3.7 quadrillion Btu, or 3.3 percent higher, than in the reference case, increasing carbon emissions by 67 million metric tons, or 3.7 percent. In the AEO99 reference case projections, natural gas-fired generating plants are expected to dominate new capacity additions over the next 10 to 15 years, although advanced coal plants become economical after 2010. Renewable electricity generation increases in the reference case projections, particularly biomass, wind, and to a lesser extent geothermal generation; however, solar thermal and photovoltaic technologies do not contribute significantly to the electricity grid within the time frame of the analysis, and almost no new hydropower capacity is projected. In the transportation sector, alternative-fueled vehicle sales account for about 9 percent of the light-duty vehicle sales in 2010, with alcohol flex-fuel vehicles and dedicated electric vehicles each accounting for about one-fourth of the market; however, nearly all the penetration of electric vehicles is driven by mandates. Analysis indicates that some of the programs for the development of renewable technologies may hold promise, as well as some of the programs for buildings if the program goals can be achieved. Stock turnover can slow the penetration of some of the improved technologies, even if successful, so that significant changes in the average stock of equipment may take a long time, which may be complemented by the tax incentives. In addition, some of the technologies may have non-economic barriers to widespread acceptance. These include unfavorable impressions of the noise, odor, and performance of previous diesel vehicles and limitations on hydropower due to environmental concerns. Some of the CCTI programs may have more longer-term benefits because stock turnover may slow penetration and because some of the research and development programs are likely to achieve success later in or beyond the 2020 horizon of the analysis. For those research, development, and deployment programs that are evaluated quantitatively, most-including the Partnership for Advancing Technology in Housing (PATH), Partnership for a New Generation of Vehicles (PNGV), advanced diesel trucks, and biomass ethanol-have increasing impacts on energy consumption and carbon emissions after 2010. The assumption that the goals of the programs will be met leads to improvements in the technologies that are gradually adopted over the time horizon of the analysis. This analysis does not necessarily include all costs of technology development and deployment. For example, the full costs of developing and manufacturing new technologies, including costs to the private sector, and infrastructure costs are not included. Certain programs are analyzed by assuming the success of program goals or standards that may not necessarily be economic within the time frame of the analysis, leading to additional costs that are not incorporated into a decisionmaking process. However, in addition to reductions in energy consumption, consumer expenditures for energy, and carbon emissions, there may be other benefits to these programs that are not evaluated. Potential ancillary benefits include improvements in air quality due to reductions in criteria pollutants, energy security from lower energy consumption, maintaining U.S. leadership in science and technology, and revenues from the deployment of more advanced technologies to other countries. Funding for research and development may accelerate the development of more efficient and advanced technologies at lower cost than might otherwise occur. In addition, research and development may tend to improve the characteristics of technologies that have already been developed to some degree. To the extent that continuing development lowers the costs of technologies or improves their efficiencies, reliability, or other attributes, the technologies become more economically competitive and attractive in the market. Ultimately, the success of technology development depends on the products becoming competitive and penetrating into the marketplace. There are a number of barriers to technology penetration that may account for seemingly slow penetration of technologies that appear cost-effective. Lack of information about new technologies is one barrier which may be overcome with information programs. Subsidies or regulated prices may hold energy prices artificially low and hamper the penetration of technologies. Builders and homeowners or tenants may have different incentives for energy efficiency. It may be difficult for the builder or landlord to recover the additional costs for more expensive, energy-efficient equipment from a buyer or tenant who may not value energy efficiency highly. Conversely, the buyer or tenant who will be paying the energy bills may not readily have the option of making the equipment choices. Even if energy consumers are aware of potential cost savings from a more efficient technology, they may have preferences for other equipment characteristics, for example, valuing vehicle size over efficiency. Also, consumers may prefer a relatively short payback period for investments in energy-consuming technologies. Technology penetration can also be slowed by uncertainties about reliability, installation and maintenance, availability of the next generation of the technology, and necessary infrastructure. Some of these barriers can be addressed by information programs, collaborative efforts for development and diffusion, research and development to improve technologies and reduce costs, and incentives to enhance the cost effectiveness of new technologies. All these initiatives may help to encourage earlier penetration of technologies. Subsequently, the initial penetration may have the additional impact of reducing costs through learning, establishing the infrastructure, and increasing familiarity with new technologies. Finally, equipment standards and other mandates such as renewable portfolio standards can also lead to earlier penetration of new, more advanced technologies; however, standards may not be the most cost-effective method for encouraging improvements in energy efficiency. The full costs of standards are not evaluated in this analysis. 1. Introduction In February 1999, the Administration sent its fiscal year 2000 budget request to the U.S. Congress. The Administration's budget includes more than $4 billion in programs related to climate change. Nearly $1.8 billion of the funding consists of tax incentives, research, development, and deployment, and other spending for the Climate Change Technology Initiative (CCTI). CCTI includes tax credits to serve as incentives for deploying energy efficiency improvements and renewable technologies for buildings, light-duty vehicles, industry, and electricity generation. Other funding covers research, development, and deployment for energy-efficient and renewable technologies, appliance standards, and carbon sequestration research. One focus of these programs is climate change, but they often have additional benefits for improved air quality due to reductions in other emissions, energy security, and international competitiveness. Although the tax incentives are largely new initiatives, many of the other programs are continuations or expansions of ongoing research, development, and deployment programs. The total budget request for CCTI programs for all Federal agencies comprises almost $1.4 billion for research, development, and deployment (representing an increase of $347 million over the estimated fiscal year 1999 budget) and nearly $400 million for tax incentives. The analysis described in this report examines all the CCTI programs with the exception of $4 million proposed for electricity restructuring programs at the U.S. Environmental Protection Agency (EPA): $14 million for management, planning, and analysis programs at the U.S. Department of Energy (DOE) and EPA; $3 million for EIA; and $10 million for carbon sequestration programs within EPA and the U.S. Department of Agriculture (USDA). The most detailed analysis in this report is for the tax incentives proposed in CCTI, which are new initiatives or extensions of current tax credits. Generally, we are not able to link research and development expenditures directly to program results or to separate the impacts of incremental funding requested for fiscal year 2000 from ongoing program expenditures. Other programs related to climate change include the U.S. Global Change Research Program, international assistance. and programs with climate change co-benefits-for example, weatherization and State energy grants. There are additional initiatives supported by the Administration that have a primary or ancillary purpose in reducing emissions. These include, but are not limited to, establishing a program for early action in reducing emissions. industry consultations, electricity restructuring, and changes in Federal procurement to increase energy efficiency and the use of renewable energy technologies in the Federal Government. With the exception of electricity restructuring, the impacts of these programs are difficult to quantify and are not discussed in this analysis. Tax Incentives The proposed CCTI tax incentives include investment tax credits—for buildings, vehicles, and industry—that would lower the initial costs of more energy-efficient and renewable technologies and production tax credits for renewable generation technologies. The revenue impacts of the proposed tax credits, as estimated by the Administration, total $383 million in fiscal year 2000 and $3.6 billion from fiscal years 2000 through 2004. Although the tax credits would be short term in nature, their longer term purpose is to encourage the use of energy-efficient and renewable energy technologies, reducing their production costs and creating a more mature market for them. Some past tax incentives have been able to accelerate substantially the introduction of new technologies into the market. For example, natural gas production from coal seams has grown dramatically since the late 1980's, largely because of tax credits that provide an incentive for the production of high-cost gas supplies. In 1997, 1,090 billion cubic feet, or 6 percent of total U.S. production, came from coal seams, compared with only 41 billion cubic feet in 1988. The tax credit has also contributed to sustained development of natural gas from coal seams by promoting an improved understanding of unconventional gas reservoirs, leading to new and lower cost technologies for its recovery. Other tax credits have had little impact, including the current biomass tax credit and the solar tax credit which was enacted in 1978 and expired in 1985. Important factors in the success of tax incentives include the timing, duration, and magnitude of the credits. Compared to some earlier tax credits, including the 40-percent solar tax credit, the incentives currently proposed are of small to modest magnitude and of relatively short duration. Other factors include the definition of qualifying entities and the different incentives provided by investment and production tax credits. Investment tax credits provide a return to the investor at the time a capital investment is made, while production tax credits provide a return during the life of the credit. The proposed incentives are summarized below: Buildings Tax Credits for Energy-Efficient Homes-new graduated tax credits for the purchase of new homes that are at least 30 percent more energy efficient than the 1998 International Energy Conservation Code (IECC). Specifically, the proposal is for a $1,000 tax credit for new homes built between 2000 and 2001 that are at least 30 percent more efficient, a $1,500 credit for homes built between 2000 and 2002 that are at least 40 percent more efficient, and a credit of $2,000 for homes built between 2000 and 2004 that are at least 50 percent more efficient than the IECC standard. Tax Credits for Energy-Efficient Equipment in Existing Homes and Buildings-new tax credits, subject to caps, for electric heat pump and natural gas water heaters, electric and natural gas heat pumps, advanced central air conditioners, and fuel cells. A credit of 10 percent, up to $250 per unit, is proposed for electric heat pumps, central air conditioners, and advanced natural gas water heaters purchased in 2000 and 2001 meeting specified efficiency levels. A 20-percent credit is proposed for purchases between 2000 and 2003 of fuel cells, electric heat pump hot water heaters, electric heat pumps, central air conditioners, advanced natural gas water heaters, and natural gas heat pumps meeting specified efficiency levels. The cap is $500 per kilowatt for fuel cells, $1,000 per unit for natural gas heat pumps, and $500 per unit for all other equipment. Tax Credits for Rooftop Solar Systems-a new 15-percent tax credit, subject to a cap, is proposed for rooftop photovoltaic systems installed between 2000 and 2006 and solar water heating systems installed from 2000 and 2004 but not applicable to solar-heated swimming pools. The cap is $2,000 for photovoltaic systems and $1,000 for solar water heating systems. • Transportation Tax Credits for Electric Vehicles and Fuel Cell Vehicles-the current 10-percent tax credit, subject to a $4,000 cap. for the purchase of qualified electric vehicles and fuel cell vehicles is scheduled to begin to phase down in 2002, phasing out by 2005; however, the proposal would extend the credit at its full level through 2006. Tax Credits for Highly Fuel-Efficient Hybrid Vehicles-new graduated tax credits for qualifying hybrid vehicles, including cars, minivans, sport utility vehicles, and pickup trucks. The proposed credits are $1,000 for vehicles purchased from 2003 to 2004 that are at least one-third more fuel efficient than a comparable vehicle in the same class; $2,000 for vehicles from 2003 to 2006 that are at least two-thirds more efficient; $3,000 for vehicles from 2004 to 2006 that are at least twice as efficient; and $4,000 for vehicles from 2004 to 2006 that are at least three times as efficient. Industry Tax Credits for Combined Heat and Power Systems-a new 8-percent tax credit is proposed for qualified combined heat and power systems larger than 50 kilowatts, installed between 2000 and 2002. Qualified systems would produce at least 20 percent thermal and at least 20 percent electrical or mechanical power. Systems with electrical capacity higher than 50 megawatts would need a total efficiency exceeding 70 percent to qualify, and smaller systems would need at least a 60-percent efficiency, Renewable Energy Electricity Generation Tax Credits for Wind Generation—the current tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base, for systems placed in service after December 31, 1993, and before July 1, 1999. would be extended to systems placed in service before July 1, 2004. Tax Credits for Biomass Generation—the current tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base, for systems using dedicated energy crops, placed in service after December 31, 1992, and before July 1, 1999, would be extended to systems placed in service before July 1, 2004; the definition of biomass systems eligible for the credit would be extended to include certain forest-related, agricultural, and other biomass sources; a new 1.0-cent-per-kilowatthour tax credit, adjusted for inflation from a 1999 base, would be added for biomass-fired electricity generated by coal plants using biomass co-firing through june 30, 2004. Research, Development, and Deployment In addition to tax incentives, CCTI includes nearly $1.4 billion of funding in the fiscal year 2000 budget request for research, development, and deployment of energy-efficient equipment and renewable energy and for research into carbon sequestration. Some of the research and development programs aim to reduce the costs and improve the operating characteristics of existing technologies, making them more economically competitive with conventional technologies. Others are directed toward inventing and developing new technologies. Some of the proposed technologies are speculative and may achieve benefits in a very long time frame or may not achieve success at all. Past research and development programs have contributed to improved energy efficiency and therefore lower carbon emissions. For example, there has been considerable impact on cost reductions and efficiency improvements for natural gas-fired, combined-cycle electricity generating plants. In the Annual Energy Outlook 1987, it was assumed that these plants would cost $855 per kilowatt (1997 dollars) and have an efficiency of 41 percent. By AEO99, these assumptions were revised to a cost of $445 per kilowatt and an efficiency of 49 percent. Less conductive windows and improved ballasts for lighting are additional examples of more efficient technologies as a result of research and development. Other benefits, such as improved quality of life and increased economic growth, may also result from research and development. It is difficult, however, to quantify the impacts of research and development on specific improvements. In the reference case of AEO99, which projects that carbon emissions in 2010 will increase by 33 percent over 1990 levels, it is assumed that research and development continue at current levels. Reductions in these programs would likely lead EIA to increase its projections of carbon emissions, while new or expanded programs could lead EIA to lower its carbon projections. 1 1 |