[Federal Register Volume 59, Number 194 (Friday, October 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24924]


[[Page Unknown]]

[Federal Register: October 7, 1994]


                                                   VOL. 59, NO. 194

                                            Friday, October 7, 1994

DEPARTMENT OF ENERGY

Office of Energy Efficiency and Renewable Energy

10 CFR Part 430

[Docket No. CE-RM-93-801]
RIN 1904-AA47

 

Energy Conservation Program for Consumer Products: Supplemental 
Advance Notice of Proposed Rulemaking Regarding Energy Conservation 
Standards for Three Types of Consumer Products

AGENCY: Office of Energy Efficiency and Renewable Energy, Department of 
Energy.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: On September 8, 1993, the Department of Energy published an 
Advance Notice of Proposed Rulemaking (58 FR 47326) regarding energy 
conservation standards for three types of consumer products. In that 
Advance Notice, the Department stated that it intended to consider more 
explicitly environmental and energy security externalities associated 
with alternative energy efficiency standards. Specifically, the 
Department expressed the intention to monetize the values of any 
externalized benefits (or costs) if a sound analytic basis could be 
found.
    The purpose of this notice is to solicit public comments on whether 
and how the Department should evaluate and consider environmental and 
energy security externalities that may be associated with alternative, 
candidate energy efficiency standards. It has three specific aims: 
First, it requests focused public input on specific questions related 
to the development and use of environmental and energy security 
externality values. Second, it outlines the Department's preliminary 
thinking in several of these issue areas in order to provide 
stakeholders with maximum available information. Finally, it solicits 
public identification of other issues relevant to the application of 
externality values in the context of appliance standards, so that these 
may be considered in appliance standards rulemakings.

DATES: Written comments in response to this Supplemental Advance Notice 
of Proposed Rulemaking must be received by DOE by December 6, 1994.
    Oral views, data, and arguments may be presented at the public 
hearing on the issues raised herein to be held in Washington, DC, on 
November 17, 1994. Requests to speak at the hearing must be received by 
the Department no later than 4 p.m., November 4, 1994. Copies of 
statements to be given at the public hearing must be received by the 
Department no later than 4 p.m., November 10, 1994.
    The length of each presentation is limited to 20 minutes.

ADDRESSES: Written comments, oral statements, requests to speak at the 
hearing, and requests for speaker lists are to be submitted to: U.S. 
Department of Energy, Office of Energy Efficiency and Renewable Energy, 
EE-431, Energy Conservation Program for Consumer Products, Docket No. 
CE-RM-93-801, Room 5E-066, Forrestal Building, 1000 Independence 
Avenue, SW., Washington, DC 20585, (202) 586-9127.
    The hearing will begin at 9:30 a.m., on November 17, 1994, and will 
be held at the U.S. Department of Energy, Forrestal Building, Room 1E-
245, 1000 Independence Avenue SW., Washington, DC.
    Copies of the transcript of the public hearing and public comments 
received may be read at the DOE Freedom of Information Reading Room, 
U.S. Department of Energy, Forrestal Building, Room 1E-190, 1000 
Independence Avenue SW., Washington, DC 20585, (202) 586-6020 between 
the hours of 8 a.m. and 4 p.m., Monday through Friday, except Federal 
holidays.
    For more information concerning public participation in this 
rulemaking proceeding, see section VI, ``Public Comment Procedures,'' 
of this notice.

FOR FURTHER INFORMATION CONTACT:

 Dr. Barry P. Berlin, U.S. Department of Energy, Office of Energy 
Efficiency and Renewable Energy, Forrestal Building, Mail Station EE-
43, 1000 Independence Avenue SW., Washington, DC 20585, (202) 586-9127
 Eugene Margolis, Esq., U.S. Department of Energy, Office of General 
Counsel, Forrestal Building, Mail Station GC-72, 1000 Independence 
Avenue SW., Washington, DC 20585, (202) 586-9507

SUPPLEMENTARY INFORMATION:

I. Introduction
    a. Authority
    b. Background
    c. The potential impact of externalities on the determination of 
appliance efficiency standard levels.
    d. The structuring of the Department's analysis of 
externalities.
II. Crosscutting Issues
    a. Relationship to existing environmental regulation and 
existing uses of externality values in the resource planning 
process.
    b. The role of damage-based and cost-based measures in the 
development of externality values.
    c. Utility pricing and incremental externality values.
III. Environmental Externalities
    a. Sulfur dioxide
    b. Nitrogen dioxide
    c. Carbon dioxide
IV. Energy Security Externalities
V. Review under Executive Order 12866
VI. Public Comment Procedures
    a. Participation in rulemaking
    b. Written comment procedures
    c. Public hearing

I. Introduction

a. Authority

    Part B of Title III of the Energy Policy and Conservation Act, Pub. 
L. 94-163, as amended by the National Energy Conservation Policy Act, 
Pub. L. 95-619, the National Appliance Energy Conservation Act, Pub. L. 
100-12, and the National Appliance Energy Conservation Amendments of 
1988, Pub. L. 100-357,1 created the Energy Conservation Program 
for Consumer Products other than Automobiles (Program). The consumer 
products subject to the Program (often referred to hereafter as 
``covered products'') are: Refrigerators, refrigerator-freezers, and 
freezers; dishwashers; clothes washers; clothes dryers; water heaters; 
central air conditioners and central air-conditioning heat pumps; 
furnaces; direct heating equipment; television sets; kitchen ranges and 
ovens; room air conditioners; fluorescent lamp ballasts; and pool 
heaters; as well as any other consumer products classified by the 
Secretary of Energy (Secretary) (section 322). To date, the Secretary 
has not so classified any additional products.
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    \1\Part B of Title III of the Energy Policy and Conservation 
Act, as amended by the National Energy Conservation Policy Act, the 
National Appliance Energy Conservation Act, and the National 
Appliance Energy Conservation Amendments of 1988, is referred to in 
this Supplemental Advance Notice of Proposed Rulemaking as the 
``Act.'' Part B of Title III is codified at 42 U.S.C. 6291 et seq. 
Part B of Title III of the Energy Policy and Conservation Act, as 
amended by the National Energy Conservation Policy Act only, is 
referred to as the National Energy Conservation Policy Act.
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    Under the Act, the Program consists essentially of three parts: 
testing, labeling, and mandatory energy conservation standards. DOE, in 
consultation with the National Institute of Standards and Technology, 
is required to amend or establish new test procedures as appropriate 
for each of the covered products (section 323). The purpose of the test 
procedures is to provide for test results that reflect the energy 
efficiency, energy use, or estimated annual operating costs of each of 
the covered products (section 323(b)(3)).
    The Federal Trade Commission is required by the Act to prescribe 
rules governing the labeling of covered products for which test 
procedures have been prescribed by DOE (section 324(a)). These rules 
require that each particular model of a covered product bear a label 
that indicates its annual operating cost and the range of estimated 
annual operating costs for other models of that product class (section 
324(c)(1)). At the present time, there are Federal Trade Commission 
rules requiring labels for the following products: room air 
conditioners, furnaces, clothes washers, dishwashers, water heaters, 
freezers, refrigerators and refrigerator-freezers, central air 
conditioners and central air-conditioning heat pumps, and fluorescent 
lamp ballasts. 44 FR 66475, November 19, 1979; 52 FR 46888, December 
10, 1987; and 54 FR 28031, July 5, 1989.
    For each of 12 of the covered products, the Act prescribes an 
initial Federal energy conservation standard (section 325(b)-(h)). The 
Act establishes effective dates for the standards in 1988, 1990, 1992 
or 1993, depending on the product, and specifies that the standards are 
to be reviewed by DOE within three to ten years, also depending on the 
product (Ibid.). After the specified three- to ten-year period, DOE may 
promulgate new standards for each product; however, the Secretary may 
not prescribe any amended standard that increases the maximum allowable 
energy use or decreases the minimum required energy efficiency of a 
covered product (section 325(l)(1)).
    With regard to television sets, the Act allows DOE to prescribe an 
applicable standard. (section 325(i)(3)).
    Three products (central air conditioners and central air-
conditioning heat pumps; furnaces; and refrigerators, refrigerator-
freezers and freezers) are the subject of this rulemaking proceeding. 
For central air conditioners and central air-conditioning heat pumps, 
the Act directs DOE to review each legislated standard for possible 
amendment and to issue final rules as follows: for the seasonal energy 
efficiency ratio, no later than January 1, 1994, for units manufactured 
after January 1, 1999; and for the heating seasonal performance factor, 
no later than January 1, 1994, for units manufactured after January 1, 
2002. For furnaces, the Act directs DOE to review the previously 
established standard for small gas furnaces (54 FR 47916, November 17, 
1989), the pending standard for mobile home furnaces, and the 
legislated standards for all other covered furnaces for possible 
amendment and to issue final rules no later than January 1, 1994, for 
units manufactured after January 1, 2002. For refrigerators, 
refrigerator-freezers, and freezers, the Act directs DOE to review the 
previous final rule, published November 17, 1989, for possible 
amendment and to issue final rules no later than November 17, 1994, for 
units manufactured after January 1, 1998.
    Any new or amended standard is required to be designed so as to 
achieve the maximum improvement in energy efficiency that is 
technologically feasible and economically justified (section 
325(l)(2)(A)).
    Section 325(l)(2)(B)(i) provides that before DOE determines whether 
an energy conservation standard is economically justified, it must 
first solicit comments on the proposed standard. After reviewing 
comments on the proposal, DOE must then determine that the benefits of 
the standard exceed its burdens based, to the greatest extent 
practicable, on a weighing of the following seven factors:
    (1) The economic impact of the standard on the manufacturers and on 
the consumers of the products subject to such standard;
    (2) The savings in operating costs throughout the estimated average 
life of the covered product in the type (or class) compared to any 
increase in the price, initial charges, or maintenance expenses for the 
covered products that are likely to result directly from the imposition 
of the standard;
    (3) The total projected amount of energy savings likely to result 
directly from the imposition of the standard;
    (4) Any lessening of the utility or the performance of the covered 
products likely to result from the imposition of the standard;
    (5) The impact of any lessening of competition, as determined in 
writing by the Attorney General, that is likely to result from the 
imposition of the standard;
    (6) The need for national energy conservation; and
    (7) Other factors the Secretary considers relevant.
    Section 327 of the Act addresses the effect of Federal rules 
concerning testing, labeling, and standards on State laws or 
regulations concerning such matters. Generally, all such State laws or 
regulations are superseded by the Act (section 327(a)-(c)). Exceptions 
to this general rule include the following: (1) State standards 
prescribed or enacted before January 8, 1987, and applicable to 
appliances produced before January 3, 1988, may remain in effect until 
the applicable energy conservation standard begins (section 327(b)(1)); 
(2) State procurement standards which are more stringent than the 
applicable Federal standard (section 327(b)(2) and (e)) and certain 
building code requirements for new construction, if certain criteria 
are met, are exempt from Federal preemption (sections 327(b)(3) and 
(f)(1)-f(4)); (3) State regulations banning constant burning pilot 
lights in pool heaters; and (4) State standards for television sets 
effective on or after January 1, 1992, may remain in effect in the 
absence of a Federal standard for such products (sections 327(b)(6) and 
(c)).
    The Act directs DOE to publish an Advance Notice of Proposed 
Rulemaking in advance of DOE consideration of prescribing a new or 
amended standard.

b. Background

    In the Advance Notice to which this is a supplement, the Department 
indicated its intention more explicitly to consider environmental and 
energy security externalities associated with alternative energy 
efficiency standards. The Department also noted that it would attempt 
to establish monetary values for externalities if a sound analytical 
basis could be found for doing so.\2\ If the Department finds that a 
sound analytical basis exists, externalities may be incorporated in its 
analysis of the net national benefits of alternative levels for the 
appliance efficiency standards covered by this rulemaking.
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    \2\Energy Conservation Program for Consumer Products, Advance 
Notice of Proposed Rulemaking Regarding Energy Conservation 
Standards for Three Types of Consumer Products, 58 FR 47326, 47333, 
September 8, 1993.
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    Externalities arise when the production or consumption of goods and 
services imposes costs or confers benefits on members of society 
external to the transaction that are not reflected in market prices. 
Environmental externalities reflect the net national reductions in the 
adverse health effects or other damages associated with a reduction in 
emissions of pollutants due to reductions in energy use as appliance 
efficiency is increased. Energy security externalities reflect the net 
national reductions in energy security vulnerability associated with 
reduced reliance on external energy sources.
    Many comments received in response to an earlier ANOPR in the 
appliance standards program3 indicated a high level of public 
interest in this issue.
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    \3\Energy Conservation Program for Consumer Products; Advance 
Notice of Proposed Rulemaking Regarding Energy Conservation 
Standards for Nine Types of Consumer Products, 55 FR 39624, 
September 28, 1990.
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     The American Council for an Energy Efficient Economy 
(ACEEE) suggested that DOE account explicitly for environmental costs 
in its economic analysis. (ACEEE, No. 6 at 6).\4\ In addition, Public 
Citizen stated that the Department should include in its analyses all 
external costs and benefits, e.g., environmental quality, national 
security, and reduced energy imports. (Public Citizen, No. 7 at 4).
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    \4\In the Appliance Standards rulemaking record, comments are 
assigned docket numbers; the second number represents the page 
number from the submittal where the issue discussed may be found.
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     The Sierra Club stated that the difference between 
``Consumer Analysis'' and ``Life Cycle Cost Analysis'' is difficult to 
ascertain. They urged DOE to evaluate, as part of the Consumer 
Analysis: (a) Environmental external costs; and (b) national security 
and balance of payments costs of increased/decreased oil consumption. 
(Sierra Club, No. 43 at 2).
     The Ohio Office of the Consumers Council (OOCC) said that 
the consumer and utility analyses should include monetization of 
externalities (environmental and security). Environmental externalities 
include sulfur oxides, carbon monoxide, carbon dioxide, nitrogen 
oxides, particulate, and other air, water, and land use impacts of 
energy production and use. Such considerations should be consistent 
with current trends in state utility regulations. (OOCC, No. 60 at 2).
    Recognizing that the specification of monetary values for such 
environmental and energy security externalities is a complex analytical 
effort, the Department is now supplementing its original Advance Notice 
for the three-product rulemaking. This supplement provides an 
indication of the Department's intent in this area, identifies a range 
of specific issues for public comment, and solicits identification of 
additional relevant issues.
    As indicated in the 1993 Advance Notice, the Department will 
attempt to develop analytically sound estimates of the values of energy 
and environmental externalities. Provided that such values can be 
calculated, the Department intends to use them in the analyses 
supporting the proposed and final rules establishing the standards for 
the products covered by this notice. Estimates of such externalities 
would be considered in conjunction with the estimates of the total net 
national benefits (or costs) of the standard, rather than in the 
analysis of consumer life-cycle costs. The life-cycle cost analysis is 
intended to estimate the actual cost impacts on consumers. So long as 
externalities are not internalized, individual consumers would not 
incur these benefits (or costs) directly.
    The Department believes that the relationship between price and 
marginal cost, including the marginal cost of emission controls, bears 
significantly on the size of the incremental adjustments to be made in 
the analysis in order to incorporate environmental and energy security 
externalities into the assessment of net national benefits. The 
Department will consider this relationship in determining the monetary 
values (if any) that should be placed on the external or marginal 
environmental and energy benefits likely to result from appliance 
efficiency standards. The consideration of marginal costs in this 
context also raises the question of whether the Department should use 
marginal electricity prices, rather than estimates of average retail 
prices, for the calculation of net national benefits. The Department 
invites comments on these issues.
    c. The potential impact of externalities on the determination of 
appliance efficiency standard levels.
    As noted above, the net national benefits estimated by the 
Department to result from appliance efficiency standards have, in the 
past, excluded environmental and energy security externalities. The 
Department recognizes that the approach taken for including these 
benefits in economic analyses of alternative appliance standards may 
vary, depending on issues and variables that are specific to each 
standard under consideration.
    Any estimates of environmental externalities would reflect ranges 
of uncertainties and be considered with other national benefits 
associated with appliance efficiency standards. The consideration of 
externality values may or may not influence the appliance efficiency 
standards selected for one or more appliances, depending on the 
quantitative externality estimates and their relationship to the costs 
of higher efficiency and other elements of the analysis.
    d. The structure of the Department's analysis.
    The Department intends to adopt a consistent approach in the 
treatment of externalities and the development of externality values 
throughout these rulemakings. Therefore, this analysis starts with 
consideration of crosscutting issues that are likely to bear on all 
standards and all types of externalities. This analysis of crosscutting 
questions provides a framework for an analysis specific to each type of 
externality.
    The following discussion is framed around a series of focused 
issues for public comment. For convenience, the main issues addressed 
are numbered consecutively throughout the entire notice. The numbered 
set provides a convenient summary of the Department's current view 
regarding the issues that bear on the development and use of 
externality values in the appliance standards analysis.
    Issues related to toxins, solid waste, and discharges affecting 
waste quality are not discussed in detail in this notice. However, the 
Department invites comment on the potential importance of these 
emissions pathways to the determination of externality values. Comments 
that are structured so as to address the same generic and externality-
specific issues raised in this notice, while also identifying other 
issues unique to particular pollutants or media, would be particularly 
helpful.
    Finally, it is worth emphasizing that the Department's current 
positions on many issues outlined below is not yet firm. Responses to 
issues in this supplemental Advanced Notice of Proposed Rulemaking 
could substantially alter the Department's approach as the rulemaking 
progresses. Parties are also encouraged to raise, and comment on, 
additional issues related to evaluating externalities and the use of 
such estimates in determining appliance standard levels.
II. Crosscutting Issues

a. Relationship to Existing Environmental Regulation and Existing Uses 
of Externality Values in the Resource Planning Process

    Issue I: The relationship between existing environmental 
regulations or the use of externality values in the resource planning 
process and the use of externality values in setting appliance 
standards.
    Based on its current information, the Department does not believe 
that existing programs of environmental regulation or existing uses of 
externality adders in the resource planning process preclude the use of 
externality values in analyses considered in setting appliance 
standards.
    The relationship between externality adders and environmental 
regulation has been extensively studied. One key finding is that proper 
use of externality adders does not turn on whether there is 
``overcontrol'' or ``undercontrol'' in existing environmental 
regulation. Rather, taking the environmental control regime as given, 
the use of externality adders can improve net national welfare by 
moving ``private'' decisionmaking within the existing regulatory regime 
closer to ``social'' decisionmaking. For example, even if there is 
``overcontrol'', it is still desirable that the external impacts of 
differences in residual damage resulting from differing emissions 
levels associated with alternative energy supply and end-use efficiency 
options be reflected in private decision-making.
    Based on its current understanding, the Department also believes 
that existing uses of externality values in the resource planning 
process do not present a barrier to the use of externality values in 
setting appliance standards. The former are largely focused on bringing 
social costing considerations into capacity planning decisions, while 
the latter is focused on reducing marginal electricity demand. The 
Department also notes that the use of externality values in the 
capacity planning process is far from universal. According to a recent 
report of the Consumer Energy Council of America Research Foundation 
(July 1993) only seven States and the Bonneville Power Administration 
use quantitative externality values.
    Issue 2: The impact if any, of existing environmental regulations 
on the determination of externality values for use in the appliance 
standards analysis.
    Based on its current understanding, the Department believes that 
the emission-reducing effects of existing programs will affect 
externality values in two distinct ways.
    First, the form of current environmental regulations can influence 
the net emissions impact of changes in energy use associated with 
alternative appliance standards. This net emissions impact reflects 
both the direct impact of changes in energy use--emissions associated 
with changes in primary energy either directly or to generate 
additional electricity--and indirect impacts that may arise due to 
emission caps, offset requirements, non-attainment rules, or other 
features of existing regulations.
    For example, if regulation takes a form that fully ``internalizes'' 
environmental externalities on all of the relevant margins, including, 
in the case of electricity, not only utility decisions related to 
capacity, but those related to dispatch and additions to capacity, as 
well as consumer demand decisions, the role for a supplemental 
externality value is difficult to identify. An emission tax equal to 
marginal damage that was reflected in the market price is one example 
of a policy instrument (albeit not one in widespread use) that would 
align private and social decision-making on all three margins.
    Second, current regulatory programs, whatever their form, have a 
significant influence on ambient concentrations of pollutants. In 
general, the marginal damage associated with changes in net emissions 
due to alternative appliance standards is sensitive to base level of 
pollutant loading.
    The Department notes that existing programs, notably implementation 
of the Clean Air Act Amendments of 1990, could result in significant 
changes in emissions loadings, and therefore change marginal damages, 
before the standards promulgated pursuant to this rulemaking take 
effect. Economic growth over time would, in itself, tend to have the 
opposite effect. The Department is currently considering how best to 
assess the marginal damages that should be associated with any 
variation in emissions due to alternative appliance standards under 
these changing circumstances.
    Issue 3: The geographic scope of environmental externalities that 
will be considered within the analysis.
    Environmental externalities associated with energy-related 
emissions arise on all geographic scales. For example, attainment of 
ambient air quality standards for criteria pollutants is assessed at 
the level of an air quality control region, generally a county or 
regional metropolitan area airshed. Concentrations of the criteria 
pollutants Nitrous Oxide (NOX), Sulfur Oxide (SOX), and 
ozone, the latter for which non-attainment remains a widespread 
problem, may be influenced by emissions of Volatile Organic Compounds 
(VOCs), NOX and SOX from the energy sector.
    Acid precipitation, for which NOX and SOX emissions from 
the utility sector are important precursors, is a pollution issue in 
which regional transport plays a major role. In some parts of the 
country, the same is also true for smog.
    Some issues involving energy-related emissions can even transcend 
national boundaries. Increasing attention has turned to the possibility 
of climate change due to increasing atmospheric concentrations of 
greenhouse gas (GHG) emissions. Carbon dioxide, primarily from the 
combustion of fossil fuels, is the single most important greenhouse 
gas. Because atmospheric concentrations are driven by global emissions 
trends, concern with greenhouse gas emissions is truly global in 
nature.
    The Department believes that emissions impacts on all geographic 
scales are relevant to the development of externality values for use in 
the context of this rulemaking. However, because appliance efficiency 
standards are implemented at the national level, environmental 
externalities should be evaluated from a net national perspective. 
Thus, for example, based on our current understanding, if variation in 
a standard increases environmental damage in some areas while reducing 
it in others, only the change in net damage to the nation would be 
relevant to the comparison of alternative standards.

b. The Role of Damage-based and Cost-based Measures

    Issue 4: The role of damage-based and cost-based measures in the 
development of externality values.
    The Department believes that both types of measures may play a role 
in estimating the net national benefits of selecting alternative energy 
efficiency standards. The Department does not view itself as facing a 
choice between damage-based and cost-based measures; rather, different 
measures are applicable in different cases. Three different cases are 
described below.
    Regardless of which case applies, in all cases the Department's aim 
is to use economic analyses to quantify the change in net national 
benefits attributable to different appliance efficiency standards.
    Case 1: Changes in the efficiency standard selected will change 
national emission levels.
    In this case, selecting a more energy-efficient standard will 
reduce emissions into the environment. The Department believes that 
damage-based measures are the preferred means of valuing the external 
effects of these reductions. Damaged-based estimates are a direct 
measure of the external effect of variations in emissions levels. 
Reductions in damage due to reduced emissions could encompass reduced 
human morbidity or illness, reduced property damage, and/or improved 
environmental resources.
    The Department recognizes that, for many pollutants, the literature 
on the damages caused by additional emissions is not well developed. 
When information on damages is lacking, the Department may consider the 
use of information related to the costs of emissions reduction in its 
effort to values externalities. The rationale for this approach is that 
control costs convey information about social willingness-to-pay for 
emissions reduction. If legislative and regulatory actions to limit 
emissions were economically rational (i.e., control measures were 
adopted in strictly increasing order of marginal cost, stopping at the 
point where marginal control cost and marginal benefits were equated), 
marginal control costs would provide an indirect measure of marginal 
damages. It is generally recognized, however, that actual regulatory 
practice often diverges significantly from these conditions. Therefore, 
the Department proposes to consider the use of control cost information 
to estimate externality values in situations where changes in 
efficiency standards affect emission levels only in those cases where 
direct damage information is unavailable.
    Case 2: The pollutant is subject to a binding emissions cap and 
changes in the efficiency standard selected will not change national 
emission levels.
    With a binding, national emissions cap in place, the aggregate 
level of emissions will not be affected by the appliance efficiency 
standard selected. Because of the cap, there is no net change in 
emissions and, therefore, there are usually no environmental 
externalities.
    Although in the case of an emissions cap there is usually no net 
environmental change on a national level, and therefore no external 
environmental effect, the level of appliance efficiency standard 
selected may affect the net national cost of meeting the emissions cap. 
For example, such a situation could arise from the need to meet 
progress requirements under the Clean Air Act Amendments of 1990. In 
such a case, adoption of a less stringent efficiency standard could 
trigger adjustments in the State Implementation Plan to impose 
additional controls on other sources to compensate for higher emissions 
from electricity generation or fuel combustion. If a more stringent 
appliance standard were adopted, States might avoid the imposition of 
additional controls on other parties.
    The Department seeks comments on whether and how the net change in 
environmental control costs attributable to variation across 
alternative appliance standards should be included as an external 
effect. In this regard, DOE notes that the effect on control costs of 
lower energy demand resulting from a more stringent appliance standard 
will vary according to the structure of pre-existing regulatory 
programs. In the case of sulfur dioxide, for example, control 
obligations of each emission source will remain fixed, but total 
compliance costs will fall. In the case of NOX and of VOCs, 
however, lower energy demand could reduce the extent to which State 
Implementation Plans must ratchet down control requirements or expand 
the set of sources subject to emissions controls. The Department 
solicits comment as to whether it is appropriate to differentiate these 
two situations, and how to calculate appropriate values of net external 
cost savings.
    It is worth noting that a binding national emissions cap may become 
non-binding over time, for example, through technology improvements.
    Case 3: The pollutant is subject to regional emission caps and 
changes in the efficiency standard selected will change emission levels 
in some areas of the country, but not others.
    For situations that fall into this category, DOE would propose to 
use a combination of the previous two cases for computing external 
effects. Comments on how to combine these two approaches would be 
particularly helpful.
    Issue 5: The use of cost information to provide a basis for 
determining society's willingness-to-pay for emissions reduction.
    As noted above, the preferred method for computing damages from a 
change in emissions is to rely on direct information from damage-based 
studies. When damage-based studies are not available, however, the 
Department will consider using control cost information to develop 
indirect estimates of externality values.
    The Department notes that existing environmental programs may 
embody an extremely wide range of marginal costs for emission 
reductions for the same pollutant. Costs within existing programs may 
vary by an order of magnitude or more across regions, and even across 
sources in a given region. For example, some areas have failed to 
implement advanced inspection and maintenance programs costing $100 per 
ton, while choosing to implement other standards to reduce the same 
pollutants costing $3,000 to $10,000 per ton. One issue is whether the 
cost of the most expensive option adopted, the least expensive option 
rejected, or some other value between the two should be considered as 
most representative of revealed societal willingness-to-pay for an 
emissions reduction.
    Externality values used in state resource planning processes may 
provide another expression of revealed willingness-to-pay for emissions 
reductions. The Department recognizes that the values used in resource 
planning processes are not actually ``paid'' by either consumers or 
utilities. However, the use of these values appears to be directly 
analogous to that contemplated by the Department in the setting of 
appliance standards. As noted above, only seven states applied monetary 
externality values as of July 1993. Other jurisdictions applied 
qualitative externality values or no such values at all. If externality 
values used by state regulators were to be considered as an expression 
of willingness-to-pay, the Department would need to develop a national 
average measure that fairly characterizes a widely disparate set of 
policies across the fifty states. The Department now believes that any 
such average should reflect differences in the size of residential 
electricity markets across states. We solicit comment and suggestions 
regarding how averaging across different policy types could be 
implemented.
    Another issue related to the possible use of externality values 
from the resource planning process is that some states have applied 
them in a manner that allows for the application of offsets for some or 
all pollutants. With offsets, sources can reduce the quantity of 
emissions to which externality values are applied by securing cost-
effective emissions reductions (or emissions sequestration), often at a 
cost that is far below the official externality value. In such cases, 
the product of actual emissions and the official externality value 
would significantly overstate the ``effective'' externality adjustment 
actually used in the planning process. The Department is considering 
how, if at all, offset policies in the application of ``official'' 
externality values in the resource planning process bear on the 
relevance of these values to the setting of appliance standards, where 
offset opportunities would not be available.
    Issue 6: The role of damage assessments implicit in official 
decisions, such as the setting of ambient air quality standards on 
damage estimates used in the appliance standards analysis.
    The Department notes that the Environmental Protection Agency (EPA) 
and other Federal agencies have the statutory responsibility to 
establish standards that reflect their assessment of damages from 
environmental externalities. For example, EPA is required to set 
primary ambient air quality standards at levels that protect the public 
health, including the health of sensitive populations, with an adequate 
margin of safety.
    On the one hand, the Department could rely on existing standards in 
determining that emissions that do not contribute to a standards 
violation do not impact human health in any way. Such reliance would 
not, of course, preclude the finding of other types of environmental 
externalities, such as ecosystem or crop damages, for emissions that do 
not contribute to standards violations.
    Alternatively, the Department, recognizing that appliance standards 
promulgated today will have their primary effect five to ten years into 
the future, and that processes for setting environmental standards 
often engender significant lags, might wish to consider studies 
pointing to adverse health effects at concentrations below currently 
applicable standards in assessing health damages. How the Department 
could decide which evidence is credible and relevant without 
duplicating the review process for setting environmental standards, 
which is clearly infeasible in terms of resource requirements, is an 
open issue.

C. Utility Pricing and Incremental Externality Values

    Issue 7: The impact of the utility sector pricing practices on the 
use of externality adders in the appliance standards analysis.
    State utility regulatory commissions, motivated by the historical 
natural monopoly features of electric and natural gas production, 
transportation, and distribution systems (although production systems 
are now increasingly seen as allowing for competition), generally set 
regulated prices for electricity based on embedded rather than marginal 
cost. Based on its present understanding, the Department believes that 
the relationship between price and marginal cost can have a major 
bearing on the application of externality values in setting appliance 
standards.
    Some background is helpful. In the absence of externalities, the 
theoretical economic conditions for social welfare maximization are met 
when price equals marginal cost (a pricing condition enforced by 
competition in perfectly competitive industries) and each consumer sets 
demand to equate this marginal cost with his/her own marginal private 
benefit (or marginal utility). With externalities, this private market 
solution diverges from the necessary conditions for a social optimum 
because external costs imposed on others are not reflected in decision-
making. An appropriate externality tax or adder can move private 
decision-making towards the social optimum.
    Within this context, consideration of the effects of a gap between 
price and marginal cost on the size of incremental externality values 
is straightforward. Suppose, for example, that the price charged to 
end-users exceeds the marginal private cost of producing and delivering 
electricity (or natural gas) to them. Then, in terms of private 
decision-making, the positive gap by which price exceeds marginal cost 
would have the same effect as a tax in reducing electricity consumption 
(and, implicitly, the emissions and the environmental externalities 
associated with production to meet incremental demand).
    Because a positive difference between price and marginal cost 
functions as if it were a tax, it bears significantly on the size of 
the additional externality adder the Department could justifiably 
employ when calculating the net national benefit of alternative 
standards. For example, if the price of a marginal kilowatt were to 
exceed its marginal cost by an amount equal to the value of the 
marginal externality damage, the pricing distortion in utility markets 
and the externality would together create a situation where utility-
customer decision-making would satisfy the marginal conditions for 
social optimality without any further adjustments. An additional 
externality adder in this situation would move away from the alignment 
of the private and social decision-making problems that motivates 
concern with externalities in the first place. Based on this reasoning, 
DOE believes that application of an additional externality adder in any 
situation where the price of a marginal kilowatt exceeds marginal cost 
by more than the value of the marginal externality damage would be 
inconsistent with the objective of maximizing net national benefits. In 
fact, for this latter case, one can envision arguments in favor of 
applying ``subtractors'' to utility rates used in a calculation of net 
national benefits.
    The Department recognizes that real-world utility pricing systems 
are quite complex. Many systems employ a fixed connection or service 
charge, together with prices to meet incremental demand that may vary 
with the class of service, time of day, or level of demand within a 
billing period. The analysis that supports the appliance standards 
rulemakings does not reflect this complexity. Rather, a national 
average is used to represent current and forecasted consumer prices. 
Based on its present information, the Department believes that the 
difference between this ``analysis price'' and marginal cost, rather 
than the difference between some true marginal price and marginal cost, 
is relevant to establishing the gap between price and cost that bears 
on the incorporation of incremental externality values in the 
Department's analysis. The Department seeks comment on alternatives to 
national averages that would better reflect local and regional 
differences in consumer prices, as well as the other sources of price 
variation mentioned above.
    Finally, in some circumstances, the price facing end-users may be 
less than marginal cost. The same principles would apply. Even ignoring 
externalities, prices below marginal cost encourage demand whose value 
to users is less than the cost of production to meet it. To correct 
this situation and at the same time reflect externalities that may also 
be present, it would be necessary to apply adders larger than the 
marginal damage from emissions associated with increased energy demand.
    Given the above, the relationship between price and marginal cost 
is clearly central to the determination of externality values for use 
in setting appliance standards.
    Issue 8: Evidence bearing on the relationship between the end-user 
price of energy and marginal cost.
    First, the Department recognizes that the price/marginal cost 
relationship can vary significantly across utilities. Given the 
national applicability of appliance standards, we will seek to estimate 
a price/marginal cost relationship that characterizes national average 
conditions. The rationale here is identical to that for focusing on 
national average emission impacts.
    Second, the relationship between price and marginal cost may vary 
across appliances because of the differences in load shapes. For 
example, refrigerators that run continuously might be considered as 
contributing to ``base load'', while air conditioners, which are used 
most intensively on hot afternoons, contribute primarily to ``peak 
load.'' The Department solicits comment on the need to develop 
information on the relationship between price and marginal cost, 
relevant to each individual appliance.
    Finally, there are several different marginal cost concepts. Short 
run marginal cost may, in systems with excess capacity, include only 
fuel and incremental fuel and operation and maintenance costs. A long-
run marginal cost concept would also include the capital costs of 
generating facilities. To the extent that transmission and distribution 
infrastructure costs also vary with marginal demand, these too can be 
included in marginal cost.
    The Department has not yet developed quantitative estimates of the 
relationship between price and marginal cost, or determined which 
marginal cost concept is relevant to the question of externality 
adders. Evidence that would be relevant to such a quantification 
includes:
    (1) The gap between prices to industrial and residential consumers. 
Assuming that PUC's do not permit sales to industrial users at prices 
below marginal cost (to do so would force residential and commercial 
customers to pick up 100 percent of system fixed costs plus a portion 
of variable costs incurred for utility customers), the price of power 
to industrial customers with an adjustment for any difference in 
marginal transmission and distribution costs between the residential 
and industrial classes, could be taken as an upper bound on marginal 
supply costs to residential customers.
    The Energy Information Administration (EIA) reported national 
average electricity rates in 1992 for residential and industrial 
consumers of $0.082 per kilowatt hour (kWh) and $0.048 per kilowatt 
hour (kWh), respectively. For natural gas, EIA reports average rates in 
1992 of $5.87 per thousand cubic feet and $2.82 per thousand cubic feet 
for residential and industrial consumers, respectively.\5\
---------------------------------------------------------------------------

    \5\U.S. Department of Energy, Energy Information Administration, 
Monthly Energy Review, March 1993, Tables 9.9 and 9.11.
---------------------------------------------------------------------------

    (2) The capital and operating cost of incremental capacity. If 
meeting marginal demand requires new capacity, the relevant marginal 
cost should include capacity cost. Current estimates of fully-loaded 
marginal costs for natural gas combined cycle plants or pulverized coal 
plants are $0.035/kwh to $0.045/kwh. Again, marginal transmission and 
distribution costs, if any, would also need to be considered.
    (3) The marginal cost of dispatching the least efficient capacity 
in systems with excess capacity. One insight into these costs can be 
gained by examining the operation and maintenance costs, on a per 
kilowatt basis, of combustion turbines used for peaking purposes on 
some systems. Another perspective may be provided by the cost per 
kilowatt hour of peak-shaving, demand-side management programs approved 
by various public utility regulatory commissions. Public comments 
providing information related to these measurement approaches and their 
qualification would be especially helpful.
    The Department solicits comment on the relevance of the categories 
of evidence cited above, as well as other types of evidence, in 
establishing a reasoned estimate of the relationship between price and 
marginal cost.

III. Environmental Externalities

    Issue 9: The types of environmental emissions from the energy 
sector to be included in the Department's consideration of the use of 
externality values in the context of appliance standards.
    In this section, the Department builds on the crosscutting analysis 
presented above to outline an approach for analysis of three types of 
energy-related emissions--sulfur oxides (SOX), nitrous oxides 
(NOX), and carbon dioxide (CO2). The focus on these three 
emission categories reflects a similar focus in recent U.S. legislation 
and international agreements, most notably the Clean Air Act Amendments 
of 1990 and the Framework Convention on Climate Change.
    The Department recognizes that there are other types of emissions, 
such as particulates, carbon monoxide, air toxins, volatile organic 
compounds, solid wastes, and water discharges associated with energy 
use. Moreover, consideration of the entire fuel cycle may reveal 
additional environmental externalities at the extraction or 
transportation stages of the cycle. The Department welcomes comment and 
evidence regarding the importance of other types of externalities that 
may arise through these and other emissions pathways that are not 
discussed below. Comments that are structured so as to address the same 
generic- and externality- specific issues raised in this notice, while 
also identifying other issues unique to particular pollutants or media, 
would be particularly helpful. Each of the discussions of the 
individual pollutants addresses a common set of issues as well as 
points specific to that emissions category. The common issues are:
    Issue 10: The local, regional, national, and global externalities 
associated with each type of emission.
    Issue 11: The impact of a change in appliance efficiency standards 
on emissions, taking account of both direct impacts and the indirect 
effects arising from existing regulatory structures.
    Issue 12: Evidence regarding the impact of change in emissions on 
the level of environmental damage to external parties. Alternatively, 
if damage cannot be estimated directly, evidence regarding cost-based 
measures available as surrogates.
    Issue 13: The impact and relevance of a change in appliance 
efficiency standards on the emission control obligations of external 
parties.
    Finally, it is important to note that the relationship between 
price and marginal cost discussed as a crosscutting issue will be 
relevant to the determination of whether an application of an 
incremental externality value is appropriate in those cases where an 
environmental or energy security externality is identified.

a. Sulfur Dioxide

    Sulfur dioxide emissions are implicated in environmental effects at 
the local, regional, and global level. At the local level, sulfur 
dioxide is one of the criteria pollutants for which ambient air quality 
standards are established under the Clean Air Act. At the regional 
level, sulfur dioxide is a precursor of acid rain, an issue addressed 
in Title IV of the 1990 Clean Air Act Amendments. At the global level, 
the 1992 Supplementary Scientific Assessment of Intergovernmental Panel 
on Climate Change identifies sulfate aerosols as a potentially 
significant offset to greenhouse warming that may be caused by 
increasing atmospheric concentrations of greenhouse gases.
    Based on its present information, the Department believes that 
attention in this rulemaking should focus on externalities related to 
the acid precipitation pathway, and therefore on the regional effects. 
On the local level, there is already widespread attainment with ambient 
air quality standards for sulfur dioxide. On the global level, the 
effect of sulfur dioxide emissions as an offset to greenhouse warming 
remains speculative, and its value may be undercut by its extremely 
short duration relative to warming from greenhouse gases.
    The acid precipitation issue is addressed in Title IV of the Clean 
Air Act Amendments of 1990. Beginning in the year 2000, its provisions 
implement a national cap on utility sulfur dioxide emissions of 8.9 
million tons together with a system of tradable allowances for 
allocating the burden of emissions reduction in a cost-effective 
manner. The cap reflects a reduction of roughly 50 percent from 1980 
emission levels.
    The Department expects that the national emissions cap will be 
binding and, concomitantly, that allowance prices will be positive. The 
Department notes that allowance transactions at positive prices are 
being recorded in increasing number, and there are no known projections 
that suggest a non-binding cap.
    Under a binding cap, reductions in SO2 emissions at one 
location due to reductions in electricity demand would free up 
emissions allowances, the use of which could increase allowable 
emissions at other locations, unless allowances were ``banked''. With 
no change in overall emissions, the Department has no basis for 
assuming that alternative appliance standards would cause any change in 
environmental damage levels. However, a net national environmental 
externality benefit could occur if the pattern of emissions changes 
across alternative standards is one that systematically reallocates 
emissions from locations where they inflict low marginal damage to 
locations where they inflict high marginal damage. Based on its current 
information, the Department would assume that emissions reallocation 
from reduced electricity demand is environmentally neutral.
    If the Department were to determine that emissions reallocation was 
not environmentally neutral, the development of damage estimates would 
become an issue. In this case, the Department would rely heavily on the 
current criteria document for sulfur dioxide, and on the report of the 
recent National Acid Precipitation Assessment Program (NAPAP), a 10-
year, $500 Million assessment effort. The Department welcomes comment 
on these and other potential sources of damage information.
    The Department also solicits comment on the possibility that the 
current binding national cap on SO2 emissions will become non-
binding during the time period affected by appliance standards as a 
result of technology improvements or cost reduction.
    With regard to economic externalities, the Department notes that 
changes in electricity demand could affect the market price of 
allowances. A change in allowance prices might affect the manner in 
which external parties elect to meet their control obligations, but 
would not affect the obligations themselves.

b. Nitrogen Dioxides

    Nitrogen oxide (NOX) emissions are implicated in environmental 
effects at both the local and regional levels. NOX is a precursor 
of tropospheric (ground-level) ozone, one of the Clean Air Act criteria 
pollutants. NOX is also an acid rain precursor. Finally, changes 
in tropospheric ozone levels, by changing total column ozone, may 
affect the amount of ultraviolet-B (UVB) radiation reaching the earth's 
surface.
    Based on its present information, the Department believes that 
attention in this rulemaking should address all three of these 
externality pathways. According to EPA (1993), the primary ambient air 
quality standard for tropospheric ozone is violated more than one time 
per year in areas where 66 million Americans live. As noted in the 
discussion of sulfur dioxide, acid precipitation is another issue of 
significant national and international concern. The potential 
importance of the UVB issue is underlined by the fact that concern 
surrounding the potential damages from a projected increase in UVB at 
the earth's surface was the major reason motivating the phaseout of 
chlorofluorocarbons (CFC's), required by the Montreal Protocol to the 
Vienna Convention and the CAAA of 1990.
    With respect to acid precipitation, the Department would consider 
the same factors and information sources as outlined above for sulfur 
dioxide. However, the regulatory structure for NOX emissions 
outlined in Title IV of the Clean Air Act Amendments of 1990 is built 
around low NOX burner technology requirements rather than an 
emissions cap. Therefore, the Department would not presume that 
national NOX emissions were insensitive to changes in electricity 
demand.
    With respect to the ambient air quality standards, the Department 
believes that three main issues must be considered.
     The regulatory structure and damages from emissions 
changes in attainment areas (those areas not violating the ambient air 
quality standards)
     The regulatory structure and damages from emissions 
changes in non-attainment areas.
     The impact of NOX transport from outside of an area 
on ambient air quality conditions in non-attainment areas.
    With respect to the first and second points, the Department notes 
that roughly one-third of the nation's coal-fired power plants and one-
half of its gas- and oil-fired power plants are located in non-
attainment areas. These are the types of generating plants that, 
together with non-utility stationary sources and vehicles, are the 
sources of NOX emissions.
    Attainment areas: Abstracting from the issue of transport into non-
attainment areas, the Department would rely heavily on the information 
underlying the existing ambient standards for tropospheric ozone. These 
standards were issued in early 1993. However, at the time the standards 
were issued, EPA noted that new studies, done after finalization of the 
criteria document on which the standards were based, might suggest 
health effects at lower concentration levels. The Department welcomes 
comment on whether and how these newer studies, which have yet to be 
formally evaluated by the EPA, should be reflected in a damage 
assessment. The Department's damage assessment will also consider non-
health impacts drawing on studies included in the criteria document 
underlying the latest standards.
    Non-attainment areas: In non-attainment areas, reductions in 
electricity demand affect the level of NOX emissions in several 
ways. Any new generating plants in ozone non-attainment areas that are 
needed to meet growing electricity demand would, under the regulatory 
structure of Title I of the Clean Air Act, be required to fully offset 
their NOX emissions before they could begin operation. 
Alternatively, changes in electricity demand could simply affect the 
operation rate of existing plants, without triggering offset 
requirements for the operating company. In this latter case, the 
initial effect would be an increase in emissions. However, Title I also 
specifies milestones, or progress requirements, for emissions reduction 
in non-attainment areas. These requirements are applicable to NOX 
in serious and severe non-attainment areas. If these progress 
requirements were binding, a change in the level of emissions from the 
operation of existing power plants could affect the level of reductions 
that State Implementation Plans would require from other types of 
sources in order to meet these requirements. From this perspective, a 
change in appliance efficiency standards could change the control 
obligations of parties unrelated to appliance purchase decisions.
    To develop its analysis on a national scale, DOE will try to 
develop information regarding the extent to which each of the cases 
described above characterizes prevailing conditions. In order to 
develop an acceptable basis for estimating the external benefits 
associated with NOX emission reductions in both attainment and 
non-attainment areas, DOE will be seeking more information on the 
likely marginal effects of appliance standards on net emissions and the 
marginal control costs required to meet non-attainment area progress 
requirements. DOE will also be seeking better data on how damages and 
control costs might vary seasonally, which may increase or decrease the 
estimated benefits of particular types of appliance efficiency 
standards.
    In addition, DOE recognizes the concern that transport of NOX 
emissions from attainment areas may affect ozone concentrations in non-
attainment areas, even though they do not trigger offsets either 
through the new source program or via progress requirements. DOE 
welcomes information and analysis regarding the importance of this 
issue for a national evaluation of externality damage, and recommended 
approaches for incorporating it into the quantitative analysis.
    Finally, the effect of increased tropospheric ozone concentrations 
on the level of UVB at the surface, represents a potentially favorable 
externality. The Department welcomes comment on the inclusion of this 
pathway in the externality analysis, and on the use of information 
developed in the context of various rulemakings and assessments related 
to the impacts of stratospheric ozone depletion to estimate marginal 
damages from reduced ozone.

c. Carbon Dioxide

    The Department believes that the potential for climate change due 
to an enhanced greenhouse effect, a global scale issue, is the only 
relevant externality pathway for carbon dioxide emissions. Clearly, 
this is a high priority issue. In 1992, the world community completed 
negotiations for a Framework Convention on Climate Change. This 
convention has already been signed by 152 nations and should achieve a 
sufficient number of ramifications to enter into force by the spring of 
1994.
    Within the United States, President Clinton and Vice-President Gore 
have both identified the threat of climate change as the environmental 
issue having the highest priority for the nation and the world. The 
President, on Earth Day 1993, announced our nation's commitment to 
return its emissions of greenhouse gases to their 1990 levels by the 
year 2000. On October 19, 1993, the Administration released a Climate 
Change Action Plan outlining a set of specific programs to achieve that 
objective. However, unlike SOX and NOX emissions, energy-
related emissions of carbon dioxide are not presently subject to formal 
regulatory requirements that go beyond emissions monitoring and 
reporting. The Administration's action plan does not include proposals 
for any such requirements.
    Carbon dioxide emissions in the energy sector are proportionally 
related to the level of use and type of fossil fuel. For electricity, 
the Department intends to estimate the effect of a change in 
electricity use on carbon dioxide by evaluating the ``average'' fuel 
mix used to supply marginal changes in electricity demand throughout 
the country. The Department welcomes comments and suggestions regarding 
these calculations. While the absence of existing regulatory programs 
and the simple relationships between primary energy use and emissions 
simplify the externality analysis compared to that applicable to 
SOX and NOX, the evaluation of marginal damages is far more 
challenging for CO2. The effect of domestic emissions levels on 
changes in the global emissions trends that determine atmospheric 
concentrations of CO2, the effect of these concentrations on the 
both the global climate and the U.S. climate, and the timing of any 
such effects are all highly uncertain. The effects of changes in 
climate on human activities and unmanaged ecosystems are even more 
uncertain.
    Given the difficulties in estimating the impacts of global climate 
change, which is a necessary preliminary step in estimating marginal 
damages from emissions changes, only the most rudimentary calculations 
have been made. Studies made by the EPA (1989), Nordhaus (1991 and 
1992) and Cline (1992) are particularly noteworthy. These authors 
candidly admit the preliminary and often speculative nature of their 
calculations, and their inability to estimate impacts for important 
categories of damages, such as impacts on unmanaged ecosystems.
    Based on its present evaluation, the Department believes that the 
existing literature does not provide a sufficient basis for developing 
estimates of marginal damage. Therefore, the Department is considering 
using revealed willingness-to-pay for emissions reductions as a proxy 
to represent the social value of emissions reduction.
    The October 1993 Climate Change Action Plan represents the most 
aggressive national policy statement on emissions reductions to date. 
The major portion of energy-related actions in the plan aim to increase 
end-use efficiency. These programs are generally voluntary in nature, 
and rely on the attractive economics of the targeted energy-efficiency 
improvements to attract public participation. It is projected that 
reprogramming federal expenditures of $1.9 billion into these areas 
will encourage private investments of approximately $61 billion 
(undiscounted 1991 dollars) through the end of the decade. These 
investments are projected to reduce energy costs (undiscounted 1991 
dollars) by $60 billion through the end of the decade, and by an 
additional $207 billion though 2010.
    Because the plan calls only for investments in efficiency projects 
that have a high rate of return, and generally does not mandate these 
investments in the event that private parties judge them to be 
unattractive, it should not impose any net costs on the private sector. 
The exclusion of measures that would impose net costs on the private 
sector could itself suggest that, at present, the willingness to pay 
for emission reductions is at or near zero. The Department notes, 
however, that the plan reflects only those actions taken to achieve a 
near-term objective. The President and Vice-President have noted that 
the plan is only a first step. Moreover, it is not clear what 
amendments or protocols may be made to the Climate Convention, and on 
what timescale. For these reasons, an evaluation of willingness-to-pay 
implicit in the action plan may not provide an adequate basis for 
evaluating the longer term willingness-to-pay for sustained emissions 
reduction. The Department notes that estimates of the long-run cost of 
emissions reduction varies widely, with bottom-up engineering models 
generally providing much lower cost estimates than top-down economic 
models.
    The Department also notes that utility regulators in several states 
employ quantitative externality values for carbon dioxide in the 
resource planning process. The Department invites comments on the 
relevance of these values to the present rulemaking. Comments that 
provide a basis for determining how a national average ``effective'' 
value might be calculated, taking account of states with and without 
CO2 externality values and varying offset provisions, would be 
especially helpful.
    The Department invites public comment on the most appropriate 
methods for estimating the monetary value of reducing CO2 
emissions, recognizing the many uncertainties involved.

IV. Energy Security Externalities

    Issue 14: The major components of energy security externalities 
associated with oil consumption that DOE should consider in this 
rulemaking.
    Issue 15: The relative importance of the level of oil imports and 
the overall level of oil usage within the economy as determinants of 
energy security.
    The literature on this subject identifies five main avenues through 
which energy security externalities can be generated. Authors generally 
reach widely varying conclusions about their significance. DOE intends 
to study each of these five areas and invites comments on their 
significance.
    The importance of several of the pathways listed below depends 
partially or wholly on the amount oil prices rise in response to an oil 
supply disruption. Thus, as a part of its study of energy security 
externality values, DOE will consider the likelihood of a disruption, 
its size, excess production capacity in other regions of the world, and 
how the price shock associated with the disruption might be mitigated 
by drawing down strategic petroleum stockpiles. DOE invites comments on 
the best approach to study these issues.
    With the exception of externalities #3 and perhaps #5 listed below, 
the external effects of oil consumption are more closely associated 
with the total amount of oil consumed in the U.S. economy, and not oil 
imports.
    (1) Gross Domestic Product losses resulting from oil price shocks: 
Increased world oil prices caused by supply disruptions may cause 
macroeconomic shocks to the economy that result in unemployment and 
Gross Domestic Product losses. Different studies reach different 
conclusions regarding the significance of oil price shocks on 
macroeconomic performance. For example, a DOE study (1987) cites 
macroeconomic stabilization as one justification for energy security 
policy. In contrast, a study by Bohi (1991) finds little, if any, link 
between oil price shocks and macroeconomic performance.
    (2) Inflationary losses that accompany oil price rises: If oil 
prices rise, then the rate of inflation in the economy increases. 
Policies to fight inflation can cause increased unemployment and 
heighten Gross Domestic Product losses. Further, because many 
government payments are indexed to inflation, oil price shocks can 
increase the size of the budget deficit. DOE intends to treat these 
inflationary losses as part of the Gross Domestic Product loss 
component cited previously.
    (3) Monopsony price effects: Some economists argue that decreased 
domestic oil consumption will lower world oil prices and reduce 
payments for imported oil. The reduced U.S. payments for imported oil 
benefit U.S. and foreign consumers, but they hurt domestic and foreign 
producers. From a U.S.-centric accounting stance, this outcome would be 
beneficial because the U.S. consumes more oil than it produces.
    Adopting a U.S.-centric stance might be problematic in light of 
continuing U.S. policies to encourage free trade. For example, U.S. 
exports of products other than oil to both oil exporting countries and 
other countries could be reduced as the effects of a reduction in the 
value of oil imports work through the trading system.
    Recognizing that monopsony-like arguments could be raised to 
justify externality values for many types of imported goods, DOE 
intends to consider whether there is anything special about oil that 
justifies an externality for it, while excluding one for other 
products.
    (4) Terms of trade effect: Decreased oil imports would improve the 
balance of trade and strengthen the U.S. dollar. This would leave U.S. 
consumers unambiguously better off. This balance-of-trade effect is not 
considered in private decision-making. However, like the monopsony 
effect, counting this as an externality raises broader issues regarding 
free trade. DOE intends to consider whether there is anything special 
about oil that justifies an externality value for it, while excluding 
one for other products.
    (5) Financing of government strategic stockpiles and military 
operations associated with oil: Some analysts have suggested that the 
costs of stocking the strategic petroleum reserve and, more 
importantly, maintaining the military power needed to minimize oil 
supply disruptions are an additional source of externalities. DOE 
intends to study this source of externality in more detail, with 
particular emphasis on whether the size of the change in import 
dependence that might be attributed to alternative appliance efficiency 
standards would have any effect on government expenses.
    In addition to these quantifiable aspects of energy security 
externalities, some analysts contend that reduced oil consumption will 
increase U.S. flexibility in conducting foreign policy. DOE intends to 
consider this issue, recognizing that any benefit here would again 
relate to the size of the impact of the efficiency standards.
    Issue 19: The impact of incremental appliance efficiency standards 
on oil consumption.
    A central issue in trying to estimate the energy security value to 
reduced oil imports is the quantitative effect of incremental 
efficiency standards on domestic oil consumption. The appliances being 
considered in this rule affect oil consumption either directly, as is 
the case with oil-fired furnaces, or indirectly by reducing the use of 
oil to generate electricity.
    In 1990, according to the Annual Energy Outlook for 1993 (AEO93), 
about 2 percent of total U.S. oil consumption was used for residential 
space heating. By 2010, the same source projects that oil used for 
residential space heating will decrease significantly, and account for 
only about 1 percent of a higher total oil consumption.
    The current efficiency standard for residential oil-fired furnaces 
is 78 percent. Moving from the current standard to 95 percent, for 
example would after complete stock replacement, reduce oil consumption 
in this category by less than 20 percent, and by less if there is a 
``rebound'' effect. Marginal changes in this standard could have only 
an extremely small effect on total oil consumption.
    In the case of appliance standards that affect electricity 
consumption, the amount by which oil consumption is reduced depends 
upon the fuels used to generate electricity. According to the AEO93, 
about 4 percent of the primary energy consumption used for electricity 
generation in 1990 was oil-based. That percentage is projected to 
remain approximately constant through 2010. Because oil's share of 
electricity generation is so small, changes in appliance efficiency 
standards for electric appliances will not significantly alter total 
oil consumption in the nation.
    Based on the national fuel mix used in 1990, each kilowatt hour of 
electricity saved will reduce oil consumption by 0.000072 barrels. 
Given this ratio, each dollar of externality value attached to a barrel 
of oil translates into only 0.007 cents per kilowatt hour on a national 
average basis.
    Oil-based electricity might be significant in some regions of the 
country. Additionally, oil tends to be used for peaking power. DOE 
intends to study whether regional and peak-load considerations might 
cause significant divergences from the national ratio of barrels of oil 
per kilowatt hour. However, because the national ratio is so low, it 
seems unlikely that even taking into account regional and peak-load 
considerations could result in large energy security externality values 
for electric appliances even if a high per-barrel externality value 
were deemed appropriate.
    Issue 17: The impact of efficiency standards on domestic oil 
production and oil imports.
    DOE believes that the preponderant share of reduced oil consumption 
caused by incremental appliance efficiency standards, will come from 
imports. The price of oil is set in a world market and domestic energy 
producers supply as much oil as is profitable given that world price. 
Unless appliance efficiency standards significantly affect the world 
oil price, domestic production will remain largely unchanged and 
imports will fall.
    The Department has considered, in several recent policy exercises, 
the impact of changes in domestic oil consumption on world market 
prices. The change in price determines how reduced consumption is split 
between reduced imports and reduced domestic production. Current 
modeling generally shows that domestic production falls by only about 
ten percent of the decrease in domestic consumption. The Department of 
Interior's Minerals Management Service also studied this issue in 
detail as a part of their 1992 5-Year Leasing Program, and reached 
similar conclusions.
    Issue 18: The possibility of energy security externalities 
associated with non-oil fuels.
    The Department does not believe that there are comparable energy 
security externalities associated with fuels other than oil. That is 
because non-oil fuels consumed in the U.S. are obtained primarily from 
domestic sources. The prices of these fuels are primarily determined in 
national markets, and are not particularly susceptible to price spikes 
caused by supply disruptions in other areas of the world. Because of 
these factors, DOE does not intend to consider energy security 
externalities for fuels other than oil.
    Finally, it is important to note that the generic issue of the 
relationship between price and marginal cost outlined in the 
Crosscutting Issues section must be considered in the determination of 
whether an application of an incremental externality value is 
appropriate in those cases where an energy security externality related 
to the use of oil in electricity generation is identified. However, 
given the competitive market structure of the fuel oil industry, the 
Department, based on its current information, presumes that oil sold 
directly to residential end-users is competitively priced.

V. Review under Executive Order 12866

    The rulemaking on energy efficiency standards for central air 
conditioners, heat pumps, furnaces, refrigerators, refrigerator-
freezers and freezers has been determined to be an ``economically 
significant regulatory action'' under Executive Order 12866, 
``Regulatory Planning and Review,'' (58 FR 51735, October 4, 1993). 
Accordingly, today's action was subject to review under the Executive 
Order by the Office of Information and Regulatory Affairs (OIRA).
    There was no substantive changes between the draft submitted to 
OIRA and today's action.
    The draft of today's action and any other documents submitted to 
OIRA for review have been made part of the rulemaking record and are 
available for public review in the Department's Freedom of Information 
Reading Room, 1000 Independence Avenue SW., Washington, DC 20585 
between the hours of 9 and 4, Monday through Friday, telephone (202) 
586-6020.

VI. Public Comment Procedures

a. Participation in Rulemaking

    The Department encourages the maximum level of public participation 
possible in this rulemaking. Individual consumers, representatives of 
consumer groups, manufacturers, associations, States or other 
governmental entities, utilities, retailers, distributors, 
manufacturers, and others are urged to submit written statements on the 
proposal. The Department also encourages interested persons to 
participate in the public hearing to be held in Washington, DC at the 
time and place indicated at the beginning of this notice.
    The DOE has established a period of 60 days following publication 
of this notice for persons to comment on this proposal. All public 
comments received and the transcript of the public hearing will be 
available for review in the DOE Freedom of Information Reading Room.

b. Written Comment Procedures

    Interested persons are invited to participate in this proceeding by 
submitting written data, views, or arguments with respect to the 
subjects set forth in this notice. Instructions for submitting written 
comments are set forth at the beginning of this notice and below.
    Comments should be labeled both on the envelope and on the 
documents, ``Three Products Rulemaking (Docket No. CE-RM-93-801)'', and 
must be received by the date specified at the beginning of this notice. 
Ten copies are requested to be submitted. Additionally, the Department 
would appreciate an electronic copy of the comments to the extent 
possible. The Department is currently using WordPerfectTM 5.1. All 
comments received by the date specified at the beginning of this notice 
and other relevant information will be considered by DOE in the 
proposed rule.
    All written comments received on the Advance Notice of Proposed 
Rulemaking will be available for public inspection at the Freedom of 
Information Reading Room, as provided at the beginning of this notice.
    Pursuant to the provisions of 10 CFR 1004.11, any person submitting 
information or data that is believed to be confidential and exempt by 
law from public disclosure should submit one complete copy of the 
document and ten (10) copies, if possible, from which the information 
believed to be confidential has been deleted. The Department will make 
its own determination with regard to the confidential status of the 
information or data and treat it according to its determination.
    Factors of interest to DOE, when evaluating requests to treat 
information as confidential, include: (1) A description of the item; 
(2) an indication as to whether and why such items of information have 
been treated by the submitting party as confidential, and whether and 
why such items are customarily treated as confidential within the 
industry; (3) whether the information is generally known or available 
to others; (4) whether the information has previously been available to 
others without obligation concerning its confidentiality; (5) an 
explanation of the competitive injury to the submitting person that 
would result from public disclosure; (6) an indication as to when such 
information might lose its confidential character due to the passage of 
time; and (7) whether disclosure of the information would be in the 
public interest.

c. Public Hearing

1. Procedure for Submitting Requests to Speak
    The time and place of the public hearing are indicated at the 
beginning of this notice. The Department invites any person who has an 
interest in these proceedings, or who is a representative of a group or 
class of persons having an interest, to make a written request for an 
opportunity to make an oral presentation at the public hearing. Such 
requests should be labeled both on the letter and the envelope, ``Three 
Products Rulemaking (Docket No. CE-RM-93-801),'' and should be sent to 
the address and must be received by the time specified at the beginning 
of this notice. Requests may be hand-delivered or telephoned to such 
address between the hours of 8:30 a.m. and 4:30 p.m., Monday through 
Friday, except Federal holidays.
    The person making the request should briefly describe the interest 
concerned and, if appropriate, state why he or she is a proper 
representative of the group or class of persons that has such an 
interest, and give a telephone number where he or she may be contacted. 
Persons selected to be heard will be notified by DOE as to the time 
they will be speaking.
    Each person selected to be heard is requested to submit ten (10) 
copies of the statement at the beginning of the hearing. In the event 
any person wishing to testify cannot meet this requirement, that person 
may make alternative arrangements with the Office of Codes and 
Standards in advance by so indicating in the letter requesting to make 
an oral presentation.
2. Conduct of Hearing
    The Department reserves the right to select the persons to be heard 
at the hearing, to schedule the respective presentations, and to 
establish the procedures governing the conduct of the hearing. The 
length of each presentation is limited to 20 minutes.
    A DOE official will be designated to preside at the hearing. The 
hearing will not be a judicial or an evidentiary-type hearing, but will 
be conducted in accordance with 5 U.S.C. 533 and section 336 of the 
Act. At the conclusion of all initial oral statements at each day of 
the hearing, each person who has made an oral statement will be given 
the opportunity to make a rebuttal statement, subject to time 
limitations. The rebuttal statement will be given in the order in which 
the initial statements were made. The official conducting the hearing 
will accept additional comments or questions from those attending, as 
time permits. Any interested person may submit to the presiding 
official written questions to be asked of any person making a statement 
at the hearing. The presiding official will determine whether the 
question is relevant and whether time limitations permit it to be 
presented for answer.
    Further questioning of speakers will be permitted by DOE. The 
presiding official will afford any interested person an opportunity to 
question, with respect to disputed issues of material fact, other 
interested persons who made oral presentations as well as employees of 
the United States Government who have made written or oral 
presentations relating to the proposed rule. This opportunity will be 
afforded after any rebuttal statements to the extent that the presiding 
official determines that such questioning is likely to result in a more 
timely and effective resolution of disputed issues of material fact. If 
the time provided is insufficient or inconvenient, DOE will consider 
affording an additional opportunity for questioning at a mutually 
convenient time. Persons interested in making use of this opportunity 
must submit their request to the presiding official no later than 
shortly after the completion of any rebuttal statements and be prepared 
to state specific justification, including why the issue is one of 
disputed fact and how the proposed questions would expedite their 
resolution.
    Any further procedural rules regarding proper conduct of the 
hearing will be announced by the presiding official.
    A transcript of the hearing will be made and the entire record of 
this rulemaking, including the transcript, will be retained by DOE and 
made available for inspection at the DOE Freedom of Information Reading 
Room as provided at the beginning of this notice. Any person may 
purchase a copy of the transcript from the transcribing reporter.

    Issued in Washington, DC September 21, 1994. 
Christine A. Ervin, 
Assistant Secretary, Energy Efficiency and Renewable Energy. 
[FR Doc. 94-24924 Filed 10-6-94; 8:45 am] 
BILLING CODE 6450-01-P