Executive Summary In February 1999, the Administration's fiscal year 2000 budget request was sent to the U.S. Congress. The request includes more than $4 billion in programs related to climate change. Nearly $1.8 billion of the funding consists of tax incentives, research, development, deployment, and other spending for the Climate Change Technology Initiative (CCTD). 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. At the request of the Committee on Science, U.S. House of Representatives, the Energy Information Administration (EIA) conducted an analysis of the potential impacts of CCTI, relative to the baseline energy projections in the Annual Energy Outlook 199) (AEO99).' This analysis was conducted primarily using the National Energy Modeling System (NEMS).2 ELA's energy-economic modeling system of domestic energy markets. This analysis discusses all programs in CCTI with the exception of $4 million proposed for electricity restructuring at the U.S. Environmental Protection Agency (EPA). $14 million for management, planning, and analysis for the U.S. Department of Energy (DOE) and EPA. $3 million for EIA, and $10 million for carbon sequestration programs within EPA and the U.S. 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 fiscal year 2000 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 assuming that 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. 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 foresee 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 Energy Information Administration, Annual Energy Outlook 1999, DOE/EIA-0383(99) (Washington, DC, December 1998). 57-713 99-4 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 some 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 short duration. CCTI proposes investment tax credits for buildings, vehicles, and industry to lower the initial costs of more energyefficient and renewable technologies and production tax credits for 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 fiscal year 2000 and $3.6 billion from fiscal year 2000 through fiscal year 2004. Tax Credit for Energy-Efficient Homes. A new $1,000 tax credit would be established for new homes purchased between 2000 and 2001 that 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. Tax 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 available for solar-heated swimming pools. The cap is $2,000 for the photovoltaic systems and $1,000 for the solar water heating systems. Transportation Tax Credit for Electric Vehicles and Fuel Cell Vehicles. Under current law, the 10-percent tax credit, subject to a $4,000 cap, for the purchase of qualified electric vehicles and fuel cell vehicles begins to phase down in 2002. phasing out by 2005; however, this proposal would extend the credit at its full level through 2006. Tax Credit for Highly Fuel-Efficient Hybrid Vehicles: The proposal would provide a new tax credit of $1,000 for qualifying hybrid vehicles, including cars, minivans, sport utility vehicles, and pickup trucks, purchased from 2003 to 2004 that are at least one-third more fuel efficient than a comparable vehicle in the same class: $2,000 for hybrid vehicles from 2003 to 2006 that are at least two-thirds more efficient; $3,000 for hybrid vehicles from 2004 to 2006 that are at least twice as efficient; and $4,000 for hybrid vehicles from 2004 to 2006 that are at least three times as efficient. • Industry Tax Credit for Combined Heat and Power Systems. A new tax credit of 8 percent would be provided for qualified combined heat and power systems larger than 50 kilowatts, installed between 2000 and 2002. Qualified systems would produce at least 20 percent thermal and at least 20 percent electrical or mechanical power. Systems with electrical capacity higher than 50 megawatts would need at least 70-percent total efficiency, and smaller systems would need at least 60-percent efficiency. Renewable Energy Electricity Generation Tax Credit for Wind Generation. Under current law, a tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base, is provided for systems placed in service after December 31, 1993, and before July 1, 1999. The proposal would extend this credit to systems placed in service before July 1, 2004. Tax Credits for Biomass Generation. Under current law, a tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base, is provided for systems using dedicated energy crops placed in service after December 31, 1992, and before July 1, 1999. The proposal would extend the credit to systems placed in service before July 1, 2004, extend the definition of biomass systems eligible for the credit to include certain forest-related, agricultural, and other biomass sources, and provide a new 1.0-cent-per-kilowatthour tax credit, which is adjusted for inflation from a 1999 base, for biomass-fired electricity generated at coal plants using biomass co-firing through June 30, 2004. Table ES1 presents the impacts of the tax credits in terms of energy savings and reductions in carbon emissions, relative to the AEO99 reference case, which assumes current law. The carbon savings include only those incremental changes in emissions, relative to the reference case. Where possible, an estimate of the tax revenue implications is provided and compared to the Administration estimates. The year 2010 is the focus because it is the midpoint of the first compliance period in the Kyoto Protocol. Some of the technologies covered by the tax credits are likely to penetrate even without the credits and are included in the reference case; however, the credits are applied to both the units that are added because of the credits and the units that would be added without the credits, which become unintended beneficiaries of the tax credits. For the EIA estimates, both revenue impacts are presented. In 2010, the tax credits for buildings, industrial, and transportation would reduce primary energy consumption by 31.6 trillion Btu, or 0.03 percent, relative to baseline consumption of nearly 111 quadrillion Btu. In addition, the tax credits for wind and biomass generation would reduce fossil energy consumption for electricity generation by 71.9 trillion Btu, or 0.06 percent of the total. In the reference case, carbon emissions are projected to reach 1.790 million metric tons in 2010, which would be reduced by 3.1 million metric tons, or 0.17 percent, as a total of the individual impacts of the tax credits, reflecting lower energy consumption and a shift in the mix of energy fuels. Although the investment tax credits reduce the initial cost of purchasing the applicable equipment in the buildings, transportation, and industrial sectors, the analysis assumes that consumers will continue to make decisions as indicated by EIA's analysis of historical trends. Consumers are typically reluctant to invest in more expensive technologies with long payback periods to recover the incremental costs. In addition, energy efficiency is only one of many attributes that consumers consider when purchasing new energy-equipment or buildings. Tax credits of longer duration and/or higher value could encourage greater penetration of the technologies by making them more economically competitive to consumers. The timing of the tax credits is also a key factor in their impacts. For example, the tax credit for combined heat and power systems applies only to systems installed between 2000 and 2002. Since 18 to 36 months are required to plan, design, and install new capacity, there is not much opportunity for incremental investments in the systems. As another example, in the AEO99 reference case, biomass gasification is assumed to be commercially available in 2005; however, since the credit expires in 2004, there is no opportunity to take advantage of the credit. Only a small quantity of capacity, based on current technology, and demonstration plants for biomass gasification will qualify for the credit. Similarly, the tax credit for fuel cell vehicles extends only through 2006, when the technology is assumed by EIA to become commercially available. The date was advanced from the reference case assumption of 2010 due to the credit. Table ES1. Summary of Impacts for Selected Climate Change Technology Initiatives, 2010 *Reductions are relative to the CCTI reference case which is similar to that in Energy Information Administration, Annual Energy Outlook 1999, DOE/EIA-0383(99) (Washington, DC, December 1998). For wind and biomass, the expenditure savings are for expenditures on fossil fuels for electricity generation. For the wind and biomass tax credits, the change represents the reduction in fossil energy use for electricity generation. *ELA's revenue losses are for calendar years, and the Administration's revenue losses are for fiscal years. *The revenue impacts can only be estimated for natural gas heat pumps-$21.6 million without unintended beneficiaries and $81.6 million with unintended beneficiaries. 'Assumes a portion of the commitments of the photovoltaic installations under the Million Solar Roots program. Excludes Federal government installations. Revenue impacts are for 2000 through 2004 although the proposed tax credit for photovoltaic systems extends through 2006. 1 Table ES2 shows the impacts of the tax credits in 2002 to 2004, which increase through that time period as the more advanced technologies become available and gradually penetrate the market. The total impact on carbon emissions is less in 2010 than in the earlier years because of the buildings equipment and biomass co-firing tax credits. Tax credits for energy-efficient buildings equipment have a larger impact on carbon emissions in the earlier years, which is reduced as the credits expire and some of the new, more efficient equipment begins to be retired and is replaced by equipment with lower efficiency. Without the tax credit, the more efficient equipment is no longer economical. Similarly, the impact of the co-firing tax credit is lower when the credit expires. The co-firing tax credit is a production tax credit that leads to more generation from biomass in coal plants when it makes biomass fuel competitive with coal. The transportation tax credits have a small impact in the earlier years because of the limited availability of eligible technologies. After 2010, the impacts of the tax credits generally remain stable or decline through 2020. For example, the credits for energy-efficient new homes and for combined heat and power systems encourage some incremental investment during the period of the credits, which has a sustained impact on energy consumption and carbon emissions. Table ES2. Summary of Impacts for Selected Climate Change Technology Initiatives, 2002-2004 "Reductions are relative to the CCTI reference case which is similar to that in Energy Information Administration, Annual Energy Outlook 1999, DOE/EIA-0383(99) (Washington, DC, December 1998). For the wind and biomass tax credits, the change represents the reduction in fossil energy use for electricity generation. *Reductions in carbon emissions from electricity are calculated by displacing marginal generating plants. "Cogenerated electricity substitutes for purchased electricity, and total site use increases due to additional natural gas consumption. Efficiency Standards Appliance efficiency standards can lead to significant reductions in energy consumption and carbon emissions by accelerating the penetration of more efficient technologies. The example with the largest impact is refrigerators, which will collectively be responsible for fewer carbon emissions in 2010 than in 1990 despite population growth and performance enhancements. The latest refrigerator standards adopted in 1993 and coming into effect in 2001 are aggressive enough to not only take inefficient units off the market but also accelerate the introduction of new technologies. |