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This was related to some of the points mentioned earlier having to do with the rate of population growth and economic growth. At the end of the period, we found that in the long term new energy supply technologies of the type we are trying to promote played a major role in allowing us to meet or approach these congressionally suggested levels of greenhouse gas emissions.
Emissions charges or efficiently operating tradable allowance systems are, in theory, the most efficient means to reduce emissions. That is true because they influence behavior at all points of the production/consumption chain and because they are directly focused on actual emissions rather than emissions rates. Because of this efficiency, an analysis of emissions charges can be used to gain insight into the cost of an efficient set of measures to reduce greenhouse emissions.
In the DOE study, stabilization of carbon dioxide emissions at 1990 levels was found to require a carbon tax of $140 per metric ton in the year 2000, rising to $200 per metric ton in the year 2010. I might add that this is quite similar to those in some of the DRI studies that the Department of Commerce talked about earlier.
A 20 percent reduction in carbon dioxide emissions in the year 2000 would require a tax rate of $495 per metric ton of carbon and cost $90 billion per year. I might point out that $100 per metric ton of carbon translates into about $12 per barrel of oil and $55 per ton of coal.
To explicitly illustrate the role of the National Energy Strategy actions in minimizing costs, we constructed a sensitivity case using as an alternative starting point the NES actions case without the nuclear power component. The absence of nuclear power had a major impact but only in the latter years of the study period. It increased the cost in 2030 of reaching one of the congressional targets by between $50 billion and $70 billion per year. The purpose of this sensitivity is to highlight the importance of the National Energy Strategy actions in holding down costs. We also looked at a variety of other measures in the study.
We are cooperating, as you know, with the Environmental Protection Agency pursuant to the Clean Air Act Amendments of 1990 in looking at some methane issues as well, methane being another important greenhouse gas. Eileen Claussen already touched on that, and we don't need to go into the detail there.
Let me conclude by noting that we look forward to working with you to enact balanced, comprehensive energy legislation consistent with the National Energy Strategy. Such legislation is perhaps the single most important step to putting the United States on a lower projected greenhouse emissions trajectory.
DOE and the administration are also committed, as several other witnesses have noted, to examining other promising actions that could reduce greenhouse emissions. In this endeavor, DOE is casting a wide net; we are working with other Government agencies, with the Energy Information Administration, with the National Laboratories, and with private sector experts, to ensure that administration analyses and estimates are of the highest possible quality.
As you know, the National Energy Strategy was always intended to be an evolving strategy. We expect that will be clearer when we issue the second edition of the National Energy Strategy in the spring of 1993.
At this time, I and, I am sure, the other members of the panel would be happy to answer any questions that you might have.
[The prepared statement of Mr. Gruenspecht follows:]
ASSOCIATE DEPUTY UNDER SECRETARY FOR PROGRAM ANALYSIS
OFFICE OF DOMESTIC AND INTERNATIONAL ENERGY POLICY
U.S. DEPARTMENT OF ENERGY
Mr. Chairman and members of the Subcommittee, I am pleased to appear before you this morning. My testimony covers three points regarding analyses of policy actions that might be adopted to address concerns regarding the potential for global climate change due to anthropogenic emissions. First, it addresses some of the analytical and conceptual challenges that arise in quantifying the impact on greenhouse gas emissions of individual actions, with particular attention to actions that promote energy conservation and efficiency. Second, it presents information regarding the substantial role of the National Energy Strategy (NES) actions in reducing greenhouse emissions. Finally, it provides information regarding the cost of other measures to reduce greenhouse emissions developed by DOE in recent studies carried out pursuant to Congressional requests.
la. Evaluating the Energy Impact of Policy Actions Energy system analysis is a complex undertaking. Changes in one part of the energy sector often affect fuel prices, which in turn affect energy demand and supply in other parts. For this reason, and because individual policy actions can have significant overlapping impacts (or positive synergies), efforts to estimate the likely impact of a series of individual programs require an integrated analysis rather than a simple summation of singleaction effects. For example, energy efficiency information programs and investments by utilities to promote more efficient use of energy by their customers would each be projected to reduce greenhouse emissions relative to a base case scenario. However, to the extent that these two types of programs would lead to some of the same efficiency investments, their combined impact on energy use (and greenhouse emissions) may be significantly less than the sum of their individual effects.
Another type of overlap occurs when the greenhouse implications of increased conservation and the introduction of low- or no- emission electricity generation technology are considered together, because conservation directly reduces the amount of new generating capacity required. The purpose of analyzing actions in combination, "integrating" them, is
to provide an understanding of these effects, and to avoid serious errors in projecting their total effects.
1b. The Role of Increased Energy Efficiency The NES is designed to increase energy efficiency, reducing both future energy demand and associated emissions of co, and other greenhouse gases. As noted below, by 2030, CO2 emissions are projected to be one-third lower in the NES policieś case than in a current policies case. However, Administration policies do not seek to reduce energy demand at any cost. Rather, a test of economic balance is applied.
The amount that can profitably be spent on conservation depends on rates of return, risks, discount rates, and payback periods. The costs of energy-saving investments must continually be balanced against other investment opportunities in the economy. Changes in the energy prices and in the cost of efficiency investments, well as changes in the value of non-energy-related uses of scarce investment resources, ultimately determine the appropriate mix between energy use and demand-reducing efficiency investments. This balance can best be determined by individual businesses and households that are most directly aware of their own energy use patterns and competing needs. This principle underlies both the NES initiatives and additional voluntary efforts such as Green Lights program.
In evaluating any investments, whether in energy efficiency or otherwise, biased methodologies should be avoided. For example, use of an artificially low discount rate to evaluate conservation investments (or to guide the establishment of standards) can impose substantial economic burdens and divert capital from other, more productive uses, such as investment in
investment in technology, education, employee training, and manufacturing facilities. It can result in the misleading impression that investments that are relatively nonproductive compared to possible alternative uses of available funds are socially desirable. Economically justified conservation investments, however, present cost-saving opportunities that can expand funds available for investment and promote growth. The Administration supports a number of programs that assist the public and industry in identifying profitable conservation opportunities. The NES seeks to move the knowledge frontiers outward through R&D and remove the barriers to application of that knowledge. For example, in the electric utility industry, the NES supports broader use of an Integrated Resource Planning (IRP) process in which the same investment criteria are used to evaluate both conservation investments and investments in new generation. The aim is to remove a current regulatory bias that favors new capacity over conservation in meeting our electricity needs.
Furthermore, since new opportunities continually emerge from the process of technical innovation, the best conservation strategy is inherently an evolving one. The Administration envisions continual progress in increasing energy efficiency through additional investment over time as energy prices, technical opportunity, and capital availability warrant. We also fully support voluntary information-oriented initiatives such as EPA'S Green Lights Program.
In summary, where real barriers to efficient market operation exist, the government should seek to remove them. However, it should also be recognized that the commercialization process for all new technologies, including energy-efficiency technologies, evolves at a pace determined by market forces. While we can certainly seek to improve information flows to accelerate the penetration of technologies whose adoption would
social goals, the inherent lag in technology diffusion is not in itself a market failure that could justify a policy to override reliance on market forces to guide investment funds to their most productive uses. Second-guessing private choices regarding investment plant, equipment, and commercial technologies may well serve to slow economic growth, and lengthen the time that the existing, and generally less energy-efficient, capital stock is in operation.
2. National Energy Strategy Actions and Greenhouse Gas Emissions The NES has two main thrusts that affect projected greenhouse emissions improvement in energy efficiency in all sectors of the American economy
economy and increased availability of energy supply technologies with improved environmental properties. Combined progress in both of these areas translates into significantly reduced net greenhouse gas emissions. While there is necessarily considerable uncertainty associated with the development of baselines over a 40 year horizon, the full suite of NES actions is projected to reduce carbon dioxide emissions by 34 percent relative to their projected levels under current policy conditions in 2030. (The comparable reduction from baseline projections in 2000 is 4 percent.)
Despite these substantial reductions, the NES actions are not projected to hold carbon dioxide emissions at current (1990) levels. The NES policies also can
a "comprehensive basis" using an index of global warming potential (GWP) to provide a single measure for all greenhouse gases. The total reduction in GWP due to the NES and other Administration actions is even more substantial.
Although energy legislation is a key component of the NES, the overall strategy is much broader than its legislative elements alone. The NES one-year progress report issued late last month details administrative actions being taken by DOE to implement over ninety NES initiatives, As one example, the Department is making a substantial effort to increase the use of energy-efficient mortgages. These programs are good for the homebuyer, good for the housing industry, and good energy policy. However, according to a recent article in American Banker, only one out of every 37,500 loans underwritten during the 1980s considered energy efficiency, despite the fact that agencies such as Fannie Mae, Freddie Mac and the Department of Veterans Affairs all have provision for energy efficient mortgages in their financing programs.
To increase utilization of these programs, DOE, together with HUD, formed a National Collaborative on Home Energy Rating Systems and Mortgage Incentives for Energy Efficiency in
Efficiency in March 1991. In January 1992, the 25 members of this consortium agreed to a "Blueprint for Action" which outlines several key actions, including the development of common standards across Federal and quasi-public mortgage agencies, development of a national voluntary home energy rating program, and initiation of educational and training programs. This work will clear the way for greater use of energy-efficient mortgages.