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Mr. Chairman and Members of the Committee:

I appreciate the opportunity to appear before you today to discuss the Energy Information Administration's (ELA) analysis of the Climate Change Technology Initiative. This analysis was requested by the Committee on Science, U.S. House of Representatives.

EIA is an autonomous statistical and analytical agency within the Department of Energy. We are charged with providing objective, timely, and relevant data, analysis, and projections for the use of the Energy Department, other agencies, the Congress, and the public. We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers decide energy policy. Because we have an element of statutory independence with respect to the analyses that we publish, our views are strictly those of ELA. We do not speak for the Department, nor for any particular point of view with respect to energy policy, and our views should not be construed as representing those of the Department or the Administration. ELA's baseline projections on energy trends, however, are widely used by government agencies, the private sector, and academia for their own energy analyses. Each year EIA publishes the Annual Energy Outlook, which provides projections and analysis of domestic energy consumption, supply, prices, and carbon emissions. These projections are not meant to be exact predictions of the future but represent a likely future, assuming known trends in demographics and technology improvements and also assuming no change in current law, regulation, and policy.

Climate Change Technology Initiative

In February 1999, the Administration's Fiscal Year 2000 (FY2000) budget request was sent to the U.S. Congress, which includes more than $4 billion in programs related to climate change. Nearly $1.8 billion of the funding is tax incentives, research, development, deployment, and other spending for the Climate Change Technology Initiative (CCTI). CCTI includes tax credits to serve as incentives for deploying energy efficiency improvements and renewable technologies for buildings, light-duty vehicles, industry, and electricity generation. Other funding covers research, development, and deployment for energy-efficient and renewable technologies and

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, DOEЛEIA-0383(99) (Washington, DC, December 1998).

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, EIA 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 foresce 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. EIA 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 somne 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 shon 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.

The tax credits proposed in CCTI are as follows:

Buildings

Tax Credit for Energy-Efficient Homes. A new $1,000 tax credit would be
established for new homes purchased between 2000 and 2001 thai 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.

Tar 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

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