Energy Efficiency in Climate Legislation

Pricing Carbon Will Spur Energy Efficiency

A price on emissions of carbon dioxide and other greenhouse gases—if that price signal reaches energy users—will spur energy-efficiency investments. A carbon price can be set through an emissions cap-and-trade standard or through a carbon tax.* Pricing carbon can send a signal throughout the economy, thus inducing energy savings in areas not easily reached through traditional energy policies, such as improving the efficiency of existing homes and reducing the amount of driving. The Alliance supports creating a price signal through cap-and-trade or a carbon tax, applied to as much of the economy as possible.

Complementary Policies Also Are Needed to Spur Energy Efficiency

A number of market barriers, such as the “split incentive” when landlords buy appliances but tenants pay energy bills, and the difficulty of obtaining good information on how to save energy, prevent people from taking cost-effective energy-efficiency measures. Split incentives alone affect an estimated one quarter of energy use in homes (Lawrence Berkeley National Laboratory 2006). Those barriers will not disappear even with increased energy prices that could result from climate legislation. Also, depending on the policy design, energy users such as homeowners may not be covered by, or may not see the full price signal from, a cap-and-trade program. Because of these barriers, complementary energy-efficiency policies and programs will be needed to spur investment in energy efficiency and thus lower the overall cost of reducing emissions.

Auto fuel economy (CAFE) standards and appliance efficiency standards already in place are having a major impact on carbon emissions. But stronger standards for vehicles and appliances, as well as standards for appliances and electronics not currently covered, will be justified by increased energy prices under a carbon cap. New policies that should be added to climate legislation (or enacted separately) include:

• Building Code Targets: Building energy codes are the most effective way to improve the efficiency of new homes and commercial buildings. Improved codes could save at least 150 million tons of carbon dioxide emissions a year by 2030, equivalent to taking 28 million cars off the road. A provision in the House energy bill (H.R. 3221) and the Lieberman-Warner Bill (S. 2191) would set national targets for energy savings from codes, and encourage states to meet the targets and improve compliance with the codes.
• Energy Efficiency Resource Standard (EERS) / Clean Energy Standard: End-use energy-efficiency programs run by utilities and states are a powerful approach to reducing energy use, especially in existing buildings, in some parts of the country. Such programs yielded estimated savings of more than $5 billion in electric and natural gas bills in 2006. A national performance standard for energy savings from these programs would be an effective approach to reducing greenhouse gas emissions as well as energy demand. A 10% electricity savings standard and 5% natural gas standard could reduce carbon dioxide emissions by 217 million tons of carbon in 2020. Combined with a cap-and-trade policy, it could reduce wholesale electricity prices by 0.7 cents per kilowatt-hour, compared to prices under the cap-and-trade policy alone (American Council for an Energy-Efficient Economy 2007).
   

Allocation/Auction Funds Should Be Used for Efficiency Programs and Policies

• A climate cap-and-trade program can be used to spur energy-efficiency policies and programs. The emissions credits under some bills pending before Congress could have a total value of over $100 billion per year at the start, with a much higher annual value by 2050. Whether auctioned or allocated, some of these credits should be used to fund energy-efficiency programs and to encourage states and others to adopt effective energy-efficiency policies.
  The Northeast states in the Regional Greenhouse Gas Initiative (RGGI) all agreed to dedicate at least 25% of the credits under the cap-and-trade program for energy efficiency and other consumer benefit and clean energy purposes. Several RGGI states, including New York, are dedicating 100% of credits to such purposes. RGGI modeling suggested that increased energy-efficiency programs and policies would reduce carbon credit prices by one-third, almost cancel out electricity price increases, and thus reduce leakage in the form of power imports from outside the region.
  Allocated credits or auction funds should be used for the following:
• Building Codes: Providing substantial incentive funding would greatly increase the effectiveness of the complementary building codes policy outlined above. Funds should be distributed to states that meet all of the adoption and compliance requirements of the above building code policy, with the funds to be used for promoting efficiency improvements in existing buildings, new green “beyond-code” buildings, and the development and implementation of improved building energy codes.
• Electricity/Natural Gas Energy-Efficiency Programs: As an alternative to an EERS or as a way to fund it, funds should be provided to states or to distribution utilities for energy-efficiency programs. Distribution of the funds should be based in part on demonstrated program savings. A portion of funds also should be distributed to states that make energy efficiency as financially attractive as energy supply for regulated utilities, through some combination of “decoupling” utility revenues from sales, incentive payments for effective energy-efficiency programs, and allowing returns on those programs.
• Reducing Vehicle Use: Funds should be distributed to local and/or state governments to fund mass transit, smart growth initiatives and policies, telecommuting programs, and other ways to reduce vehicle miles traveled (VMT). After development of appropriate data and metrics, these funds should be distributed based on achieved reductions in per capita VMT.
• Research and Development Programs: Funds should be provided for critical clean-energy research and development, with at least one-third of that for new energy-efficiency technologies and practices. Expert panels including the National Commission on Energy Policy have recommended doubling federal support for clean energy R&D. A new federal structure, such as the recently authorized “ARPA-E,” should be free to try out a variety of programs subject to careful evaluation and oversight.
• Federal Deployment Programs: Stable and increased funding of small but critical existing federal deployment programs, including appliance standards, building codes, and Energy Star, could greatly increase savings from these programs for as little as $200 million per year. Additional funds could be used for new national market transformation programs.
• Low-Income Weatherization: Any funds that are provided to reduce impacts on low-income families will be more cost-effective and will help reduce greenhouse gas emissions if they are dedicated to reducing energy use in those households, thus providing long-term bill relief, rather than to paying part of the bills every month. Dedicating some of the electricity and natural gas efficiency programs considered above to help low-income families also could help those families cope with the costs of a carbon price.

Any Credit Allocation Should Not Weaken the Price Signal to Save Energy

In order to use energy efficiency (not just fuel switching), a cap-and-trade policy must be designed so that energy users, including electricity customers, see the cost of the carbon emissions they cause, and thus have an incentive to reduce emissions by saving energy.

• Avoid updated (input or output-based) allocations: Reducing energy use reduces greenhouse gas emissions, and thus reduces the number of credits needed. However, if credits are allocated based (directly or indirectly) on energy use and if the allocation is updated periodically, then saving energy will reduce the number of credits received, as well as the need for credits, thus providing little incentive to save energy.
• Avoid distributing allocated credits to customers in energy rates: Regulated utilities will typically be required to pass on the value of any credit allocation they receive to their customers. Other providers in competition with regulated utilities may be forced to pass on the value as well. But any allocation that is passed on to customers in rates per kilowatt-hour or per therm will reduce the incentive of customers to save energy. From the sole perspective of inducing customer energy savings, it would be preferable to use any such allocation to help consumers by paying for energy-efficiency programs or per-capita rebates.
   

Offsets, if Allowed, Should Be Provided for Real Energy Efficiency

Offsets, i.e. credits granted for emission reductions outside the scope of a cap, could be an important tool to spur needed reductions in carbon emissions through energy efficiency in other countries, and another way to reduce the cost of the climate change policy. However, if the reductions are not real or are not due to the offsets, then the offsets would just weaken the cap. Energy efficiency should be eligible for offsets if offsets are allowed, but rules must be developed to ensure the savings are verifiable, sustainable, and additional. Offsets for energy efficiency under the scope of the cap could also provide an additional incentive for efficiency—if the cap is reduced to compensate for the “double counting” of the savings.

* While this fact sheet focuses on cap-and-trade policy, as that is what is before Congress, all the analysis and recommendations could apply similarly to a tax on greenhouse gas emissions.
 

For more information please contact Alliance policy staff at (202)857-0666 or policyinfo@ase.org.

The Alliance to Save Energy is a coalition of prominent business, government, environmental and consumer leaders who promote the efficient use of energy worldwide to benefit consumers, the environment, the economy, and national security.

April 2008