Abstract: New Corporate Average Fuel Economy (CAFE) standards were recently passed in the United States with the twin goals of reducing greenhouse gas emissions and oil use. The new standards represent a dramatic change from recent policy. This paper examines the key features of the new rules, and compares them to previous CAFE standards in terms of flexibility and structure. The importance of consumer preferences and market forces on CAFE outcomes are identified. In the second part of the paper, the perspective of the consumer is explored. Consumer assessments of fuel economy savings with more fuel-efficient vehicles may be biased or incomplete, leading many to argue that there is an “energy efficiency gap” in consumer demand for vehicles. Reasons for such a gap, such as market failures, behavioral responses, and market barriers, are summarized. The implications for policy are discussed, including the role of combining CAFE with other policies.

Abstract: There is little evidence from impact evaluation studies of ambitious residential energy conservation programs, especially in developing countries. In this paper, I investigate the short- and long-term impacts of the most ambitious electricity conservation program to date. This was an innovative program of private incentives and conservation appeals implemented by the Brazilian government in 2001-2002 in response to supply shortages of over 20%. I nd that the program reduced average electricity consumption per customer by 25% over a nine-month period in affected areas. Importantly, the program reduced consumption by 12% in the long run. Such persistent effects, which arose mostly from behavioral adjustments, may substantially improve the cost-effectiveness of ambitious conservation programs. Finally, I show that a price elasticity estimated out-of-crisis would have to be increased fivefold to rationalize conservation efforts by the private incentives alone. Appeals to social preferences likely amplify consumers' responsiveness in times of crisis.

Abstract: The failure of consumers to make seemingly cost-effective investments in energy efficiency is commonly referred to as the energy efficiency gap. We review the most recent literature relevant to the energy efficiency gap and in particular discuss what the latest insights from behavioral economics might mean for the gap. We find that engineering studies may overestimate the size of the gap by failing to account for all costs and neglecting particular types of economic behavior. Nonetheless, empirical evidence suggests that market failures such as asymmetric information and agency problems affect efficiency decisions and contribute to the gap. Behavioral anomalies have been shown to affect economic decisionmaking in a variety of other contexts and are being increasingly cited as an explanation for the gap. The relative contributions of the various explanations for the gap differ across energy users and energy uses. This heterogeneity poses challenges for policymakers, but also could help elucidate when different policy interventions will most likely be cost-effective. If behavioral anomalies can be more cleanly linked to energy efficiency investments, then policymakers will face new challenges in performing welfare analysis of energy efficiency policies.

Abstract: A variety of renewable electricity policies to promote investment in wind, solar, and other types of renewable generators exist across the United States. The federal renewable energy investment tax credit, the federal renewable energy production tax credit, and state renewable portfolio standards are among the most notable. Whether the benefits of promoting new technology and reducing pollution emissions from the power sector justify these policies’ costs has been the subject of considerable debate. We argue in this paper that the debate is misguided because it does not consider two important interactions between renewable electricity generators and the rest of the power system. First, the value of electricity from a renewable generators depends on the generation and investment it displaces. Second, a large increase in renewable generation can reduce electricity prices, increasing consumption and emissions from fossil generators, and offsetting some of the environmental benefits of the policies. Two policy conclusions follow. First, existing renewable electricity policies can be redesigned to promote investment in the highest-value generators, which can greatly reduce the cost of achieving a given emissions reduction. Second, subsidies financed out of general tax revenue reduce emissions less than subsidies financed by charges to electricity consumers.

Abstract: Residential buildings are responsible for approximately 20 percent of U.S. energy consumption, and single-family homes alone account for about 16 percent. Older homes are less energy efficient than newer ones, and although many experts have identified upgrades and improvements that can yield significant energy savings at relatively low, or even negative, cost, it has proved difficult to spur most homeowners to make these investments. In this study, I analyze the energy and carbon dioxide (CO2) impacts from three policies aimed at improving home energy efficiency: a subsidy for the purchase of efficient space heating, cooling, and water heating equipment; a loan for the same purchases; and efficiency standards for such equipment. I use a version of the U.S. Energy Information Administration’s National Energy Modeling System, NEMS-RFF, to compute the energy and CO2 effects and standard formulas in economics to calculate the welfare costs of the policies. I find that the loan is quite cost-effective but provides only a very small reduction in emissions and energy use. The subsidy and the standard are both more costly but generate emissions reductions seven times larger than the loan. The subsidy promotes consumer adoption of very high-efficiency equipment, whereas the standard leads to purchases of equipment that just reach the standard. The discount rate used to discount energy savings from the policies has a large effect on the welfare cost estimates.

Abstract: Efforts to limit cumulative emissions over the next century may be partially thwarted by the responses of fossil fuel suppliers. Current price-cost margins for major reserves are ample, leaving scope for significant price reductions if climate policies reduce demand for fossil fuels through conservation or substitution to clean alternatives. Most models simulating the consequences of climate policies completely disregard these supply responses. As for theoretical models, under standard assumptions they predict such strong supplier responses that climate policies may have no effect on cumulative emissions and may even leave society worse off, suffering damages from global warming sooner and with less time to adapt (the “green paradox”).We contribute to this literature by developing a richer theoretical model that takes account of the different extraction costs and emissons rates of different fossil reserves. We use this model to compare the qualitative effects of four policy options—accelerating cost reductions in the clean backstop technologies, taxing emissions, improving energy efficiency, and a clean fuel blend mandate. We also discuss the consequences of mandating carbon capture and sequestration. All policies can reduce cumulative emissions, but the backstop policy accelerates emissions while conservation policies (energy efficiency or blend mandates) delay emissions. We then calibrate the model using data on costs, reserves, and emissions factors for five major categories of oil. Using this calibrated model, we estimate the interemporal leakage rate—the percentage error in cumulative emissions reductions that would arise if no account is taken of the supply responses of oil producers. We find that conservation policies can have higher intertemporal leakage rates and backstop policies can have lower leakage than an emissions tax. Leakage rates generally decline as the policies become more stringent.

Abstract: Energy efficiency resource standards (EERS) refer to policies that require utilities and other covered entities to achieve quantitative goals for reducing energy use by a certain year. EERS policies generally apply to electricity and natural gas sales and electricity peak demand, though they also cover other energy sources in Europe. Our study aggregates information about the requirements of existing EERS policies for electricity sales in the United States. We convert quantitative goals into comparable terms to compare the nominal stringency of EERS programs across states. EERS programs also differ in their nonquantitative requirements, including flexibility measures, measurement and verification programs, and penalties and positive incentives. We compare the U.S. policies to similar policies in the European Union and discuss important policy issues, including exogenous changes in fuel prices and issues with utility management of energy efficiency programs.

Abstract: Twenty states in the United States have adopted energy efficiency resource standards (EERS) that specify absolute or per¬centage reductions in energy use relative to business as usual. We examine how an EERS compares to policies oriented to meeting objectives, such as reducing greenhouse gas emissions, cor¬recting for consumer error in energy efficiency investment, or reducing peak de¬mand absent real-time prices. If reducing energy use is a policy goal, one could use energy taxes or cap-and-trade systems rather than an EERS. An EERS can be optimal under special conditions, but to achieve optimal goals following energy efficiency investments, the marginal external harm must fall with greater energy use. This could happen if inframarginal energy has greater negative externalities, particularly regarding emissions, than energy employed at the margin.

Abstract: The Clean Air Act has assumed the central role in U.S. climate policy, directing the Environmental Protection Agency to develop regulations governing the emissions of greenhouse gases from existing coal-fired power plants. The cost and environmental effectiveness of policy options depend on abatement costs, the magnitude of emissions reduction opportunities, and the sensitivity of plant utilization. This paper examines the operation of electricity-generating units over 25 years to estimate the marginal costs and potential magnitude of emissions reductions that could result from improvements in their operating efficiency. We find that a 10 percent increase in coal prices causes a 0.3 to 0.9 percent heat rate reduction, broadly consistent with engineering assessments of abatement costs and opportunities. We also find that coal prices have a significant effect on utilization, but that will vary depending on the policy design. The results are used to compare cost-effectiveness of alternative policies.

Abstract: EPA is in the process of regulating U.S. greenhouse gas (GHG) emissions using its powers under the Clean Air Act. The likely next phase of this regulatory program is performance standards under Section 111 of the act for coal plants and petroleum refineries, which the agency has committed to finalize by the end of 2012. Section 111 appears to allow use of flexible, market-based regulatory tools. In this paper, we discuss one such tool, tradable standards. Tradable standards appear to be a legally and politically viable choice for the agency, and evidence suggests they are substantially more cost-effective than traditional performance standards. The paper discusses implementation issues with tradable standards, including categorization, banking, and phased implementation, as well as broader issues with the Section 111 rulemaking process as it relates to state-level GHG regulatory efforts.

Abstract: The American Recovery and Reinvestment Act included more than $90 billion in strategic clean energy investments intended to promote job creation and promote deployment of low-carbon technologies. In terms of spending, the clean energy package has been described as the nation’s “biggest energy bill in history.” To provide a preliminary assessment of the Recovery Act’s clean energy package, this paper reviews the rationale, design, and implementation of the act. The paper surveys the policy principles for clean energy stimulus and describes the process of crafting the clean energy package during the 2008–2009 Presidential Transition. Then, the paper reviews the initial employment, economic activity, and energy outcomes associated with these energy investments and provides a more detailed case study on the Recovery Act’s support for renewable power through grants and loan guarantees. The paper concludes with lessons learned.

Abstract: Commercial and residential buildings are responsible for 42 percent of all U.S. energy consumption and 41 percent of U.S. CO2 emissions. Engineering studies identify several investments in new enegy-efficiency equipment or building retrofits that would more than pay for themselves in terms of lower future energy costs, but homeowners and businesses generally do not have good information about how to take advantage of these opportunities. Energy auditors make up a growing industry of professionals who evaluate building energy use and provide this information to building owners. This paper reports the results of a survey of nearly 500 home energy auditors and contractors that Resources for the Future conducted in summer 2011. The survey asked about the characteristics of these businesses and the services they provide, the degree to which homeowners follow up on their recommendations, and the respondents’ opinions on barriers to home energy retrofits and the role for government. Findings from the survey suggest that the audit industry only partially is filling the information gap. Not enough homeowners know about or understand audits, and the follow-through on recommendations once they do have audits is incomplete. But the survey findings suggest that low energy prices and the high cost of retrofits may be more responsible for these outcomes than failures of information.

Abstract: Promoting energy efficiency (EE) has become a leading policy response to greenhouse gas emissions, energy dependence, and the cost of new generators and transmission lines. Such policies present numerous puzzles. Electricity prices below marginal production costs could warrant EE policies if EE and energy are substitutes, but they will not be substitutes if the energy price is sufficiently high. Using EE savings to meet renewable energy requirements can dramatically increase the marginal cost of electricity. Rejecting "rationality" of consumer energy choices raises doubts regarding cost–benefit analysis when demand curves may not reveal willingness to pay. Decoupling to guarantee constant profit regardless of use contradicts findings that incentive-based mechanisms outperform cost-of-service regulation. Regulators may implement EE policies to exercise buyer-side market power against generators, increasing consumer welfare but reducing overall economic performance. Encouraging utilities to take over potentially competitive EE contradicts policies to separate competitive from monopoly enterprises.

Abstract: We analyze the cost-effectiveness of electric utility rate payer–funded programs to promote demand-side management (DSM) and energy efficiency investments. We develop a conceptual model that relates demand growth rates to accumulated average DSM capital per customer and changes in energy prices, income, and weather. We estimate that model using nonlinear least squares for two different utility samples. Based on the results for the most complete sample, we find that DSM expenditures over the last 18 years have resulted in a central estimate of 1.1 percent electricity savings at a weighted average cost to utilities (or other program funders) of about 6 cents per kWh saved. Econometrically-based policy simulations find that incremental DSM spending by utilities that had no or relatively low levels of average DSM spending per customer in 2006 could produce 14 billion kWh in additional savings at an expected incremental cost to the utilities of about 3 cents per kWh saved.

Abstract: In this paper, we introduce a new top-down approach to modeling the effects of publicly financed energy-efficiency programs on electricity consumption and carbon dioxide emissions. The approach draws on a partial-adjustment econometric model of electricity demand and represents the results of a reverse auction for electricty savings from different levels of public investment. The model is calibrated to recent estimates of the cost-effectiveness of rate payer–funded efficiency programs at reducing electricity consumption. The results suggest that supply curves for conserved electricity are upward sloping, convex, and dependent on policy design and electricity prices. Under the scenarios modeled, electricity savings of between 1 and 3 percent are achievable at a marginal cost of $50 per megawatt hour (MWh) and a corresponding average cost of $25–$35/MWh.

Abstract: This paper examines alternative ways that the value of CO2 emissions allowances created under cap-and-trade policy could be returned to households. One approach (based on principles of economic efficiency) is effectively a “tax shift” that would use revenues from an auction of CO2 emissions allowances to reduce preexisting distortionary taxes. A second approach (based on principles of property rights for common-pool resources), known as cap-and-dividend, would refund allowance value as equal lump-sum cash transfers to households. Economic theory suggests (with some caveats) that a tax shift would be considerably less costly to the overall economy. In contrast, cap-and-dividend provides amplecompensation for low-income households, though it appears to be more costly than other approaches, including perhaps well-designed regulatory policies. A dividend approach might be combined with other policies to provide incentives for households to invest in energy-efficient technologies and thereby lower the costs of the carbon policy.