Claimed Savings in Carbon Permit Fee Costs Based on CEA Assumptions About Energy Efficiency Q31. What are the "claimed savings" in carbon permit fee costs based on the CEA assumptions about energy efficiency? Please give the range that corresponds to the range covered by Dr. Yellen in her testimony. A31. In all illustrative analyses presented in Dr. Yellen's testimony and in the Administration's economic analysis, the assumed rate of autonomous energy efficiency improvement was 0.96% per year, the default value used by the team at Battelle Laboratory that designed the Second Generation Model. There are no "claimed savings" associated with this energy efficiency improvement, since this rate is assumed to be in both the baseline projection of emissions and policy scenarios. For a full discussion of energy efficiency improvement, refer to pp. 46-47 of the AEA. For a discussion of the effects of the tradable permit system on energy efficiency, refer to p. 53 of the AEA. (Pages 46-47 and 53 of the AEA follows.) Energy Efficiency Improvement Energy efficiency improvements over time -- defined as the rate at which the total use of energy falls relative to GDP -- are attributable to three factors: changes in energy conservation due to price changes; the effects of non-price policy measures to improve energy efficiency (such as government support of R&D); and autonomous increases in energy efficiency. The first factor reflects the incentive provided by higher energy prices for firms and households to reduce energy consumption through efficiency measures and thereby make the economy as a whole more energy efficient. The second factor reflects the potential influence of a wide range of non-price public policies to improve the efficiency with which energy is used in the economy. For example, measures could be undertaken to speed the rate of diffusion and adoption of technologies which can simultaneously lower energy use and household and business energy bills. Finally, energy efficiency improvements occur over time which are independent of both prices and energy policies. For example, in the United States, the gradual transition from a manufacturing economy to a less energyintensive service economy has improved the energy efficiency of the economy. The autonomous energy efficiency improvement factor (AEEI)" reflects only the pace of 15 The Autonomous Energy Efficiency Improvement should be distinguished from the annual energy efficiency improvement used by some in the literature. The annual rate includes the autonomous component as well as price-induced and non-price (continued...) efficiency improvements that are purely autonomous and thus independent of both energy prices and energy policies. In modeling energy efficiency improvement, these three components are addressed in different ways. For the autonomous energy efficiency factor (AEEI), a plausible assumption is an improvement of about 1.0 percent per year. The developers of the Second Generation Model employ an AEEI of 0.96 percent per year as their default energy efficiency assumption. Similarly, the Energy Information Administration analysis (see Energy Information Administration 1997a) assumes a pace of energy efficiency improvement of 0.9 percent. In this analysis, we used the SGM default assumption concerning the autonomous energy efficiency parameter. For priceinduced changes in energy efficiency, the model generates its own forecasts of changes in energy consumption that reflect the effects of greenhouse gas permit prices on energy prices. Economists have traditionally had difficulty in modeling non-price policy-induced shifts in energy efficiency. For example, it is hard to assess the likely future pay-off from investments in energy R&D, although historical estimates of the rate of return to society from such investments are substantial. Similarly, the series of policy measures proposed by the Administration -- such as the Administration's electricity restructuring proposal, the Climate Change Technology Initiative, its voluntary sectoral initiatives, the federal sector's own energy efficiency program or other measures that could be adopted to spur the diffusion and adoption of existing technologies -- could substantially reduce the cost of mitigation and increase the amount of reductions achieved domestically. However, models like the Second Generation Model do not have the capacity to quantify these potential payoffs. Some authorities in the field of energy policy, using an engineering approach rather than an economic paradigm, have sought to quantify the extent to which policy initiatives could spur more rapid improvements in energy efficiency. Experts at five national laboratories managed by the Department of Energy found that a third of the emissions reductions necessary to return to 1990 levels by 2010 could be achieved through the adoption of existing energy-efficiency technologies at no net resource cost. This translates into a non-price policy related efficiency contribution of 0.3% per year (Interlaboratory Working Group on Energy-Efficient and Low-Carbon Technologies 1997). The National Academy of Sciences reached qualitatively similar conclusions in a 1992 report. As reflected in the Department of Energy study, if a higher rate of energy efficiency improvement were achieved, the United States could meet a correspondingly larger fraction of its commitment through domestic reductions potentially at lower permit prices. 15(...continued) policy-induced components. |