produced and made commercially available than those represented in EIA's analysis of the Kyoto Protocol. Second is the description of how the adoption of the better technologies will occur without "onerous taxes or heavy-handed regulations." The Annual Energy Outlook 1998 includes future cost and performance improvements to technologies that either exist or are near commercialization (i.e., technologies whose development is sufficiently well defined so that we can predict with confidence that consumers will have the technology available to them within the next two decades). If a technology is to have an observable impact on greenhouse gas emissions by 2010, it must be commercially available now or within the next few years. The technologies represented in the Kyoto Protocol analysis represent EIA's best, peer-reviewed, engineering estimate of the rate at which evolutionary changes to technologies may occur in the mid-term. Some of the technologies included in the analysis are already near their thermodynamically defined upper limit on efficiency of 1.0 (e.g., gas furnaces). In most cases, the tops of the ranges of the end-use efficiencies represented in EIA's analysis are quite near their theoretically defined maximums. The costs associated with these more advanced units are usually significantly higher than the average available technology within the end-use service and fuel class and, as a result, are rarely selected under normal conditions. These projected costs are based on engineering analysis and review by engineering firms (such as Parsons Engineering and A.D. Little) and industry groups (such as the Electric Power Research Institute). To illustrate the uncertainty involved in these projections and the fact that the realized menu could be better or worse than described in our reference case, we have provided a high and low technology sensitivity analysis that shows the amount of technology improvement that occurs in the reference case and how much more could be achieved with aggressive research and development (R&D). The analysis shows that for the 1990+9% case, the expected technology improvements incorporated in the reference case lowers the projected carbon price in 2010 by an estimated 33 percent from what it would have been if only those technologies known in 1998 were considered. More aggressive R&D could further reduce the projected carbon price in the 1990+9% case by an estimated 25 percent from the reference case price. Mr. Geller suggests five strategies (three are various forms of efficiency standards and two are voluntary programs that are informational in nature) to achieve 61 percent of the energy-related reductions required domestically (an estimated 310 million metric tons of carbon equivalent). Mr. Geller assumes that 4 percent (54 million metric tons) of the total reduction will come from sinks, offsets from other greenhouse gases, and international trading. Mr. Geller is silent on how the other 39 percent of energy-related reductions will be achieved. To date, voluntary programs such as the Climate Change Action Plan (CCAP), including Climate Challenge and Climate Wise, have fallen short of expectations. The second part of Mr. Geller's assertion compares taxes and regulations. Our analysis uses the marginal value of the cost of reducing U.S. carbon emissions by a specified level *See page ix, footnote 1, of the ACEEE report, "Approaching the Kyoto Targets: Five Key Strategies for (a carbon price similar to a sulfur price) to determine an economically efficient allocation of carbon emission reductions across the economy. We assume no cost for the administrative implementation of the carbon cap and trade system. To simulate such an efficient allocation, we assume that higher energy prices (i.e., end-use prices are adjusted for the carbon price) will provide the incentive for consumers to switch to less carbon intensive forms of energy and to reduce their demand for energy services. The revenues collected are returned to consumers and/or businesses through either a personal income tax rebate or a social security tax rebate. In this way, the economy becomes more energyefficient through a shift in relative prices, while making approximately the same level of resources available to the economy as a whole. Q19. August 1998 ACEEE Study: “Approaching the Kyoto Targets: Five Key Strategies for the United States" In August 1998, the American Council for an Energy-Efficient Economy (ACEEE) published a study entitled “Approaching the Kyoto Targets: Five Key Strategies for the United States," by Howard Geller, Steven Nadel, R. Neal Elliott, Martin Thomas, and John DeCicco (hereafter, the ACEEE Study or Study). According to the Study's Executive Summary: "This report presents and analyzes five major energy efficiency policy initiatives that could greatly help the United States achieve its Kyoto target. These policies would stimulate widespread energy efficiency improvements in all key sectors of the economy-buildings, transport, industry and electricity supply. By doing so, the initiatives yield energy bill savings that exceed the cost of the measures on a net present value basis. Thus, the initiatives reduce GHG emissions at an economic benefit rather than cost to the nation." (ACEEE Study, page v.) A19. We have reviewed the American Council for an Energy Efficient Economy's (ACEEE) report, "Approaching The Kyoto Targets: Five Key Strategies For The United States." Where appropriate we have identified issues we have with the proposed strategies, and included our analysis in the response to Q19.1-19.5. In general, we believe that the claimed benefits of each of the proposed strategies are optimistic. In addition, we have an additional issue with the estimate of the benefits of all of the programs combined. ACEEE calculated the combined benefits by simply adding the individual program benefits together. In most cases, individual efficiency program impacts are lessened when several programs are combined because of the impact of the various strategies on one another. For example, if new appliance efficiency standards are issued, the potential savings from a public benefits fund to encourage consumers to purchase more efficient appliances may be lessened because new appliances will already embody a substantial portion of available efficiency gains. Similarly, if ACEEE's combined heat and power proposal encourages the amount of newly installed combined heat and power/cogeneration facilities that they report, the heatrate targets in ACEEE's power sector carbon emissions reducing proposal may be met or nearly met. Therefore, this additional proposal will have limited effect on the installed generating capacity. While our review of each of the ACEEE's five likely that the combined benefits of the policy proposals in the ACEEE report are overstated because they were not developed in an integrated framework which accounts for the impacts the individual strategies have on each other. Q19.1 Appliance and Equipment Efficiency Standards and Related Voluntary Programs The ACEEE Study's first strategy is “appliance and equipment efficiency standards and related voluntary programs." The Study states: "Our strategy consists of: (1) rapidly completing ongoing “Complementing efficiency standards, we also recommend that The ACEEE Study claimed that this strategy would avoid 25 million metric tons of carbon emissions by 2010 and 44 million metric tons by 2020. Further, they claimed that net present value of costs and savings for measures installed during 1999-2010 would be $13 billion and $28 billion, respectively, for a net benefit of $15 billion (ACEE Study, page xi). Please comment on the ACCEE Study's methodology, assumptions, and findings with respect to this strategy. A19.1 There are several features of the ACEEE study that we find problematic. In they have applied consumer prices for end-use electricity to the savings of energy by electric utilities, rather than applying the more appropriate value of primary energy, which is much lower than the value of consumer end-use electricity. There are also differences between the ACEEE and EIA data on the costs of upgrading to more energy efficient equipment and the energy savings resulting from such investments. Also, average electric utility fossil fuel carbon emissions have been used to estimate the carbon emissions that would be saved rather than the more appropriate marginal carbon savings associated with the changes made. This overstates estimated carbon emissions savings, since efficient natural gas generation (with considerably lower carbon emissions) is often the marginal choice for additional capacity. A greater elaboration on these comments is provided below. ACEEE evaluated many different appliances on a one-by-one basis in order to formulate a total energy/carbon savings, relative to a "frozen efficiency" case. These assumptions necessarily imply that: (1) there are no interaction effects between the efficiency programs considered and (2) that new appliance efficiency does not change over time unless a standard is imposed. By assuming (2) above, the ACEEE study implies that all voluntary programs, demand-side management (DSM) programs, etc., that are currently in place have no impact on future energy efficiency offered in the marketplace. And, as noted in the response to Q19, some programs have interaction effects that must be accounted for. For example, as building codes and voluntary programs that act to increase building shell efficiency penetrate the new construction market over time, the potential energy savings from a new furnace/heat pump/air conditioner efficiency standard necessarily decrease. These interaction effects need to be fully incorporated in this type of analysis to get an accurate picture of estimated energy saving. As a result of not incorporating interactions, ACEEE's methodology would likely overstate the potential savings. General issues relating to this "efficiency standard" strategy are: 1) Market Barriers. --The ACEEE study cites three market barriers to the adoption of energy efficient products uninformed decision makers, financial procedures which over emphasize initial capital costs, and distributors who stock few or no energy efficient products. There are many other potential causes of market barriers to the adoption of efficient equipment. However, not all perceived market barriers are market failures, and if policies attempt to "correct" these non-existent market imperfections, there is a potential for welfare losses. Examples of barriers which we believe are not market failures are: Uncertainty about future energy prices and technologies. For example, upgrading a technology today may lock the purchaser into a particular energy prices in the future may be lower than today's prices, reducing the savings from an energy efficient investment. Actual costs for retrofitting incurred by consumers could be higher than estimated (e.g., because not all costs were included in the analysis). Therefore, economic returns may be lower than represented in the abstract analysis. Certain characteristics of the more energy efficient product may be less desirable than the "inefficient" product. An example is replacing incandescent lights with compact fluorescent lights (CFLs). CFLs have a fairly low overall capital cost and very rapid paybacks. For high utilization bulbs, the payback can be less than two years with a return on the extra investment of over 50 percent per year. Nevertheless, CFLs have been very slow to penetrate the marketplace, and many have been purchased only with utility DSM subsidies. Reasons for their slow market penetration may include poorer lighting quality, the fact that the CFL bulbs do not fit all lamps, and a less pleasing physical appearance.' 2) Penetration of Energy Star Equipment by 2010. -- The Energy Star programs are voluntary programs. Although the Energy Star Computer program has been very successful achieving a large share of the market, it is probably unrealistic to assume the penetration rates (50 percent, 75 percent, or 90 percent) that ACEEE projects for all Energy Star products. The incentive for cable box makers and buyers (the cable companies) to invest in Energy Star equipment is likely to be very weak, unless the added costs are negligible, because the added energy costs are not borne by the cable company and the company may find it difficult to recoup these higher costs through increased rates. Finally, the penetration of some equipment such as energy-efficient commercial refrigerators, with lives of 15 years or more, may be limited by slow turnover rates. - For estimating 3) Carbon Factors for Assessing End Use Electricity Savings. carbon emissions savings from Commercial Refrigeration and Home Electronics, the ACEEE study uses carbon factors that represent the average emissions savings for reducing generation from fossil fired plants, rather than factors which represent carbon saved from a reduction in electricity from the marginal generating plant. These ACEEE carbon emissions factors are as much as 29 percent higher than marginal carbon emissions factors in the EIA study, and thereby could overstate carbon emissions savings by about 1.4 million metric tons in 2010 for these two voluntary programs. For estimating carbon emissions savings due to enhanced standards, the ACEEE uses different factors than they did for evaluating savings 'See Jaffe & Stavins, “Energy Efficiency Investments and Public Policy," The Energy Journal, Vol. 15, |