Report#:SR/OIAF/99-01

Preface

Executive Summary

Introduction

CCTI Tax Initiatives

Research and Development Support

Energy-Efficient Appliances and Equipment

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Contacts

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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 (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.

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 1999 (AEO99).⁽¹⁾ This analysis was conducted primarily using the National Energy Modeling System (NEMS),⁽²⁾ EIA'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 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 energy-efficient 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.

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 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 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.

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.

Within the building technologies program, additional funding is provided to DOE to accelerate the lighting and appliance efficiency standards program in order to encourage the deployment of more energy-efficient appliances and equipment. Program goals include the development of new standards for fluorescent lamp ballasts, water heaters, and clothes washers, with test procedures for residential central air conditioners and heat pumps, distribution transformers, commercial heating, ventilation, and air conditioning, and water heaters.

Because future standards are not specified, the potential impact is analyzed by evaluating the impacts of proposed standards in the American Council for an Energy-Efficient Economy study Approaching the Kyoto Targets: Five Key Strategies for the U.S.⁽³⁾ The results are shown in Table ES3. EIA projects that energy consumption in 2010 would be reduced by 143.9 trillion Btu, or 0.13 percent, and carbon emissions by 5.4 million metric tons, or 0.30 percent. Because of the energy efficiency improvements, consumers would save $2,335 million (1998 dollars) in 2010 alone in expenditures for energy, not accounting for additional equipment costs. As the technologies penetrate the market, the average efficiency of the equipment stock improves. As a result, the assumed efficiency standards have increasing impacts on energy consumption and carbon emissions after 2010. In fact, of the programs evaluated here, efficiency standards have the most significant impact.

Research, Development, and Deployment

CCTI also includes nearly $1.4 billion of funding in the fiscal year 2000 budget request for research, development, and deployment of more energy-efficient and renewable energy and for research into carbon sequestration. More than $1.1 billion is requested for programs within DOE, with additional funding for EPA and the Departments of Housing and Urban Development (HUD), Commerce, and USDA. In addition to developing new technologies, some programs aim to reduce the costs and improve the operating characteristics of existing technologies, making them more economically competitive with conventional technologies. Other initiatives include programs to encourage the deployment of new technologies, such as consultations, partnerships, and voluntary programs.

• Buildings. Programs include cooperative efforts with the building industry to improve the energy-efficiency of homes, funding for new Energy Star products, the development of energy-efficient technologies, and partnerships to improve the energy efficiency of commercial buildings and schools.

• Transportation. Proposed funding includes the Partnership for a New Generation of Vehicles program, plus other partnerships to develop advanced diesel cycle engine technologies for pickup trucks, vans, and sport utility vehicles and to improve the fuel efficiency of new heavy trucks, and the continued development of ethanol and other biofuels.

• Industry. Programs include partnerships to develop more energy-efficient technologies for the most energy-intensive industries and the continuing development of cogeneration systems and elimination of barriers for combined heat and power technologies.

• Electricity Generation. Funding includes continued development for solar energy, biomass power, wind energy, geothermal power, and hydropower; the Renewable Energy Production Incentive, renewable energy demonstration projects; the International Solar Program; improvements for the quality and reliability of power service; distributed generation; hydrogen production and storage; superconducting technology; life extension of nuclear power plants; and development of more efficient coal and natural gas generation.

• Carbon Sequestration. This program funds research into the capture and storage of carbon dioxide by enhancing the natural capacity of terrestrial ecosystems and oceans to take up and store carbon dioxide in underground geological structures and the deep ocean.

Accelerating the adoption of new technologies in the market at lower costs through research, development, and deployment can help reduce carbon emissions and also can contribute positively to the overall quality of life. Support for these activities at historic levels is assumed in the AEO99 reference case. As a result, reductions in these programs could lead EIA over time to raise its carbon projections, and new or expanded programs could lead EIA to lower its carbon estimates.

The impacts of research and development funding for new technologies, whether ongoing or incremental, are difficult to quantify in the same manner as the tax incentives. Some of the proposed technologies may only achieve benefits in a long time frame beyond 2020 or may not achieve success at all; however, predicting which technologies will be successful is highly speculative. A direct link cannot be established between levels of funding for research and development and specific improvements in the characteristics and availability of energy technologies. In addition, successful development of new technologies may not lead to immediate penetration in the marketplace. Low prices for fossil energy and conventional technologies; unfamiliarity with the benefits, use, and maintenance of new products; and uncertainties concerning the reliability and further development of new technologies are all factors that may slow technology penetration and are barriers that the tax credits are intended to address. However, these limitations do not mean that the impacts of the research, development, and deployment programs could not be substantial over time.

It is also difficult to analyze the impacts of information programs, voluntary initiatives, and partnerships on realized technology development and deployment. Some voluntary programs appear to have achieved some success, such as Energy Star. The benefits of past efforts are difficult to quantify but are generally assumed in the reference case. They are even more difficult to quantify for the future.

This analysis addresses these initiatives by discussing the current state of development of the technologies and the economics of their development and deployment. For several of these programs, the potential impacts are addressed by assuming that program goals are achieved, then deriving the impacts on energy consumption and emissions, or by analyzing the impact of technology improvements based on current levels of research and development.

In AEO99, the baseline assumptions include continuing improvements in technology, consistent with ongoing research and development. The impacts of these improvements can be evaluated by comparing the reference case with a case in which it is assumed that all future equipment choices in the end-use demand sectors are from technologies available in 1999, building shell and industrial plant efficiencies are frozen at 1999 levels, and new fossil generating technologies do not improve beyond 1999. In 2010, energy consumption in this low technology case is 3.7 quadrillion Btu, or 3.3 percent higher, than in the reference case, increasing carbon emissions by 67 million metric tons, or 3.7 percent.

In the AEO99 reference case projections, natural gas-fired generating plants are expected to dominate new capacity additions over the next 10 to 15 years, although advanced coal plants become economical after 2010. Renewable electricity generation increases in the reference case projections, particularly biomass, wind, and to a lesser extent geothermal generation; however, solar thermal and photovoltaic technologies do not contribute significantly to the electricity grid within the time frame of the analysis, and almost no new hydropower capacity is projected. In the transportation sector, alternative-fueled vehicle sales account for about 9 percent of the light-duty vehicle sales in 2010, with alcohol flex-fuel vehicles and dedicated electric vehicles each accounting for about one-fourth of the market; however, nearly all the penetration of electric vehicles is driven by mandates.

Analysis indicates that some of the programs for the development of renewable technologies may hold promise, as well as some of the programs for buildings if the program goals can be achieved. Stock turnover can slow the penetration of some of the improved technologies, even if successful, so that significant changes in the average stock of equipment may take a long time, which may be complemented by the tax incentives. In addition, some of the technologies may have non-economic barriers to widespread acceptance. These include unfavorable impressions of the noise, odor, and performance of previous diesel vehicles and limitations on hydropower due to environmental concerns. Some of the CCTI programs may have more longer-term benefits because stock turnover may slow penetration and because some of the research and development programs are likely to achieve success later in or beyond the 2020 horizon of the analysis. For those research, development, and deployment programs that are evaluated quantitatively, most--including the Partnership for Advancing Technology in Housing (PATH), Partnership for a New Generation of Vehicles (PNGV), advanced diesel trucks, and biomass ethanol--have increasing impacts on energy consumption and carbon emissions after 2010. The assumption that the goals of the programs will be met leads to improvements in the technologies that are gradually adopted over the time horizon of the analysis.

This analysis does not necessarily include all costs of technology development and deployment. For example, the full costs of developing and manufacturing new technologies, including costs to the private sector, and infrastructure costs are not included. Certain programs are analyzed by assuming the success of program goals or standards that may not necessarily be economic within the time frame of the analysis, leading to additional costs that are not incorporated into a decisionmaking process. However, in addition to reductions in energy consumption, consumer expenditures for energy, and carbon emissions, there may be other benefits to these programs that are not evaluated. Potential ancillary benefits include improvements in air quality due to reductions in criteria pollutants, energy security from lower energy consumption, maintaining U.S. leadership in science and technology, and revenues from the deployment of more advanced technologies to other countries.

Funding for research and development may accelerate the development of more efficient and advanced technologies at lower cost than might otherwise occur. In addition, research and development may tend to improve the characteristics of technologies that have already been developed to some degree. To the extent that continuing development lowers the costs of technologies or improves their efficiencies, reliability, or other attributes, the technologies become more economically competitive and attractive in the market. Ultimately, the success of technology development depends on the products becoming competitive and penetrating into the marketplace.

There are a number of barriers to technology penetration that may account for seemingly slow penetration of technologies that appear cost-effective. Lack of information about new technologies is one barrier which may be overcome with information programs. Subsidies or regulated prices may hold energy prices artificially low and hamper the penetration of technologies. Builders and homeowners or tenants may have different incentives for energy efficiency. It may be difficult for the builder or landlord to recover the additional costs for more expensive, energy-efficient equipment from a buyer or tenant who may not value energy efficiency highly. Conversely, the buyer or tenant who will be paying the energy bills may not readily have the option of making the equipment choices. Even if energy consumers are aware of potential cost savings from a more efficient technology, they may have preferences for other equipment characteristics, for example, valuing vehicle size over efficiency. Also, consumers may prefer a relatively short payback period for investments in energy-consuming technologies. Technology penetration can also be slowed by uncertainties about reliability, installation and maintenance, availability of the next generation of the technology, and necessary infrastructure.

Some of these barriers can be addressed by information programs, collaborative efforts for development and diffusion, research and development to improve technologies and reduce costs, and incentives to enhance the cost effectiveness of new technologies. All these initiatives 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 lead to earlier penetration of new, more advanced technologies; however, standards may not be the most cost-effective method for encouraging improvements in energy efficiency. The full costs of standards are not evaluated in this analysis.

File last modified: April 14, 1999

URL: http://www.eia.doe.gov/oiaf/archive/climate99/execsum.html

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