Getting Innovative Environmental Technology Into the Marketplace:
Where Tax Incentives Can Make the Difference
David B. Goldstein, Ph.D.
Energy Program Co-Director
Natural Resources Defense Council
May 30, 2001
Mr. Chairman and Members of the Committee:
My name is David B. Goldstein and I am Energy Program Co-Director for the Natural Resources Defense Council, a national environmental organization with over 400,000 members. I wish to thank you, Mr. Chairman, and members of the Committee, for convening this hearing on energy efficiency and new technology in a national energy policy and for inviting me to speak. I also want to commend the Chairman for his leadership on S. 207, which would provide desperately needed relief to our overstressed electricity and natural gas grids.
Energy efficiency is a critical piece of any national energy strategy because of the impacts that energy use has on two things that everyone cares about: the environment and their pocketbooks. Energy use accounts for the overwhelming bulk of air pollution problems – problems that are linked to over 60,000 excess deaths per year due to direct causes such as cardiopulmonary disease. Energy production also contributes to water pollution and loss of environmental values such as wildlife protection and recreation.
Energy also costs a lot of money, as virtually all consumers and businesses have become aware over the past year. Even before the recent jumps in energy price, our nation’s energy bill exceeded half a trillion dollars a year – or 6% of GDP. This is much higher than is the case in other industrialized countries, so energy is a competitive drag on the U.S. economy as well as harming household budgets and reducing the bottom line of energy-consuming businesses.
NRDC believes, and we hope members of the committee agree, that the overwhelming purpose of national energy policy should be to minimize the costs of energy services – both direct costs to consumers and costs to the environment – while providing reliably for the energy service needs of the growing economy.
Energy services are qualities like warm buildings in the winter, good lighting in buildings, access to where people want to go in a comfortable manner, and production of consumer and industrial goods. The sole purpose of energy use is to provide energy services – no one enjoys energy use for its own sake.
Energy efficiency means providing the same or better energy services for less energy consumption and cost. Optimum levels of energy efficiency maximize consumers’ and businesses’ well being. In theory, the market encourages everyone to optimize energy efficiency. But in practice, an overwhelming array of market failures and market barriers has prevented the economically attractive level of energy efficiency from occurring naturally: after nearly 30 years of analysis of all sectors in the economy, there is virtually no evidence of any use of energy ever having been optimized without policy intervention.
How far can we go with energy efficiency? Prior to 1973, energy use was growing in parallel with economic output (GDP). Many analysts predicted that this trend would inevitably persist in the future, and numerous forecasts of future energy needs were made based on this premise. In fact, due to energy policy activities at the state, regional, and federal levels, and with some small boost from energy price spikes, energy use per unit of economic output began to decrease after 1973, and is now 42% lower than it was at the first energy crisis. About three quarters of this decline is attributable to energy efficiency improvements.
Additional improvements in energy efficiency beyond the national average occurred in states where strong policy efforts were expended. In California, electricity intensity, which was already 28% below national average in 1975, had declined further to 46% below by 1998. Had this not occurred, California's power crisis of the past two summers would have been far worse.
One of the best examples of how innovative policies have reduced demand for energy is in refrigerators. In the mid-1970’s, the refrigerator was the largest single user of electricity in the home, and aggregate use of electricity for home refrigerators was growing at an annual rate of 9.5%.
If this growth rate had continued up to the present, as DOE and most utilities and their state regulators were expecting at the time, peak demand by refrigerators today would be about 150,000 MW, that’s about one fourth of today’s electric capacity for the nation.
Instead, as a result of state and federal energy policies, including research and development, economic incentives, and six iterations of efficiency standards, the actual level of peak demand will be about 15,000 MW when the refrigerator stock turns over. The difference between actual demand and forecast exceeds the capacity of all U.S. nuclear power. Figure 1 shows the trend of growth and then decline in energy use per refrigerator after World War II.
The most effective policies that have been implemented to improve energy efficiency are:
But these policies alone will not allow the nation to reach a goal of minimizing the cost of energy services. Standards provide a floor for energy efficiency – they require manufacturers to use efficiency technologies that are well known and well understood and therefore can be employed by everyone. Incentive programs can encourage more significant improvements in energy efficiency, but they typically have been limited by the range of technologies that are already available on the marketplace. New innovative ideas that are hard for consumers to find or that have yet to be introduced by manufacturers cannot easily be acquired by incentives established on a state-by-state or regional level.
Advanced levels of energy efficiency can only be achieved by making it worthwhile for manufacturers, vendors, retailers, and consumers all to benefit from the introduction of a new technology.
That’s why the incentives in your bill, Mr. Chairman, S. 207, are so critical to a comprehensive national energy policy. These types of incentives, provided through the tax system, offer a key missing piece of the solution to the problem of harnessing American ingenuity to improve energy efficiency.
S. 207 provides tax incentives for energy efficiency in buildings. Buildings are an often-overlooked source of energy waste. They consume over a third of U.S. energy use and account for about a third of total air pollution in the United States – almost twice as much as cars. Energy use in buildings can be cut in half or better using cost-effective technologies that are available to those consumers that are willing to look hard.
But in practice most of those technologies simply are not options for energy users, whether consumers or businesses, because they are too hard to find. Economic incentives can cause the entire chain of production and consumption, from the manufacturer to the contractor or vendor to the consumer, to accept new technologies rapidly. In the few cases where utility programs have been consistent enough across the country and long-lasting enough, new products have been introduced that have become or will become the most common product in the marketplace, with reductions in energy use of 30%-60%.
The policies embodied in S. 207 are built on success stories like these.
Manufacturers have pointed out that in order to introduce new technologies that cost more and that are perceived to be risky, they need the assurance that the same product can be sold throughout the country and that the financial incentives will be available for enough time to make it worth investing in production. S. 207 does this by providing nationally uniform performance targets for buildings and equipment that will be eligible for tax incentives for 6 full years.
When the public interest community first began discussions with your staff, Senator Smith, and with committee staff, over a year ago, we felt that the approach that has been embodied into S. 207 was simply good economic and environmental policy: a government action that could promote economic growth and protect the environment at the same time. Subsequently, we have seen how this bill could be the major part of a solution to some very real economic and environmental problems associated with energy that have emerged over the past two years.
Let’s start with the problem of electric reliability. Not only in California and the West, but here in New Hampshire as well, we are facing the risk of electrical blackouts and/or excessively high electricity prices this summer and next. Regions that are confronting these problems are trying to move forward aggressively both on energy efficiency programs and on power plant construction. But the lead times for most actions on the supply side are far too long to provide a solution. And demand-side approaches attempted on a state-by-state level are much less effective than coordinated national activities.
Here, S. 207 could be a critical piece of a national solution. Air conditioners, for example, represent about 30% of summertime peak electric loads. Air conditioners that use a third less power can be purchased today, but they are not produced in large enough quantities to make a difference to peak load. If incentives are made available, manufacturers could begin to mass-produce these products in a matter of months, not years. Mass production and increased competition for tax incentives will drive prices sharply lower, so the incentives will be self-sustaining in the long-term. And with 5 million air conditioners being sold every year, a sudden increase in energy efficiency could have a significant effect in balancing electricity supply and demand even after less than a year.
Another peak power efficiency measure with a very short lead time is installing energy-efficient lighting systems – either new or retrofit – in commercial buildings. Some 15% of electrical peak power results from lighting in commercial buildings. Efficient installations, such as those NRDC designed and installed in our own four offices, can cut peak power demand by over two-thirds while improving lighting quality. Lighting systems are designed and installed with a lead time of months, so incentives for efficient lightings as provided in S. 207 could begin to mitigate electric reliability problems as soon as next summer.
The second major new problem is the skyrocketing cost of natural gas, which caused heating bills throughout the country to increase last winter. Improved energy efficiency can cut gas use for the major uses – heating and water heating – by 30%-50%. Much of this potential could be achieved in the short term, because water heaters need replacement about every ten years, and are the second largest user of natural gas in a typical household (and largest gas user in households living in efficient homes or in warm areas).
These types of quick-acting incentives help consumers in two different ways: first, they provide new choices that are not now available in practice for families and businesses that want to cut their own energy costs while obtaining tax relief. But they also help the non-participants, because reduced demand cuts prices for everyone.
A comprehensive energy policy aimed at minimizing the cost and environmental impacts of providing energy services for a growing economy should, we believe, be a consensus goal. While we do not yet know what the full set of measures that would be contained in a national energy plan based on least-cost are, and thus, do not yet know the full range of policy measures that would be needed to achieve such a vision, it is evident that energy efficiency will play a more important role in the next 30 years as it has in the past 30, when it was the nation’s largest source of new energy.
We also know that today’s energy efficiency policies, relying primarily on efficiency regulations at the state and federal levels and on regionally-based economic incentives, are not sufficient to achieve the least-cost goal. At least one missing piece of the policy mix is the provision of long-term, nationally-uniform incentives for quantum leaps forward in technology.
The Smith Bill, S. 207, fills this gap for energy uses exceeding a third of the nation’s entire energy consumption, and an even higher fraction of its energy bill.
 Energy Information Administration’s “Energy Overview” data for 1997 show $567 billion spent nationwide for energy, while GDP was about $8.5 billion.
 American Council for an Energy Efficient Economy, Fact Sheet on Energy Efficiency Progress and Potential, 2001.
 Source: A.H. Rosenfeld. Testimony Before California State Committee on Environmental Quality.
 Exponential extrapolation of past trends was not an unrealistic assumption from either of two perspectives. First, in the mid-1970’s, when the turnaround from growth to decline in energy consumption for refrigerators began, virtually every utility in the country, backed by their regulatory agencies and Department of Energy forecasters, was assuming that overall residential electricity use would continue to grow at about the same 9.5% rate as it had grown during the prior decades. The total growth in electricity consumption for refrigerators, considering increasing sales of the product, was also about 9.5%. Suggesting that this rate would come down in the future, as the author did, was highly controversial.
Second, of the 6.1% annual growth in energy consumption per refrigerator, one-third of the increase was due to decreases in efficiency, apparently from cost-cutting, rather than from growth in size or features as shown in Figure 1 (both of which have tended to plateau since the 1970s).