"Fuel economy regulation has worked, in practice. The CAFE standards played the leading role in bringing about the 50% increase in on-road fuel economy for lightduty vehicles from 1975 to 1995. This increase in fuel economy held down gasoline consumption with an effectiveness of 80-90%, taking into account the rebound effect. Today, consumers spend over $50 billion per year less on motor fuel than they would have at 1975 MPG levels. "The many potential threats to the success of fuel economy regulation either did not materialize or were relatively minor considerations in comparison to the overall trends. Vehicle life expectancy increased, vehicle travel increased, there was a shift from cars to light trucks, domestic manufacturers' market shares waxed and waned, yet petroleum consumption in personal transportation was greatly reduced over what it would have been, vehicle emissions were reduced and urban air quality improved, traffic fatality rates continued to decline, and domestically manufactured cars retained market share. Consumers were sufficiently satisfied to support raising fuel economy standards even further." CAFE standards, by specifying goals for new-fleet average fuel economy, offer manufacturers considerable flexibility in terms of technology choice and mix in efficiency improvement among different vehicle models. Also, manufacturers can choose to pay fines rather than complying with the fleet fuel economy goals. Given this structure and experience, I would not classify the CAFE standards as "heavy-handed regulation." Proposed Public Benefits Program in the Administration's Electric Industry Restructuring Legislation Q6. A6. How did you calculate the benefits of the proposed Public Benefits program in the Our analysis of the proposed Public Benefits Fund program is described in detail in our study "Approaching the Kyoto Targets: Five Key Strategies for the United States" which I submitted to the Committee for the hearing record. In short, our analysis estimates how much of the Fund would be spent on energy efficiency programs, how much energy savings would result, how much the efficiency measures would cost, and how much emissions reductions occur due to the energy savings. Based on historical spending patterns, we assume that 59 percent of Public Benefit funds are used for energy efficiency programs. Thus, 41 percent would be used for other purposes including low income energy assistance. Regarding the Administration's views concerning our analysis of the Public Benefits Fund, we have not received a formal response from them. Nor have we Comparing Carbon Emissions Reductions with SO, Reductions Q7. A7. On page 6 of your testimony you refer to the "success" of the SO2 program, and imply that "[t]he exact same strategies” will hold down the cost of carbon emissions reductions. However, the success of the SO, program was largely due to the availability of plentiful, cheap, low-sulfur Western coal that could be readily substituted for high-sulfur Eastern and Midwestern coal. Where does a plentiful and cheap low-carbon fuel exist that could be readily substituted for existing fossil fuels? The explanation of the success of the 1990 Clean Air Act Amendments (CAAA90) is more complicated than you suggest. The EIA study on the Impacts of the Kyoto Protocol (p. 16) succinctly explains what has happened: "For example, in the Annual Energy Outlook 1993 (AEO93), the first EIA analysis of CAAA90 compliance, the cost of a SO2 allowance was projected to be $423 a ton in 2000, in 1996 dollars, rising to $751 a ton in 2010. Currently the cost of an allowance is $95 a ton, and AEO98 projects that the cost will be $121 a ton in 2000 and $189 in 2010. Projected coal prices in AEO98 are 34 and 48 percent lower in 2000 and 2010, respectively, than those projected in AEO93, reflecting recent improvements in mine design and technology, economies of scale in the mining industry, and lower transportation costs induced by rail competition. There has been more fuel switching to low-sulfur, low-cost Western coal than previously anticipated (it was initially assumed that many eastern coal-fired plants would not be able to burn western coal without considerable loss of performance). There has also been downward pressure on short-term allowance costs because generators have taken actions to comply with the SO2 limitations earlier than anticipated. Finally, technology improvements have lowered the cost of flue-gas desulfurization technologies, or scrubbers, from $313 per kilowatt for scrubber retrofitting as assumed in 1993 to $191 per kilowatt in 1998." So there are a number of reasons why the 1990 Clean Air Act Amendments have been so successful, and many of them are related to technological improvement (including advances that enabled greater switching low-sulfur Western coals) technological improvements the EIA failed to anticipate in 1993 well after CAAA90 was enacted. Given how far off the EIA was in projecting the cost of SO2 emissions reductions just five years ago, why should anyone trust their estimates of the cost of CO2 emissions reductions 1222 years from now? More generally, studies of a wide range of emissions regulations show that the actual costs of emissions reduction are almost always far less than projections made prior to the regulations being adopted or taking effect. The reason for this is technological 4 *H. Hodges, "Falling Prices: Cost of Complying with Environmental Regulations Almost Always Less improvement. Once industries are required to reduce emissions, they develop new techniques for cutting emissions at minimum cost and often with other productivity benefits, as has been the case for SO2 emissions control. I maintain that history will repeat itself for GHG emissions reduction. If/when policy makers adopt GHG emissions limits and regulations, industries will pursue and develop a wide range of measures--some we might anticipate today and others that will come as a surprise--that will reduce emissions at minimum cost and with maximum productivity and other benefits. Given the pervasive nature of GHG emissions, there will be no one "magic bullet"; rather there will be many "little bullets" that affect the way we produce and consume energy in order to dramatically lower the carbon intensity of our economy. |