stabilize greenhouse gas\nconcentrations at safe levels, new technologies will have to reduce emissions by more than a\nfactor of ten during the next few decades and be competitive enough to achieve deployment\nthroughout the world. This need for major and continual advancements can only be met through a\nstrong commitment to Federal RD&D.\nTHE ROLE OF TECHNOLOGY THROUGH 2010\nThe key to cost-effective greenhouse gas reductions by 2010 is the large potential of today's\nunderutilized energy-efficient technologies. Greater penetration of these technologies can\nenhance economic productivity through more efficient use of our energy resources. Paying energy\nbills is a relatively less productive use of consumer and business resources than the many other\ninvestments and spending choices that consumers and businesses have available to them.\nShifting capital from energy expenditures to new investments elsewhere in the economy will help\ndrive economic growth, employment and consumer income. Several major studies support the\neconomic value of improved energy efficiency. For example, an Energy Information Administration\nreport based on the Annual Energy Outlook 1996 suggests that a reduction in U.S. energy\nconsumption of 12 percent (by the year 2015) would increase GDP by 0.5 percent.\nHowever, there is clear evidence that this potential is not being realized in the current market\nsystem because of a number of institutional, organizational, and other barriers that work against\nthe diffusion of existing, energy-efficient technologies and the development of advanced\ntechnologies. The existence or availability of a financially attractive technology does not by itself\nPRE-DECISIONAL DRAFT -- Do Not Cite or Quote ***\nMarch 10, 1997\n3\nmean the technology will be purchased and used in sizable quantities. For high rates of market\npenetration, a number of other key factors must be in place:\nPotential buyers of products need to know of the technology;\nPotential buyers of products need clear, reliable information on the performance and\nMKt\neconomic benefits of the technology;\nant\nPotential buyers must be the ones to see the benefits of lower energy bills;\ndo it\nService providers and users of the technologies must have expertise to appropriately\ndesign for, install, and operate the technology; and\nSources of capital must understand the low-risk nature of these investments.\nhim\nIn many cases, these factors are not in place due to a wide variety of market barriers. For\nexample, the attached table provides a list of market barriers in the buildings sector.\nThese barriers result in consumers and businesses ignoring otherwise cost-effective investments\nin energy-efficient technologies. Consequently, many of these energy-efficient technologies have\nrelatively small market shares and low rates of technology diffusion. There is a sizable remaining\npotential, or \"efficiency gap.\" For example, fluorescent lighting ballasts were found in almost every\ncommercial building in 1989. Energy-efficient ballasts had been on the market for many years,\nwere based on well-known, proven technology, delivered equivalent performance to its inefficient\ncounterpart, and had a longer lifetime. Although purchases of efficient magnetic ballasts in 1989\nrepresented investments with IRRs of 60% or greater, only about 12 percent of the market had\nfound the technology and about 24 percent of the market was purchasing the technology due to\nstate standards. The remaining 64 percent of the market was purchasing less efficient\ntechnologies and committing themselves to much higher operating expenses over the life of the\nballast. This remaining 64% represented a large efficiency gap for building lighting.\nA number of federal, voluntary programs are currently enhancing markets by overcoming the\nbarriers to energy efficiency. The Administration's Climate Change Action Plan (CCAP) launched\nover 40 initiatives in 1993. Building on other DOE and EPA programs, the CCAP's goal was to\nreturn U.S. greenhouse gas emissions to 1990 levels by the year 2000. Despite large funding\ncuts, the CCAP programs are successfully overcoming market barriers and are currently expected\nto deliver approximately 3/4 of the emissions reductions originally projected. With continued\nsupport beyond the year 2000, these programs will significantly restrain growth in U.S. greenhouse\ngases through 2010 and beyond. Even at current funding levels, Administration projections\nindicate that these programs will eliminate 1/4 of total emissions growth through the year 2010,\nresulting in annual energy bill savings of approximately $30 billion (in 1995 dollars). A sustained\ncommitment to these programs beyond the year 2000 is needed to achieve these results, and\nrestored full funding of CCAP programs will further cut the growth in greenhouse gas emissions.\nTotal expenditures on CCAP programs in 1997 is $183 million, $120 million below the President's\nrequested budget of $305 million.\nCCAP 1.25\nA successful strategy to reduce greenhouse gas emissions by 2010 while improving the economy\nwould include:\n(1)\nRestored full funding of CCAP programs, with a sustained commitment to these programs\nbeyond the year 2000.\nPRE-DECISIONAL DRAFT -- Do Not Cite or Quote\nMarch 10, 1997\n4\n(2)\nNew initiatives to overcome additional market barriers and aggressively develop and deploy\nkey technologies.\nFollowing is a discussion of the role of federal programs for accelerated technology diffusion and\nnear-term RD&D in some key energy sectors. Because the CCAP's focus on the year 2000\nlimited the options that were implemented, a longer term goal provides significant new\nopportunities to overcome remaining market barriers and develop key technologies. Some of\nthese areas of opportunity are also discussed below. An interagency effort is underway to assess\npotential initiatives to address these opportunities and to develop a national market transformation\nplan that effectively narrows the efficiency gap by 2010 and beyond. Example approaches\nmentioned below are illustrative of the types of initiatives that may be included in a final plan.\nBUILDINGS\nThe largest untapped potential is our daily energy use in homes and commercial buildings, which\nconsume one-third of the nation's energy and two-thirds of its electricity. Deploying existing, cost-\neffective technologies could return greenhouse gas emissions to below 1990 levels by 2010.\nThese technologies include improved lighting, heating, cooling, windows, insulation, office\nequipment, energy management systems, and geothermal heat pumps. Many of these\ntechnologies improve the quality of service delivery (for example, improved comfort and lighting\nquality) and have been documented in a number of cases to improve productivity.\nDOE's Rebuild America program and EPA's Green Lights and ENERGY STAR Buildings programs\nare demonstrating that many of the barriers to energy efficiency in the commercial buildings sector\ncan be overcome. These programs have formed over 2500 partnerships to improve energy\nefficiency in buildings by up to 40% through technology investments with annual rates of return of\n20-50%. Program partners saved over $250 million on their energy bills in 1996. Because the\nrates of return on energy efficiency investments in commercial buildings are so high, they offer\nincreased yields to businesses over typical investment opportunities, spurring new investment,\neconomic growth, increased federal tax revenues, and new jobs.\nEPA and DOE's ENERGY STAR Consumer Labeling program is removing barriers that consumers\nhave faced in purchasing energy-efficient home products, such as heating and cooling equipment\nand appliances. The program has already transformed a number of markets, including cutting the\nenergy used by computers, monitors, and printers by 50% at virtually no incremental cost.\nManufacturers of home products are now partnering with the federal government and labeling their\nmore efficient products as consumers are provided with information on these products'\nenvironmental and economic benefits. Through 1996, this program has seen thousands of\nproducts labeled and billions of dollars invested in ENERGY STAR products. Consumers saved\napproximately $500 million on their energy bills in 1996.\nAdditional opportunities for new initiatives include:\nOvercoming Split Incentives - In landlord-tenant arrangements, the building owner often\nmakes long-range investment decisions but does not pay the energy bills for the property.\nIn these situations, the owner will often not invest in energy efficiency opportunities in spite\n*** PRE-DECISIONAL DRAFT -- Do Not Cite or Quote ***\nMarch 10, 1997\n5\nof excellent, low-risk financial returns because the returns go to someone else. The same\nproblem occurs with building designers and builders, because they choose the\ntechnologies for new buildings but do not pay the energy bills. EPA and DOE could\ndevelop a means of providing reliable and impartial energy performance information for\ncommercial buildings. This would allow building purchasers to make informed decisions\nand demand good energy performance. CCAP programs in this sector have built the\nreputations and developed the technical expertise that would be needed to address these\nbarrier.\nEnergy Information - Empowering consumers and businesses to save money and\npreserve the environment requires that they bei properly informed about energy choices.\nOne available vehicle for better information is their monthly energy bills. Better information\ncould include benchmarking comparisons showing how their bill measures up to model,\ncost-effective efficiency and to other customers. It could also include information on the\noverall efficiency and renewable components of the customer's power provider.\nRD&D of Fuel Cells - An aggressive 5-year R&D effort aimed at fuel cells (running on\nhydrogen converted from natural gas), such as proton-exchange membrane (PEM) fuel\ncells, which could become the most cost-competitive energy provider for buildings (and\nlight industry). If successful, a new or retrofit building in 2010 using efficient technologies\nwith electricity and hot water provided by an 80% to 90% efficient fuel cell could have no\nfirst-cost penalty with well under half the energy bill of a typical 1990 building and one-\nquarter the greenhouse gas emissions.\nReflective Surfaces - Recent research has shown that a city can be cooled by five or six,\ndegrees Fahrenheit by planting shade trees and replacing roads, roofs and parking lots\nwith lighter surfaces during the course of normal maintenance. This nominal additional\ncost could, by the year 2010, save the country up to $5 billion a year in energy and\nenvironmental costs. In Los Angeles alone, this would lower annual air conditioning bills by\n$170 million and reduce the creation of ozone smog by 10%. An aggressive diffusion and\ntargeted reflective materials R&D effort could yield substantial greenhouse gas reductions.\nINDUSTRY\nThe industrial sector consumes about one-third of the nation's energy. Since 1985, the energy\nintensity of the industrial sector has not improved significantly. Yet major energy-saving\ntechnological advances have continued steadily in cross-cutting areas (such as motors, which\nconsume 70% of industrial electricity) and in industry-specific areas (such as impulse-drying in\npaper manufacturing, vacuum pressure swing adsorption in glass making, and electrochemical\ndezincing of steel scrap). Many industrial efficiency improvements also offer important productivity\nbenefits. As an example, the average total annual savings from many energy efficiency projects\nundertaken at the Louisiana Division of Dow Chemicals were 3 to 13 times as large as the energy\nsavings alone.\nSeveral CCAP programs are achieving near-term efficiency improvements. DOE's Motor\nChallenge program, for example, is providing technical support to over 1,600 industry partners.\nRather than focusing on a particular technology, DOE and EPA's Climate Wise program is working\nwith over 250 companies to develop company-specific plans to reduce greenhouse gas emissions.\nPRE-DECISIONAL DRAFT -- Do Not Cite or Quote\nMarch 10, 1997\n6\nThe seven most energy-intensive industries-steel, aluminum, petroleum refining, chemicals, pulp\nand paper products, glass, and metal casting-account for about 80% of the energy consumed in\nU.S. manufacturing. They represent the largest opportunity for reducing industrial greenhouse gas\nemissions. DOE has formed long-term partnerships with each of these industries to develop\n\"Visions\" of energy-efficient, low-polluting, highly competitive \"Industries of the Future,\" as well as\nroadmaps to identify an RD&D pathway to achieving the vision.\nThe announcement of a new climate policy would create a large opportunity to work more\naggressively with major industries such as these to achieve significant reductions by 2010. The\nindustry Visions developed with DOE typically foresee between a 1% to 1.5% per year\nimprovement in efficiency for two decades. Achieving the high-end of that range, or even higher\n(by accelerating the rate of implementation) is possible, but would require a significantly greater\ngovernment-industry effort. Because industry has already identified niches for each technology\npursued, the diffusion of newly developed technologies can occur relatively quickly. For example,\nwe have already seen in the metal casting area a leap from idea to actual prototype in 18 months.\nNot only can we reduce the energy intensity of industry, an aggressive RD&D program could begin\nto reduce the carbon intensity of industrial energy consumption. Accelerating our current R&D\neffort in advanced gas turbine cogeneration (coupled with regulatory streamlining for accelerated\ndiffusion) could allow significant market penetration by 2010 of distributed power plants with\nefficiencies in excess of 85%. Industries such as pulp and paper could power these turbines with\nlow-cost biomass feedstocks.\nTRANSPORTATION\nFuel economy has been flat for over a decade due in part to the absence of increased fuel-\nefficiency standards, but also because consumers haven't themselves demanded increased fuel\neconomy. The attributes of cars most desirable to consumers change over time. During the\n1970s, when oil prices were high, fuel economy was one of the top features consumers looked for\nwhen shopping for cars. Lately, fuel economy has fallen while speed, acceleration, four wheel\ndrive and amenities are more more in demand. Since 1982, the average horsepower ratings of\nthe new light vehicle fleet has increased by 60 percent while the average fuel economy of the\nsame fleet has remained unchanged. From an engineering point of view, manufacturers have\nincreased the efficiency of new cars, but that efficiency has been devoted to delivering what\nconsumers want today. Had the new cars sold in 1996 retained the same average acceleration\nperformance and average weight as the new cars sold in 1982, the improved technologies actually\nincorporated into the fleet during this period could have increased new car fuel economy by about\n6 miles per gallon, or about 20 percent. If fuel prices and/or consumer preferences were to\nchange again, and there were increased demand for better fuel economy in new cars,\nmanufacturers could redirect both past and future technology improvements to deliver better fuel\neconomy.\nWith the focus on the year 2000, CCAP programs are focusing on reducing fuel consumption\nthrough increased telecommuting and reduced traffic congestion. The Partnership for a New\nGeneration of Vehicles (PNGV), on the other hand, is a longer-term effort to develop more efficient\ntechnologies for new vehicles. PNGV is a joint automotive research and development effort\nbetween the federal government and the U.S.-based automakers. The goal is to develop new\nautomotive technology that can more than double the fuel efficiency of a typical family sedan while\n*** PRE-DECISIONAL DRAFT -- Do Not Cite or Quote ***\nMarch 10, 1997\n7\nmeeting stringent emission and safety standards and maintaining affordability, performance, and\nutility. The timeline is for basic component research through 1997-1998, the design, buildup, and\nevaluation of concept vehicles through 2001, and the development of production prototypes by\n2003-2004. Increasing the fuel economy of a midsize vehicle from 27 to 80 miles per gallon would\nreduce the carbon dioxide emissions of that vehicle by two-thirds. The full impact of the PNGV\nprogram and its effect on fuel efficiency won't be realized until beyond 2010. However, some of\nthe technology elements that are developed will also provide an important near-term opportunity\nfor improving fuel efficiency in vehicles prior to 2010.\nOne technology that offers the chance for dramatic gains in efficiency that could be realized by\n2010 is the diesel engine. The diesel has a number of advantages from the perspective of\nstabilizing in 2010. Diesels are already more than 40% efficient, and a 55% efficient diesel is a\nplausible outcome of near-term research, an efficiency that no other engine can surpass or even\nmatch before 2010. Also, both the fuel and manufacturing infrastructures already exist for diesel,\nunlike several other proposed advanced engines, making rapid penetration more feasible.\nAdvanced diesels not only afford potential savings in a hybrid for cars, but also for sport utility\nvehicles and light duty trucks (the segment of fastest growth in fuel use), and in heavy duty trucks,\nwith their low fuel economy (7 to 8 mpg). The key problem is the unacceptably high level of\nparticulate and NOx emissions. A \"clean\" diesel would be a major achievement, and is now\nviewed as plausible by many even in the near term through a combination of a cleaner fuel (such\nas dimethyl ether which can be made from natural gas or ethanol), an advanced engine, and after-\ntreatment (including advanced catalysts). DOE is pursuing all of these areas, but successful\npenetration by 2010 will require additional funding.\nEthanol is another prime candidate for an intense RD&D effort. Federal R&D has brought the cost\nof ethanol from $3.60 per gallon in 1980 to $1.20 per gallon. With continued R&D in bio-\nengineered organisms and fast-growing crops, the biofuels program is expected to produce\nethanol for under 70 cents a gallon by 2005, competitive with oil at its current price (ethanol has\nlower energy content). The ethanol would be derived not from the starchy (i.e., edible) part of\ncorn, as it is now, but from cellulosic waste (such as waste paper or crop waste) and dedicated\ncrops, either herbaceous (as from switchgrass) or woody (as from hybrid poplar trees). A 1996\nArgonne analysis of total fuel cycle shows a greater than 90% reduction in greenhouse gases from\nwoody-biomass-derived E85 (85% ethanol) compared to reformulated gasoline.\nADDITIONAL, CROSS-CUTTING OPPORTUNITIES FOR NEW INITIATIVES\nA number of additional opportunities exist across all sectors of the economy. For example:\nFinancing for Energy Efficiency Investments - Large companies often rely on their own\ncapital for new investments and yet are reluctant, due to organizational barriers, to use that\nsame capital for investments in efficiency (even though they offer impressive rates of\nreturn). Small to mid-size businesses and consumers have little access to capital to begin\nwith, and they have a difficult time obtaining reasonable financing. Consequently, in all\nsectors of the economy, there are significant opportunities for efficiency improvements that\ncould be made if financing designed specifically for energy efficiency investments were\nwidely available. Previous opportunities to achieve a public good through organizing\nfinancial markets have been addressed by creating a secondary financing market through\n\"government sponsored enterprises\" (GSEs), like Fannie Mae, Freddie Mac or Sallie Mae.\n*** PRE-DECISIONAL DRAFT -- Do Not Cite or Quote\nMarch 10, 1997\n8\nThese GSEs purchase particular types of loans (e.g. home mortgages, student loans) from\nprimary lenders, such as commercial banks and mortgage companies, and bundle these\nloans for sale in the secondary security market to investors. After more than three years of\neffort, much of it aimed at developing a broadly accepted North American Monitoring and\nVerification Protocol for efficiency retrofits, DOE has laid the foundation for jump-starting a\nbillion dollar a year secondary market for energy efficiency loans.\nIncentives Through a Domestic Greenhouse Gas Policy - A new U.S. climate change\npolicy would provide unique opportunities to provide further incentives to improve the\npenetration and innovation of energy efficiency and renewable technologies. This could\nwork in a number of ways. For example, under a domestic trading system with a cap on\ngreenhouse gas emissions, a reserve of allowances or a portion of auction revenues could\nbe set aside to reward new R&D investment and production of efficient and renewable\ntechnologies.\nBusiness Accounting Practices - Currently, companies ignore future energy liability and\nundervalue the benefits of investments in energy efficiency. When a firm invests in energy\nefficiency, the accounting shows only a liability, and there is no recognition of the reduction\nin future energy expenditures. With the longer term focus beyond 2000 and a clear policy\nsignal on energy, it may be possible to work with businesses to develop new practices that\nmore accurately reflect energy liabilities. Strategic improvements to tracking demand and\nuse of energy resources would allow firms to identify and capitalize on profitable\nimprovements that are currently hidden in the noise of corporate financial data.\nGovernment Procurement - In addition to providing a strong energy signal to businesses,\na new climate policy will create additional opportunities for coordinated government action\nin promoting efficient technologies. Programs like ENERGY STAR Computers have\nbenefited significantly from federal procurement policy in the past, but innovative initiatives\nare often difficult because of decentralized and sometimes restrictive procurement policies.\nThe federal, state, and local governments together purchase a sizable portion of energy-\nconsuming technologies. Harnessing the combined purchasing power of all levels of\ngovernment could be an important opportunity to provide large markets for efficient and\nrenewable technologies. This would provide a strong incentive for increased R&D; reduce\nthe cost of production of these technologies (due to the effects of \"learning by doing\");\ndemonstrate the successful performance of new technologies; and make all participating\ngovernments more energy efficient.\nELECTRICITY PRODUCTION\nThe efficiency improvements described above could slow electricity demand growth substantially,\nand much of the growth that did occur could be provided locally by distributed cogeneration; such\nas advanced turbines in industry (running mainly on natural gas, with some biomass) or fuel cells\nin buildings (running on natural gas). The very low central station power demand growth means\nthat the replacement of dirtier plants with cleaner ones that is expected to occur would also be\nslowed. However, a clear and consistent price signal from a cap and trade system at even a low\nlevel could have a substantial effect, most likely causing some of the dirtiest and oldest coal plants\nto be repowered with natural gas.\nPRE-DECISIONAL DRAFT -- Do Not Cite or Quote\nMarch 10, 1997\n9\nSuch a price signal for carbon would almost certainly lead to increased utilization of natural gas,\nthrough a combination of increased gas use at dual-fuel power plants and repowering of selected\nolder, inefficient plants. An estimated 10% of existing coal capacity is nominally dual-fuel. While\nsome of this capacity would require some investments to use gas, the infrastructure is already\nthere and costs would be minimal - likely well under $100/kW. Repowering of older coal plants\nwith gas would cost an estimated $400/kW. This increased use of gas could be expected to\nincrease prices. That suggests the need for expanded R&D into lowering the cost of natural gas\nproduction and increasing the domestic resource base, though efforts such as improved drilling\nand advanced computational modeling. Such R&D could have a large impact on the cost of\nclimate mitigation.\nIn addition, much technological progress has been made in co-firing biomass fuels with coal. This\ntechnology exists, but economic incentives for widespread use are currently lacking. Incremental\ncapital investments would be required, but up to an estimated 40% co-firing biomass with coal\nwould be possible at costs of $150-250/kW - making biomass co-firing an attractive option under\na cap and trade policy.\nTHE ROLE OF TECHNOLOGY BEYOND 2010\nA strategy of continued diffusion of efficient energy using and energy supply technologies and\naccelerated development of key new low-carbon technologies during the next decade sets the\nstage for accelerated development and diffusion of a number of very-low and zero carbon\ntechnologies that may begin to see limited penetration by 2010, but will have substantial impacts\nafter 2010. The need for major technology advances can be seen from the following equation:\nEmissions = Population X Affluence (GDP/capita) X Technology (Emissions/GDP)\nFrom 1990 to 2050, we may well see global population double and affluence increase by a factor\nof four. At the same time, just to stabilize concentrations at pre-industrial levels (which would still\nhave severe national and global impact), the world may ultimately need to lower emissions from\n1990 levels, requiring the average emissions-related technology to improve by more than a factor\nof ten during the next few decades and then be rapidly deployed throughout the world.\nThis section examines the most promising R&D for mitigating CO₂ focusing on four strategic\nthrusts: (1) clean power generation, (2) energy efficiency, (3) carbon sequestration accompanying\na transition to a hydrogen-based economy, and (4) basic and very advanced research.\nResponding to the climate problem may require breakthroughs in all of these areas, and in any\ncase the high-risk nature of R&D requires the pursuit of multiple pathways.\nIncreasing the probability of achieving these desirable outcomes will require expanding the\ngovernment's current R&D spending in these areas, which is roughly $1.3 billion per year. Also,\nthe policies described in the previous section, including partnerships with industry, \"market pull\"\ndeployment initiatives, and improved regulations, will be required to ensure technological success\nand accelerated market penetration. The benefits could be enormous, including the avoidance of\nthe costs associated with the other approaches to CO₂ mitigation such as higher taxes and\nregulation. A 1997 study by Pacific Northwest Laboratory found that developing and deploying\nadvanced technologies over the next 15 to 30 years could substantially lower the cost to the global\neconomy of achieving major reductions in emissions of greenhouse gases.\nPRE-DECISIONAL DRAFT -- Do Not Cite or Quote\nMarch 10, 1997\n10\nCLEAN POWER GENERATION\nNatural gas technologies now set the benchmark for low cost, cleaner power generation.\nMoreover, advances in natural gas turbines will yield overall energy conversion efficiencies of 60%\nor more in the next decade, doubling the efficiency of traditional coal-fired plants. High\ntemperature fuel-cells, such as molten carbonate and solid oxide, may have significant application\nin power generation with further R&D, promising high efficiency and low emissions. Molten\ncarbonate fuel cells are expected to reach 50-60% efficiency by 2000, and perhaps 70% by 2005.\nAs a result, fuel cells can cut greenhouse gas emissions by as much as 50%.\nHigh efficiency coal-fueled power plants, such as integrated gasification combined cycle (IGCC)\nare now being demonstrated at efficiencies (40 to 43%) that are competitive with more traditional\ncoal-fired power plants but with much lower emissions, including 35-45% lower CO₂ emissions.\nThe efficiency of the next generation IGCC plant could exceed 55%, and, in combination with a\nfuel cell, achieve 60% by 2015. While lowering CO₂ emissions, these technologies also\ndramatically reduce traditional pollutants, such as particulate matter, nitrogen dioxide, and sulfur\ndioxide, while allowing the continued use of low-cost fossil fuels. Hence, advances in technology\nfrom federal R&D in this area will ensure the supply of low cost, clean electricity, while helping the\nU.S. realize domestic and global market opportunities for these superior technologies.\nWhile electricity from fossil fuels continue to become cleaner and cheaper, expanded R&D and\ndeployment could make a number of renewable technologies competitive on purely economic\ngrounds in the next two decades: wind power, PV, biomass power, solar thermal, and geothermal.\nIn a greenhouse-gas constrained world, these zero-carbon emitting sources of power would be\neven more competitive. Royal/Dutch Shell projects these technologies to be the dominant global\nsource of energy by the middle of the next century.\nRenewable technologies are becoming more economically competitive over time. Both wind and\nPV are experiencing a 20% cost reduction for every doubling of cumulative production.\nPhotovoltaic (PV) cells, which convert sunlight into electricity, have dropped from 90 cents per\nkilowatt-hour in 1980 to under 20 cents today while wind power has dropped from 25 cents per\nkWh to 5 cents. These cost reductions will continue to occur not just because of R&D, such as\nadvances in thin film PV, but also through economies of scale and improvements in manufacturing\nthat come with increased production. A number of different PV technologies are being pursued,\nproviding multiple opportunities for breakthroughs. Accelerated RD&D for wind could potentially\nhave an impact on CO₂ emissions in 2010.\nNuclear power provides 22% of our electricity emits no CO₂ and its contribution to reducing CO₂\nemissions is expected to increase as plants become increasingly efficient over the next decade.\nHowever, these plants are due to begin retiring by 2010, with virtually all capacity due to be retired\nby 2030. To keep nuclear power a viable option for future electricity production, DOE has\ndeveloped advanced nuclear reactor designs soon to be certified by the Nuclear Regulatory\nCommission. A plant similar to these advanced designs was recently completed in Japan at under\nhalf the time and about half the cost to complete the most recently finished U.S. nuclear plants. In\naddition, the Department is conducting R&D on life extension of existing nuclear power plants so\ncontinued operation of these zero carbon technologies is an option in the future.\nOpportunities for new initiatives include:\n*** PRE-DECISIONAL DRAFT -- Do Not Cite or Quote ***\nMarch 10, 1997\n11\nIncreasing market penetration of technologies such as PV and fuel cells - Government\ninvestments in R&D cannot be limited by the old notion of the linear model of R&D where\nbasic research is fed into a technology pipeline and out pops a commercialized product.\nToday's complex technologies do not begin with basic research and then proceed in a\nsimple fashion through the different stages until marketing begins. Successful innovation\nrelies heavily on communication and feedback between engineers and scientists\nthroughout the innovation process, including the later stages of development. Rapid\npenetration of clean technologies requires a concerted effort of activities across the\ntechnology innovation spectrum. The CCAP contains a number of measures to reduce\ncosts through accelerated domestic deployment for wind, PVs, geothermal, and fuel cells,\nbut these efforts are severely under-funded.\nIncreasing international diffusion of advanced supply technologies - A U.S. strategy to\naccelerate market penetration of these technologies requires an international component.\nMany renewables are most cost-effective today in developing countries without an\nelectricity grid. Advanced coal technologies will be critical in developing nations with large\ncoal reserves, such as China. Besides lowering costs, many of these efforts give vendors\nand utilities experience using these new technologies in niche markets, helping to remove\nbarriers to more expanded use in the future as the technology improves.\nA new government partnership with utilities - The power industry is reducing R&D and\ndeployment of renewables, fuel cells and other technologies in the face of increased\ncompetitive pressures - which in turn drives short-term cost-cutting efforts. Congressional\nlegislation to restructure the utility industry may well be enacted in the next two years -\nproviding a crucial opportunity to find alternative means to support R&D and deployment of\nlow-carbon power generation technologies.\nGiven the uncertain nature of R&D, the level of funding necessary to achieve such a world cannot\nbe known, but is likely to be considerably higher than today's investment levels, especially if the\nNation seeks to maintain world leadership in these technologies. In PVs, deep R&D cuts in the\n1980's have left us with only 40% of the world market. The Japanese outspend our $60 million\nR&D effort in PVs by more than two to one. The relatively high price for electricity in other\ndeveloped nations, and the far greater financial incentives they offer industry, means alternative\nenergy will be cost-effective in foreign countries before it is here. Our primary competitive\nadvantage can come only from technological leadership. Innovative partnerships aimed at\ndomestic deployment are essential because there aren't many instances of a nation achieving\nglobal market leadership in a technology for which there was not a robust domestic market.\nEND-USE ENERGY EFFICIENCY\nTechnology R&D in transportation is essential because the sector uses very little electricity, so\nadvances in clean power generation offer little hope of lowering its CO₂ emissions in the near term.\nAlso, two other major national problems - urban air pollution and dependence on foreign oil -\nstem largely from the transportation sector. The current federal strategy is to develop cars and\ntrucks that are highly fuel-efficient as well as ones that run on fuels other than petroleum, including\nnatural gas, electricity, and biofuels (ethanol). We could see significant penetration of biofuels in\nthe next two decades with the RD&D strategy discussed in the first section.\nPRE-DECISIONAL DRAFT -- Do Not Cite or Quote ***\nMarch 10, 1997\n12\nAs mentioned previously, the Partnership for a New Generation of Vehicle (PNGV) is pursuing\nmultiple pathways for both advanced engines (hybrid electric, Stirling engine, gas turbine and\nclean diesel) and energy storage (such as a batteries, flywheel or ultra capacitor). Supporting\nR&D includes lightweight, super-strong materials such as composites; high-temperature ceramics;\nregenerative breaking; and advanced power electronics. PNGV vehicles, available just prior to\n2010, will be 2.5 times more efficient than today's conventional vehicles, providing large potential\nto reduce greenhouse gas emissions.\nProton Exchange Membrane (PEM) fuel cells have perhaps the greatest long-term potential for\nreducing transportation CO2. Recently PNGV developed an on-board reformer for converting\ngasoline into hydrogen to run a PEM fuel cell, which would have a 50% increase in fuel efficiency\nover an internal combustion engine, half the CO2, and a 90% reduction in conventional pollutants.\nbelow ultra-low emission vehicle standards. A PEM fuel cell running on ethanol would have\nvirtually no net CO₂ emission. A decade of R&D may be needed to bring costs down and integrate\nfuel cells into a commercial vehicle, which Chrysler has committed to do in partnership with the\ngovernment. Maximum efficiency and emissions reductions would come from running the car on\nhydrogen directly, which will require even more research with automakers.\nThe ultimate low-CO₂ vehicles and the fuels they would use cannot be known today. To ensure\nthat the R&D leads to commercially viable vehicles, a number of programs are needed to\nguarantee that the infrastructure is available to support vehicles that run on non-traditional fuels.\nThe Industries of the Future visions and technology roadmaps identify the best R&D opportunities\nfor increasing energy efficiency and reducing emissions in the industrial sector while increasing\nproductivity. These include advanced materials development, such as ceramic composites;\nseparation technology, such as advanced membranes; catalysis; bioprocessing, biocatalysis, and\nrenewable feedstocks; sensors and controls; and industrial cogeneration. All of these industries\nwould like to dramatically improve their environmental performance. The pulp and paper industry,\nfor example, sees the possibility of becoming a no-net-CO₂ industry, through a combination of\nefficient use of energy and biomass cogeneration.\nThese industries (except chemicals) significantly under-invest in R&D compared to the industry\naverage. What R&D they have devoted to the environment has traditionally been focused on\ncompliance - end-of-pipe treatment and control, as opposed to prevention - since that is how\nour regulatory system is designed. While increased R&D is needed, the Administration's\nregulatory reinvention revolution must succeed.\nFederal RD&D into buildings technologies has been remarkably successful. Consider just five\ntechnologies developed or advanced by the national laboratories in the past two decades at a cost\nof roughly $40 million - building design software and advanced lighting, windows, oil burners,\nand refrigerator compressors. These have provided cumulative net savings of more than $25\nbillion to consumers and businesses, exceeding the $8 billion spent on all energy efficiency R&D\nsince 1978. They now provide 18 million metric tons of annual CO₂ savings.\nContinued RD&D in the buildings sector is likely to prove just as cost-effective: Key near-term\ntechnologies include improvements in lighting, superwindows, advanced design software,\nhigh-efficiency clothes washing, heat-pump water heaters, gas heat pumps, improved insulation\nand duct systems, more efficient cooling including gas cooling, solar heating and cooling, and day\nPRE-DECISIONAL DRAFT .. Do Not Cite or Quote ***\nMarch 10, 1997\n13\nlighting, and urban heat island mitigation R&D (such as more reflective roofing and road materials).\nLonger term R&D needs include electrochromic glazings for windows, building-integrated PV\nsystems, and PEM fuel cells, all of which could begin to see market share before 2010 and make a\nvery large impact in the following decade.\nOpportunities for new initiatives include:\nIncreasing federal investments in technology RD&D with industry - Most of the technology\npathways that will result in sizable reductions in CO₂ emissions in the 2010-2020 time\nframe are being pursued today, but at funding levels substantially below what is required to\nmaintain greenhouse gas stabilization beyond 2010 at relatively low economic costs to our\nnation. Examination of these pathways and increased funding in some key areas is of\ncritical importance.\nCARBON CAPTURE AND SEQUESTRATION\nIn addition to the portfolio of R&D options related to less CO₂ intensive technologies for energy\nsupply and use, capture and disposal of CO₂ offers an additional alternative for reducing\natmospheric concentrations of CO2. If major reductions in CO₂ emissions are necessary, and\nglobal reliance on fossil fuels continues beyond the middle of the next century, then some form of\nCO₂ sequestration will almost certainly be needed.\nMoreover, a successful program to develop safe, low cost greenhouse gas sequestration options\nshould garner bipartisan support for progress on climate change issues by allowing for continued\nuse of fossil fuels while minimizing the direct costs of mitigation programs. If these disposal\ntechniques are sufficiently low in cost, they could also be a means to induce developing country\nparticipation in a climate change mitigation program, thereby overcoming another institutional\nbarrier to implementing an effective mitigation program.\nA long-term R&D strategy would include demonstration of a number of sequestration options and\nresearch into their possible environmental impacts; converting CO₂ into an industrial chemical\nfeedstocks; other novel sequestration options, such as CO₂ fixation by micro-algae; selectively\npermeable membranes for CO₂ capture; processes for converting fossil fuels and biomass into\nCO₂ and hydrogen; development of hydrogen infrastructure technology, including transportation\nand storage; and PEM fuel cells.\nTechnology R&D into clean power generation and energy efficiency support many long-standing\nnational goals and have been pursued for years. Carbon dioxide capture and sequestration,\nhowever, makes sense on a massive scale only in a greenhouse-gas constrained world. So, at\nleast in this country, this area has been relatively under funded; since 1990 Japan has spent more\nthan 30 times what we have on CO₂ capture and sequestration.\nBASIC AND ADVANCED RESEARCH\nA number of areas of basic research could prove crucial to responding to climate change, including\nbiotechnology, fermentation microbiology, combustion research, polymer and ceramic science,\nprocess engineering, supercritical CO2, new materials synthesis, and nanotechnology. We need\nto better understand the underlying biochemistry of the bioconversion of carbon dioxide to\n*** PRE-DECISIONAL DRAFT -- Do Not Cite or Quote\nMarch 10, 1997\n14\nmethane or to other potential fuels and feedstocks. This new research includes the ability to\nsequence the genetic material of microorganisms and plants, to develop new molecular genetic\nengineering techniques, and to understand biophysical and biochemical pathways of\nphotosynthesis.\nOne essential area for expanded R&D is superconductivity. Superconductors offer the possibility\nof storing and transmitting electricity with virtually zero loss, with potential savings of 5% to 10% of\nall electricity presently generated by utilities. Highly efficient superconducting motors could have\nan even larger impact since motors currently consume 60% of all electricity. While U.S. and\nGerman funding is roughly $40 million annually, Japan spends nearly $70 million, not including\ntheir superconducting MagLev train program, with some $3.5 billion being spent over five years.\nSignificant increases in both basic and applied research in superconductivity should be an\nessential part of a low-CO₂ R&D strategy.\n*** PRE-DECISIONAL DRAFT -- Do Not Cite or Quote ***\nMarch 10, 1997\nrestrict Tech banniers\nHistorical Forces Leading to Market Barriers to Energy Efficiency in the Buildings Market\nType of Barrier\nNature of Barrier\nExamples of Barrier\nImperfect Competition\nNatural Monopoly\nEconomies of scale\nElectric utilities\nMarket Power (Monopoly and\nBargaining power; Interdependent conduct\nUniqueness of building location; few development firms in one area\nOligopoly)\nAnti-Competitive Conduct\nCollusion; predation\nManipulation of permit process to the detriment of competitors\nInformation Availability\nInformation Costs\nTransaction costs\nHigh cost of customized audit (cheaper if done en masse); collecting product info;\nfinding credible information sources\nAsymmetric Information\nUnequal bargaining\nDeveloper's superior knowledge of building\nMisinformation\nMisinformed exchange\nBelief: \"no efficiency increase is possible\"\nLack of Information\nUninformed exchange\nNo knowledge of efficient technologies\nEconomic Non-Rationality\nBounded Rationality, Satisficing\nUsing rules of thumb to reduce transaction\nIgnore costs that are < 5% of rent; use a two year payback; seek acceptable profits\ncosts; not maximizing profits\nOther Non-Rationality\nCultural reasons for taking actions that affect\nPreferring energy production to cost-cutting because it is more congruent with\nbusiness practice\nmanagement culture\nRisk Aversion\nResistance to change\nAvoid changes in suppliers and technologies; avoid new technologies\nSide Effects\nNegative externalities from power production\nPollution from power generation; dependence on imported oil; risks of nuclear energ\nSplit Incentives\nUtility costs not paid by purchaser and user\nLandlord-tenant problem; builder-buyer problem\nof equipment\nPublic Goods\nR&D\nNon-excludability, zero marginal costs\nToo little R&D performed\nExpertise and Training\nNon-excludability, zero marginal costs\nToo little training on efficient design, installation and maintenance; too little informati\ndissemination\nCash Flow Constraints\nLack of access to capital\nSmall business tenants on the edge; developer's reluctance to take on more debt\nRegulatory Distortions\nRegulatory Bias\nMore profits for energy production than for\nUtility reluctance to install conservation even when cheaper than new supply\nefficient use\nAverage Cost Pricing\nPrice signals do not reflect cost, leading to\nUtility regulation in the US\ninefficient usage\nBuilding Codes\nObsolete codes and poor code enforcement\nLocal US building codes contain requirements that interfere with efficient constructio\ninhibit innovation and efficiency; # of\nthousands of building codes in the US\ninconsistent codes inhibits achieving\neconomies of scale\nProductisity\n<\n03/17/97\n13:46\n202 252 0275\nOPPE\nMUNNELL\n001/010\nFAX TRANSMISSION\nU.S. ENVIRONMENTAL PROTECTION AGENCY, OFFICE OF POLICY, PLANNING AND\nEVALUATION\n401 M STREET SW\nWASHINGTON, DC 20460\n202-260-4332\nFAX: 202-260-027\nTo:\nAssistant Secretaries Group\nDate:\nMarch 17, 1997\nFax #:\nSee attached list.\nPages:\n10, including this cover sheet.\nFrom:\nWilliam N. White\nSpecial Assistant to David\nGardiner\nSubject:\nRegulation paper\nCOMMENTS:\nPlease find attached the paper Using Standards and Regulations to Reduce Greenhouse Gas\nEmissons, to be discussed at tomorrow's Assistant Secretaries Elimate Change Group meeting\n7/19\nPlease contact me at 260-1345 if you have questions or do not receive a complete transmission.\n03/17/97\n13:47\n202 252 0275\nOPPE\nMUNNELL\n003/010\nUsing Standards and Regulations to Reduce Greenhouse Gas\nEmissions\nIntroduction\nLimitations on greenhouse gas emissions could take the form of standards and\nregulations. This paper lays out the broad policy options available for limiting emissions\nusing standards and other measures, but does not analyze the costs and benefits of\nparticular options. Standards to limit greenhouse gas emissions could take the form of:\nMinimum energy efficiency standards for energy consuming equipment: Historically,\nthese have targeted appliances and other residential and commercial equipment, as\nwell as personal transportation (i.e., the Corporate Average Fuel Economy (CAFE)\nprogram).\nOther measures: These can take many forms and could include minimum purchase\nrequirements for renewable sources of electricity, demand side management programs\n(which mandate electric utilities to undertake information and energy efficiency\nsubsidy programs), federal spending rules for transportation infrastructure, and federal\nprocurement policies.\nDirect limits on greenhouse gases: Standards could specify allowable greenhouse gas\nemission levels per unit of output (or some other factor). For example, a powerplant\ncould face a limit on the amount of carbon dioxide emitted per kilowatt of electricity\ngenerated. Another example is methane from some landfills, which is already\ncontrolled due to limits on emissions of volatile organic compounds.\nWithin any program of standards, flexibility could be introduced by allowing\nthose who perform better than the levels prescribed by the standards to trade their\nresulting \"credits\" with others, thereby reducing costs. Such a program could share many\nof the characteristics of an emissions trading program.\nFigure 1: U.S. Energy-Related Fossil Fuel Emissions By Sector\nHistorical (1950-1995) and Projected (1998-2015)\n1900\nFigures 1 and 2\n1600\nsummarize sectoral CO2\n1400\nemissions (with and without\nemissions associated with\n1200\nMillion Metric Tons of Carbon\nelectricity). As indicated, with\n1000\nTransportation\nrespect to direct emissions,\n800\nelectric utilities account for about\n$00\none-third of total CO₂ emissions,\n400\ntransportation for about one third,\n200\nroughly one fifth for industry,\n0\nseven percent for the residential\n1950\n1960\n1970\n1990\n1990\n2000\n2010\nsector, and about 4% for the\nPre-Decisional Draft Do Not Cite or Quote\n1\n03/17/97\n13:48\n202 252 0275\nOPPE\nMUNNELL\n004/010\ncommercial sector. If electric utility emissions are attributed to final energy consumers,\nthen industry's share rises to about one third and the residential and commercial sectors\neach account for 15-20% of the total.\nFigure 2: U.S. Energy-Related Fossil Puel Emissions By Sector\nHistorical (1950-1995) and Projected (1996-2015)\n1800\n1600\n1400\n1200\nMillion Metric Tone of Carbon\n1000\nElectric Utilities\n800\nTransportation\n600\n400\nIndustry Excluding Electricity)\n200\nResidential & Commercial (Exeluding Electricity\n0\n1950\n1950\n1970\n1990\n1990\n2000\n2010\nEnergy Efficiency Standards\n1. Appliance Standards\nStandards for energy consuming equipment can expand markets for such\ntechnologies, help to reduce information barriers and can lower consumer's decision\ncosts. Standards can also provide incentives to private research and development by\nreducing uncertainty in the market. U.S. homeowners spend $110 billion each year to\npower home appliances. These uses account for about 70% of all the primary energy\nconsumed in homes.\nDuring its typical 10-15 year lifetime, an appliance's operating costs may exceed\nits initial purchase price several times over. Nevertheless, many consumers do not\nconsider energy efficiency when making purchases. Manufacturers are often reluctant to\ninvest in more efficient technology that may not be accepted in the highly competitive\nmarketplace.\nRecognizing the great potential for energy savings, many states began prescribing\nminimum energy efficiencies for appliances. Anticipating the burden of complying with\ndiffering state standards, manufacturers supported the development of federal standards\nthat would preempt state standards. Federal standards provide a high degree of certainty\nfor energy savings and achieve higher penetration rates for efficiency gains than\nvoluntary, educational or incentive programs.\nPre-Decisional Draft Do Not Cite or Quote\n2\n03/17/97\n13:50\n202 252 0275\nOPPE\nMUNNELL\n4.\n005/010\nIn 1975, the U.S. Congress established a program of test procedures, energy\nconservation standards, and labeling for certain major household appliances including\nrefrigerators, freezers, air conditioners, water heaters, furnaces, dishwashers, clothes\nwashers, clothes dryers and kitchen ranges and ovens. A 1987 amendment, the National\nAppliance Energy Conservation Act, set the first national efficiency standards for these\nappliances and established a schedule for regular updates by DOE to achieve the\nmaximum improvement in energy efficiency that is technologically feasible and\neconomically justified.\nThe Energy Policy Act (EPACT) of 1992 expanded coverage to certain\ncommercial and industrial equipment, including commercial heating and air-conditioning\nequipment, water heaters, certain incandescent and fluorescent lamps, distribution\ntransformers, and electric motors. EPACT also established maximum water flow-rate\nrequirements for certain plumbing products and provided for voluntary testing and\nconsumer information programs for office equipment, luminaires, and windows.\nUnder DOE's first rulemaking in November 1989, updated standards were set for\nrefrigerators and freezers that went into effect January 1993. The Final Rule for energy\nconservation standards for clothes washers, clothes dryers, and dishwashers issued in\nMay 1991 became effective May 14, 1994.\nThe initial standards included in EPCA, and those already amended by DOE, are\nexpected to save about 23 quadrillion Btus (24.3 exajoules) of source energy from 1993\nto 2015. Current appliance standards have already saved consumers $1.9 billion and will\nultimately save $58 billion in energy costs over the lifetimes of units installed between\n1990 and 2015.\nIn addition, more efficient products are more competitive internationally and have\nenvironmental benefits from reduced atmospheric emissions. The total emission\nreductions of federal appliance standards implemented to date are estimated to be 14.2\nMMTCE in the year 2000. Further development of standards could result in additional\nreductions.\n2. Personal Transportation\nConsumers make choices about which type of vehicle to purchase and how much\nthey drive their vehicles. There are many attributes that consumers may consider when\npurchasing a vehicle, such as: price, fuel economy, quality, safety, styling, performance,\nreliability, handling, comfort, options, size, etc. Fuel economy can conflict with a\nnumber of these attributes, and recent surveys confirm that fuel economy is very low on\nthe list of attributes that consumers seek today. If the cost to society of greenhouse\nemissions is not reflected in the cost of owning and operating a vehicle, consumers will\nmake inefficient choices, a classic case of market failure. One way to incorporate the\nexternal costs into the prices that consumers face is through regulation.\nPre-Decisional Draft Do Not Cite or Quote\n3\n03/17/97\n13:51\n202 252 0275\nOPPE\nMUNNELL\nI.\n006/010\nSuch regulations already exist in the United States. The Energy Policy and\nConservation Act of 1975 established mandatory average fuel economy standards for new\ncars and light trucks starting with the 1978 model year. The standard (currently, 27.5\nmpg for cars and 20.7 mpg for light trucks) is calculated by each manufacturer's fleet\n(domestic or import) and model year. Each manufacturer's fleet average is equal to the\nsales-weighted fuel economy of all its new cars or light trucks of that vintage that are sold\nin the United States. Manufacturers that exceed the standard can carry forward credits for\nup to three years; manufacturers that fall short can carry backward projected future credits\nfor up to three years. Failure to comply with CAFE requirements can result in a civil\npenalty. No major U.S manufacturer has ever paid a fine; only European manufacturers\nof luxury cars have opted to pay a fine rather than comply with the standards in a given\nyear or take advantage of the credit system.\nEmissions of greenhouse gases from the transportation sector account for about\none-third of total U.S. GHG emissions. Transportation greenhouse gas emissions are\nexpected to grow from about 430 million metric tons of carbon \"equivalent\" (MMTCe) in\n1990 to 550 or more MMTCe in 2010. Passenger cars and light duty trucks (light\nvehicles) contribute the majority of transportation emissions. Emissions from light\nvehicles alone accounted for 20% of total U.S. greenhouse gas emissions in 1990, and in\nthe absence of new policy measures are expected to rise from about 250 million metric\ntons of carbon equivalent (MMTCe) in 1990 to 350-400 MMTCe in 2010. All of this\ngrowth will likely be from light trucks, which are projected to account for a greater share\nof emissions than cars by the year 2000.\nI\nThe major factors underlying the rapid growth in emissions from light vehicles\nare: growth in vehicle miles traveled; stagnant new fleet fuel economy levels; and growth\nin the relative proportion of light trucks sold, which have lower CAFE standards than\ncars.\nTrends in Fuel Price and New Auto and Light Truck MPG\n30\n$4.00\nCAFE Standard-Cars\nActual\n25\n$3.00\ngrowth in vehicle\nMiles Per Gallon (MPG)\n20\nEstimated New Car\nmiles traveled\n$2.00\n(1990$)\nFleet Fuel Economy\n15\n(VMT) since\nCAFE Standard-Light\n1990 has\n10\nTrucks\n$1.00\naveraged 2.4%\n5\nEstimated New Light\nper year. Growth\n0\n$0.00\nTruck Fleet Fuel\nin VMT is a\nEconomy\n1978\n1980\n1982\n1984\n1986\n1988\n1990\n1992\nPrice of unleaded\nfunction of a\nreg. gasoline/gallon\nnumber of\nfactors, including\ndemographic changes (more women in the workforce; immigration), land use patterns\n(where people live in relation to where they work, shop, etc); the cost of driving each\nmile (now at an all-time low on an inflation-adjusted basis); and others.\nPre-Decisional Draft Do Not Cite or Quote\n4\n03/17/97\n13:52\n202 252 0275\nOPPE\nMUNNELL\n007/010\nCorporate average fuel economy of new car fleets increased steadily along with\nincreasing CAFE standards throughout the late 1970s until the mid 1980s. Since then,\nnew car and light truck fuel economy has been stagnant as new more efficient\ntechnologies have been applied to performance (which has increased by 60% for all light\nvehicles in the last 15 years) and utility rather than to fuel economy. Absent a driving\nforce such as policy changes or fuel price increases, no significant increase in new fleet\nfuel economy is expected to occur. Further, because new vehicle fuel economy has been\nstagnant for several years, the in-use fleet of cars and light-trucks has also nearly reached\na fuel economy equilibrium.\nIn fact, the overall in-use fuel economy of the combined new light vehicle fleet\n(i.e., cars and light trucks such as minivans, sport utility vehicles, and pickup trucks) has\nalready begun to decline. Each year, about 15 million light vehicles are sold in the\nUnited States. In the past 15 years, sales of light trucks have skyrocketed. They have\ngone from under 25% of the market in 1982 to almost 45% today. A key reason that this\nshift is important in terms of GHG emissions is that light trucks face lower CAFE\nstandards than cars (almost 7 mpg lower). Moreover, since light trucks tend to last longer\nthan cars, they are likely to be driven more miles over their lifetime than cars.\nIn 1994, President Clinton convened a Federal Advisory Committee Policy\nDialogue to assist in the development of measures to significantly reduce greenhouse gas\nemissions from personal motor vehicles (\"CarTalk\"). Although CarTalk ended without\nconsensus among all members of the Committee, the process did result in a number of\nanalyses and proposed policy options.\nOther Mandates\nStandards could also be used to limit greenhouse gas emissions in other sectors of\nthe economy. Most prominent among these are:\nElectricity Restructuring: There is currently a trend among states to adopt retail\ncompetition for the electricity industry. This trend could be accelerated with federal\nlegislation. Retail competition is expected to lower the price of electricity by as much as\n20-25% in certain regions and change the fuel mix of generation. Preliminary EPA and\nDOE analysis indicates that utility greenhouse gas emissions could rise by as much as 2-\n6% as a result. To mitigate the environmental impacts of competition and maintain the\nenvironmental benefits of current state level renewable and demand side management\nprograms, a number of options have been adopted at the state level (for states that have\nalready adopted competition) or are under consideration for the rest of the nation. These\ninclude:\nA \"portfolio standard\" for renewable energy or greenhouse gas emissions: This\ninvolves requiring that all generators meet a specified level of renewable generation\nPre-Decisional Draft Do Not Cite or Quote\n5\n03/17/97\n13:53\n202 252 0275\nOPPE\nMUNNELL\n008/010\nor greenhouse gas emission reduction either by undertaking such projects themselves\nor purchasing \"credits\" from others who have.\nA social benefit fund: Revenue is collected by placing a charge on transmission\nservice. The funds are then used to subsidize energy efficiency projects or low\nincome consumers. California has already adopted this approach.\nInformation disclosure requirements: Generators could be required to disclose the\nemission profiles of their generation, facilitating the marketing of \"green\" electricity.\nAdditional air pollutant requirements: Many states are hesitant to adopt retail\ncompetition because they perceive that differing regional environmental requirements\nboth put their electric industry at a competitive disadvantage and will result in more\npollution being transported into their states. Thus, additional environmental\nrequirements to \"level the playing field\" - which could include greenhouse gas\nemission reductions - are currently being debated.\nThe Intermodal Surface Transportation Efficiency Act (ISTEA): This Act establishes the\nrules for federal transportation funding to the states. In 1991, ISTEA authorized $140\nbillion in transportation projects over a six year period. The Act expires in 1997 and\nCongress is now considering options for its reauthorization. These could include\nprovisions that would indirectly reduce greenhouse gas emissions. Examples include the\nfollowing:\nCongestion Mitigation and Air Quality Improvement Program: Additional funds\ncould be targeted to transportation projects that reduce air emissions and energy\nconsumption on a long-term sustainable basis.\nBrownfields Restoration: Successful redevelopment of browfields can help revive\ninner city areas and reduce sprawl, thereby reducing vehicle miles traveled. By\nfocusing job growth in inner city areas it encourages greater reliance on more energy\nefficient and environmentally sound transporation modes, including transit, walking,\nand bicycling. More funds could be made available for these projects.\nIncentive Funds: Climate actions through ISTEA can produce economic efficiency\nand reduce emissions, while increasing mobility choice and community livability.\nOne option would be to create a $500 million Fuel Efficiency Incentive Fund that\nrewards the ten states that are able to reduce fuel consumption, on a per capita basis,\nthe greatest over the next five years.\nA Program of Standards on Direct Emissions\nThis system would establish a set of greenhouse gas performance standards for\nsources of emissions. Flexibility could be introduced by allowing the trading of emission\nPre-Decisional Draft\nDo Not Cite or Quote\n6\n202 252 0275\nOPPE\nMUNNELL\n4.\n009/010\n03/17/97\n13:54\nreduction \"credits\" when sources perform superior to specified levels. A source could\nthus comply with the performance standard either through its own control efforts, or by\npurchasing credits from other sources.\nFor such a system to work, a performance standard would be established for each\nsector covered under the program. For example, for coal fired electric boilers, a limit\ncould be placed on the amount of carbon per Btu of energy combusted. Sources\nsurpassing that limit would earn \"credits\" that would be tradable. The amount of tradable\ncredit would be based on the source's past production rate.\nThe performance standards themselves would be \"rate based.\" That is, they\nwould establish allowable emissions per unit of production, but not set total output limits.\nThe total amount of tradable credit available to a source would be the product of the\namount by which the source is surpassing the rate-based standard and its historical\nproduction levels.\nLikely candidates to include in such a program include:\nManufacturers of energy-using equipment for which an efficiency standard\ncan be set. For example, residential, commercial, and industrial equipment\n(refrigerators, furnaces, ranges, HVAC equipment, motors, and lighting) could\nbe included.\nTransportation equipment manufacturers, including passenger vehicles, light\nand heavy duty trucks, commercial transport equipment (planes, trains), and\noff-road equipment (e.g., tractors, farm equipment) and small engines (e.g.,\nmowers).\nThe many sources of non-CO2 emissions (such as coal mine methane,\nagricultural sources of emissions, and halogenated substances). A credit\nprogram is also well suited to \"opt-in\" smaller sources which are not included\nunder the regulator requirements due to administrative and monitoring\nconsiderations, but have the potential to reduce emissions at low costs.\nElectric utilities and heavy industry\nPetroleum refiners\nUnder a program of this type, the set of performance standards for all sectors must\nbe consistent with the national target. Since total CO₂ emissions are not directly limited,\nsuch compliance would have to be projected based on an analysis of the performance\nstandards.\nTrading Credits and Determining Compliance\nCredits could be traded bilaterally between the source who creates the credit and\nthe source whose performance (i.e., emissions) exceed the regulatory standard\nAlternatively, brokers and central exchanges could also be a mechanism for trades.\nPre-Decisional Draft Do Not Cite or Quote\n7\n03/17/97\n13:54\n202 252 0275\nOPPE\nMUNNELL\n010/010\nThe regulating authority at some point must approve the authenticity of the credit\ngenerating reductions. For some sectors, credits could be certified for one year only. For\nexample, a utility emitting under its limit in a year would generate credits equal to the\nreductions in that year only. These may be sold in that year or banked for the utilities or\nuse or future sale.\nFor other sectors, annual certification would not be feasible. For equipment\nmanufacturers, credits would be granted for each piece of equipment sold with\nperformance better than the standard. Credits would equal the emissions associated with\nthis improvement for the life of the equipment. It would not be feasible to track each\npiece of equipment that is produced to ensure its continued operation and performance.\nTherefore, lifetimes, usage, and degradation assumptions would need to be stipulated.\nConclusion\nThere is a long history of government using standards and regulations to address\nmarket failures relating to environmental externalities, the provision of information, and\nenergy security. In addition, the role of government in the provision of transportation\ninfrastructure and the regulation of natural monopolies is large. Consequently, the\nnumber of actions could be taken to mitigate emissions of greenhouse gases is large.\nThese range from direct limits on emissions, to changes in government policies that\nindirectly affect the demand for energy. Given this wide array, choices must be made that\nconsider both the costs that such interventions may impose and the resulting reductions in\ngreenhouse gas emissions.\nPre-Decisional Draft Do Not Cite or Quote\n8\n002/010\nMUNNELL\nOPPE\n13:46\n202 252 0275\n03/17/97\nDISTRIBUTION:\nOrganiz.\nName\nFax #\nState\nEileen Claussen\n647-0217\nRafe Pomerance\nCommerce\nEverett Erhlich\n482-0432\nJeffrey Hunker\n482-4636\nOSTP\nRosina Bierbaum\n456-6025\nCEA\nAlicia Munnell\n395-6958\nJeff Frankel\nTreasury\nJoshua Gotbaum\n622-2633\nJustice\nLois Schiffer\n514-0557\nInterior\nBrooks Yeager\n208-4561\nNOAA\nTerry Garcia\n482-6318\nOMB\nT.J. Glauthier\n395-4639\nUSTR\nJennifer Haverkamp\n395-4579\nAgric\nCharlie Rawls\n720-5437\nDOE\nDirk Forrister\n586-9987\nMark Chupka\n586-0861\nEPA\nMary Nichols\n260-5155\nDavid Doniger\nDavid Gardiner\n260-0275\nDOT\nFrank Kruesi\n366-7127\nOVP\nPete Jordan\n456-9500\nCEQ\nSteve Seidel\n456-6546\nUSAID\nDavid Hales\n703-875-4639\nDOL\nAndrew Samet\n219-5980"
}