In February 2000, the Administration's fiscal year 2001 budget request was sent to the U.S. Congress. The request includes about $4 billion in programs related to climate change. The proposal includes about $1.6 billion in fiscal year 2001 for tax incentives, research, development, deployment, and other spending for the Climate Change Technology Initiative (CCTI). CCTI includes tax incentives for deploying energy efficiency improvements and renewable technologies for buildings, light-duty vehicles, 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, enhanced energy security, and maintaining U.S. leadership in science and technology. Although the tax incentives are largely new initiatives, many of the other programs are continuations or expansions of ongoing research, development, and deployment programs. The total fiscal year 2001 CCTI budget request of about $1.6 billion for all Federal agencies includes about $1.4 billion for research, development, and deployment and $201 million for tax incentives in fiscal year 2001. Of the $1.4 billion in expenditures for programs other than tax incentives, $337 million is the increase over the fiscal year 2000 budget.

At the request of the U.S. House of Representatives, Committee on Government Reform, Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs, 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 2000 (AEO2000).⁽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 $65 million for management, planning, and analysis for the U.S. Department of Energy (DOE), the Environmental Protection Agency (EPA), and the U.S. Department of Agriculture (USDA) and $3 million for EIA. The analysis primarily focuses on the tax incentives in CCTI, which are new initiatives or extensions of current tax credits. EIA is not able to link research and development expenditures directly to program results or to separate the impacts of incremental funding requested for fiscal year 2001 from ongoing program expenditures. Therefore, the research, development, and deployment programs are either addressed qualitatively, analyzed via their impact in the AEO2000 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, for example, proposals for electricity restructuring and renewable portfolio standards.

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, assuming 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 also 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 performance, reliability, installation and maintenance, costs, future technology developments, and infrastructure requirements. EIA analyzes empirical evidence to estimate consumer price response and preferences in order to project consumer reaction to changes in energy prices or improvements in energy efficiency; however, models generally 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 intended to encourage the adoption of technologies close to commercial viability. As such, these proposed incentives are of small to modest magnitude and of relatively short duration.

CCTI proposes investment tax credits for buildings and vehicles to lower the initial costs of more energy-efficient and renewable technologies to consumers, production tax credits for renewable generation technologies, and a change in the depreciable life for distributed power property. With the exception of the latter tax incentive, these are generally proposed for 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 loss of the incentives are $201 million in fiscal year 2001 and $4.0 billion from fiscal year 2001 through fiscal year 2005, all in nominal dollars.

The tax incentives proposed in CCTI are as follows:

• Buildings

- Tax Credits for Energy-Efficient Homes--new tax credits to the purchasers of new homes that are at least 30 percent more energy efficient than the 1998 International Energy Conservation Code (IECC). Specifically, the proposal is for a $1,000 tax credit for new homes built from 2001 through 2003 that are at least 30 percent more efficient and a credit of $2,000 for homes built from 2001 through 2005 that are at least 50 percent more efficient than the IECC standard.

- Tax Credits for Energy-Efficient Equipment in Homes and Buildings--new 20-percent tax credits, subject to caps, to the purchasers of electric heat pump water heaters, natural gas heat pumps, and fuel cells, meeting specified efficiency levels, purchased from 2001 through 2004. The cap is $500 per kilowatt for fuel cells, $1,000 per unit for natural gas heat pumps, and $500 per unit for electric heat pump water heaters.

- Tax Credits for Rooftop Solar Systems--a new 15-percent tax credit, subject to a cap, for rooftop photovoltaic systems installed between 2001 and 2007 and solar water heating systems installed from 2001 through 2005 but not applicable to solar-heated swimming pools. The cap is $2,000 for photovoltaic systems and $1,000 for solar water heating systems.

- 15-Year Depreciable Life for Distributed Power Property--qualified distributed power property placed in service after the date of enactment would be assigned a 15-year depreciation recovery period and a 22-year class life. Qualified systems would include property used in the generation of electricity for primary use in nonresidential real property or residential rental property used in the taxpayer's trade or business and property with a rated total capacity in excess of 500 kilowatts that is used in the generation of electricity for primary use in a taxpayer's industrial manufacturing process or plant activity. Under current law, a distributed power asset used in a commercial or residential building is likely to be classified as a building structural component and depreciated using the straight-line method over 39 years if placed in service after 1993. Although this initiative is listed as an industrial program in CCTI, the proposal represents no change for property used in an industrial manufacturing process or plant activity. Therefore, it is considered a buildings program in this analysis. Distributed power in the residential sector is only represented in the EIA model for single-family homes, therefore any potential impacts from the tax initiative on residential rental property are not reflected in these results.

• Transportation

- Tax Credits for Electric Vehicles and Fuel Cell Vehicles--the current 10-percent tax credit, subject to a $4,000 cap, for the purchase of qualified electric vehicles and fuel cell vehicles is scheduled to begin to phase down in 2002, phasing out in 2005; however, the proposal would extend the credit at its full level through 2006.

- Tax Credits for Hybrid Vehicles--new tax credits for qualifying hybrid vehicles, including cars, minivans, sport utility vehicles, and pickup trucks, purchased from 2003 through 2006, ranging from $500 to $3,000, depending on the vehicle's design performance.

• Renewable Energy Electricity Generation

- Tax Credits for Wind Generation--the current tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base, for systems placed in service after December 31, 1993, and before January 1, 2002, would be extended to systems placed in service before July 1, 2004, or, if unfinished by that date but under firm contract or under construction, eligibility is extended through June 30, 2005.

- Tax Credits for Biomass Generation--the current tax credit of 1.5 cents per kilowatthour, which is adjusted for inflation from a 1992 base, for systems using dedicated energy crops (closed-loop), placed in service after December 31, 1992, and before January 1, 2002, would be extended to systems placed in service before July 1, 2004, or, if unfinished by that date but under firm contract or under construction, eligibility is extended through June 30, 2005. The definition of biomass systems eligible for the credit would be extended to systems using nondedicated energy crops (open-loop), including certain forest-related, agricultural, and other biomass sources. New open-loop facilities placed in service on or after January 1, 2001, through December 31, 2005, would receive the 1.5-cent-per-kilowatthour credit for ten years, and a 1.0-cent-per-kilowatthour credit, adjusted for inflation from a 2000 base, would be provided for electricity produced from 2001 to 2003 from facilities placed in service prior to January 1, 2001. A new 0.5-cent-per-kilowatthour tax credit, adjusted for inflation from a 2000 base, would be added for biomass-fired electricity generated by coal plants using biomass co-firing from January 1, 2001, through December 31, 2005.

- Tax Credits for Landfill Gas Generation--a new tax credit of 1.0 cent per kilowatthour for landfills subject to EPA's New Source Performance Standards (NSPS) and a 1.5-cent-per-kilowatthour credit for landfills not subject to the NSPS for systems placed in service between January 1, 2001, and December 31, 2005. The proposal would also extend the tax credit to December 31, 2006, for facilities under construction but not completed in 2005 or for facilities with a construction contract in place in 2005 to be completed in 2006.

Table ES1 presents the impacts of the tax incentives in terms of energy savings and reductions in carbon emissions in 2010, relative to the AEO2000 reference case, which assumes current laws and regulations. Note that the EIA model only tracks the carbon equivalent of carbon dioxide emissions from the combustion of energy. The incentives may have additional impacts on other greenhouse gas emissions, for example, reductions in methane emissions from landfills and increases in methane emissions from biomass combustion. These impacts are not quantified in this analysis. The carbon savings include 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 incentives are likely to penetrate even without the incentives and are included in the reference case. Since the tax incentives may be claimed by all units, those units that would be added even without the incentives become unintended beneficiaries of the tax incentives. For the EIA estimates, both revenue impacts are presented.

Table ES1.  Summary of Projected Impacts for CCTI Tax Initiatives, 2010

In 2010, the tax incentives for buildings and transportation are estimated to reduce primary energy consumption by 44.2 trillion British thermal units (Btu), or 0.04 percent, relative to the consumption of 111 quadrillion Btu projected in the reference case. In addition, the tax credits for renewable generation would reduce fossil energy consumption for electricity generation by 48.7 trillion Btu, or 0.04 percent of total projected energy consumption. In the AEO2000 reference case, carbon emissions are projected to reach 1,787 million metric tons in 2010, which would be reduced by 1.3 million metric tons, or 0.07 percent, as a result of the impacts of the tax incentives.

Table ES2 presents the cumulative energy and emissions reductions through 2005, 2010, and 2020. From 2000 through 2010, the cumulative reductions in primary energy consumption total 1,062 trillion Btu and the cumulative carbon reductions are 21.5 million metric tons. Over the forecast horizon of this analysis, 2000 through 2020, the cumulative reductions in energy consumption and carbon emissions are 2,801 trillion Btu and 53.4 million metric tons, respectively.

Although the investment tax credits reduce the initial cost to the purchasers of the applicable equipment in the buildings and transportation 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 incentives of longer duration and/or higher value could encourage greater penetration of the technologies by making them more economically competitive. The timing of the tax incentives is also a key factor in their impacts. For example, the tax credit for fuel cell vehicles extends through 2006, but the technology is assumed by EIA to not become commercially available until 2005.

Tables ES3 and ES4 show the projected impacts of the tax incentives in 2002 through 2005, which generally increase through that time period as the more advanced technologies become available and gradually penetrate the market. When the buildings equipment tax credits expire in 2004 as proposed in CCTI, the impact of the credits is reduced, because some of the new, more efficient equipment begins to need replacement and is replaced by equipment of lower efficiency. Without the tax credit, the more efficient equipment is no longer economic. The total impact on carbon emissions is less in 2010 than in the earlier years because most other tax incentives expire in 2005. The transportation tax credits have a small impact in the earlier years because of the limited availability of eligible technologies; however, later in the period the impacts are larger because the tax credits encourage the penetration of advanced technology vehicles. The initiative for distributed power also has a larger impact later in the projection period because it is a change in the depreciation schedule without a time limit, not a tax credit. After 2010, the impacts of the tax incentives generally remain stable or decline through 2020 with the exception of the distributed power tax initiative and the transportation tax credits.

Table ES3. Projected Reductions in Primary Energy Use for CCTI Tax Initiatives, 2002-2010

Table ES4. Projected Reductions in Carbon Emissions for CCTI Tax Initiatives, 2002-2010

Although the CCTI tax initiatives lower carbon emissions, there is a loss to the Federal government resulting from the lower tax revenues. In Table ES5, the cost per ton of carbon reduced or avoided is presented for each of the tax initiatives, discounting both the tax revenue losses and the emissions reductions and discounting only the revenue losses because there is some disagreement about discounting nonmonetary values. Discount rates of 7 and 15 percent are used, along with no discounting.

With no discounting, the cost of carbon reductions ranges from $44 to $267 per ton across the various tax initiatives. For a 7-percent discount rate, the cost ranges from $54 to $460 per ton if carbon emissions are discounted and from $24 to $157 per ton if emissions are not discounted, and, for a 15-percent discount rate, the cost ranges from $55 to $813 per ton if carbon emissions are discounted and from $14 to $98 per ton if emissions are not discounted. The cost per ton of carbon emissions reduction increases with higher discount rates if the carbon emissions are discounted because the revenue reductions occur earlier in the period while the carbon emissions are reduced over the life of the equipment. As requested by the Subcommittee, it is noted that only the landfill gas tax initiative has a cost in the range of the $14 to $23 dollars per ton estimated as the cost of implementing the Kyoto Protocol.

The investment tax credits lower the initial cost of purchasing more efficient equipment; however, the tax credits do not appear to be of sufficient magnitude to overcome consumer reluctance to purchase more expensive equipment with long payback periods. Most consumers are willing to invest in more efficient, but more expensive, equipment if the higher initial costs are offset by lower fuel expenditures within a period of several years. In the electricity generation sector, the production tax credits may affect some marginally competitive plants; however, new natural gas-fired, combined-cycle plants generally retain an economic advantage. Also, the more flexible operation of natural gas-fired generating facilities provides an advantage over wind generation. Higher prices for fossil fuels or higher demand growth could serve to make these technologies more economically attractive. Tax incentives of longer duration and/or higher value could also lead to more significant impacts by making the technologies more competitive.

Table ES5. Projected Tax Revenue Reductions per Ton of Carbon Emissions Reduced

Although tax incentives have benefits in encouraging some incremental investments, there may be some unintended consequences. Some of the technologies covered by the incentives would likely penetrate even without the incentives, which can be seen by comparing the tax incentive cases with the reference case. Those units would receive the tax benefits in addition to those units added incrementally as a result of the incentives. Such unintended beneficiaries may be a significant portion of the total units, nearly all of the rooftop solar equipment and 70 percent or more for the distributed power, transportation, wind, and biomass tax initiatives (Table ES6). Another unintended result could be a shifting of planned investments to fall within the time period of the incentives by purchasers either delaying until the incentives begin or accelerating their investments.

Table ES6. Projected Unintended Beneficiaries of CCTI Tax Initiatives

Efficiency Standards

Appliance efficiency standards can lead to 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 take inefficient units off the market and also accelerate the introduction of new technologies.

Within the building technologies program, additional funding is provided to DOE to accelerate the 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 water heaters, distribution transformers, and commercial heating and cooling.

Because future standards are not specified, the potential impact is analyzed by evaluating the impacts of an accelerated standards case in AEO2000, in which it is assumed that standards are revised every 8 years and the efficiency levels increased by 10 percent when technologically feasible. In general, both the schedule and level of the assumed efficiency improvements are aggressive when compared to the history of standards enactment. Because of the timing of these assumed standards, some technologies may have two cycles of improvement in the forecast horizon. The results are shown in Table ES7. In the buildings sector, EIA projects that energy consumption in 2010 would be reduced by 468.3 trillion Btu, or 1.2 percent, and carbon emissions by 7.1 million metric tons, or 1.1 percent. Because of the energy efficiency improvements, consumers are projected to save $3,036 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. Of the programs evaluated here, efficiency standards are projected to have the largest impact although the costs of implementing such standards are not evaluated in this analysis.

Research, Development, and Deployment

CCTI also includes $1.4 billion of funding in the fiscal year 2001 budget request for research, development, and deployment of more energy-efficient and renewable energy and for research into carbon sequestration. Almost $1.2 billion is requested for programs within DOE, with additional funding for EPA, the Department of Housing and Urban Development (HUD), 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 combined heat and power 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, either by enhancing the natural capacity of terrestrial ecosystems and oceans to take up and store carbon dioxide or by separating carbon dioxide from other gases when producing energy and storing it in an environmentally benign manner.

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 AEO2000 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 specific 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 of these technologies 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 incentives 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 success, such as Energy Star. The benefits of past efforts are difficult to quantify but are generally assumed in the efficiency trends 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 AEO2000, 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 projections with a case in which it is assumed that all future equipment choices in the end-use demand sectors are from technologies available in 2000, building shell and industrial plant efficiencies are frozen at 2000 levels, and new fossil generating technologies do not improve beyond 1999. In 2010, energy consumption in this low technology case is projected to be 2.5 quadrillion Btu, or 2.2 percent higher, than in the reference case, increasing projected carbon emissions by 45 million metric tons, or 2.5 percent. The reference case also incorporates the impacts of voluntary programs and partnerships, as well as other initiatives for improving energy efficiency and reducing carbon emission, such as the Climate Change Action Plan. Consistent with the requirement that EIA remain policy neutral, the reference case of AEO2000 includes only current laws and regulations, not proposed regulations, policies, and programs. In a similar fashion, this analysis includes only the CCTI programs, as requested, with no other proposed or possible legislation and regulations.

In the AEO2000 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 are projected to become economical after 2010. Renewable electricity generation increases in the reference case projections, particularly biomass, wind, and 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, advanced and alternative-fueled vehicle sales are projected to account for nearly 15 percent of the total light-duty vehicle sales in 2020, with gasoline-electric hybrid, turbo direct injection diesels, and alcohol flexible-fuel vehicles leading this portion of the market; however, about 68 percent of advanced technology sales are driven by mandates.

If the program goals can be achieved, analysis indicates that some of the programs for buildings and for the development of renewable technologies may hold promise. 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 accelerated by the tax incentives. In addition, some of the technologies may have noneconomic 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), advanced diesel trucks, and biomass ethanol programs--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, improved energy security from reduced energy imports, maintaining U.S. leadership in science and technology, and revenues from the deployment of more advanced technologies in 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 being accepted in 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 undertaking energy efficiency investments. 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, power, and safety over efficiency. Also, consumers may have a relatively short payback period for investments in energy-consuming technologies. Technology penetration can also be slowed by uncertainties about performance, reliability, installation and maintenance, costs, 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.