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NEC/CEQ Climate Change Deputies Mtg, Wed, 3/19/97, 1:30pm, Rm 472 w/ JAF [Jeffrey Frankel]
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NEC/CEQ Climate Change Deputies Mtg, Wed, 3/19/97, 1:30pm, Rm 472 w/ JAF [Jeffrey Frankel]
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Records of the Council of Economic Advisers (Clinton Administration)
Alicia Munnell's Files
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FOIA Number: 2017-1095-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
Subgroup/Office of Origin:
Council of Economic Advisers
Series/Staff Member:
Alicia Munnell
Subseries:
OA/ID Number:
10102
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Folder Title:
NEC / CEQ Climate Change Deputies Mtg, Wed, 3/19/97, 1:30pm, Rm. 472 w/ JAF
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Section:
Shelf:
Position:
S
20
3
2
2
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cc: Am
JAF
FAX TRANSMISSION
JS
U.S. ENVIRONMENTAL PROTECTION AGENCY
OFFICE OF POLICY, PLANNING AND
EVALUATION
40 I M STREET SW
WASHINGTON, DC 20460
202-260-4332
FAX: 202-260-0275
To:
Assistant Secretaries Group
Date:
March 14, 1997
Fax #:
See attached list
Pages:
including this cover sheet.
From:
William N. White
Special Assistant to David
10
Gardiner
Subject:
Papers on Trading and Regulation
COMMENTS:
Please find attached two for discussion
papers at the Assistant Secretaries Climate Change Group
meeting on Tuesday. The first is Domestic Greenhouse Gas Emissions Trading, the second is
Using Standards and Regulations to Reduce Greenhouse Gas Emissions. Please contact me at
260-1345 if you have questions or do not receive a complete transmission.
second transmi Heal separately!
WL with
who were
address hear So with 50, to Ideal
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Domestic Greenhouse Gas Emissions Trading
Introduction
This paper describes options for a domestic emissions trading program to meet an
international agreement on an emissions target for greenhouse gases. Emissions trading
involves allocating or auctioning emissions allowances, and allowing the trading of
allowances in a market with sufficient mechanisms to ensure compliance with targeted
levels. Emission trading creates new, marketable assets that can have substantial value,
so distributional issues will be an important component of program design. Allocation
designs or auction revenues can be used to address these distributional issues.
Emissions trading offers two advantages over a system of emission taxes. First,
by setting overall quantity targets, emissions trading programs offer greater certainty that
national emission targets will be achieved. Under a tax system, the quantity of total
emissions is the result of individual polluters' decisions in response to the incentive
provided by the tax. In principle, if the entire cost structure is known, any quantity target
attained by a tradable permit system could also be attained by an appropriately calculated
tax. In so far as forecasting in practice is difficult, however, the resulting level of
emissions can be greater or less than the level targeted when the tax rate is set. Second,
under an allowance system, the government has greater flexibility in deciding whether to
collect revenues. It can auction permits, allocate them based on historical emissions, or
undertake some combination of the two. This flexibility can affect the public acceptance
of the mitigation program. Emission tax systems always involve revenues accruing to the
government (although they can be rebated).
Emission Trading of Greenhouse Gases
An emissions trading program, like any program designed to limit greenhouse
gases, must contain certain elements. First, an agreed upon emissions budget, and any
rules governing provision for the project-specific crediting of reductions made in
activities not explicitly covered by the budget, must be established. A central authority
must be given the domestic responsibility for verifying compliance and must be provided
sufficient information to do so. Finally, noncompliance with allowance limitations or
reporting requirements must generate real consequences, such as penalties or subtraction
of allowances.
A program would have to establish permit lifetimes, monitoring and enforcement
provisions, as well as rules for permit banking, borrowing, and trading. Consideration
should also be given to transaction costs, which should be kept as low as possible.
However, particularly difficult issues involve determining what types of activities require
a permit and how permits should be allocated.
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What types of Activities Should Require a Permit
Sources of greenhouse gases include not only those emitting carbon dioxide, but
other gases such as methane, nitrous oxides, hydrofluorocarbons (HFCs),
perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). Gases differ both in their
atmospheric lifetimes and in their ability to trap heat in the atmosphere. In addition,
carbon is not only emitted through the combustion of fossil fuels, but is also absorbed by
"sinks" such as trees and soils.
The decision for determining permit holders should consider the following:
Coverage: While it may not be necessary to ensure that every ton of greenhouse gas
is accounted for within an emission trading regime, the scope of coverage of the
trading program should be sufficient to ensure compliance with targets set in
accordance with an international agreement.
Administrative and compliance feasibility: The number of sources involved in the
trading program should be small enough to be administratively feasible and large
enough to ensure market competition. In addition, monitoring and verification of
permit compliance must be possible for those included in the program.
Potential to Diffuse Low Greenhouse Gas Technologies: Alternative points of
intervention should be evaluated for their ability to provide incentives for research,
development, adoption and diffusion of low greenhouse gas technologies.
Market Impacts: Any program that limits emissions will affect the bottom line of
firms. The permit program will have economic impacts that vary depending on
program design. For example, exempting certain sizes or categories of sources from
permit requirements because of administrative or equity concerns (e.g., small boilers
or home heating oil) has competitive implications within the energy market.
Public Acceptance: The program must consider the ease or difficulty with which
various allocation approaches would be accepted by the public.
Consistency with the international trading system: The domestic program should be
consistent with any international prescriptions concerning the coverage of sources and
gases.
Carbon Sources
Carbon dioxide currently accounts for about 85% of U.S. greenhouse gas
emissions and number in the hundreds of millions since they include sources such as
automobiles and residential gas water heaters. However, since virtually all of the carbon
contained in fossil fuel extracted from the ground (with the possible exception of certain
feedstocks) is eventually released to the atmosphere, a trading program need not focus
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uniquely on direct emitters, but can be implemented through other points in the energy
market. These include fuel imports, fuel extraction, processing, refining, distribution, and
secondary conversion (e.g., coal to electricity). In addition, these points could vary by
sector. For example, an emission trading program could focus on the point of final
combustion for coal, but on refining for oil, or distribution for natural gas. Given the
wide variety of options available for including energy sources in a trading program, a few
alternative programs are described below for illustration:
A Program Targeting Primary Fuel Producers
The primary fuel producing sector - extraction, processing, refining, and
distribution - has many levels where a permit program could be implemented. One
option would be to require permits at the point of first sale (a permit is surrendered with
the first inter- or intra- company transaction). Such a system would include transactions
between a coal company and an electric utility, between a natural gas producer and its
marketing arm, between a natural gas producer and a broker, or between an oil extraction
company and its refinery operations. Fuel importers would also require permits to import
fuel. This would capture the carbon from fuel consumed in the refining process. The
number of market actors under this program design would be under 5000 and virtually all
carbon in the energy sector would be included in the program.
A Program of Emission Trading at the Sectoral Level
An emissions trading program could also be applied at the point of combustion,
allowing trading among affected sources. This system would be most comparable to the
current SO₂ emission allowance trading system.
Targeting the six largest industrial CO₂ emitting sectors (electric utilities, cement,
primary metals, pulp and paper, petroleum refining and chemicals) in a sectoral trading
program could encompass as many as 20,000 market participants and 90 percent of
industrial CO₂ emissions. Mobile source emissions could either bc indirectly included in
the system by allocating transportation equipment manufacturers permits for emissions
associated with their automobile fleets or by including refiners in the program.
Residential and commercial emissions could be similarly addressed by focusing upstream
in the energy system.
Other Greenhouse Gases and Sinks
Other gases account for the remaining 15% of greenhouse gas emissions (on a
carbon-equivalent basis). Most important among these is methane, which accounts for
11% of national emissions. Since gases differ in their lifetimes and in their potential to
trap heat in the atmosphere, an "exchange rate" or trading ratio must be established to
convert all gases into common units for inclusion in a trading program. Such ratios have
been developed by climate researchers and could be applied here. These should be
consistent with the rules established in the international protocol.
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Several, although not all, of the many sources of non-carbon greenhouse gases
could likely be included in a trading system. For example, methane emitting coal mines,
landfills, livestock manure management facilities and potentially natural gas distribution
systems may meet the criteria described above for inclusion in a greenhouse gas trading
program. These sources account for 7% of national greenhouse gas emissions. Similarly,
emissions of some sources of other gases could potentially be included (e.g., magnesium
production).
Forests in the United States currently remove an amount of carbon equal to 8% of
national emissions from the atmosphere. Their inclusion in the trading program would
theoretically enhance the system's flexibility. However, translating the potential of sinks
into monitorable, verifiable, and cost effective emission reductions would require the
development of a national accounting system for sinks. Such a system is needed to
ensure that the planting of trees and preservation of forests in a given area would not
result in offsetting losses elsewhere. The decision on whether to include sinks in the
trading system will be influenced by the outcome of the international negotiations.
Allocating Permits
In an emission trading system, some mechanism must be provided for allocating
permits to sources. This could be done on the basis of baseline/historical emissions
(where permits are given to those currently emitting) or through an auction (where
revenues accrue to the government). These two mechanisms might also be combined: a
portion of permits could be allocated on the basis of historical emissions while the rest
are auctioned. In any case, the value of these assets could be large depending on the
permit price, which is determined by the emissions target and the costs of substitutes.
Given that an auction could produce substantial revenues, some decision would have to
be made with respect to what to do with the proceeds. These could be used to redress
inequities in the distribution of control costs, fund R&D for less carbon intensive energy
sources and end uses, or to reduce taxes or the deficit.
For example, a reserve of allowances or a portion of auction revenues could be
set aside to encourage more rapid development and diffusion of low greenhouse gas
emitting technologies. Manufacturers of energy consuming equipment could compete for
the set aside based on the degree to which they produce equipment more efficient than the
average in use or than required by current mandatory efficiency standards. Such a
program could yield reductions in energy demand and help buffer the consumer from the
impact of higher energy costs.
Alternatively, permit allocation formulae could take into account the market
impacts of the mitigation program. "Set asides" could be made available to those
industries, workers, or consumers who experience a grossly disproportional share of the
costs of control. A set aside could also be auctioned, with the revenues used to redress
gross inequities in the distribution of control costs.
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Allocation Based On Baseline/Historical Emissions
Under this approach, sources are given a number of permits based on baseline fuel
production or emissions and an allocation formula. Various allocation formulae can be
devised, weighted to greater or lesser degrees in favor of sources with high historical
emissions. Emissions allowances are endowed to facility operators for no cost and would
be transferable. Those receiving permits thus obtain assets of potentially large value from
the government at no cost.
Such an allocation mechanism could create entry barriers. In a capital intensive
sector like primary fuel production, where entry barriers are already substantial, new
entrants would be further disadvantaged if they had to purchase permits - especially if
existing holders hoard permits. This problem could be mitigated by withholding a
number of permits for purchase by new entrants or by auctioning a portion on the open
market. Such an auction would also facilitate price discovery in a new market. Although
new firms will still be disadvantaged (as they will pay for all of their permits), they would
be able to enter the market. The pool of permits would need to be withheld from existing
sources to ensure compliance with budgeted national emission levels - unless there are
specific international provisions for early banking.
It may be desirable to design an allocation that would allow credit for early
emissions reductions (those achieved prior to the start of the program, but after the
baseline period) in particular for those that reduced greenhouse gas emissions as part
of government sponsored voluntary programs. If credits for past actions are given, the
total credits allowed would need to be deducted from the overall permit allocation in
order not to exceed national greenhouse gas emissions target.
Auction
Alternatively, an auction could be used to allocate permits. In this case, permit
holders would pay the market clearing price for every unit of greenhouse gas released.
Auctions ensure that permits are available for trade, and would serve to inform potential
traders about current price levels. All participants have equal access to permits, placing
new entrants on the same footing as existing emitters. As discussed earlier, since an
auction could produce substantial revenues, some decision would have to be made with
respect to what to do with the procceds.
Relationship to an International Trading System
Because control costs differ substantially among countries, international trading
offers the potential of large, global efficiency gains. The current U.S. position calls for
the international agreement on greenhouse gases to incorporate the trading of reduction
obligations. While such obligations are the responsibility of governments, the creation of
a domestic trading program reduces transaction costs and increases the likelihood that the
theoretical gains of international trading will be realized.
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Without a domestic trading system, some mechanism for effecting an
international transaction between governments would need to be created. That is, once
governments trade international obligations, some means to allocate the change in
national "allowable" emission levels to sources within the country must be created.
Without a domestic trading program, this is likely to require government intervention.
With a program, sources of greenhouse gases could themselves become agents in the
international market and undertake this function, thereby lowering transactions costs.
Consistency among the rules of domestic and international trading is therefore
important. The International Agreement will specify the time dimension of national
obligations, the coverage of gases, as well as the rules for banking and borrowing. If the
domestic specifications for emissions trading are consistent with those for the trading of
obligations among countries, the potential efficiency gains of international trading are
more likely to be realized.
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Attachment: US Experience with Emissions Trading
The US has had more experience with emissions trading than any other country in
the world. Specific programs include:
Sulfur Dioxide (SO₂) Allowance Trading: The Clean Air Act Amendments of 1990
required a 50% reduction in SO₂ emissions from electric utility boilers. To
accomplish this goal, a fixed number of emission allowances were allocated to
electric utilities based on a formula reflecting historical emissions. In addition, a
small portion of allowances are auctioned every year to facilitate price discovery and
new entrants. Allowances are specifically excluded from being defined as rights to
pollute, may be traded to any party anywhere within the continental U.S., and may be
"banked" for use in future years. Participants need to conduct regular monitoring of
emissions and make an annual accounting of their emissions. Penaltics are imposed if
emissions exceed the number of allowances held by a source.
A functioning market in SO₂ allowances now exists, involving both bilateral
exchanges between companies, and brokered exchanges through third parties. This
market, along with other factors,¹ has helped to dramatically reduce the cost of the
abatement program. Initially, forecasters claimed that a 50% reduction (10 million
tons) in SO2 would correspond to allowance prices in the range of $400 to $1000.2
However, prices for allowances that would be needed in the next decade to achieve
this level of emission reduction currently range between $90 to $100. In addition,
1995 emissions were actually 40% below the legally required levels for that year.
Water Effluent Trading: The US generally has regulated surface water quality
through a system of discharge limits for large sources of water pollution. In addition,
states have standards for ambient water quality which are often not attained even after
large dischargers apply "best technology." The reason is that small ("nonpoint")
sources (such as runoff from farms) contribute significantly to water pollution. A
number of state and local governments are employing trading systems for watersheds
that either permit trading among large dischargers, or allow large dischargers to fulfill
their requirements by controlling nonpoint sources. These include the Fox River in
Wisconsin, the Dillon Reservoir in Colorado, and the Tar-Pamlico River in North
Carolina. The latter two programs are designed to manage future economic growth.
Thus, the quantity of effluent allowances allocated exceeds current discharge levels.
Once growth consumes this excess, trading is expected to reduce compliance costs.
I These include the fact that the bill that was actually adpted was not as onerous as many in industry had
feared, the low price and widespread availability of low sulfur coal, the awarding of "bonus allowances,"
the postponement of capital investments, and lower than expected transportation costs.
2 Hahn, Robert W., and Carol May, "The Behavior of the Allowance Market: Theory and Evidence," The
Electricity Journal, March, 1994.
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Inter-refinery Lead Trading: EPA operated a lead trading program from 1983 to
1987 as it phased out lead from gasoline. Lead trading allowed refiners and importers
to trade lead reduction credits in order to meet limits for the lead content of gasoline.
The quantity of allowances to which a firm was entitled was determined by the
amount of leaded fuel produced by the firm and the contemporancous EPA standard.
Those who bettered the standard could sell their credits to others. Some 10 billion
grams of lead were traded during the course of the program at prices ranging from
0.75 to 5 cents per gram. Allowing the trading of lead credits reduced the costs of the
program by approximately 20 percent.
Criteria Air Pollutant Trading: EPA first began incorporating aspects of emissions
trading in its air program in 1974, when it allowed a modified source to use "credits"
earned by another source within the same plant to avoid additional regulatory
requirements. Since then, emission trading has substantially expanded. Trades have
numbered in the thousands and have been estimated by Hahn and Hester (1986) to
have achieved savings between $525 million and $12 billion.
Market Mechanisms for Chlorofluorocarbon (CFC) Phaseout: Under the 1987
Montreal Protocol to limit stratospheric ozone depletion, the U.S. required the phase
out of the production of CFCs by 1996. As part of its program, the U.S. adopted a
tradeable permit regime covering CFC manufacturers and importers. These
allowances were allocated based on each firm's 1986 market share. As the market for
CFCs declined, the system allowed firms to allocate production among different
facilities according to the least-cost pattern of supply. It also gave CFC users the
flexibility to switch between different CFC compounds, within the overall limit on
allowances. This program helped reduce the costs of the phaseout. In 1988, EPA
estimated that the cost to halve CFC use would be $3.55 per kilogram. By 1993, it
became clear that all uses could be eliminated by 1996 at a cost of $2.45 per
kilogram.
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DISTRIBUTION:
Organiz.
Name
Fax #
State
Eileen Claussen
647-0217
Rafe Pomerance
Commerce
Everett Erhlich
482-0432
Jeffrey Hunker
482-4636
OSTP
Rosina Bierbaum
456-6025
CEA
Alicia Munnell
395-6958
Jeff Frankel
Treasury
Joshua Gotbaum
622-2633
Justice
Lois Schiffer
514-0557
Interior
Brooks Yeager
208-4561
NOAA
Terry Garcia
482-6318
OMB
T.J. Glauthier
395-4639
USTR
Jennifer Haverkamp
395-4579
Agric
Charlie Rawls
720-5437
DOE
Dirk Forrister
586-9987
Mark Chupka
586-0861
EPA
Mary Nichols
260-5155
David Doniger
David Gardiner
260-0275
DOT
Frank Kruesi
366-7127
OVP
Pete Jordan
456-9500
CEQ
Steve Seidel
456-6546
USAID
David Hales
703-875-4639
DOL
Andrew Samet
219-5980
Assistant Secretaries' Meeting
19 March 97 1:30pm
REVIEW OF CLIMATE CHANGE PAPERS FROM THE EPA
1.
Trading paper
Issue: sign off? Yes, this paper is in good shape.
2.
Technology diffusion paper
Issue: sign off? No, A. Ask that the quote by the 2001 economists be removed. The quote is
out of context and subject to wide interpretation.
B. Ask the authors to justify why they continue to blur market failure
and non-market barriers (e.g., high discount rates, risk
aversion, incomplete information). The reasons for slow diffusion
differ, and policies should reflect this difference.
The EPA claims that this "text-book" distinction has no added
value to actual policy analysis. This is untenable. For example,
tradable pollution permits were "textbook" economics a few years
ago but have gone on the save the economy billions of dollars.
Does the EPA have evidence to suggest that no additional
benefits are gain when a policy accounts for the distinction
between market failure and non-market barriers?
C. Effectiveness rates of programs are debatable. I calculated that the
implied rate of return to a $200 m/yr CCAP program with their
1.25 E/GDP goal was about 2000 percent.
3.
Regulation and Standards
Issue: sign off? No, this paper needs a good edit. I will send my comments over directly.
II. IAT UPDATE
1. Rates of technological change remain an issue. The implied 2000% rate of return for
CCAP seems high to me. We need to ask for rates of return on tax payer dollars
and ask whether these rates are reasonable.
2. Tax reform with and without carbon policy. We asked for but have yet to receive the
baselines with tax reform and no carbon policy?
year
gdp
%energy
%improve
gdp gain
disc factor
disc gdp disc prog CO
0.25%
5%
2E+08
1
7E+12
0.04
0.0025
700000000
1.05
666666667
171428571
2
0.005
1.40E+09
1.1025
1.27E+09
163265306
3
0.0075
2.10E+09
1.157625
1.81E+09
155490768
4
0.01
2.80E+09
1.2155062
2.30E+09
148086445
5
0.0125
3.50E+09
1.2762816
2.74E+09
141034710
6
0.015
4.20E+09
1.3400956
3.13E+09
134318771
7
0.0175
4.90E+09
1.4071004
3.48E+09
127922639
8
0.02
5.60E+09
1.4774554
3.79E+09
121831085
9
0.0225
6.30E+09
1.5513282
4.06E+09
116029605
10
0.025
7.00E+09
1.6288946
4.30E+09
110504386
totals
2.76E+10
1.39E+09
rate of return
1982.98%
200 mulice
1.25 in onlisy
impluencent to
6DP ratio
why cell we quin
from 1.00 to
1.25
history
International Impact Assessment Model - Free Trade
March 17, 1997
Carbon Tax
CRA
600
500
400
S/Ton
300
200
100
0
2000
2010
2020
2030
+
X
111
112
ID
Country
Policy
Oil Response
Import Subt
Backstop
Ref Scene
111
United States
US1
L
M
H
IS92A
112
United States
US2
L
M
H
IS92A
For further information, contact: Dr. W. David Montgomery (202) 662-3840 [email protected]
1.25 Extrapolated Stabilization Path
1,650
1,600
Carbon Emissions (Million Metric Tons)
1,550
1,500
1,450
1,400
1,350
1,300
1990 1995 2000 2005 2010 2015 2020
Year
Year
1990 1995 2000 2005 2010 2015 2020
1,300
1,350
1,400
1,450
1,500
1,550
Carbon Emissions (Million Metric Tons)
1,600
1,650
1.25 Stabilization Path
Role of Technology Policies in Limiting Greenhouse Gas Emissions
"Economics studies have found that there are many potential policies to reduce
has
greenhouse gas emissions for which the total benefits outweigh the total costs. For the
United States in particular, sound economic analysis shows that there are policy options
that would slow climate changé without harming American living standards, and these
measures may in fact improve U.S. productivity in the long run."
The Economists' Statement on Climate Change, Feb 13, 1997 (signed by more
THE den YO A
than 2,000 economists, including six Nobel Laureates)
strategy to accelerate the diffusion of existing technologies and the research, development and
deployment of more advanced technologies is a critical component of any U.S. policy to stabilize
greenhouse gas emissions. A cap and trade system alone - without such a technology strategy
- would result in higher prices for carbon allowances than would otherwise be the case. Analysis
suggests than an accelerated technology effort has a large potential for bringing down this price,
and thus the cost to the economy. In addition to major studies in the early 1990s, forthcoming
analysis by five leading National Laboratories finds that a large potential remains for reducing U.S.
energy consumption and greenhouse gas emissions while meeting the full energy needs of U.S.
businesses and families. In the long term, stabilizing concentrations at even twice pre-industrial
levels, which will likely still have severe national and global environmental impact, poses an
unprecedented challenge that can only be met with superior technology brought about by
aggressive diffusion and significantly higher levels of R&D. at what cat ?
Two types of technology provide significant opportunities to reduce greenhouse gas emissions
while providing our full energy needs. First, energy-efficient technologies are currently
underutilized in all sectors of the economy. These technologies allow us to do more while
consuming less energy and reducing pollution. Through increased energy efficiency, we can
why
maintain GDP growth while cutting energy usage and associated greenhouse gas and other air
At
what
?
pollution Second, technologies using a variety of energy sources, such as solar, wind, and
biomass, are becoming increasingly competitive. These technologies can supply energy with little cust?
or no carbon emissions, allowing us to sever the link between GDP and greenhouse gas
emissions and other air pollution. Working together, energy efficiency and low-pollution
technologies provide the means of sustaining economic growth while meeting medium- and long-
term limits on greenhouse gas emissions.
In addition to reducing greenhouse gas emissions, these technologies provide other benefits to the
nation that have long been the basis of national policy, including: achieving major reductions in
criteria air pollutants, decreasing dependence on foreign oil, increasing productivity of domestic
industries, and promoting U.S. leadership in the large and growing international market for
advanced technologies.
By the year 2010, existing energy-efficient technologies comprise the bulk of the potential to
substantially reduce greenhouse gas emissions in the U.S. The development of some additional
key technologies, particularly in the transportation and energy supply sectors, can provide
additional opportunities for economically beneficial reductions. Studies by the National Academy
of Sciences, the Office of Technology Assessment, and the American Council for an Energy-
Efficient Economy (jointly with the Union of Concerned Scientists and others) have all
demonstrated that the technological potential exists to cut energy consumption and greenhouse
gas emissions in the medium-term (by 20% or more at a net economic benefit. (Significant
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Camments COB Friday
2
reductions before 2010 are more difficult to achieve cost-effectively because sufficient time must
be allowed for the natural turnover of energy consuming equipment.)
A clear policy on limiting U.S. greenhouse gas emissions will help to focus attention on energy
consumption and will provide important incentives for the diffusion of existing technologies and the
development of even more advanced technologies. The technological response to past
environmental policies, such as acid rain controls and the ban on CFCs, has been dramatic. In
both cases, the actual cost of control has been dramatically less than early projections.
Unfortunately, even with a clearer market signal, the technology response to a greenhouse gas
policy will continue to be restrained. A host of market barriers contribute to today's large energy
efficiency gap - the significant underutilization of existing, cost-effective energy-efficient
technologies.
doe to har sand
reason
Federal policies that can unleash more of the technology potential are important because they
allow a smoother and less costly transition to meeting a carbon constraint. Several federal
programs, many of which were launched in the President's Climate Change Action Plan, are
successfully overcoming market barriers to key energy-efficient technologies through partnerships
with the private sector. These programs need to be fully supported, and additional initiatives need
to be put in place to target the remaining barriers to energy efficiency.
meaning what?
LOI
1.25
To achieve a sustainable emissions pathway/beyond the year 2010, there is an inavoidable need
for advances in low-pollution energy supply technologies as well as continued improvements in the
efficiency of energy using technologies. As global population and affluence continue to rise,
technological advances provide the key to stabilizing global concentrations of greenhouse gases at
safe levels without jeopardizing our quality of life. In order to stabilize greenhouse gas
concentrations at safe levels, new technologies will have to reduce emissions by more than a
factor of ten during the next few decades and be competitive enough to achieve deployment
throughout the world. This need for major and continual advancements can only be met through a
strong commitment to Federal RD&D.
THE ROLE OF TECHNOLOGY THROUGH 2010
The key to cost-effective greenhouse gas reductions by 2010 is the large potential of today's
underutilized energy-efficient technologies. Greater penetration of these technologies can
enhance economic productivity through more efficient use of our energy resources. Paying energy
bills is a relatively less productive use of consumer and business resources than the many other
investments and spending choices that consumers and businesses have available to them.
Shifting capital from energy expenditures to new investments elsewhere in the economy will help
drive economic growth, employment and consumer income. Several major studies support the
economic value of improved energy efficiency. For example, an Energy Information Administration
report based on the Annual Energy Outlook 1996 suggests that a reduction in U.S. energy
consumption of 12 percent (by the year 2015) would increase GDP by 0.5 percent.
However, there is clear evidence that this potential is not being realized in the current market
system because of a number of institutional, organizational, and other barriers that work against
the diffusion of existing, energy-efficient technologies and the development of advanced
technologies. The existence or availability of a financially attractive technology does not by itself
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3
mean the technology will be purchased and used in sizable quantities. For high rates of market
penetration, a number of other key factors must be in place:
Potential buyers of products need to know of the technology;
Potential buyers of products need clear, reliable information on the performance and
MKt
economic benefits of the technology;
ant
Potential buyers must be the ones to see the benefits of lower energy bills;
do it
Service providers and users of the technologies must have expertise to appropriately
design for, install, and operate the technology; and
Sources of capital must understand the low-risk nature of these investments.
him
In many cases, these factors are not in place due to a wide variety of market barriers. For
example, the attached table provides a list of market barriers in the buildings sector.
These barriers result in consumers and businesses ignoring otherwise cost-effective investments
in energy-efficient technologies. Consequently, many of these energy-efficient technologies have
relatively small market shares and low rates of technology diffusion. There is a sizable remaining
potential, or "efficiency gap." For example, fluorescent lighting ballasts were found in almost every
commercial building in 1989. Energy-efficient ballasts had been on the market for many years,
were based on well-known, proven technology, delivered equivalent performance to its inefficient
counterpart, and had a longer lifetime. Although purchases of efficient magnetic ballasts in 1989
represented investments with IRRs of 60% or greater, only about 12 percent of the market had
found the technology and about 24 percent of the market was purchasing the technology due to
state standards. The remaining 64 percent of the market was purchasing less efficient
technologies and committing themselves to much higher operating expenses over the life of the
ballast. This remaining 64% represented a large efficiency gap for building lighting.
A number of federal, voluntary programs are currently enhancing markets by overcoming the
barriers to energy efficiency. The Administration's Climate Change Action Plan (CCAP) launched
over 40 initiatives in 1993. Building on other DOE and EPA programs, the CCAP's goal was to
return U.S. greenhouse gas emissions to 1990 levels by the year 2000. Despite large funding
cuts, the CCAP programs are successfully overcoming market barriers and are currently expected
to deliver approximately 3/4 of the emissions reductions originally projected. With continued
support beyond the year 2000, these programs will significantly restrain growth in U.S. greenhouse
gases through 2010 and beyond. Even at current funding levels, Administration projections
indicate that these programs will eliminate 1/4 of total emissions growth through the year 2010,
resulting in annual energy bill savings of approximately $30 billion (in 1995 dollars). A sustained
commitment to these programs beyond the year 2000 is needed to achieve these results, and
restored full funding of CCAP programs will further cut the growth in greenhouse gas emissions.
Total expenditures on CCAP programs in 1997 is $183 million, $120 million below the President's
requested budget of $305 million.
CCAP 1.25
A successful strategy to reduce greenhouse gas emissions by 2010 while improving the economy
would include:
(1)
Restored full funding of CCAP programs, with a sustained commitment to these programs
beyond the year 2000.
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(2)
New initiatives to overcome additional market barriers and aggressively develop and deploy
key technologies.
Following is a discussion of the role of federal programs for accelerated technology diffusion and
near-term RD&D in some key energy sectors. Because the CCAP's focus on the year 2000
limited the options that were implemented, a longer term goal provides significant new
opportunities to overcome remaining market barriers and develop key technologies. Some of
these areas of opportunity are also discussed below. An interagency effort is underway to assess
potential initiatives to address these opportunities and to develop a national market transformation
plan that effectively narrows the efficiency gap by 2010 and beyond. Example approaches
mentioned below are illustrative of the types of initiatives that may be included in a final plan.
BUILDINGS
The largest untapped potential is our daily energy use in homes and commercial buildings, which
consume one-third of the nation's energy and two-thirds of its electricity. Deploying existing, cost-
effective technologies could return greenhouse gas emissions to below 1990 levels by 2010.
These technologies include improved lighting, heating, cooling, windows, insulation, office
equipment, energy management systems, and geothermal heat pumps. Many of these
technologies improve the quality of service delivery (for example, improved comfort and lighting
quality) and have been documented in a number of cases to improve productivity.
DOE's Rebuild America program and EPA's Green Lights and ENERGY STAR Buildings programs
are demonstrating that many of the barriers to energy efficiency in the commercial buildings sector
can be overcome. These programs have formed over 2500 partnerships to improve energy
efficiency in buildings by up to 40% through technology investments with annual rates of return of
20-50%. Program partners saved over $250 million on their energy bills in 1996. Because the
rates of return on energy efficiency investments in commercial buildings are so high, they offer
increased yields to businesses over typical investment opportunities, spurring new investment,
economic growth, increased federal tax revenues, and new jobs.
EPA and DOE's ENERGY STAR Consumer Labeling program is removing barriers that consumers
have faced in purchasing energy-efficient home products, such as heating and cooling equipment
and appliances. The program has already transformed a number of markets, including cutting the
energy used by computers, monitors, and printers by 50% at virtually no incremental cost.
Manufacturers of home products are now partnering with the federal government and labeling their
more efficient products as consumers are provided with information on these products'
environmental and economic benefits. Through 1996, this program has seen thousands of
products labeled and billions of dollars invested in ENERGY STAR products. Consumers saved
approximately $500 million on their energy bills in 1996.
Additional opportunities for new initiatives include:
Overcoming Split Incentives - In landlord-tenant arrangements, the building owner often
makes long-range investment decisions but does not pay the energy bills for the property.
In these situations, the owner will often not invest in energy efficiency opportunities in spite
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of excellent, low-risk financial returns because the returns go to someone else. The same
problem occurs with building designers and builders, because they choose the
technologies for new buildings but do not pay the energy bills. EPA and DOE could
develop a means of providing reliable and impartial energy performance information for
commercial buildings. This would allow building purchasers to make informed decisions
and demand good energy performance. CCAP programs in this sector have built the
reputations and developed the technical expertise that would be needed to address these
barrier.
Energy Information - Empowering consumers and businesses to save money and
preserve the environment requires that they bei properly informed about energy choices.
One available vehicle for better information is their monthly energy bills. Better information
could include benchmarking comparisons showing how their bill measures up to model,
cost-effective efficiency and to other customers. It could also include information on the
overall efficiency and renewable components of the customer's power provider.
RD&D of Fuel Cells - An aggressive 5-year R&D effort aimed at fuel cells (running on
hydrogen converted from natural gas), such as proton-exchange membrane (PEM) fuel
cells, which could become the most cost-competitive energy provider for buildings (and
light industry). If successful, a new or retrofit building in 2010 using efficient technologies
with electricity and hot water provided by an 80% to 90% efficient fuel cell could have no
first-cost penalty with well under half the energy bill of a typical 1990 building and one-
quarter the greenhouse gas emissions.
Reflective Surfaces - Recent research has shown that a city can be cooled by five or six,
degrees Fahrenheit by planting shade trees and replacing roads, roofs and parking lots
with lighter surfaces during the course of normal maintenance. This nominal additional
cost could, by the year 2010, save the country up to $5 billion a year in energy and
environmental costs. In Los Angeles alone, this would lower annual air conditioning bills by
$170 million and reduce the creation of ozone smog by 10%. An aggressive diffusion and
targeted reflective materials R&D effort could yield substantial greenhouse gas reductions.
INDUSTRY
The industrial sector consumes about one-third of the nation's energy. Since 1985, the energy
intensity of the industrial sector has not improved significantly. Yet major energy-saving
technological advances have continued steadily in cross-cutting areas (such as motors, which
consume 70% of industrial electricity) and in industry-specific areas (such as impulse-drying in
paper manufacturing, vacuum pressure swing adsorption in glass making, and electrochemical
dezincing of steel scrap). Many industrial efficiency improvements also offer important productivity
benefits. As an example, the average total annual savings from many energy efficiency projects
undertaken at the Louisiana Division of Dow Chemicals were 3 to 13 times as large as the energy
savings alone.
Several CCAP programs are achieving near-term efficiency improvements. DOE's Motor
Challenge program, for example, is providing technical support to over 1,600 industry partners.
Rather than focusing on a particular technology, DOE and EPA's Climate Wise program is working
with over 250 companies to develop company-specific plans to reduce greenhouse gas emissions.
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The seven most energy-intensive industries-steel, aluminum, petroleum refining, chemicals, pulp
and paper products, glass, and metal casting-account for about 80% of the energy consumed in
U.S. manufacturing. They represent the largest opportunity for reducing industrial greenhouse gas
emissions. DOE has formed long-term partnerships with each of these industries to develop
"Visions" of energy-efficient, low-polluting, highly competitive "Industries of the Future," as well as
roadmaps to identify an RD&D pathway to achieving the vision.
The announcement of a new climate policy would create a large opportunity to work more
aggressively with major industries such as these to achieve significant reductions by 2010. The
industry Visions developed with DOE typically foresee between a 1% to 1.5% per year
improvement in efficiency for two decades. Achieving the high-end of that range, or even higher
(by accelerating the rate of implementation) is possible, but would require a significantly greater
government-industry effort. Because industry has already identified niches for each technology
pursued, the diffusion of newly developed technologies can occur relatively quickly. For example,
we have already seen in the metal casting area a leap from idea to actual prototype in 18 months.
Not only can we reduce the energy intensity of industry, an aggressive RD&D program could begin
to reduce the carbon intensity of industrial energy consumption. Accelerating our current R&D
effort in advanced gas turbine cogeneration (coupled with regulatory streamlining for accelerated
diffusion) could allow significant market penetration by 2010 of distributed power plants with
efficiencies in excess of 85%. Industries such as pulp and paper could power these turbines with
low-cost biomass feedstocks.
TRANSPORTATION
Fuel economy has been flat for over a decade due in part to the absence of increased fuel-
efficiency standards, but also because consumers haven't themselves demanded increased fuel
economy. The attributes of cars most desirable to consumers change over time. During the
1970s, when oil prices were high, fuel economy was one of the top features consumers looked for
when shopping for cars. Lately, fuel economy has fallen while speed, acceleration, four wheel
drive and amenities are more more in demand. Since 1982, the average horsepower ratings of
the new light vehicle fleet has increased by 60 percent while the average fuel economy of the
same fleet has remained unchanged. From an engineering point of view, manufacturers have
increased the efficiency of new cars, but that efficiency has been devoted to delivering what
consumers want today. Had the new cars sold in 1996 retained the same average acceleration
performance and average weight as the new cars sold in 1982, the improved technologies actually
incorporated into the fleet during this period could have increased new car fuel economy by about
6 miles per gallon, or about 20 percent. If fuel prices and/or consumer preferences were to
change again, and there were increased demand for better fuel economy in new cars,
manufacturers could redirect both past and future technology improvements to deliver better fuel
economy.
With the focus on the year 2000, CCAP programs are focusing on reducing fuel consumption
through increased telecommuting and reduced traffic congestion. The Partnership for a New
Generation of Vehicles (PNGV), on the other hand, is a longer-term effort to develop more efficient
technologies for new vehicles. PNGV is a joint automotive research and development effort
between the federal government and the U.S.-based automakers. The goal is to develop new
automotive technology that can more than double the fuel efficiency of a typical family sedan while
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meeting stringent emission and safety standards and maintaining affordability, performance, and
utility. The timeline is for basic component research through 1997-1998, the design, buildup, and
evaluation of concept vehicles through 2001, and the development of production prototypes by
2003-2004. Increasing the fuel economy of a midsize vehicle from 27 to 80 miles per gallon would
reduce the carbon dioxide emissions of that vehicle by two-thirds. The full impact of the PNGV
program and its effect on fuel efficiency won't be realized until beyond 2010. However, some of
the technology elements that are developed will also provide an important near-term opportunity
for improving fuel efficiency in vehicles prior to 2010.
One technology that offers the chance for dramatic gains in efficiency that could be realized by
2010 is the diesel engine. The diesel has a number of advantages from the perspective of
stabilizing in 2010. Diesels are already more than 40% efficient, and a 55% efficient diesel is a
plausible outcome of near-term research, an efficiency that no other engine can surpass or even
match before 2010. Also, both the fuel and manufacturing infrastructures already exist for diesel,
unlike several other proposed advanced engines, making rapid penetration more feasible.
Advanced diesels not only afford potential savings in a hybrid for cars, but also for sport utility
vehicles and light duty trucks (the segment of fastest growth in fuel use), and in heavy duty trucks,
with their low fuel economy (7 to 8 mpg). The key problem is the unacceptably high level of
particulate and NOx emissions. A "clean" diesel would be a major achievement, and is now
viewed as plausible by many even in the near term through a combination of a cleaner fuel (such
as dimethyl ether which can be made from natural gas or ethanol), an advanced engine, and after-
treatment (including advanced catalysts). DOE is pursuing all of these areas, but successful
penetration by 2010 will require additional funding.
Ethanol is another prime candidate for an intense RD&D effort. Federal R&D has brought the cost
of ethanol from $3.60 per gallon in 1980 to $1.20 per gallon. With continued R&D in bio-
engineered organisms and fast-growing crops, the biofuels program is expected to produce
ethanol for under 70 cents a gallon by 2005, competitive with oil at its current price (ethanol has
lower energy content). The ethanol would be derived not from the starchy (i.e., edible) part of
corn, as it is now, but from cellulosic waste (such as waste paper or crop waste) and dedicated
crops, either herbaceous (as from switchgrass) or woody (as from hybrid poplar trees). A 1996
Argonne analysis of total fuel cycle shows a greater than 90% reduction in greenhouse gases from
woody-biomass-derived E85 (85% ethanol) compared to reformulated gasoline.
ADDITIONAL, CROSS-CUTTING OPPORTUNITIES FOR NEW INITIATIVES
A number of additional opportunities exist across all sectors of the economy. For example:
Financing for Energy Efficiency Investments - Large companies often rely on their own
capital for new investments and yet are reluctant, due to organizational barriers, to use that
same capital for investments in efficiency (even though they offer impressive rates of
return). Small to mid-size businesses and consumers have little access to capital to begin
with, and they have a difficult time obtaining reasonable financing. Consequently, in all
sectors of the economy, there are significant opportunities for efficiency improvements that
could be made if financing designed specifically for energy efficiency investments were
widely available. Previous opportunities to achieve a public good through organizing
financial markets have been addressed by creating a secondary financing market through
"government sponsored enterprises" (GSEs), like Fannie Mae, Freddie Mac or Sallie Mae.
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These GSEs purchase particular types of loans (e.g. home mortgages, student loans) from
primary lenders, such as commercial banks and mortgage companies, and bundle these
loans for sale in the secondary security market to investors. After more than three years of
effort, much of it aimed at developing a broadly accepted North American Monitoring and
Verification Protocol for efficiency retrofits, DOE has laid the foundation for jump-starting a
billion dollar a year secondary market for energy efficiency loans.
Incentives Through a Domestic Greenhouse Gas Policy - A new U.S. climate change
policy would provide unique opportunities to provide further incentives to improve the
penetration and innovation of energy efficiency and renewable technologies. This could
work in a number of ways. For example, under a domestic trading system with a cap on
greenhouse gas emissions, a reserve of allowances or a portion of auction revenues could
be set aside to reward new R&D investment and production of efficient and renewable
technologies.
Business Accounting Practices - Currently, companies ignore future energy liability and
undervalue the benefits of investments in energy efficiency. When a firm invests in energy
efficiency, the accounting shows only a liability, and there is no recognition of the reduction
in future energy expenditures. With the longer term focus beyond 2000 and a clear policy
signal on energy, it may be possible to work with businesses to develop new practices that
more accurately reflect energy liabilities. Strategic improvements to tracking demand and
use of energy resources would allow firms to identify and capitalize on profitable
improvements that are currently hidden in the noise of corporate financial data.
Government Procurement - In addition to providing a strong energy signal to businesses,
a new climate policy will create additional opportunities for coordinated government action
in promoting efficient technologies. Programs like ENERGY STAR Computers have
benefited significantly from federal procurement policy in the past, but innovative initiatives
are often difficult because of decentralized and sometimes restrictive procurement policies.
The federal, state, and local governments together purchase a sizable portion of energy-
consuming technologies. Harnessing the combined purchasing power of all levels of
government could be an important opportunity to provide large markets for efficient and
renewable technologies. This would provide a strong incentive for increased R&D; reduce
the cost of production of these technologies (due to the effects of "learning by doing");
demonstrate the successful performance of new technologies; and make all participating
governments more energy efficient.
ELECTRICITY PRODUCTION
The efficiency improvements described above could slow electricity demand growth substantially,
and much of the growth that did occur could be provided locally by distributed cogeneration; such
as advanced turbines in industry (running mainly on natural gas, with some biomass) or fuel cells
in buildings (running on natural gas). The very low central station power demand growth means
that the replacement of dirtier plants with cleaner ones that is expected to occur would also be
slowed. However, a clear and consistent price signal from a cap and trade system at even a low
level could have a substantial effect, most likely causing some of the dirtiest and oldest coal plants
to be repowered with natural gas.
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Such a price signal for carbon would almost certainly lead to increased utilization of natural gas,
through a combination of increased gas use at dual-fuel power plants and repowering of selected
older, inefficient plants. An estimated 10% of existing coal capacity is nominally dual-fuel. While
some of this capacity would require some investments to use gas, the infrastructure is already
there and costs would be minimal - likely well under $100/kW. Repowering of older coal plants
with gas would cost an estimated $400/kW. This increased use of gas could be expected to
increase prices. That suggests the need for expanded R&D into lowering the cost of natural gas
production and increasing the domestic resource base, though efforts such as improved drilling
and advanced computational modeling. Such R&D could have a large impact on the cost of
climate mitigation.
In addition, much technological progress has been made in co-firing biomass fuels with coal. This
technology exists, but economic incentives for widespread use are currently lacking. Incremental
capital investments would be required, but up to an estimated 40% co-firing biomass with coal
would be possible at costs of $150-250/kW - making biomass co-firing an attractive option under
a cap and trade policy.
THE ROLE OF TECHNOLOGY BEYOND 2010
A strategy of continued diffusion of efficient energy using and energy supply technologies and
accelerated development of key new low-carbon technologies during the next decade sets the
stage for accelerated development and diffusion of a number of very-low and zero carbon
technologies that may begin to see limited penetration by 2010, but will have substantial impacts
after 2010. The need for major technology advances can be seen from the following equation:
Emissions = Population X Affluence (GDP/capita) X Technology (Emissions/GDP)
From 1990 to 2050, we may well see global population double and affluence increase by a factor
of four. At the same time, just to stabilize concentrations at pre-industrial levels (which would still
have severe national and global impact), the world may ultimately need to lower emissions from
1990 levels, requiring the average emissions-related technology to improve by more than a factor
of ten during the next few decades and then be rapidly deployed throughout the world.
This section examines the most promising R&D for mitigating CO₂ focusing on four strategic
thrusts: (1) clean power generation, (2) energy efficiency, (3) carbon sequestration accompanying
a transition to a hydrogen-based economy, and (4) basic and very advanced research.
Responding to the climate problem may require breakthroughs in all of these areas, and in any
case the high-risk nature of R&D requires the pursuit of multiple pathways.
Increasing the probability of achieving these desirable outcomes will require expanding the
government's current R&D spending in these areas, which is roughly $1.3 billion per year. Also,
the policies described in the previous section, including partnerships with industry, "market pull"
deployment initiatives, and improved regulations, will be required to ensure technological success
and accelerated market penetration. The benefits could be enormous, including the avoidance of
the costs associated with the other approaches to CO₂ mitigation such as higher taxes and
regulation. A 1997 study by Pacific Northwest Laboratory found that developing and deploying
advanced technologies over the next 15 to 30 years could substantially lower the cost to the global
economy of achieving major reductions in emissions of greenhouse gases.
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CLEAN POWER GENERATION
Natural gas technologies now set the benchmark for low cost, cleaner power generation.
Moreover, advances in natural gas turbines will yield overall energy conversion efficiencies of 60%
or more in the next decade, doubling the efficiency of traditional coal-fired plants. High
temperature fuel-cells, such as molten carbonate and solid oxide, may have significant application
in power generation with further R&D, promising high efficiency and low emissions. Molten
carbonate fuel cells are expected to reach 50-60% efficiency by 2000, and perhaps 70% by 2005.
As a result, fuel cells can cut greenhouse gas emissions by as much as 50%.
High efficiency coal-fueled power plants, such as integrated gasification combined cycle (IGCC)
are now being demonstrated at efficiencies (40 to 43%) that are competitive with more traditional
coal-fired power plants but with much lower emissions, including 35-45% lower CO₂ emissions.
The efficiency of the next generation IGCC plant could exceed 55%, and, in combination with a
fuel cell, achieve 60% by 2015. While lowering CO₂ emissions, these technologies also
dramatically reduce traditional pollutants, such as particulate matter, nitrogen dioxide, and sulfur
dioxide, while allowing the continued use of low-cost fossil fuels. Hence, advances in technology
from federal R&D in this area will ensure the supply of low cost, clean electricity, while helping the
U.S. realize domestic and global market opportunities for these superior technologies.
While electricity from fossil fuels continue to become cleaner and cheaper, expanded R&D and
deployment could make a number of renewable technologies competitive on purely economic
grounds in the next two decades: wind power, PV, biomass power, solar thermal, and geothermal.
In a greenhouse-gas constrained world, these zero-carbon emitting sources of power would be
even more competitive. Royal/Dutch Shell projects these technologies to be the dominant global
source of energy by the middle of the next century.
Renewable technologies are becoming more economically competitive over time. Both wind and
PV are experiencing a 20% cost reduction for every doubling of cumulative production.
Photovoltaic (PV) cells, which convert sunlight into electricity, have dropped from 90 cents per
kilowatt-hour in 1980 to under 20 cents today while wind power has dropped from 25 cents per
kWh to 5 cents. These cost reductions will continue to occur not just because of R&D, such as
advances in thin film PV, but also through economies of scale and improvements in manufacturing
that come with increased production. A number of different PV technologies are being pursued,
providing multiple opportunities for breakthroughs. Accelerated RD&D for wind could potentially
have an impact on CO₂ emissions in 2010.
Nuclear power provides 22% of our electricity emits no CO₂ and its contribution to reducing CO₂
emissions is expected to increase as plants become increasingly efficient over the next decade.
However, these plants are due to begin retiring by 2010, with virtually all capacity due to be retired
by 2030. To keep nuclear power a viable option for future electricity production, DOE has
developed advanced nuclear reactor designs soon to be certified by the Nuclear Regulatory
Commission. A plant similar to these advanced designs was recently completed in Japan at under
half the time and about half the cost to complete the most recently finished U.S. nuclear plants. In
addition, the Department is conducting R&D on life extension of existing nuclear power plants so
continued operation of these zero carbon technologies is an option in the future.
Opportunities for new initiatives include:
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Increasing market penetration of technologies such as PV and fuel cells - Government
investments in R&D cannot be limited by the old notion of the linear model of R&D where
basic research is fed into a technology pipeline and out pops a commercialized product.
Today's complex technologies do not begin with basic research and then proceed in a
simple fashion through the different stages until marketing begins. Successful innovation
relies heavily on communication and feedback between engineers and scientists
throughout the innovation process, including the later stages of development. Rapid
penetration of clean technologies requires a concerted effort of activities across the
technology innovation spectrum. The CCAP contains a number of measures to reduce
costs through accelerated domestic deployment for wind, PVs, geothermal, and fuel cells,
but these efforts are severely under-funded.
Increasing international diffusion of advanced supply technologies - A U.S. strategy to
accelerate market penetration of these technologies requires an international component.
Many renewables are most cost-effective today in developing countries without an
electricity grid. Advanced coal technologies will be critical in developing nations with large
coal reserves, such as China. Besides lowering costs, many of these efforts give vendors
and utilities experience using these new technologies in niche markets, helping to remove
barriers to more expanded use in the future as the technology improves.
A new government partnership with utilities - The power industry is reducing R&D and
deployment of renewables, fuel cells and other technologies in the face of increased
competitive pressures - which in turn drives short-term cost-cutting efforts. Congressional
legislation to restructure the utility industry may well be enacted in the next two years -
providing a crucial opportunity to find alternative means to support R&D and deployment of
low-carbon power generation technologies.
Given the uncertain nature of R&D, the level of funding necessary to achieve such a world cannot
be known, but is likely to be considerably higher than today's investment levels, especially if the
Nation seeks to maintain world leadership in these technologies. In PVs, deep R&D cuts in the
1980's have left us with only 40% of the world market. The Japanese outspend our $60 million
R&D effort in PVs by more than two to one. The relatively high price for electricity in other
developed nations, and the far greater financial incentives they offer industry, means alternative
energy will be cost-effective in foreign countries before it is here. Our primary competitive
advantage can come only from technological leadership. Innovative partnerships aimed at
domestic deployment are essential because there aren't many instances of a nation achieving
global market leadership in a technology for which there was not a robust domestic market.
END-USE ENERGY EFFICIENCY
Technology R&D in transportation is essential because the sector uses very little electricity, so
advances in clean power generation offer little hope of lowering its CO₂ emissions in the near term.
Also, two other major national problems - urban air pollution and dependence on foreign oil -
stem largely from the transportation sector. The current federal strategy is to develop cars and
trucks that are highly fuel-efficient as well as ones that run on fuels other than petroleum, including
natural gas, electricity, and biofuels (ethanol). We could see significant penetration of biofuels in
the next two decades with the RD&D strategy discussed in the first section.
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As mentioned previously, the Partnership for a New Generation of Vehicle (PNGV) is pursuing
multiple pathways for both advanced engines (hybrid electric, Stirling engine, gas turbine and
clean diesel) and energy storage (such as a batteries, flywheel or ultra capacitor). Supporting
R&D includes lightweight, super-strong materials such as composites; high-temperature ceramics;
regenerative breaking; and advanced power electronics. PNGV vehicles, available just prior to
2010, will be 2.5 times more efficient than today's conventional vehicles, providing large potential
to reduce greenhouse gas emissions.
Proton Exchange Membrane (PEM) fuel cells have perhaps the greatest long-term potential for
reducing transportation CO2. Recently PNGV developed an on-board reformer for converting
gasoline into hydrogen to run a PEM fuel cell, which would have a 50% increase in fuel efficiency
over an internal combustion engine, half the CO2, and a 90% reduction in conventional pollutants.
below ultra-low emission vehicle standards. A PEM fuel cell running on ethanol would have
virtually no net CO₂ emission. A decade of R&D may be needed to bring costs down and integrate
fuel cells into a commercial vehicle, which Chrysler has committed to do in partnership with the
government. Maximum efficiency and emissions reductions would come from running the car on
hydrogen directly, which will require even more research with automakers.
The ultimate low-CO₂ vehicles and the fuels they would use cannot be known today. To ensure
that the R&D leads to commercially viable vehicles, a number of programs are needed to
guarantee that the infrastructure is available to support vehicles that run on non-traditional fuels.
The Industries of the Future visions and technology roadmaps identify the best R&D opportunities
for increasing energy efficiency and reducing emissions in the industrial sector while increasing
productivity. These include advanced materials development, such as ceramic composites;
separation technology, such as advanced membranes; catalysis; bioprocessing, biocatalysis, and
renewable feedstocks; sensors and controls; and industrial cogeneration. All of these industries
would like to dramatically improve their environmental performance. The pulp and paper industry,
for example, sees the possibility of becoming a no-net-CO₂ industry, through a combination of
efficient use of energy and biomass cogeneration.
These industries (except chemicals) significantly under-invest in R&D compared to the industry
average. What R&D they have devoted to the environment has traditionally been focused on
compliance - end-of-pipe treatment and control, as opposed to prevention - since that is how
our regulatory system is designed. While increased R&D is needed, the Administration's
regulatory reinvention revolution must succeed.
Federal RD&D into buildings technologies has been remarkably successful. Consider just five
technologies developed or advanced by the national laboratories in the past two decades at a cost
of roughly $40 million - building design software and advanced lighting, windows, oil burners,
and refrigerator compressors. These have provided cumulative net savings of more than $25
billion to consumers and businesses, exceeding the $8 billion spent on all energy efficiency R&D
since 1978. They now provide 18 million metric tons of annual CO₂ savings.
Continued RD&D in the buildings sector is likely to prove just as cost-effective: Key near-term
technologies include improvements in lighting, superwindows, advanced design software,
high-efficiency clothes washing, heat-pump water heaters, gas heat pumps, improved insulation
and duct systems, more efficient cooling including gas cooling, solar heating and cooling, and day
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13
lighting, and urban heat island mitigation R&D (such as more reflective roofing and road materials).
Longer term R&D needs include electrochromic glazings for windows, building-integrated PV
systems, and PEM fuel cells, all of which could begin to see market share before 2010 and make a
very large impact in the following decade.
Opportunities for new initiatives include:
Increasing federal investments in technology RD&D with industry - Most of the technology
pathways that will result in sizable reductions in CO₂ emissions in the 2010-2020 time
frame are being pursued today, but at funding levels substantially below what is required to
maintain greenhouse gas stabilization beyond 2010 at relatively low economic costs to our
nation. Examination of these pathways and increased funding in some key areas is of
critical importance.
CARBON CAPTURE AND SEQUESTRATION
In addition to the portfolio of R&D options related to less CO₂ intensive technologies for energy
supply and use, capture and disposal of CO₂ offers an additional alternative for reducing
atmospheric concentrations of CO2. If major reductions in CO₂ emissions are necessary, and
global reliance on fossil fuels continues beyond the middle of the next century, then some form of
CO₂ sequestration will almost certainly be needed.
Moreover, a successful program to develop safe, low cost greenhouse gas sequestration options
should garner bipartisan support for progress on climate change issues by allowing for continued
use of fossil fuels while minimizing the direct costs of mitigation programs. If these disposal
techniques are sufficiently low in cost, they could also be a means to induce developing country
participation in a climate change mitigation program, thereby overcoming another institutional
barrier to implementing an effective mitigation program.
A long-term R&D strategy would include demonstration of a number of sequestration options and
research into their possible environmental impacts; converting CO₂ into an industrial chemical
feedstocks; other novel sequestration options, such as CO₂ fixation by micro-algae; selectively
permeable membranes for CO₂ capture; processes for converting fossil fuels and biomass into
CO₂ and hydrogen; development of hydrogen infrastructure technology, including transportation
and storage; and PEM fuel cells.
Technology R&D into clean power generation and energy efficiency support many long-standing
national goals and have been pursued for years. Carbon dioxide capture and sequestration,
however, makes sense on a massive scale only in a greenhouse-gas constrained world. So, at
least in this country, this area has been relatively under funded; since 1990 Japan has spent more
than 30 times what we have on CO₂ capture and sequestration.
BASIC AND ADVANCED RESEARCH
A number of areas of basic research could prove crucial to responding to climate change, including
biotechnology, fermentation microbiology, combustion research, polymer and ceramic science,
process engineering, supercritical CO2, new materials synthesis, and nanotechnology. We need
to better understand the underlying biochemistry of the bioconversion of carbon dioxide to
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14
methane or to other potential fuels and feedstocks. This new research includes the ability to
sequence the genetic material of microorganisms and plants, to develop new molecular genetic
engineering techniques, and to understand biophysical and biochemical pathways of
photosynthesis.
One essential area for expanded R&D is superconductivity. Superconductors offer the possibility
of storing and transmitting electricity with virtually zero loss, with potential savings of 5% to 10% of
all electricity presently generated by utilities. Highly efficient superconducting motors could have
an even larger impact since motors currently consume 60% of all electricity. While U.S. and
German funding is roughly $40 million annually, Japan spends nearly $70 million, not including
their superconducting MagLev train program, with some $3.5 billion being spent over five years.
Significant increases in both basic and applied research in superconductivity should be an
essential part of a low-CO₂ R&D strategy.
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restrict Tech banniers
Historical Forces Leading to Market Barriers to Energy Efficiency in the Buildings Market
Type of Barrier
Nature of Barrier
Examples of Barrier
Imperfect Competition
Natural Monopoly
Economies of scale
Electric utilities
Market Power (Monopoly and
Bargaining power; Interdependent conduct
Uniqueness of building location; few development firms in one area
Oligopoly)
Anti-Competitive Conduct
Collusion; predation
Manipulation of permit process to the detriment of competitors
Information Availability
Information Costs
Transaction costs
High cost of customized audit (cheaper if done en masse); collecting product info;
finding credible information sources
Asymmetric Information
Unequal bargaining
Developer's superior knowledge of building
Misinformation
Misinformed exchange
Belief: "no efficiency increase is possible"
Lack of Information
Uninformed exchange
No knowledge of efficient technologies
Economic Non-Rationality
Bounded Rationality, Satisficing
Using rules of thumb to reduce transaction
Ignore costs that are < 5% of rent; use a two year payback; seek acceptable profits
costs; not maximizing profits
Other Non-Rationality
Cultural reasons for taking actions that affect
Preferring energy production to cost-cutting because it is more congruent with
business practice
management culture
Risk Aversion
Resistance to change
Avoid changes in suppliers and technologies; avoid new technologies
Side Effects
Negative externalities from power production
Pollution from power generation; dependence on imported oil; risks of nuclear energ
Split Incentives
Utility costs not paid by purchaser and user
Landlord-tenant problem; builder-buyer problem
of equipment
Public Goods
R&D
Non-excludability, zero marginal costs
Too little R&D performed
Expertise and Training
Non-excludability, zero marginal costs
Too little training on efficient design, installation and maintenance; too little informati
dissemination
Cash Flow Constraints
Lack of access to capital
Small business tenants on the edge; developer's reluctance to take on more debt
Regulatory Distortions
Regulatory Bias
More profits for energy production than for
Utility reluctance to install conservation even when cheaper than new supply
efficient use
Average Cost Pricing
Price signals do not reflect cost, leading to
Utility regulation in the US
inefficient usage
Building Codes
Obsolete codes and poor code enforcement
Local US building codes contain requirements that interfere with efficient constructio
inhibit innovation and efficiency; # of
thousands of building codes in the US
inconsistent codes inhibits achieving
economies of scale
Productisity
<
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FAX TRANSMISSION
U.S. ENVIRONMENTAL PROTECTION AGENCY, OFFICE OF POLICY, PLANNING AND
EVALUATION
401 M STREET SW
WASHINGTON, DC 20460
202-260-4332
FAX: 202-260-027
To:
Assistant Secretaries Group
Date:
March 17, 1997
Fax #:
See attached list.
Pages:
10, including this cover sheet.
From:
William N. White
Special Assistant to David
Gardiner
Subject:
Regulation paper
COMMENTS:
Please find attached the paper Using Standards and Regulations to Reduce Greenhouse Gas
Emissons, to be discussed at tomorrow's Assistant Secretaries Elimate Change Group meeting
7/19
Please contact me at 260-1345 if you have questions or do not receive a complete transmission.
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Using Standards and Regulations to Reduce Greenhouse Gas
Emissions
Introduction
Limitations on greenhouse gas emissions could take the form of standards and
regulations. This paper lays out the broad policy options available for limiting emissions
using standards and other measures, but does not analyze the costs and benefits of
particular options. Standards to limit greenhouse gas emissions could take the form of:
Minimum energy efficiency standards for energy consuming equipment: Historically,
these have targeted appliances and other residential and commercial equipment, as
well as personal transportation (i.e., the Corporate Average Fuel Economy (CAFE)
program).
Other measures: These can take many forms and could include minimum purchase
requirements for renewable sources of electricity, demand side management programs
(which mandate electric utilities to undertake information and energy efficiency
subsidy programs), federal spending rules for transportation infrastructure, and federal
procurement policies.
Direct limits on greenhouse gases: Standards could specify allowable greenhouse gas
emission levels per unit of output (or some other factor). For example, a powerplant
could face a limit on the amount of carbon dioxide emitted per kilowatt of electricity
generated. Another example is methane from some landfills, which is already
controlled due to limits on emissions of volatile organic compounds.
Within any program of standards, flexibility could be introduced by allowing
those who perform better than the levels prescribed by the standards to trade their
resulting "credits" with others, thereby reducing costs. Such a program could share many
of the characteristics of an emissions trading program.
Figure 1: U.S. Energy-Related Fossil Fuel Emissions By Sector
Historical (1950-1995) and Projected (1998-2015)
1900
Figures 1 and 2
1600
summarize sectoral CO2
1400
emissions (with and without
emissions associated with
1200
Million Metric Tons of Carbon
electricity). As indicated, with
1000
Transportation
respect to direct emissions,
800
electric utilities account for about
$00
one-third of total CO₂ emissions,
400
transportation for about one third,
200
roughly one fifth for industry,
0
seven percent for the residential
1950
1960
1970
1990
1990
2000
2010
sector, and about 4% for the
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commercial sector. If electric utility emissions are attributed to final energy consumers,
then industry's share rises to about one third and the residential and commercial sectors
each account for 15-20% of the total.
Figure 2: U.S. Energy-Related Fossil Puel Emissions By Sector
Historical (1950-1995) and Projected (1996-2015)
1800
1600
1400
1200
Million Metric Tone of Carbon
1000
Electric Utilities
800
Transportation
600
400
Industry Excluding Electricity)
200
Residential & Commercial (Exeluding Electricity
0
1950
1950
1970
1990
1990
2000
2010
Energy Efficiency Standards
1. Appliance Standards
Standards for energy consuming equipment can expand markets for such
technologies, help to reduce information barriers and can lower consumer's decision
costs. Standards can also provide incentives to private research and development by
reducing uncertainty in the market. U.S. homeowners spend $110 billion each year to
power home appliances. These uses account for about 70% of all the primary energy
consumed in homes.
During its typical 10-15 year lifetime, an appliance's operating costs may exceed
its initial purchase price several times over. Nevertheless, many consumers do not
consider energy efficiency when making purchases. Manufacturers are often reluctant to
invest in more efficient technology that may not be accepted in the highly competitive
marketplace.
Recognizing the great potential for energy savings, many states began prescribing
minimum energy efficiencies for appliances. Anticipating the burden of complying with
differing state standards, manufacturers supported the development of federal standards
that would preempt state standards. Federal standards provide a high degree of certainty
for energy savings and achieve higher penetration rates for efficiency gains than
voluntary, educational or incentive programs.
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In 1975, the U.S. Congress established a program of test procedures, energy
conservation standards, and labeling for certain major household appliances including
refrigerators, freezers, air conditioners, water heaters, furnaces, dishwashers, clothes
washers, clothes dryers and kitchen ranges and ovens. A 1987 amendment, the National
Appliance Energy Conservation Act, set the first national efficiency standards for these
appliances and established a schedule for regular updates by DOE to achieve the
maximum improvement in energy efficiency that is technologically feasible and
economically justified.
The Energy Policy Act (EPACT) of 1992 expanded coverage to certain
commercial and industrial equipment, including commercial heating and air-conditioning
equipment, water heaters, certain incandescent and fluorescent lamps, distribution
transformers, and electric motors. EPACT also established maximum water flow-rate
requirements for certain plumbing products and provided for voluntary testing and
consumer information programs for office equipment, luminaires, and windows.
Under DOE's first rulemaking in November 1989, updated standards were set for
refrigerators and freezers that went into effect January 1993. The Final Rule for energy
conservation standards for clothes washers, clothes dryers, and dishwashers issued in
May 1991 became effective May 14, 1994.
The initial standards included in EPCA, and those already amended by DOE, are
expected to save about 23 quadrillion Btus (24.3 exajoules) of source energy from 1993
to 2015. Current appliance standards have already saved consumers $1.9 billion and will
ultimately save $58 billion in energy costs over the lifetimes of units installed between
1990 and 2015.
In addition, more efficient products are more competitive internationally and have
environmental benefits from reduced atmospheric emissions. The total emission
reductions of federal appliance standards implemented to date are estimated to be 14.2
MMTCE in the year 2000. Further development of standards could result in additional
reductions.
2. Personal Transportation
Consumers make choices about which type of vehicle to purchase and how much
they drive their vehicles. There are many attributes that consumers may consider when
purchasing a vehicle, such as: price, fuel economy, quality, safety, styling, performance,
reliability, handling, comfort, options, size, etc. Fuel economy can conflict with a
number of these attributes, and recent surveys confirm that fuel economy is very low on
the list of attributes that consumers seek today. If the cost to society of greenhouse
emissions is not reflected in the cost of owning and operating a vehicle, consumers will
make inefficient choices, a classic case of market failure. One way to incorporate the
external costs into the prices that consumers face is through regulation.
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Such regulations already exist in the United States. The Energy Policy and
Conservation Act of 1975 established mandatory average fuel economy standards for new
cars and light trucks starting with the 1978 model year. The standard (currently, 27.5
mpg for cars and 20.7 mpg for light trucks) is calculated by each manufacturer's fleet
(domestic or import) and model year. Each manufacturer's fleet average is equal to the
sales-weighted fuel economy of all its new cars or light trucks of that vintage that are sold
in the United States. Manufacturers that exceed the standard can carry forward credits for
up to three years; manufacturers that fall short can carry backward projected future credits
for up to three years. Failure to comply with CAFE requirements can result in a civil
penalty. No major U.S manufacturer has ever paid a fine; only European manufacturers
of luxury cars have opted to pay a fine rather than comply with the standards in a given
year or take advantage of the credit system.
Emissions of greenhouse gases from the transportation sector account for about
one-third of total U.S. GHG emissions. Transportation greenhouse gas emissions are
expected to grow from about 430 million metric tons of carbon "equivalent" (MMTCe) in
1990 to 550 or more MMTCe in 2010. Passenger cars and light duty trucks (light
vehicles) contribute the majority of transportation emissions. Emissions from light
vehicles alone accounted for 20% of total U.S. greenhouse gas emissions in 1990, and in
the absence of new policy measures are expected to rise from about 250 million metric
tons of carbon equivalent (MMTCe) in 1990 to 350-400 MMTCe in 2010. All of this
growth will likely be from light trucks, which are projected to account for a greater share
of emissions than cars by the year 2000.
I
The major factors underlying the rapid growth in emissions from light vehicles
are: growth in vehicle miles traveled; stagnant new fleet fuel economy levels; and growth
in the relative proportion of light trucks sold, which have lower CAFE standards than
cars.
Trends in Fuel Price and New Auto and Light Truck MPG
30
$4.00
CAFE Standard-Cars
Actual
25
$3.00
growth in vehicle
Miles Per Gallon (MPG)
20
Estimated New Car
miles traveled
$2.00
(1990$)
Fleet Fuel Economy
15
(VMT) since
CAFE Standard-Light
1990 has
10
Trucks
$1.00
averaged 2.4%
5
Estimated New Light
per year. Growth
0
$0.00
Truck Fleet Fuel
in VMT is a
Economy
1978
1980
1982
1984
1986
1988
1990
1992
Price of unleaded
function of a
reg. gasoline/gallon
number of
factors, including
demographic changes (more women in the workforce; immigration), land use patterns
(where people live in relation to where they work, shop, etc); the cost of driving each
mile (now at an all-time low on an inflation-adjusted basis); and others.
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Corporate average fuel economy of new car fleets increased steadily along with
increasing CAFE standards throughout the late 1970s until the mid 1980s. Since then,
new car and light truck fuel economy has been stagnant as new more efficient
technologies have been applied to performance (which has increased by 60% for all light
vehicles in the last 15 years) and utility rather than to fuel economy. Absent a driving
force such as policy changes or fuel price increases, no significant increase in new fleet
fuel economy is expected to occur. Further, because new vehicle fuel economy has been
stagnant for several years, the in-use fleet of cars and light-trucks has also nearly reached
a fuel economy equilibrium.
In fact, the overall in-use fuel economy of the combined new light vehicle fleet
(i.e., cars and light trucks such as minivans, sport utility vehicles, and pickup trucks) has
already begun to decline. Each year, about 15 million light vehicles are sold in the
United States. In the past 15 years, sales of light trucks have skyrocketed. They have
gone from under 25% of the market in 1982 to almost 45% today. A key reason that this
shift is important in terms of GHG emissions is that light trucks face lower CAFE
standards than cars (almost 7 mpg lower). Moreover, since light trucks tend to last longer
than cars, they are likely to be driven more miles over their lifetime than cars.
In 1994, President Clinton convened a Federal Advisory Committee Policy
Dialogue to assist in the development of measures to significantly reduce greenhouse gas
emissions from personal motor vehicles ("CarTalk"). Although CarTalk ended without
consensus among all members of the Committee, the process did result in a number of
analyses and proposed policy options.
Other Mandates
Standards could also be used to limit greenhouse gas emissions in other sectors of
the economy. Most prominent among these are:
Electricity Restructuring: There is currently a trend among states to adopt retail
competition for the electricity industry. This trend could be accelerated with federal
legislation. Retail competition is expected to lower the price of electricity by as much as
20-25% in certain regions and change the fuel mix of generation. Preliminary EPA and
DOE analysis indicates that utility greenhouse gas emissions could rise by as much as 2-
6% as a result. To mitigate the environmental impacts of competition and maintain the
environmental benefits of current state level renewable and demand side management
programs, a number of options have been adopted at the state level (for states that have
already adopted competition) or are under consideration for the rest of the nation. These
include:
A "portfolio standard" for renewable energy or greenhouse gas emissions: This
involves requiring that all generators meet a specified level of renewable generation
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or greenhouse gas emission reduction either by undertaking such projects themselves
or purchasing "credits" from others who have.
A social benefit fund: Revenue is collected by placing a charge on transmission
service. The funds are then used to subsidize energy efficiency projects or low
income consumers. California has already adopted this approach.
Information disclosure requirements: Generators could be required to disclose the
emission profiles of their generation, facilitating the marketing of "green" electricity.
Additional air pollutant requirements: Many states are hesitant to adopt retail
competition because they perceive that differing regional environmental requirements
both put their electric industry at a competitive disadvantage and will result in more
pollution being transported into their states. Thus, additional environmental
requirements to "level the playing field" - which could include greenhouse gas
emission reductions - are currently being debated.
The Intermodal Surface Transportation Efficiency Act (ISTEA): This Act establishes the
rules for federal transportation funding to the states. In 1991, ISTEA authorized $140
billion in transportation projects over a six year period. The Act expires in 1997 and
Congress is now considering options for its reauthorization. These could include
provisions that would indirectly reduce greenhouse gas emissions. Examples include the
following:
Congestion Mitigation and Air Quality Improvement Program: Additional funds
could be targeted to transportation projects that reduce air emissions and energy
consumption on a long-term sustainable basis.
Brownfields Restoration: Successful redevelopment of browfields can help revive
inner city areas and reduce sprawl, thereby reducing vehicle miles traveled. By
focusing job growth in inner city areas it encourages greater reliance on more energy
efficient and environmentally sound transporation modes, including transit, walking,
and bicycling. More funds could be made available for these projects.
Incentive Funds: Climate actions through ISTEA can produce economic efficiency
and reduce emissions, while increasing mobility choice and community livability.
One option would be to create a $500 million Fuel Efficiency Incentive Fund that
rewards the ten states that are able to reduce fuel consumption, on a per capita basis,
the greatest over the next five years.
A Program of Standards on Direct Emissions
This system would establish a set of greenhouse gas performance standards for
sources of emissions. Flexibility could be introduced by allowing the trading of emission
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reduction "credits" when sources perform superior to specified levels. A source could
thus comply with the performance standard either through its own control efforts, or by
purchasing credits from other sources.
For such a system to work, a performance standard would be established for each
sector covered under the program. For example, for coal fired electric boilers, a limit
could be placed on the amount of carbon per Btu of energy combusted. Sources
surpassing that limit would earn "credits" that would be tradable. The amount of tradable
credit would be based on the source's past production rate.
The performance standards themselves would be "rate based." That is, they
would establish allowable emissions per unit of production, but not set total output limits.
The total amount of tradable credit available to a source would be the product of the
amount by which the source is surpassing the rate-based standard and its historical
production levels.
Likely candidates to include in such a program include:
Manufacturers of energy-using equipment for which an efficiency standard
can be set. For example, residential, commercial, and industrial equipment
(refrigerators, furnaces, ranges, HVAC equipment, motors, and lighting) could
be included.
Transportation equipment manufacturers, including passenger vehicles, light
and heavy duty trucks, commercial transport equipment (planes, trains), and
off-road equipment (e.g., tractors, farm equipment) and small engines (e.g.,
mowers).
The many sources of non-CO2 emissions (such as coal mine methane,
agricultural sources of emissions, and halogenated substances). A credit
program is also well suited to "opt-in" smaller sources which are not included
under the regulator requirements due to administrative and monitoring
considerations, but have the potential to reduce emissions at low costs.
Electric utilities and heavy industry
Petroleum refiners
Under a program of this type, the set of performance standards for all sectors must
be consistent with the national target. Since total CO₂ emissions are not directly limited,
such compliance would have to be projected based on an analysis of the performance
standards.
Trading Credits and Determining Compliance
Credits could be traded bilaterally between the source who creates the credit and
the source whose performance (i.e., emissions) exceed the regulatory standard
Alternatively, brokers and central exchanges could also be a mechanism for trades.
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The regulating authority at some point must approve the authenticity of the credit
generating reductions. For some sectors, credits could be certified for one year only. For
example, a utility emitting under its limit in a year would generate credits equal to the
reductions in that year only. These may be sold in that year or banked for the utilities or
use or future sale.
For other sectors, annual certification would not be feasible. For equipment
manufacturers, credits would be granted for each piece of equipment sold with
performance better than the standard. Credits would equal the emissions associated with
this improvement for the life of the equipment. It would not be feasible to track each
piece of equipment that is produced to ensure its continued operation and performance.
Therefore, lifetimes, usage, and degradation assumptions would need to be stipulated.
Conclusion
There is a long history of government using standards and regulations to address
market failures relating to environmental externalities, the provision of information, and
energy security. In addition, the role of government in the provision of transportation
infrastructure and the regulation of natural monopolies is large. Consequently, the
number of actions could be taken to mitigate emissions of greenhouse gases is large.
These range from direct limits on emissions, to changes in government policies that
indirectly affect the demand for energy. Given this wide array, choices must be made that
consider both the costs that such interventions may impose and the resulting reductions in
greenhouse gas emissions.
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DISTRIBUTION:
Organiz.
Name
Fax #
State
Eileen Claussen
647-0217
Rafe Pomerance
Commerce
Everett Erhlich
482-0432
Jeffrey Hunker
482-4636
OSTP
Rosina Bierbaum
456-6025
CEA
Alicia Munnell
395-6958
Jeff Frankel
Treasury
Joshua Gotbaum
622-2633
Justice
Lois Schiffer
514-0557
Interior
Brooks Yeager
208-4561
NOAA
Terry Garcia
482-6318
OMB
T.J. Glauthier
395-4639
USTR
Jennifer Haverkamp
395-4579
Agric
Charlie Rawls
720-5437
DOE
Dirk Forrister
586-9987
Mark Chupka
586-0861
EPA
Mary Nichols
260-5155
David Doniger
David Gardiner
260-0275
DOT
Frank Kruesi
366-7127
OVP
Pete Jordan
456-9500
CEQ
Steve Seidel
456-6546
USAID
David Hales
703-875-4639
DOL
Andrew Samet
219-5980