The Top Ten Reasons Why We Need a Renewed Commitment to Energy Efficiency

Posted on February 16, 2004
Posted By: Bill Prindle
 
Looking back on the energy events of 2003 and recent years, with an eye toward the future, the energy policy experts at ACEEE offer their top ten reasons for renewing America’s commitment to energy efficiency.

10. Efficiency is much more than a personal virtue. In the spring of 2001 senior Administration officials opined that energy efficiency, while a "personal virtue", is not a serious energy policy solution. That same year, the state of California, faced with an electricity crisis, mounted a multi-pronged energy efficiency program that achieved an unprecedented 7% reduction in electricity demand, corrected for weather and economic factors [http://aceee.org/pubs/u021full.pdf]. This reduction in demand succeeded in preventing any further blackouts in the state and was the major factor responsible for reducing excessive wholesale prices in the California power market, saving customers billions of dollars. State officials close to the situation said it was this demand-side response, led by energy efficiency, that contained the crisis. This experience has cemented the role of energy efficiency as a "public good" that has enormous benefits for our economy and the environment.

9. Efficiency is the key to a sustainable economy. Over the last 30 years, the energy intensity of the U.S. economy has fallen by more than 40%. That means that without energy efficiency, we would be using 70% more energy to support our economic growth. It’s not likely that we could have found the land, the capital, the infrastructure, or the fuel to sustain that much demand growth. In faster-growing economies, this is even more critical. In China, for example, the electricity system is currently overstrained, threatening several planned factory openings and thus crimping China’s economic growth. That’s why China is developing some of the world’s toughest efficiency standards for vehicles and other equipment, and sees efficiency as a central principle for sustaining a strong economy.

8. Efficiency is no-regrets insurance against global warming. Most of our greenhouse gas emissions come from energy consumption in powerplants, factories, buildings, and vehicles. ACEEE research shows that without efficiency, carbon emissions would be 30% higher today. A 2001 ACEEE study calculated that the U.S. can reduce its carbon emissions back to 1990 levels by 2020, through cost-effective policies such as appliance standards, building codes, public benefits funds, fuel economy standards, accelerated use of combined heat and power, and tax incentives [http://www.aceee.org/pubs/e012full.pdf]. These measures will help, not hurt, the economy; so regardless of the ultimate relationship between energy use and climate, energy efficiency investments are a “no-regrets” insurance policy that will provide net benefits in any case.

7. Efficiency can cut powerplant waste in half. Our aging powerplant fleet (average age approaching 50 years), with a typical thermal efficiency of less than 35%, wastes more than one-quarter of all the energy consumed in the United States. Modern combined heat and power (CHP) systems offer a form of distributed generation that attains net thermal efficiencies up to 80%. ACEEE research estimates that over 150 GW of power generation capacity could be developed as CHP between now and 2020 [http://www.aceee.org/pubs/ie983.htm], which is almost half of forecast demand (and would be over half of forecast demand if rigorous end-use efficiency were pursued in the electricity sector). To get CHP’s benefits, however, we need fair and consistent national interconnection standards, and we need state utility tariff policies that eliminate predatory pricing for standby and supplemental power. We also need air quality policies that allocate emissions based on useful output, not on fuel input, and that streamline permitting for smaller facilities.

6. Efficiency policies are needed to overcome barriers and market failures. Academic economists often theorize that market forces spur the optimal level of investment in energy efficiency, and that public policies to increase efficiency are not needed. These theorists ignore the realities of the marketplace, which throw up numerous market barriers and cause markets to fail to make optimum efficiency investments. For example:

  • Builder-Buyer. Homebuilders, appliance manufacturers, automakers, and other producers of energy-using equipment are more concerned about up-front cost that operating cost. They compete based on reducing the first cost of their product, not the operating cost to the user. They thus often fail to offer more energy-efficient models that may cost a little more initially but would minimize consumers’ life-cycle costs. This “builder-buyer” barrier is why appliance standards, building codes, and fuel economy standards are needed to keep efficiency levels improving.
  • Information Gap. Energy-using technology is sold to millions of homeowners, car buyers, and other consumers, many of whom don’t understand the science or economics of efficiency, and thus don’t know what to look for in a product. This lack of information and awareness makes efficiency invisible in many markets, making it hard to sell the benefits of efficiency compared to the more obvious attributes of the product. To bridge this “information barrier”, we need labeling and branding programs like Energy Star to make efficiency more visible to consumers.
  • Split Incentives. More than a quarter of American homes, and more than half of American offices, are rented. That means the landlord typically pays for energy-using equipment, but the tenant typically pays the energy bill. And in larger organizations, procurement people buy equipment on low-bid principles, accounting people pay energy bills, and engineering people keep facilities running, splitting the responsibility for energy efficiency. These “split-incentive” barriers increase the need for building codes, appliance standards, and public benefits funds to reach these sectors.
  • Utility Dependence on Energy Sales. For most utilities and energy suppliers, shareholder return is tied to the amount of energy sold through the utility system. Under the typical state rate regulation system, reductions in energy sales mean lost revenues and lost returns to shareholders. This makes most utilities natural opponents to energy efficiency investments. Some states, such as California and Oregon, have “de-coupled” revenues from energy sales or pursued other regulatory mechanisms to overcome this predisposition to increase unit sales. Such approaches can allow utility companies to operate efficiency programs without sacrificing profitability.

5. Energy efficiency means economic prosperity. Efficiency is an engine of sustainable economic growth. If we had not become 40% more efficient in recent decades, we would be spending an extra $400 billion a year on energy, above the current $600 billion we now spend. This would divert an extra 4% of our GDP to energy costs, costing us over $1000 per person in direct energy bills plus increased costs for the products and services we buy. Energy efficient products and services already account for tens of billions of dollars of direct sales, and drive a growing number of jobs, investments, and profit margins. So there is no conflict between energy efficiency and a thriving economy. In fact, efficiency is a foundation of economic strength.

4. Energy efficiency clears the air. Since the majority of regulated air pollutants come from powerplant smokestacks or vehicle tailpipes, energy efficiency policies that reduce electricity use or vehicle energy use also reduce air pollution. The Clean Air Act Amendments of 1990 made specific provisions for utilities to use energy efficiency as an emission reduction option [http://aceee.org/pubs/u034full.pdf]. EPA’s nitrogen oxides emission reduction regulations have recognized the value of energy efficiency in reducing those emissions. The State of Texas, in seeking to meet its NOx deadlines, implemented a statewide building energy code in 2001 because of its emission reduction benefits. States in the Northeast are banding together to use energy efficiency as part of a comprehensive strategy to cut air pollution across the region. Yet federal legislative initiatives such as the Administration’s Clear Skies bill fail to recognize these benefits, and don’t allow end-use efficiency and other indirect emission reduction strategies as part of their compliance regimes. This omission should be corrected so that energy efficiency is a recognized source of emission reductions.

3. Energy efficiency is vital to national security. Defense and foreign policy professionals agree that our oil dependence on volatile regions such as the Middle East is a key threat to U.S national security. The fact is that without the fuel economy improvements we’ve achieved since the 1970s, we would be importing another 4 million barrels of oil a day, putting Middle East oil producers more firmly in the driver’s seat. Because Gulf producers continue to control the world’s low-cost marginal or “swing” production capacity, modest changes in world oil demand have an enormous effect on their economic and political power. And since the U. S. consumes over one-quarter of world oil supply, we are a critical “swing” consumer. It was the fall in U.S. oil demand in the 1980s that initially weakened the OPEC cartel, but surging sales of lower-mileage SUVs have accordingly driven U.S. demand back up in the last decade. ACEEE research shows that, using today’s technology, we can improve our fuel economy by 50% over a 10-15 year period, with a 5% increase in vehicle cost and net lifetime savings to the buyer [http://www.aceee.org/energy/cafe.pdf]. But since automakers have strong negative incentives to build higher-mileage vehicles, we need strong new fuel economy standards, tax incentives, and other means to reduce our transportation oil demand.

2. Energy efficiency keeps the lights on. On August 14, 2003, up to 50 million people in the U.S and Canada lost power in the largest blackout in North American history. While the immediate cause has been linked to power system operating practices and outmoded transmission technologies in parts of the U.S. grid, the fact remains that this emergency happened on a hot weekday afternoon, when air conditioning demand pushed the system to the breaking point. Excess customer demand overheats transformers, overloads transmission lines, and strains any of the other weak points in the power system. So while we need clearer operating standards and a rationalized regulatory system for U.S transmission systems, we also need to invest in energy efficiency and other forms of demand response to keep both the physical infrastructure and the financial markets of our electricity system in balance. Efficiency investments have already avoided the need for more than 30,000 MW of peak capacity; ACEEE research shows that by targeting investment in efficiency programs that have maximum peak impact, we could avoid another 64,000 MW of peak demand [http://www.aceee.org/utility/index.htm]. These savings would not only reduce strain on the grid during peak hours, thereby reducing the risk of blackout, they would also exert strong leverage on peak power prices, saving money for all customers on the system.

1. Efficiency is our first line of defense against soaring natural gas prices. The biggest energy story of 2003 has been the realization, right up to the desk of the Chairman of the Federal Reserve, that North America’s natural gas markets are changing dramatically, and that this is not a short-term blip but a long-term structural shift. Demand has outstripped, and is expected to continue to outpace, our continental production capacity. A new floor is appearing under gas prices: from the soft $2/MCF wellhead prices of the 1990s, market forecasters are projecting wholesale prices at $4.50/MCF and up for the foreseeable future. New supply investments, such as the Alaskan pipeline and LNG imports, will take years to come on line, and depend on higher gas prices to be financially viable. Energy efficiency is one of the few realistic policy strategies that can bring balance to natural gas markets, both for the next few years and for the longer term. A 2003 ACEEE study shows that modest efficiency gains of 2% or less can have major price impacts in tight gas markets, driving down wholesale prices by about 20% or $1/MCF over the next five years. Pursuing this strategy would save consumers over $100 billion on a total investment of just over $30 billion, including a $7 billion public policy cost. [http://www.aceee.org/energy/efnatgas-study.htm]. In this brave new world of pricy and volatile natural gas markets, energy efficiency is a key hedging strategy that can help get us through what could otherwise be an economically devastating problem.

 
 
Authored By:
Mr. Prindle directs ACEEE’s energy policy program, which conducts policy analysis and advocacy on energy efficiency issues at the national and state levels. He also continues to work on building energy codes and related new construction issues. Within ACEEE, he oversees organization development, communications, conferences, publications, operations, and buildings programs. In more than 25 years in the energy field, he has worked in regional planning, corporate communications, management consulting, solar
 

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Comments

February, 16 2004

Edward Reid, Jr. says

Bill, It's too bad both ASE and ACEEE lack the courage of their convictions. Neither organization fought against the "site-based" building efficiency incentives in last year's energy bill, which would have made the implementation of on-site combined heat and power systems in buildings far more difficult. Both organizations consistently resist resource-based energy efficiency measurement, in favor of "site-based" measurements which ignore the major losses in electricity production, which constitute the waste of ~25% of total US energy consumption, as discussed in your article, as well as the additional losses in transmission and distribution. As long as building energy efficiency standards are set in terms of "BTU/sq. ft./year" measured at the site, CHP systems will appear to be less efficient than "all electric" buildings. I refer you to the article :"Site Energy Measurement Metrics - Simple, Straightforward...and Wrong" (PUF, 9/15/2003) for a more detailed discussion of this issue. Ed

February, 16 2004

Mark Krebs says

So you want to get serious about energy efficiency? As Ed implied, a good starting point would be metrics that are not tantamount to professing that energy is somehow created inside of utility meters.

As of Friday, S2095 would mandate FEMP to reduce energy usage on the basis of Btu/ft2. Thus you can "save" 30% by replacing gas water heaters and furnaces with electric resistance. And as we all know (but some do not dare say) that increases the consumption of energy resources overall.

The same thing could happen with proposed builder tax credits depending on how DOE makes its "determinations."

February, 16 2004

Len Gould says

As the two previous comment point out, and the article somewhat misses, the issues are more complex than they would first appear. It seem that some sort of new measuring unit for end-use energy is required, call it the "kilowatt potential" or kwp. Every cunsumption event can be measured by the kwp required to perform the event, be it driving a vehicle or heating hot water.

The problem then becomes trying to integrate the relative polution aspects of the consumption event into the e.g. market price. As is unstated above, in many cases it is desireable to use electric resistance heat for hot water rather than a fuel, e.g when the water heater can heat water for storage in offpeak periods in areas where most electricity comes from nuclear or hydro. But how does a consumer / builder / etc. become aware of the isues. What if the mix of electrical generation in an area changes over time?

Without a clear, long-term policy declaration by senior governments, none of the above seems rational, or likely. Governments need to make clear declarative statements at a regional level such as "Within 5 / 10 / 15 and 20 years; xx% of electricity generation will be (nuclear / wind / hydro / coal / gas / etc.). Average electrical transmission losses will be xx%. xx% of light duty motor vehicle fuels will be (gasoline / {bio} / diesel / hydrogen / batteries). etc." Given that, then meaningful calculations could be published or markets could be designed which would meaningfully relate for a building engineer or owner, fleet buyer etc. a unit of electricity to a unit of fuel etc. The targets would be revised each five years for new technology or conditions.

Without something like this we are condemned to never-ending debates among industry players of all stripes which presently serve mainly to confuse and tune out the really important factor, the consuming public.

February, 16 2004

Jack Ellis says

I agree wholeheartedly with your reason number 6, and I think energy conservation is a worthwhile endeavor, but I object to the way you've cited certain facts to support your arguments:

#10. To be most effective, energy efficiency needs to be driven by self-interest rather than altruism. California energy consumers dialled back their enegy use primarily for one of two reasons: out of fear that they'd face financial ruin from high energy prices or to take advantage of discounts offered by the State.

#9. You're assuming energy is a scarce good, and perhaps you're correct. But absent any government-mandated conservation efforts (and any government-sponsored efforts to cap energy prices), steep rises in energy prices would have driven manufacturers of energy-consuming devices to develop more efficient models that consumers (large and small) would snap up as quickly as they could. We can only speculate about which path would have been more beneficial, but the claims made in this point are exaggerated.

#8. Perhaps. Despite claims to the contrary, the linkage between climate change and CO2 levels is no less speculative than the notion that eating salmon or drinking red wine will eliminate all risk of heart disease.

#7. I agree CHP is a worthwhile technology that faces numerous institutional hurdles. Whether it improves energy efficiency is not nearly as important as its cost performance. If CHP doubles energy efficiency but still increases the delivered cost of energy at the point of use, that's really wasteful.

#6. I agree but with one important difference. I'd get the utilities out of the business of promoting energy efficiency. Regulatory incentives in the form of higher returns are not sufficient to overcome the bureaucratic inertia, conflict of interest and inept regulatory micromanagement that accompany such programs. To be effective, conservation programs have to focus on satisfying customers rather than meeting the terms of regulatory mandates. Utilities have every incentive to please regulators but almost no incentive to do what's in a customer's best interest.

#5. Sorry, but that's playing fast and loose with the facts. Truth is it's almost impossible to extrapolate what would have happened in the absense of tougher efficiency standards. Perhaps the market would have done an even better job than government mandates have.

#2. Another case where facts are stretched pretty hard to make a point. The Joint Task Force is crystal clear on why this happened. There was nothing exceptinal about weather or demand on August 14th.

#1. Maybe. Then again for something less than $30 billion and zero investment in public policy costs, a few LNG terminals and associated tanker capacity could do as much to shave 20% off the price of natural gas as a 2% reduction in demand.

Very often the public is confused about issue because they see conflicting interpretations of the exact same set of facts. I'd suggest you focus on a few key messages (education, labeling, clear descriptions of the economic tradeoffs among initial and operating costs) and avoid citing speculation as fact.

February, 18 2004

James Hopf says

At a minimum, policies that have perverse incentives, and which actually adjust the market in the wrong direction (such as efficiency standards discussed above that actually encourage electric heat) need to be eliminated. More generally, however, all the problems discussed above illustrate how command and control govt. interference is not the most efficient means to produce the desired effect.

Instead, we should actually harness market forces to achieve our enviromental and energy independence objectives. Once again, the main problem is that negative external factors (i.e., pollution and foreign dependence) are not reflected in the market. If we corrected the market to account for these things, through taxes on pollution, CO2 emissions, foreign energy use, and use of key energy sources that have limited supply (e.g., gas), all of these problems would go away, and they would go away in the most efficient and elegant fashion.

Such taxes on energy (so that its "true" costs are reflected) will raise the price of energy, and thus automatically encourage conservation. The issue raised above about the electric heat would automatically be avoided. If there were pollution taxes, or taxes on gas use to reflect supply security/depletion concerns, the cost of electric heat would (of course) go up much more than the cost of gas. Transmission loss effects are automatically accounted for accurately. Then again, Len may even be shown to be right because, if there were no taxes on nuclear or hydro (due to their lack of problems), the cost rise for electric power could even be less if those sources figured prominently in the generation mix.

The point is that the disincentives are applied right at the source, where and when the primary energy source is being consumed. Silly effects like allocating emissions based on fuel consumption rather than power production automatically go away, and more efficient power plants are automatically favored. It's simple, you pay taxes in proportion to the pollution you create, and you obtain revenue in direct proportion (of course) to the electricity you produce.

Take Jack's Issue #1 as another example of the benefits of the "free market" approach. If a few LNG terminals would reduce the cost of gas for a much smaller cost than various conservation initiatives, then this approach will automatically be selected, by the free market, under the "externality tax" policy. Using this approach, industry is allowed to decide the most cost effective approach.

Under the "pollution/foreign energy tax" a system, all of the priorities/concerns of society are automatically reflected in a completely elegent and efficient way. It is the "ideal" approach, under which the free market determines the most efficient means to deliver on these societal goals. I don't think govt. should dictate how efficient things should be. All external costs should be reflected in energy prices. From that point on, the free market (industry, consumers, etc...) should make their own decisions.

February, 18 2004

James Hopf says

More on conservation policy....:

The only counter example I can think of where the free market may need "some help" concerns ignorance and short-sightedness on the part of the general public. I cautiously believe that industry would be too smart to make such errors.

Many studies (polls, etc...) have shown that the public simply does not think about costs down the road, such as energy costs, when making purchases of cars or applicances, etc.... They only consider up front cost. I think studies have shown that even if a more efficient car would pay for its extra capital cost in 1 or 2 years (through fuel cost savings), the public still wouldn't buy it.

It is known fact that large numbers of conservation measures (with a large associated energy savings) clearly make economic sense under just about any set of economic assumptions (i.e., interest rate, ROI, payback period, etc....). And yet, the public doesn't persue or choose them anyway. The public is basically making a demonstrably "wrong" decision. Admittedly, in many cases the reason is that energy is so cheap that, even though it makes economic sense, it just isn't important enough to spend the time and initiative looking into.

There may be ways around these problems. One idea (that is being persued by some) is the concept of energy services companies. This applies more on the industrial or commercial scale. Companies would contract with these energy service companies to provide all energy services for some fixed fee. The energy service company would then make all decisions concerning whether investing in more efficient technology is worth it, etc... As the contract is fixed fee, the energy services company's incentive is to do whatever makes the most economic sense. The benefit is that the customer does not have to take the time and initiative to look into all the conservation measures. Also, the energy services company will be fully aware of all products an applications that are out there, and what their economic potential is. They won't "miss" anything.

Another idea, on the consumer level, to get around their short-sightedness, would be to place a tax on energy and use the revenue to provide rebates on energy efficient products. The rebates (and associated taxes) would be high enough to bring the cost of the more efficient product down to the cost of the less efficient ones. It WILL be the case that the increased efficiency of the purchased product will more than offset the increase in energy price due to the tax. Thus, not only is the govt. program revenue neutral, but the consumer ends up spending less, overall, in the long run.

How can this be, market purists may ask. Doesn't the unfettered free market always result in the lowest overall cost approach? In short, not always. The only reason why the proposed program would make sense, and would work economically, is the fact that the public is known to be making "demonstrably wrong" market decisions, as discussed above. Free market theory depends upon the assumption of fully enlightened consumers acting in the own best self-interest. The market is "broken" in this sense, and this policy provides the patch. Since it is known fact (in the applicable instances) that the more efficient product saves more money in energy costs, over the period of use, than the extra cost of fabrication, it is clear that if you taxed the energy enough to wipe out the savings, the tax would raise more than enough money to pay the capital cost difference. In most cases, this is true even with all interest effects accounted for.

A humbler version of this approach was proposed for things like lightbulbs. They wanted the label to present the overall lifetime cost of use (i.e., the initial cost plus all power costs over the life of the bulb). The idea is that the consumer would see the higher presented total cost for the incandescent bulb, and choose the flourescent one instead. Of course, this doesn't change the fact that he will still have to shell out more money at the counter if he buys the flourescent bulb. It's really just a "promise" on the label that he has to believe. I'm not sure how well this would work (here's hoping). The approach described above is more tangible, and gets around the above issue.

February, 19 2004

Len Gould says

James: You've nailed my position exactly. That's an interesting idea re- energy service companys moving down to the residential level. Would a homeowner be willing to pay a flat annual fee to a company to provide all their home energy requirements? The company then gets to manage their thermostat remotely, add insulation, change bulbs, replace appliances by pre-arranged service calls.

February, 20 2004

James Hopf says

One more thing I forgot to mention......

Len made reference to predictions or plans (from some govt. or policy body etc..) concerning how much energy will come from which source, etc.... There is always substantial disagreement on such issues, concerning how much is possible, or desireable, etc... These disagreements often stymie creation of policy.

That is another beauty of the pollution tax approach. This approach makes absolutely NO predictions about how things will progress in the future, or about what's possible or practical, etc.. In fact, this policy doesn't even really take a position on what is desirable. It simply, dispassionately calculates and applies the external costs to various energy prices. Then the market is left to decide.

Is coal the best option? In fact, it may be. This approach is actually open to that conclusion. It adds the external costs to coal. If it turns out that coal is STILL the cheapest approach, than coal will still be used. In that instance, the policy basically will have (automatically) concluded that coal's lower costs were more than worth its environmental disadvantages.

How much coal contributes under this system would depend on several factors, many of which are not easily knowable, and over which experts disagree. How much more expensive will other options be relative to coal in the future? How expensive is it, really, for currently available (and future) pollution control technologies to reduce coal plant pollution by a given amount? What is the largest “possible” reduction (at any cost)? What are the economics of switching from coal to gas? When you use any other approach, such as direct regulation or cap-and-trade, you have to arrive at answers to these difficult questions.

You won't be allowed to pass direct regulations (or caps) that are more aggressive than what is considered "possible". Coal utilities will successfully argue that your measures are "not possible", or “too expensive”. And you probably couldn't (politically) just take the stand that coal should be eliminated. Thus, what usually happens is that coal utilities argue that the "possible" reductions are much less than what they really are, and you wind up with goals that are too weak. Another philosophical problem with any regulatory limit, or emissions cap, is that whatever goal you choose, the financial disincentive to pollute drops to zero once that goal is met, even though the negative effects have clearly not dropped to zero.

The biggest problem with current regulatory approaches is that you can have completely clean sources that are only a little more expensive than polluting sources (e.g., wind or nuclear vs. coal) but they are not built anyway because there is literally zero financial incentive. It is a symptom of the all or nothing approach. You have to either set the limits below what coal can achieve (i.e., basically declare coal "illegal"), or you set them at a level coal can achieve and effectively apply zero incentive to use cleaner sources.

The pollution tax approach avoids all of those arguments, pitfalls, and problems. The analysis is quite removed from these issues, and is quite specific. The analysis focuses solely on the effects of pollution, in terms of deaths, health effects, and associated monetary costs to society. Based upon this research, the total external "cost" to society, from each emitted ton of each pollutant, is determined in monetary terms. These costs are then cast into pollution tax rates (in dollars per emitted ton). The analysis does not concern itself at all with issues such as what is the "achievable" amount of reduction, or the economic costs of those reductions. It does not concern itself at all with "preferred" energy sources or future goals. This approach does not "pick winners". It just states the facts, and ensures that REALITY is reflected in energy prices.

February, 20 2004

James Hopf says

continued........

Then the free market does all the work. If it is "too expensive" to put in certain pollution controls, then fine, you will just choose to keep paying the taxes, indefinitely. That will reflect the "true cost" of your energy source. Do you "just need a few more years of relief" because you expect that a much cheaper means of pollution reduction will be developed in the near future, and it would be far more expensive (and thus, a huge waste) to have to make the reduction now? This is no issue with the pollution tax approach. If you expect a breakthrough a few years down the road, just pay the tax for a few years. It’s all your choice, and nobody else's. The govt. will NOT stick its nose into your business and tell you what to do. You just have to pay all costs associated with your actions. The whole silliness concerning grandfathered coal plants and the New Source Review, for example, would of course completely go away under this approach. These would be no "grandfathering" under this system. If you pollute a whole hell of a lot, you'll pay a whole hell of a lot of tax. It's up to you to decide whether spending all that capital cost (to "throw away a perfectly good, old, operating plant") is worth the reduction in pollution tax.

My point is that the pollution tax approach elegantly bypasses all of the arguments that are often (and often speciously) used against proposals for any meaningful pollution control. It ensures that environmental VALUES are fully and inherently included in the power market, and the associated decisions that are made.

February, 20 2004

Len Gould says

James: Give, (polution/ foreign import hidden costs/ public commons use) taxes are an ideal solution. But then, given all the myriad special interests which would be upset, what are the odds of ever seeing anything like it? Current political structures are simply incapable of such a dramatic shift (IMHO).

February, 23 2004

Steven Rosenstock says

It is interesting how the discussion has gone from efficiency to emissions. As a starting point, in the interest of full disclosure, I work for the Edison Electric Institute.

Getting back to Bill Prindle's article, here are a few discussion points:

#10 - Yes, electric energy and demand as metered by utiilties went down in CA in 2001. But there was an increase in the use of on-site generation, so some of the "savings" were shifted to electric usage that was not metered. Also, the values quoted were for the CA ISO, which serves the IOU areas (75% of the electric usage in CA). Looking at the whole state, using EIA data, the reduction was less than 7% (but still significant).

#9 - I have read stories that electric usage in China increased 15% last year (and oil usage was up 8%). If that pace continues, in 5 years China will be using more electricity than the US.

#8 - I know this may not be very PC, but if we reduce our emissions, and if the emissions from Chinese vehicles and factories and plants go up by 10-15% per year, have we really accomplished anything? After all, if the global emissions are still going up, just shifted from one country to another, has it helped?

#7 - New power plants are over 50% efficient on a fuel to electric conversion basis. The key with CHP is the ability to use the heat. CHP has been developed where it makes sense, and you don't have to connect to the grid to make it economical. Some DG technologies, such as microturbines, are only 25-30% efficient (fuel to electric) under the best operating conditions. So shifting from central generation to DG would be less efficient.

#6 - Market barriers exist for all products. DVD players costing $500-1000 a few years ago had a very small market penetration. DVD players that cost $75-100 have a large market penetration. In terms of investments, some people have short term payback requirements (e.g., they are moving out of their house in 2 years), others can take a longer term view. Market realities are not market failures.

#4 - In some cases, efficiency can help clean the air. In other cases, it won't make a difference. For example, a green customer buys his/her electricity from hydro and wind suppliers (or to be totally green, all solar). He/she makes energy efficiency improvements, say 20%. Energy usage goes down 20%. Emissions go down 0. 20% of zero is still zero.

In terms of autos, a person goes from a 20 mpg vehicle to a 30 mpg vehicle. If that person increases their driving miles by more than 50%, emissions from efficiency are not reduced (only emissions from advanced engines/controls are).

#3 - In terms of national security, we import a lot of oil from the Middle East, so that is a concern. So far, we only import natural gas from Canada and Mexico, but we could start importing LNG from the Middle East soon (up to 15 or 25%?). We import less than 1-2% of our electricity from Canada and Mexico. Shouldn't ASE and ACEEE focus more of their efforts on transportation issues, if they are so worried about national security?

#2 - Sorry, the blackout did not happen on a hot weekday afternoon. It happened on a warm weekday afternoon, where the electric demands were lower than in the really hot days of August 2002 and hot days of June 2003. Just look up the NYISO, ISO-NE, and PJM data for those time periods. Also, there are still a lot of efficiency programs in New York and New England (to the tune of well over $250 million per year). You could have doubled or tripled the amount spent on efficiency programs, and the blackout still would have happened.

#1 - In terms of gas prices, efficiency can help reduce gas prices. But it is baffling why some groups talk about measures to reduce electric use, when only 18% of our electricity is made from gas. Wouldn't it be better to concentrate on making gas end-use products and industrial processes more efficient?

Also, as a question for the "source" advocates: with LNG from overseas, it has to be drilled, then cooled to a liquid (-260 F I think), then shipped, then pumped into LNG terminals, then "modified" for US pipelines to reduce the heat content. What are the energy losses in these processes? 70%? 80%? Since LNG may be so inefficient, should we ban its use, or insist that gas appliances be that much more efficient to make up for it?

(I hope the EnergyPulse server doesn't melt down when people respond :-)

February, 23 2004

Geoffrey Young says

Excellent article. Also useful comments from James Hopf re the economic efficiency of pollution taxes.

February, 23 2004

TERRY MEYER says

#10. It’s so refreshing to see someone remember to address demand. The Feds are big on this and they have a point. Time-of-use pricing and metering could go a long way towards fixing all our immediate problems. Sure, there are growth studies showing that all our needs cannot be time-shifted, but with small changes in demand going so far in influencing prices, it might not lower annual consumption much, but it could lower prices a lot. There’s certainly no denying the time it would buy forestalling infrastructure investments since right now we have to have much more infrastructure in place to meet peak demand than would be needed to supply average demand. Flatten out the load curve and we’d have a place to put all the nightly generation from the base-loaded nukes everyone wants to build cheek by jowl from coast to coast. Besides, real time price feedback might be even more effective at bringing consumers face to face with their energy costs than just an average rate on their monthly bill. Since it’s never been tried long-term, for all we know real time pricing might solve ALL our energy problems.

#8. Steven Rosenstock. Yes, shifting pollution from one country to another is preferable to a net increase, if you’re a global village idiot like me. But the point stands because even I don’t want to give up my SUV just so an additional Chinaman can drive one.

#4. While efficiency in load demand may clear the air, efficiency in load supply doesn’t always. Hotter flames can burn fossil fuel more completely but produce more NOx. When efficiencies are so low or fuel so short that people are willing to have their eyes sting even more please wake me up.

Wouldn’t higher energy bills drive efficiency up?

#3. Is it really just SUVs that have “driven U.S. demand back up in the last decade”?

#2 Jack Ellis & Steven Rosenstock stretched facts pretty hard to make a point. While the Joint Task Force may say there was nothing exceptional about weather or demand on 8/14/2003, NERC says those same “unexceptional” factors leave the same area susceptible to a repeat of the same blackout this summer. [OK, OK, I can’t believe they haven’t trimmed those same trees yet.]

.

James Hopf,

Elegant, indeed. But can ALL associated costs really be accurately quantified? What if, under the Hopf model, after all costs are fully vetted, we find out they were in error? What if some source has an accident that pollutes so much it raises the healthcare costs of a million people by $500,000 each and would cost $10 trillion to fully clean up? What if this happens after $billions have been invested in sources similar to the one that had the accident and there is no preventing future similar accidents without completely redesigning and rebuilding all those sources? What happens to the false profits of the operators and consumers of those sources that were made under false assumptions? Who pays for the cleanup after the polluter is bankrupt?

There is disagreement now about the full costs of just one source. How would we ever fully quantify all the costs of all the sources and sinks? Go by some engineer’s assumptions about what is “significant”?

It IS an ideal. Would it provide enough stability for financial markets to provide? I think it would, ideally. I don’t know where the MONEY would come from what with President Cheney sucking up all the available American credit to pay for his tax cuts on the wealthy, but the stability would be there waiting for tax-and-spenders to come along and free up some capital.

What is life worth? More accurately, what is a shortened life worth? How can you accurately know life expectancy in order to calculate how much the life was shortened? Won’t this have to be vetted in order to fully quantify external costs? The rest of my life is worth $trillions/second to me. I’d be willing to pay only negative dollar$ to keep Dumbya alive.

February, 24 2004

Len Gould says

Terry: Re: All assosciated risks. There are entities capable of such assesments. They're called insurance companies. If you and all the other opponents of nuclear power were ever able to agree on a fixed coverage which would keep e.g. Greenpeace and Nader etc. off the playing field, I'm thinking the industry would take it up given the real risks involved.

The problem is getting the agreement, isn't it? It's their livelihood and their religion. No simple risk management system is going to satisfy them even though the real risks are miniscule compared to just driving a car (or your SUV).

February, 24 2004

James Hopf says

Terry:

You're absolutely right! Determining (and agreeing on) what the external costs (i.e., collective health risks, indirect economic costs, etc...) are for each energy source will be a very difficult scientific task, and will be the subject of enormous debate. The point is, this is an analysis (and debate) that has to be performed anyway. It is the very core of all environmental/energy policy issues. My approach merely clarifies what the real issues/questions are.

You say that my approach is based upon determination of these risks and/or external costs, and that there may be uncertainty or disagreement with respect to those numbers. My question (in response) would be that, if we don't know the answer to those issues, what is our conceivable basis for any type of enviromnental policy if the first place. This is true whether we use a direct regulation approach, a cap-and-trade approach, or my proposed pollution-tax approach. All policy is ostensibly based on having some quantitative measure of the negative effects of pollution. How else to we claim to have a basis for any environmental regulations?

The benefit of the pollution-tax approach is that it clarifies what the real questions are. The debate is boiled down to its real essence, and issues that are, in fact, completely extranneous and just serve to confuse the issue (i.e., political or economic issues) are completely removed. It results in an analysis/debate that is completely scientific. It is completely centered on scientific questions concerning the effects and risks of various pollutants and energy sources.

The fact that you almost never hear debate on veracity of calculated health risks when you hear debates on energy/enviromnental policy is a clear sign that the proposed system would offer a substantial benefit. Taking coal as an example, no rational person can really take the position that even if EPA is right and coal kills 10,000 people per year and inflicts 120 billion in indirect economic costs, we STILL shouldn't apply any sort of tax on coal electricity (or MASSIVELY reduce allowable emissions). Most serious people on the other side of this issue really take that position because they believe that the EPA science is complete BS. Well, under my proposed system, if you disagree with coal emission taxes or restrictions because you think the science is bunk, you're gonna have to come out and say so, and defend your scientific position.

But that's not how it works now. The above science is routinely reaffirmed as the scientific concensus, but then our policy-makers routinely ignore it (i.e., simply act as though it weren't true), citing specious arguments about costs or practicality. Under the proposed system, you won't be able to duck the scientific issues. You either make a scientific case that the current concensus is wrong, or you accept the appropriate pollution taxes based upon that science.

As described in my earlier posts, under this policy, "economic" or "pragmatic" considerations are irrelevant, and they do not enter at all into the calculation of pollution taxes. It is based on science, and science only. Not to say that our science on these issues is necessarily perfect. That's the difficult part. Let the SCIENTIFIC debates begin!!

February, 26 2004

Len Gould says

(from a critique by J.A.L. Robertson, M.A. (Cantab), F.R.S.C. of "A Review of AECL's Environmental Statement" 1996 Sept. http://www.magma.ca/~jalrober/eisrev2.htm)

quote << I also submit for consideration two further principles. The first of these would provide a basis for protection of people and, incidentally, the environment: "The risk for people should be optimized for the public benefit, considering technical, economic and social factors, subject to an absolute upper limit to the permissible risk for any individual". My use of "optimized" rather than "minimized" is deliberate, for reasons already discussed. It directly opposes the use of "minimizing" and "minimize" on page 158, and "minimize" and "the best that can be done" on page 160. Similarly, "Safety would be top priority" (p.157) is nonsense and should read: "Adequate safety would be an essential requirement".

The other possible addition would, if agreed, greatly simplify application of other principles: "Any very small risk, comparable with other very small risks ignored by our society, should be ignored in policy decisions concerned with the disposal of nuclear wastes". This is termed the de minimis principle from the legal equivalent de minimis non curat lex - "the law does not concern itself with trifles". My contention is that this principle would merely reflect everyone's rule of thumb for day-to-day living, and would avoid a waste of society's resources that could be much better expended elsewhere.>> end quote

March, 07 2004

TERRY MEYER says

Good quotes on risk. Reminds me of 280,000,000 Americans wearing social straight jackets just to lessen the chance that 280 Americans will have a plane wreck. Reminds me of the freedoms we'd have to give up to reduce the risks of drugs on the streets when we can't even keep drugs out of prisons.

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