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regulators nominated by the National Association of Regulatory Utility Commissioners (NARUC) and appointed by the Secretary of Energy. Funds would be collected, per kWh, as power leaves the generating station and enters the transmission grid. This arrangement is based closely on the Universal Service Fund established under the Telecommunications Act of 1996, administered by the National Exchange Carriers Association (an independent administrator appointed by the FCC) and governed by a joint federal (FCC)/state utility commission representatives board (Scheer, Brinch, and Eto 1998). Our strategy is based on the Clinton Administration's PBF proposal.

Analysis

To estimate the likely impacts of the proposal on consumers, U.S. energy use, and emissions from electric generating plants, we developed a computer spreadsheet model. Our analysis includes only the energy efficiency portion of the PBF — which we estimate to be 59 percent of the total PBF. Expenditures and benefits of renewable energy, R&D, and non-efficiency lowincome programs are not included in our analysis. Our analysis begins by examining the full impacts of the PBF, including both federal and state programs. We then estimate the portion of costs and benefits that can be specifically attributed to a federal PBF, and the portion likely to occur in the absence of further federal action. We only count the former since ELA's Reference Case Forecast implicitly assumes continuation of ongoing utility DSM and energy efficiency efforts. Other key assumptions in the analysis are as follows:

A one-mil PBF is adopted by Congress in 1999 and begins operation January 1, 2000. The PBF accumulates a small surplus in the early years, before most states have an opportunity to act, but the surplus is soon used up and by 2006 available federal PBF funds are rationed as state requests modestly exceed the federal PBF funding available. Although the PBF in the Administration's restructuring proposal would sunset after 15 years, we assume the policy remains in effect indefinitely.

Fifty-nine percent of PBF funds are used for energy efficiency (including low-income energy efficiency) with the remainder used for other public benefit activities. This share is based on the split between efficiency, non-efficiency low-income programs, and utility R&D in 1995, but assume that R&D expenditures increase 25 percent due to increased attention to renewables R&D.

Energy efficiency measures implemented as part of the PBF program have an average levelized cost of $0.03 per kWh saved. On average, PBF funds are used to pay one-third of measure costs, with the remaining two-thirds of funding coming from customers, energy service companies, and other efficiency service providers. These values are based in part on the broad array of past utility demand-side management (DSM) programs and in part on a subset of programs that have emphasized the market transformation approach to program design. Increasingly, states and utilities are emphasizing the market transformation approach (Nadel and Latham 1998). Our analysis takes into account the cost for administering utility

Reaching the Kyoto Targets, ACEEE

energy efficiency programs as well as "free riders” (i.e., program participants who would still adopt the efficiency measures without utility incentives).

Efficiency measures on average have a life of 13 years but savings degrade at the rate of 3 percent annually, starting in the second year. Thus, savings in the tenth year are approximately 75 percent of first year savings. Once measures wear out, we assume that 75 percent will be replaced at owner expense because owners are satisfied with the savings and performance and wish to continue them.

In the absence of federal action, we assume state PBFs totaling $1.9 billion annually will be adopted ($1.06 billion already adopted plus $0.8 billion from states that are now considering PBFs - details are provided in the Appendix C). This $1.9 billion represents 28 percent of the total federal/state pool available, leaving 72 percent of the pool that can be directly credited to a federal PBF.

Energy savings will reduce carbon, sulphur dioxide and nitrogen oxide emissions in proportion to emissions from all fossil fuel plants (weighted average of coal, gas and oil). Emissions rates show a gradual decline over time as power plant efficiency improves and natural gas accounts for a growing share of the generation mix (see Appendix A). Transmission and distribution losses of 6-7 percent are included in the calculation of avoided emissions.

Assumptions used in the analysis and year by year results are provided in Appendix C. The results are summarized in Table 3. Overall, federal plus state public benefit funds will have a substantial positive impact on consumer energy bills, national energy use, and pollutant emissions. Impacts include:

By 2010, energy efficiency expenditures attributable to public benefit activities will reduce annual U.S. electricity consumption by 411 billion kWh. Of these savings, 296 billion kWh (7.1 percent of projected electricity consumption in 2010 in the Reference Case) are attributable to a federal PBF. By 2020, we estimate that public benefit activities will reduce national electricity use by 714 TWh, while the federal PBF alone will reduce electricity use by 514 billion kWh (11.1 percent of consumption in the Reference Case).

The energy savings attributable to a federal PBF will reduce U.S. carbon emissions by 69 MMT in 2010 and 111 MMT by 2020. Substantial reductions in emissions of sulfur dioxide (0.96 million tons in 2010), nitrogen oxides (0.61 million tons in 2010), and other air pollutants will also occur.

Over the 1999-2010 period, we estimate that the federal PBF will result in incremental investments of $86 billion in energy efficiency measures along with energy bill savings of about $124 billion over the lifetime of these measures (on a net present value basis in 1996S). Thus, the federal PBF would result in net savings of around $38 billion.

These benefits are based on a national charge of one mil per kWh, matched by an equivalent state charge. The combined national/state charge will raise electric rates by 3 percent above otherwise projected levels in 2010. But by reducing electricity consumption by an average of 10 percent, the combined PBF will result in reductions in the average electric bill of approximately 7 percent (since bills are the product of rates times consumption). Thus, consumers as a whole will realize significant financial benefits while contributing towards the goal of reducing greenhouse gas emissions.

VEHICLE FUEL ECONOMY IMPROVEMENT

Opportunity

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Light duty vehicles (cars and light trucks) currently account for 56 percent of transportation sector energy use. The ELA's Reference Case Forecast projects light duty vehicle energy use to grow from 14.0 Quads in 1996 to 17.8 Quads in 2010, an annual average rate of 1.7 percent (EIA 1997a). Overall transportation energy use is expected to rise 2.4 percent annually, due in part to large increases in air travel and freight transport. In 2010, according to the Reference Case Forecast, the sector will remain about 95 percent dependent on petroleum and continue to lead all other sectors in GHG emissions growth. EIA's Reference Case does not list carbon emissions from light duty vehicles, so we use an emissions factor of 25.2 MMT per quad based on full fuelcycle emissions (19.0 MMT from end use and 6.2 MMT from upstream emissions). Carbon emissions from light vehicles essentially keep pace with energy use, growing at 1.7 percent annually from 1996 to 2010, leading to 448 MMT of carbon emissions in 2010, 27 percent greater than emissions in 1996 and 54 percent above 1990 emissions.

In spite of today's trend of increasing energy use and GHG emissions, opportunities abound for moving toward a more sustainable transportation system. Advances in technology offer hope that, with public policy guidance, the U.S. transportation system can evolve to provide its amenities at lower cost, while accumulating less environmental damage that compromises the future. Progress in automotive engineering, from improvements in conventional technology to advanced, ultra-efficient designs with hybrid-electric or fuel cell drive trains, can substantially reduce energy use and emissions. The technologies that are already available for increasing fuel economy include engine improvements such as multipoint fuel injection and variable valve control, transmission improvements such as continuously variable transmission, and load reductions such as better aerodynamics or use of lighter weight materials (DeCicco and Ross 1996).

Recent announcements by automakers demonstrate the emergence of advanced highly efficient vehicles. Toyota is now mass producing the Prius in Japan, a five-passenger hybridelectric sedan that is expected to be available in the United States by 2000. Each of the U.S. Big-3 automakers have unveiled prototype vehicles using lightweight materials and hybrid drivetrains that can achieve double or higher fuel economy compared to today's cars. For example, Ford's P2000 prototype family sedan attains 63 miles per gallon (mpg). Daimler-Benz also has indicated it plans to mass-produce fuel-cell vehicles by 2003-2005 (Nauss 1997).

Vehicle technology improvements are but one element of a comprehensive climate-sensitive transportation policy, albeit the single most important element. Although not analyzed here,

"The Prius appears to have a fuel economy of 50 to 55 mpg on U.S. tests (city-highway composite rating).

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measures to promote travel demand reduction, low-carbon fuels, more efficient freight movement, and slower growth in air travel should also be pursued (Energy Innovations 1997).

Barriers

The barriers to vehicle fuel economy improvement include: (1) gasoline prices are at an alltime low; (2) fuel prices do not fully reflect environmental, social, and national security costs associated with oil consumption (i.e., the externalities); (3) fuel costs are a relatively small portion of the total cost of owning and operating a vehicle, and the net value to consumers of higher fuel economy is not very great; (4) consumers lack all the necessary information to optimize their fuel economy decisions, and (5) manufacturers obtain higher profits from selling inefficient sport utility vehicles than they do from selling more fuel-efficient cars (Greene 1998). The significant technological advances made during the past decade have gone to increasing power and performance, not to increasing fuel economy.

But the principal barrier to implementing the opportunities for more efficient vehicle technology is the lack of regulatory guidance, through strengthened Corporate Average Fuel Economy (CAFE) standards. The CAFE standard for cars is the same as it was in 1985, and for light trucks, it is just 0.2 mpg above the 1987 level. Compounding the problem is increasing sales of light trucks, which topped 45 percent of total passenger vehicle sales in 1997. The result is that fleet-wide new vehicle CAFE in 1996 was 24.6 mpg, the same as in 1983 and down from a high of 25.9 mpg in 1988 (EPA 1996), While automakers may sell several hundred high-tech electric vehicles in 1998, they will also sell over two million sport utility vehicles. The experience of the last 10 years clearly shows that without increases in CAFE standards, aggregate fuel economy performance will not improve and carbon emissions will continue to rise.

Strategy

Our vehicle fuel economy strategy combines mutually reinforcing policies and programs for improving the energy and emissions performance of cars and light trucks. A goal of this package is to engage competitive forces in the automotive industry to induce continuous progress in energy and environmental performance, analogous to the market-driven progress that already occurs for other vehicle features. This strategy will stimulate the widespread adoption of incremental energy efficiency improvements (e.g., engine improvements and weight reduction) as well as "leapfrog" technologies such as hybrid drivetrains, fuel cells, and new lightweight materials. Elements of this strategy include the following:

Strengthening CAFE standards on cars and light trucks in order to achieve new-fleet fuel economy of at least 41.7 mpg by 2010. In addition, raise CAFE standards to achieve 75 mpg by 2030, along with ongoing improvements of emissions control requirements for noxious pollutants.