The American Clean Energy and Security Act of 2009 (ACES) that passed the House on June 26th, 2009 provides a critical and effective framework to make the United States a world leader in advancing energy efficiency and addressing climate change. ACES establishes an economy-wide cap on greenhouse gas emissions and puts the United States on a trajectory to reduce emissions by 83 percent below 2005 levels by 2050.¹

By creating a market-based incentive to reduce emissions through the lowest-cost means available, the ACES cap-and-trade program has the potential to be the most significant energy efficiency policy ever implemented in this country.  The cap will encourage people to become more efficient and will drive innovation in energy efficiency technologies.  According to a recent EPA analysis, under the ACES cap-and-trade mechanism energy consumption would not increase between now and 2050, thus avoiding the projected 17 percent increase in energy consumption through 2050 without the cap.²

ACES addresses one of the greatest energy market failures – the carbon externality cost – but recognizes that other barriers to energy efficiency must be addressed as well in order to unleash the full potential of this important national resource.  To address these barriers, the bill creates a variety of complementary energy efficiency policies and provides funding for a variety of energy efficiency programs.  Importantly, the bill also provides some safeguards to help ensure that allowances are allocated in a way that does not mute the price signal to electricity consumers and that cost-control mechanisms (namely offsets) do not undermine the carbon cap.  Each of these is discussed below.

Complementary Policies

ACES includes several policies to overcome barriers to investment in energy efficiency, including new and improved efficiency codes and standards, better consumer information, and transportation planning.  Here are a few highlights: 

Section 201 of ACES includes an aggressive policy and timetable for the development and nationwide implementation of improved building energy codes. It encourages independent code-setting organizations to develop the codes, and state and local governments to adopt and enforce them, but quickly provides a federal “backstop” if they do not.  ACES directs DOE to establish codes that achieve 30% savings within one year of enactment, 50% savings by the end of 2014 for homes and 2015 for commercial buildings, and an additional 5% savings every three years until 2030.  DOE is to give technical and financial assistance to the International Code Council and the American Society of Heating, Refrigerating and Air-Conditioning Engineers to develop the codes, but would step in if the independent organizations did not meet the targets.

On implementation, ACES directs states to adopt these or equivalent codes within one year, and to demonstrate high rates of compliance with the codes within two additional years.  It provides 0.5% of all allowance value to states and local governments for this purpose.  States can use other allowance allocations from the bill as well, and if they do not meet the compliance targets, they lose an increasing percentage of their allocation.  In any jurisdiction in which states and local governments do not meet the targets, DOE would enforce the federal energy code.

The Alliance has strongly advocated for a comprehensive provision on codes such as this one because codes are an essential tool for improving the efficiency of new and renovated buildings but are not effectively used in much of the country.  The Alliance estimates that this provision alone could reduce U.S. energy use in buildings by 8 percent by 2030 for an estimated annual savings of 4 quadrillion Btus.

Section 101 of ACES creates a combined efficiency and renewable electricity standard (CERES), which requires that 20 percent of electricity sales be met with a combination of renewable energy and energy efficiency by 2020.  Energy efficiency program savings can entail up to one-fourth (five percent) of the RES requirement, or two-fifths (eight percent) if a state governor deems it necessary to meet the requirement.  Eligible efficiency programs include customer electricity savings, combined heat and power and fuel cells, and reduced distribution system losses; and trading of efficiency credits is limited. It is expected that many, if not most, utilities will meet as much of the CERES requirement with efficiency as they are allowed, since energy efficiency is generally less costly than renewable energy. 

The cap on the energy efficiency component of CERES severely limits the energy and monetary savings from this provision: the five percent efficiency gains will not exceed business-as-usual program savings expected under existing state-level energy efficiency resource standards (EERS) and other policies in many states, though eight percent savings could provide a significant boost to utility energy efficiency efforts, especially since building codes and standards cannot be used to meet the energy efficiency component of CERES.  Additionally, a late amendment to the bill requires that electricity from nuclear generating plants or plants with carbon capture technology not count as baseline electricity use under CERES, significantly hindering the stringency of the standard.  In sum, while this provision represents an important step forward, the Alliance will continue to encourage an increase in the energy efficiency component of the RES or the establishment of a stand-alone EERS.

Section 202 of ACES establishes the Retrofits for Environmental and Energy Performance (REEP) program, which would facilitate home and commercial retrofits by providing performance-based grants for certifiable efficiency improvements. Under this program, homes would receive $1,000 to $3,000 for prescribed or demonstrated savings of 10 to 20 percent, respectively, and commercial buildings would similarly recieve grants per square foot of demonstrated energy savings. This program would reduce the upfront costs of energy efficiency improvements while providing an incentive for homeowner to achieve the most cost-effective energy savings possible.

Section 204 of ACES establishes a model building performance labeling program that would reduce information barriers to building energy efficiency by directing EPA to establish measures of designed energy performance for different building types, develop one or more building energy labels, run pilot programs, and work with states and local governments to implement labeling and disclosure programs.  The policy could increase the incentives for builders to design more efficient buildings and provide valuable information to potential buyers and tenants.. Unfortunately, an eleventh hour amendment to H.R. 2454 reduced the labeling provision to new construction only, severely limiting its effectiveness on existing buildings and leaving intact major informational barriers to homeownership.

Sections 211-213 of ACES establish new appliance efficiency standards, notably one on outdoor lighting, and make a number of improvements to the process by which DOE sets standards.  One provision, which is essential for the success of the codes provision described above, would allow state building codes more flexibility to address the efficiency of heating and cooling equipment and lighting within the limitations of preemption of states by federal appliance standards.

Complementary Funding

We estimate that funding for energy efficiency in ACES would total more than $100 billion over the 2012-2050 period, an average of about $3 billion per year.  In some provisions, energy efficiency shares funding with renewable energy and smart grid initiatives, so it is difficult to anticipate how much would actually go to energy efficiency. Funding from ACES for energy efficiency over the 2012 to 2050 period could be as low as $84 billion or as high as $173 billion - $2.2 billion to $4.4 billion annually – depending on the use of state funds.³  Assuming the current funding for energy efficiency does not decrease, ACES funding could represent roughly a doubling of 2008 spending by utilities, state and local governments of $3 to $4 billion.⁴ Figure 1 shows the range of energy efficiency spending over time.    

Figure 1: Energy Efficiency program funding provided through the reallocation of allowance value in H.R. 2454:

Funding for energy efficiency could potentially come from approximately two dozen sections of the bill.  As discussed below, six sections of the bill specify allowance value that must be used for energy efficiency.  The other sections authorize programs, but do not actually dedicate funding for energy efficiency, and therefore their funding is dependent on future appropriations.  While a couple of the funding provisions offer detail on the types of programs that should be funded, generally the program details and how energy efficiency is defined are left to the funding recipients to determine.         

State & local governments (Section 131 and added Section 782(g) of the Clean Air Act) – ACES directs DOE to establish State Energy and Environmental Development (SEED) accounts to be used by state and local governments for energy efficiency and renewable energy programs—this is the largest dedicated source of energy efficiency funds.  Allowances are provided to the SEED accounts according to the following schedule:

Of these allowances, as little as 20 percent or as much as 80 percent could be used for energy efficiency.  Five percent of SEED allowances must be used for the Retrofits for Energy and Environmental Performance (REEP) program established in section 202 of ACES. This provision would award performance-based grants for achieving energy savings in commercial and residential buildings and would receive $7.4 billion in SEED funds over the lifetime of the program, or $190 million annually.

On the whole, the SEED program could receive $30 billion to $118 billion for energy energy efficiency over the 2012-2050 period, with an average annual energy efficiency funding of $760 million to $3.0 billion. 

Natural gas utilities (Section 782 (b) and 784 of CAA) – Natural gas utilities receive allowances according to the following schedule:

Natural gas utilities must use at least one-third of their free allowances specifically for energy efficiency.  Total funding for energy efficiency from this provision totals $26 billion over the 2016 to 2029 period, averaging $1.8 billion annually.   

Home heating oil and propane (Section 782(c) and 785 of CAA) – States receive allowances based on their residential and commercial consumption of home heating oil according to the following schedule:

States must use at least one-half of these allowances specifically for energy efficiency. This provision would provide $8.3 billion over the 2012-2029 period, averaging of $464 million annually.

Building code incentives (Section 201) – As part of the building codes provision and in recognition of the importance of these provisions in driving energy efficiency and CO2 savings, 0.5 percent of the total allowance value is allocated to states to support building code development and enforcement efforts.  This equates to roughly $378 million annually and $14.7 billion over the 39-year period of the bill.

Renewable electricity standard (Section 101) – The renewable electricity standard allows electricity providers to pay $25/MWh in lieu of meeting their requirements.  These funds are to be used by states to promote renewable energy and energy efficiency.  While we have not yet estimated the likely revenues from this provision, it could be tens of millions, if not hundreds of millions of dollars, annually.     

Energy Efficiency Research and Development (Section 782(h) of the Clean Air Act). ACES directs the EPA to allocate 1.5% of total emissions each year to research and development - 0.45 percent of which will be distributed to Clean Energy Innovation Hubs (section 171), and 1.05 percent of which will be distributed to the DOE program on Advanced Research Project Agency – Energy (ARPA-E) funds. One of the eight Clean Energy Innovation Hubs will likely focus on energy-efficient building systems and designs, so assuming that one-eigth of all R&D funds go to efficiency R&D, ACES will provide $5.5 billion will for energy efficiency over the 2012 to 2050 period - about $142 million annually.

Additional authorizations – ACES contains additional program authorizations for energy efficiency funding, such as: 

• Electric and plug-in hybrid vehicles (Sections 121 through 124)
• Smart Grid (Sections 142 through 146)
• Transportation planning (Section 222 and 223)
• Industrial energy efficiency and waste heat recovery (Sections 241 and 242)
• Low-income energy efficiency (Section 264)

Most of these authorizations do not currently dictate the funding level, stating “there are authorized to be appropriated such sums as may be necessary to carry out this section.”  As the history of congressional appropriations suggests, many of these authorizations may go unfunded indefinitely, so we have not included them in our estimates. 

Figure 2 shows the distribution of total allowance value to energy efficiency provisions and non-energy efficiency  funding.

While acknowledging that these spending levels would be a significant increase over historical levels of federal funding for energy efficiency, the Alliance continues to champion energy efficiency program funding as a primary cost-containment mechanism in climate legislation and a measure to ensure reductions in areas difficult to reach with a price signal alone.  In the Senate negotiations, the Alliance asks that the strong complementary funding framework developed in the ACES be maintained and strengthened, and that new efficiency funding not simply displace current funding. Both of these considerations are necessary to realize the full potential of energy efficiency savings under a cap-and-trade mechanism

Alliance Recomendations

Use of Utility Allowances

ACES provides electric and gas utilities 35 percent and nine percent of total allowances, respectively, and gives states 1.9 percent of allowances for to the benefit of heating oil and propane consumers.  While all allowance value must be used generally “for the benefit of ratepayers,” the specific mechanism for returning the value is not prescribed in the legislation and will have a strong bearing on the cost-effectiveness of the program. Utility allowances should be used to promote cost-saving end-use energy efficiency and should not mute the carbon price signal created by the cap.

Use allowance value for cost-saving energy efficiency: In ACES, Gas utilities must use one third of their free allowances for promoting end-use energy efficiency. Electric distribution utilities have no such requirement.  The Alliance recommends that, consistent with natural gas utilities, electric utilities be required to use a percentage of their allowance value to promote end-use energy efficiency for their customers or use allowances to spur all cost-effective end-use energy efficiency before using them for other purposes.  Electric utilities have a long track record of administering energy efficiency programs, and these programs can help reduce the overall cost of carbon abatement and reduce consumer energy bills.

Do not mute the carbon price signal: There is some concern that utilities might use allowances to reduce customer bills proportionate to their energy consumption. While this would not affect the overall level of emissions, the lack of a carbon price signal to consumers would mean underinvestment in cost-effective energy efficiency, and thus raise the overall cost of carbon abatement. The bill specifically says that if rebates are provided to electricity, natural gas, or heating oil consumers, they cannot be rebated on a volumetric basis.  This could be interpreted as requiring that customer rebates be rebated as reductions in fixed rates, but the interpretation is not clear and some observers think some utilities will simply surrender their free allowances.  This would “perfectly” mute the carbon price to end-use consumers.  The language governing utility use of free allowances needs to be clarified and strengthened.

Cost Control and Offsets

Ensure the offsets are real and additional: ACES would allow a maximum of 2 billion tons of carbon dioxide equivalent to be offset by credits for reductions in greenhouse gas emissions outside the cap. Carbon offsets can be an effective cost-containment tool, but only if the claimed carbon reductions are real. If the reductions are not real, the cap itself would be undermined, and the cost per ton of real carbon abatement would increase.

Two billion tons of carbon dioxide is roughly one-third of current U.S. emissions, and twice the total allowed covered emissions in 2050.  As shown in Figure 3, offsets comprise an increasing proportion of total allowance over time, up to 60 percent in 2050.  Thus offset regulations must be very clear on how to address the many issues associated with evaluating, measuring and verifying savings, and how to ensure that the entities tasked with making key decisions are independent of political pressure. 

Determining real carbon abatement from offsets is a challenging task, involving measurement and verification of emissions reductions, and confirmation that the reductions occured outside of a business as usual framework. The Clean Development Mechanism, the world’s largest offset program, is expected to issue only 2.7 billion tons of carbon dioxide equivalents (roughly 1.5 years of ACES legislation) in the four years between 2008 and 2012⁵ and has already demonstrated the challenge of verifying offset credits. The program is fraught with controversy and no small amount of “hot air” (i.e., emissions reductions that would have occurred without the project investment).  Additionally, end-use energy efficiency projects do not fare particularly well -- less than one-fifth of the credits issued under the CDM have been for energy efficiency projects, 90 percent of which were due to efficiency improvements in electric generation.⁶

Negotiations in the House on the jurisdition of the offset provisions demonstrate the vulnerability of offsets to political pressure. The House-passed H.R. 2454 provides the EPA with jurisdiction over most offset projects, excluding domestic agriculture and forestry projects which were transferred in eleventh hour negotiations to the jurisdiction of the United States Department of Agriculture.  Hopefully, both entities will ensure that carbon offsets are rigorously measured and verified by upholding the Offsets Integrity Advisory Board and other oversight mechanisms establishing in ACES, but many of the details are still to be worked out. While the hard part is ahead, the bill currently takes reasonable measures to ensure the validity of offsets. Any attempts to dilute these safeguards should be vigorously opposed.

Footnotes

• 1. This is roughly consistent with Intergovernmental Panel on Climate Change recommendations to reduce risk of exceeding a 2 degree Celsius increase by the end of the century. 
• 2. Environmental Protection Agency, EPA Analysis of Waxman Markey Discussion Draft, April 20, 2009, p.13.
• 3. Alliance to Save Energy calculations are based on allowance allocation levels from H.R. 2454 (as passed 6-26-09) and allowance price projections from the EPA’s Analysis of the American Clean Energy and Security Act of 2009. (released 6-23-09). Alliance analysis includes allocations for: SEED accounts; building codes; natural gas utilities; heating oil and propane consumers; and one-eighth of funding for clean energy innovation centers. We do not include noncompulsory utility funding for energy efficiency, revenues from the renewable electricity standard or separate authorizations.
• 4. The Consortium for Energy Efficiency, 2008 Annual Industry Report, http://www.cee1.org/ee-pe/2008/us_combo.php
• 5. United Nations Framework Convention on Climate Change, Clean Development Mechanism, http://cdm.unfccc.int/about/index.html
• 6. Nicholas Mueller, “Sectoral Approaches and the CDM,” EE Global, Paris, April 2009.