appliance efficiency standards and new Energy Star products, by evaluating the impacts of the standards proposed in a study by the American Council for an Energy-Efficient Economy. Approaching the Kyoto Targets: Five Key Strategies for the U.S., in combination with the new Energy Star programs for televisions and video cassette recorders and the goal of the Million Solar Roofs program. The program for the development of more energy-efficient technologies for light and heavy trucks is evaluated by assuming that the program goals for advanced diesel technologies for light trucks and for a variety of fuel-saving technologies for heavy trucks will be achieved and by evaluating the economics of their penetration. In a similar fashion, the Partnership for Advancing Technology in Housing (PATH). which has a goal of improving the energy efficiency of homes, is analyzed by assuming that the goals for new housing construction will be fully realized; however, the costs of achieving those highly efficient homes are not evaluated or incorporated into a decisionmaking process. For each tax incentive or other program evaluated quantitatively, the impacts were analyzed by using the relevant sector of NEMS in a standalone mode. The results are presented in terms of energy savings and reductions in carbon emissions from the sector, relative to the reference case, along with other key indicators from the sector. Where possible, an estimate of the tax revenue losses is also provided and compared with the Administration's estimates in the budget submission. It is important to recognize that all results are presented as incremental changes to the reference case. Where CCTI encompasses ongoing research, development, and deployment programs already included in the reference case for AEO99, the impacts of the proposed funding additions are not evaluated. It is also possible that some of the more efficient technologies included in the CCTI tax incentives would penetrate even in the absence of the incentives. The tax incentives are applied to both the units that are added incrementally as a result of the incentives and the units that would be added even in the baseline, which become unintended beneficiaries of the tax incentives. Where applicable, this analysis identifies the incremental units that are projected to be introduced as a result of the CCTI provisions. Another unintended effect of an investment tax credit is that part of the value of the credit accrues to equipment manufacturers and suppliers. Because the credit increases the demand for capital equipment, higher equilibrium prices for the equipment result. This effect could result in as much as 70 percent of the tax credit being passed on to equipment suppliers in the form of higher equipment prices.' If this situation were to occur, the impact of a tax credit on capital equipment additions could be quite modest. This effect has not been incorporated in the analysis. The presentation of the results focuses on the year 2010, because it is the midpoint of the first commitment period in the Kyoto Protocol, and also on 2005, because none of the tax credits extends beyond 2006. Some of the CCTI programs may have benefits in the longer term. Because of stock turnover, which can be slow, energy efficiency improvements and standards may take a long time to produce significant changes in the average stock of equipment. In addition, some of the research and development programs may have results later in, or beyond, the 2020 horizon of the analysis. The results are presented primarily in terms of energy savings and carbon reductions. Additional benefits that may occur, but are not evaluated, include improvements in air quality due to reductions in other emissions, energy security from lower energy imports, international opportunities for American companies as a result of improved technologies, and revenues from the deployment of more advanced technologies to other countries. As noted above, the PATH program is evaluated by assuming that program goals will be met, even though the resulting technologies may not be economical within the time frame of the analysis. New equipment evaluated for 'American Council for an Energy-Efficient Economy. Approaching the Kyoto Targets: Five Key Strategies for the U.S. (Washington, DC. August 1998). Austan Goolsbee. "Investment Tax Incentives, Prices, and the Supply of Capital Goods," Working Paper 6192 (Cambridge, MA: National Bureau of Economic Research, September 1997). the analysis of energy efficiency standards may similarly be unable to penetrate consumer markets on their own. The additional costs that could be required to make the technologies competitive are not addressed. In addition, there may be others, such as the full private sector costs of developing and manufacturing new technologies, infrastructure costs, and social costs, that are not captured in the analysis. Uncertainties It is possible that a standalone analysis of energy efficiency policies may overstate somewhat the potential energy and carbon savings that would be seen in a fully integrated analysis of U.S. energy markets. In other words, the individual energy sector savings are not necessarily additive. As an example, some policies may encourage the development and deployment of more energy-efficient and/or less carbon-intensive technologies for electricity generation. If concurrent policies encourage energy efficiency in the end-use demand sectors and reduce the demand for electricity, however, there may be less opportunity for the generation sector to grow and invest in the new generation technologies. Therefore, evaluating the combined impacts in an integrated model may be important. In this analysis, however, the individual impacts of the CCTI programs are projected to be relatively small, and it is unlikely that an integrated evaluation would provide additional information. One of the key uncertainties in analyzing the impacts of new, more efficient technologies is consumer price elasticity-the extent to which, and how quickly, energy consumers will react to changes in energy prices or to improvements in the energy efficiency of equipment by purchasing the more efficient technologies. The EIA analysis relies on empirically derived estimates of price elasticities and consumer preferences to evaluate technology penetration; however, models cannot predict shifts in consumer tastes or market transformations associated with rapid adoption of new technologies. The pace of technology development is also a major uncertainty. EIA relies on engineering evaluations of the availability, costs, and characteristics of new technologies assuming continuing patterns of research and development. It is acknowledged, however, that the future development paths of energyusing technologies cannot be foreseen with certainty. Market Barriers Although some programs in the CCTI are aimed at the basic research and development of more efficient or renewable technologies, others are focused on the diffusion and deployment of the technologies. There are a number of reasons why new technologies may be slow to penetrate, the foremost of which is cost-effectiveness. Much of the research in new energy technologies, such as photovoltaic and wind generation, is aimed at reducing their costs. The lack of penetration of technologies that do appear to be cost-effective is often termed "market failure.” More recently, analysts have attempted to separate true market failure from other market barriers. Market failures may result from lack of information about the characteristics of new technologies, which may be helped through a variety of information programs. Another difficulty is exemplified by the difference between the incentives of builders and homeowners. To the extent that newer technologies may be more expensive, it may be difficult for builders or andlords to recover their additional costs from buyers or tenants who may not value energy efficiency as highly as other characteristics. Conversely, the buyer or tenant who will be paying the energy costs may not readily have the ption of making equipment choices. Finally, artificially lower prices for energy, through subsidies or regulated rices for example, may hamper the penetration of technologies, because even lower technology costs would be ecessary for them to appear cost-effective. Other items may be viewed as market barriers, not failures. Energy consumers may be fully aware of potential cost savings from a more efficient technology but have a preference for other characteristics of equipment they purchase. The current trend for larger, more powerful vehicles is a prime example, but there are many examples of characteristics for vehicles, appliances, and equipment that compete with energy efficiency. New technology also tends to have a naturally slow penetration for a variety of reasons, including uncertainty as to the reliability and benefits of the new product; lack of familiarity with new techniques for installing and maintaining the equipment; uncertainty about the future availability of the next generation of the technology, which could represent a major improvement; and apprehension about the infrastructure for support and maintenance of the technology. Perceptions about the payback periods for new equipment purchases may also vary among consumers. A technology may appear cost-effective when the potential fuel cost savings are estimated over a long period of time, but many consumers appear to want a more immediate payback for their higher initial purchase costs. Also, the tendency for homeowners to move frequently works against the purchase of equipment with long payback periods. Finally, uncertainty about future fuel prices and the likely duration of occasional price spikes may discourage consumers from investing in energy-saving equipment. Market failures can be addressed by a number of programs, including those in the CCTI. Information programs, collaborative efforts for development and diffusion, research and development to improve the technologies and reduce costs, and incentives to enhance the cost-effectiveness of new technologies all 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 accelerate the market penetration of advanced technologies. No attempt was made in this analysis to evaluate the costs of such standards. 2. CCTI Tax Initiatives Introduction The Administration's Climate Change Technology Initiative (CCTI) includes a number of proposed tax incentives that would provide tax credits for buildings, vehicles, industry, and renewable electricity generation. The purpose of the tax credits is to reduce the initial costs of more energy-efficient and renewable technologies for buildings, vehicles, and industry and provide tax incentives for the generation of electricity from renewable sources, thereby encouraging their adoption earlier than would otherwise occur. The tax credits are short-term incentives, lasting only a few years and extending no later than 2006; however, in addition to their short-term impacts, they are intended to stimulate the use of the technologies, lower costs, and establish a more mature market for them. The Administration estimates the combined revenue impact of the tax credits at $383 million in fiscal year 2000 and $3.6 billion from fiscal years 2000 through 2004. In general, this analysis of the tax incentives used the National Energy Modeling System (NEMS), the Energy Information Administration (EIA) model of U.S. energy markets. To evaluate the tax credits for new energy-efficient homes, U.S. Department of Energy (DOE) building code and building simulation models were also used. The results of the analysis highlight the energy savings and reductions in carbon emissions for each of the tax credits, relative to a reference case based on the Annual Energy Outlook 1999 (AEO99),9 published in December 1998. Where possible, an estimate of the tax revenue implications is also provided and compared to the Administration estimates. 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 1980s, largely because of tax credits that provide an incentive for the production of high-cost gas supplies. 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 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. It is likely that some of the technologies targeted in the CCTI would penetrate to some degree even in the absence of the proposed tax credits; however, those units would receive the tax credit as well as the marginal units that would come on line purely as a result of the credit. Estimates of the magnitude of such unintended benefits are also provided. Another unintended result of the tax credits may be a tendency on the part of purchasers to either delay or accelerate investments in order to receive the credits, an effect that cannot be quantified. An additional unintended *Energy Information Administration, National Energy Modeling System: An Overview, DOE/ELA-0581 (Washington, DC, February 1998). Energy Information Administration, Annual Energy Outlook 1999, DOE/EIA-0383(99) (Washington, DC, December 1998). Energy Information Administration / Analysis of the Climate Change Technology Initiative effect of an investment tax credit is that part of the value of the credit accrues to equipment manufacturers and suppliers. The credit increases the demand for capital equipment, leading to higher equilibrium prices for the equipment. As a result, as much as 70 percent of the tax credit could be passed to equipment suppliers in the form of higher equipment prices.10 If this situation were to occur, the impact of a tax credit on capital equipment additions could be quite modest. This effect has not been incorporated in the analysis. Buildings The Clinton Administration's proposed budget for fiscal year 2000 includes a package of proposals aimed at promoting energy efficiency and improving the environment. The CCTI package would provide $2.1 billion in targeted tax incentives over 5 years for consumers who purchase energy-efficient products and energy from renewable sources for use in buildings. By offering consumers price reductions on energy-efficient products through reductions in their Federal taxes, the CCTI initiatives are intended to increase demand for the products and, thereby. increase economies of scale in the production process, reduce production and retail costs, and develop a more robust market for the products. The CCTI package also includes $273 million in investments for research, development, and deployment of clean technologies for residential and commercial buildings in fiscal year 2000 (see Chapter 3). The proposed CCTI tax credits provide incentives for the purchase of more efficient equipment and structures by offering income tax credits for the year in which the equipment or structure was purchased. The Administration estimates reductions in tax revenues of $2.1 billion from fiscal year 2000 through fiscal year 2006 as a result of the proposed initiatives for the buildings sectors. Specific estimates include $1.5 billion in tax incentives for energyefficient equipment. $429 million for the purchase of new energy-efficient homes, and $132 million for rooftop solar systems. The EIA has conducted an analysis of the CCTI tax incentive proposals that have the potential to affect levels of energy use and carbon emissions in the buildings sectors. Estimates of the projected impacts were developed by comparing the results from a reference case with results from an analysis case incorporating the proposed tax initiatives. Energy consumption and energy-related carbon emissions were the only effects considered. The reference case included efficiency and price improvements expected under current policy and market conditions. The residential and commercial demand modules of NEMS were used to model the CCTI proposals that could be explicitly represented (tax credits for energy-efficient equipment in existing homes and buildings and tax credits for rooftop solar systems). An off-line analysis using DOE building simulation models and payback analyses was employed to evaluate the potential impacts of the proposed tax credits for energy-efficient new homes. Estimates were developed considering only the buildings sectors, with no analysis of possible feedback effects from other sectors of the economy. Tax Credits for Energy-Efficient Building Equipment Background A two-tier tax incentive program has been proposed to accelerate the development and distribution of energyefficient technologies, generally providing a 10-percent credit for energy-efficient equipment purchased in 2000 and 2001 and a 20-percent credit for higher efficiency equipment purchased from 2000 through 2003. For example, a small 10 Austan Goolsbee, "Investment Tax Incentives, Prices, and the Supply of Capital Goods." Working Paper 6192 (Cambridge, MA: National Bureau of Economic Research, September 1997). |