appliance efficiency standards. One focus of these programs is climate change; but they often have additional benefits for improved air quality due to reductions in criteria pollutants, energy security, and maintaining U.S. leadership in science and technology. Although the tax credits are largely new initiatives, many of the other programs are continuations or expansions of ongoing research, development, and deployment programs. The total CCTI budget request of $1.8 billion for all Federal agencies includes almost $1.4 billion for research, development, and deployment and nearly $0.4 billion for tax incentives. Of the $1.4 billion in expenditures for programs other than tax incentives, $397 million is the increase over the Fiscal Year 1999 budget.

The Committee requested that EIA analyze the potential impacts of CCTI, relative to the baseline energy projections in the Annual Energy Outlook 1999 (AEO99)'. This analysis used primarily the National Energy Modeling System (NEMS), ELA's energy-economic model of domestic energy markets. This analysis discusses all programs in CCTI with the exception of $4 million proposed for electricity restructuring at the Environmental Protection Agency (EPA), $14 million for management, planning, and analysis for the Department of Energy (DOE) and EPA, $3 million for ELA, and $10 million for carbon sequestration programs within EPA and the Department of Agriculture (USDA). The analysis primarily focuses on the tax incentives in CCTI, which are new initiatives or extensions of current tax credits. We are not able to link research and development expenditures directly to program results or to separate the impacts of incremental funding requested for FY2000 from ongoing program expenditures. Therefore, the research, development, and deployment programs are either addressed qualitatively, analyzed via their impact in the AEO99 reference case, or analyzed by the potential impacts if certain program goals are achieved. Other programs that may have benefits for climate change, but are not part of CCTI, are not included in the analysis. These include electricity restructuring and renewable portfolio standards. Renewable portfolio standards are addressed in the report by referring to analysis in AEO99 on a 5.5-percent standard.

'Energy Information Administration, Annual Energy Outlook 1999, DOESEIA-0383(99) (Washington, DC, December 1998).

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NEMS represents energy-consuming and producing technologies with a high degree of detail; however, the pace of technology development and penetration remains a major uncertainty. To project the future of energy markets, ELA relies upon engineering evaluations of the availability, costs, and characteristics of new technologies, continuing patterns of research and development; however, it is not possible to foresee with certainty how energy-using technologies will develop in the future. To be successful a technology must be developed and penetrate the market. Barriers that may limit or slow the penetration of apparently cost-effective technologies include: lack of information, subsidies or regulated prices that may hold energy prices artificially low, differences in incentives between builders and users of energy equipment, consumer preference for other equipment attributes instead of efficiency, consumer preference for short payback periods, and uncertainties about reliability, installation and maintenance, future technology developments, and infrastructure requirements. ELA analyzes empirical evidence to estimate price elasticities and consumer preferences in order to project consumer reaction to changes in energy prices or improvements in energy efficiency; however, models cannot predict shifts in consumer tastes or market transformations associated with the rapid adoption of new technologies, such as the Internet.

Tax Incentives

Tax incentives have played a significant role in energy policy for many years. Some incentives have been able to accelerate substantially the introduction of new technologies into the market, while others have had little impact. Both the level of the incentives and likely market conditions are important factors in any assessment of the impacts of changes in the tax laws. Compared to some earlier tax credits, such as the solar tax credit of 40 percent which was enacted in 1978 and expired in 1985, the incentives currently proposed are of small to modest magnitude and of relatively short duration.

CCTI proposes investment tax credits for buildings, vehicles, and industry to lower the initial costs of more energy-efficient and renewable technologies and production tax credits for

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renewable generation technologies. These tax credits are in effect for only a few years for the intended purpose of encouraging the penetration of these technologies, reducing costs, and creating a more mature market. Administration estimates of the revenue impact of the credits are $383 million in FY2000 and $3.6 billion from FY2000 through Fiscal Year 2004.

Tax Credit for Energy-Efficient Homes. A new $1,000 tax credit would be
established for new homes purchased between 2000 and 2001 that are at least 30
percent more efficient than the 1998 International Energy Conservation Code
(IECC), a $1,500 credit for homes between 2000 and 2002 that are at least 40
percent more efficient, and a credit of $2,000 for homes between 2000 and 2004
that are at least 50 percent more efficient.

Tax Credit for Energy-Efficient Equipment in Existing Homes and Buildings. A new tax credit of 10 percent, up to $250 per unit, would be established for electric heat pumps, central air conditioners, and advanced natural gas water heaters purchased in 2000 and 2001 meeting specified efficiency levels and a 20-percent credit 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 Credit for Rooftop Solar Systems. A new 15-percent tax credit, subject to a
cap, would be established for rooftop photovoltaic systems installed between 2000
and 2006 and solar water heating systems installed from 2000 and 2004 but is not

available for solar-heated swimming pools. The cap is $2,000 for the photovoltaic systems and $1,000 for the solar water heating systems.

Transportation

Tax Credit for Electric Vehicles and Fuel Cell Vehicles. Under current law, the
10-percent tax credit, subject to a $4,000 cap, for the purchase of qualified electric
vehicles and fuel cell vehicles begins to phase down in 2002, phasing out by 2005:
however, this proposal would extend the credit at its full level through 2006.

Tax Credit for Highly Fuel-Efficient Hybrid Vehicles. The proposal would provide
a new tax credit of $1,000 for qualifying hybrid vehicles, including cars,
minivans, sport utility vehicles, and pickup trucks, 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 hybrid vehicles from 2003 to 2006 that are at least two-
thirds more efficient; $3,000 for hybrid vehicles from 2004 to 2006 that are at
least twice as efficient; and $4,000 for hybrid vehicles from 2004 to 2006 that are
at least three times as efficient.

Industry

Tax Credit for Combined Heat and Power Systems. A new tax credit of 8 percent would be provided 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 at least 70percent total efficiency, and smaller systems would need at least 60-percent efficiency.

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Tax Credit for Wind Generation. Under current law, a tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base, is provided for systems placed in service after December 31, 1993, and before July 1, 1999. The proposal would extend this credit to systems placed in service before July 1, 2004.

Tax Credits for Biomass Generation. Under current law, a tax credit of 1.5 cents
per kilowatthour, which is adjusted for inflation from a 1992 base, is provided for
systems using dedicated energy crops placed in service after December 31, 1992,
and before July 1, 1999. The proposal would extend the credit to systems placed
in service before July 1, 2004, extend the definition of biomass systems eligible
for the credit to include certain forest-related, agricultural, and other biomass
sources, and provide a new 1.0-cent-per-kilowatthour tax credit, which is adjusted
for inflation from a 1999 base, for biomass-fired electricity generated at coal
plants using biomass co-firing through June 30, 2004.

Table 1 presents the impacts of the tax credits in terms of energy savings and reductions in carbon emissions. relative to the AEO99 reference case, which assumes current law. The carbon savings include only those incremental changes in emissions, relative to the reference case. Where possible, an estimate of the tax revenue implications is provided and compared to the Administration estimates. The year 2010 is the focus because it is the midpoint of the first compliance period in the Kyoto Protocol. Some of the technologies covered by the tax credits are likely to penetrate even without the credits and are included in the reference case; however, the credits are applied to both the units that are added because of the credits and the units that would be added without the credits, which become unintended beneficiaries of the tax credits. For ELA, both revenue impacts are presented.