Climate Change: Information on Limitations and Assumptions of DOE's
Five-Lab Study (Letter Report, 09/08/98, GAO/RCED-98-239).
Pursuant to a congressional request, GAO provided information on the
study conducted by five Department of Energy (DOE) national laboratories
on reducing U.S. emissions through energy-efficient and low-carbon
technologies, focusing on: (1) how the study's scope and methodology may
limit its usefulness; (2) key assumptions that may have influenced the
study's results; and (3) the study's role in the formulation of the
October 1997 climate change proposal and the Kyoto Conference's
emission-reduction goals for the United States.
GAO noted that: (1) the five-lab study is an important step in
evaluating the role that energy-efficient and low-carbon technologies
can play in the nation's efforts to reduce global warming gases; (2)
however, the study's usefulness is limited because it does not discuss
the specific policies needed to achieve its estimate of 394 million
metric tons of carbon reductions by 2010 and does not fully consider the
costs to the nation's economy of reaching this goal; (3) according to
DOE laboratory officials, specifying the types of policies needed to
achieve such significant reductions by 2010 was not one of the study's
objectives; (4) furthermore, the study assumes a fee of $50 per ton for
carbon emissions, which would increase the cost of energy; however, the
study does not evaluate the broader impacts that this cost may have on
the economy; (5) DOE officials acknowledge that the study does not
examine the broader economic impacts of such a carbon fee on the U.S.
economy but said that, in their opinion, these broader economic impacts
would be minor; (6) the study's finding that the widespread adoption of
energy-efficient technologies can be achieved with low to no net cost to
the nation is heavily dependent on the assumptions made for four sectors
of the U.S. economy--buildings, industry, transportation, and
electricity production; (7) among the groups that GAO interviewed, GAO
found a disparity of views on key assumptions that may have influenced
the study's results; (8) several of the groups questioned some of these
assumptions as being too optimistic, such as those about the payback
period, rate of adoption of new technologies, or timing of technological
breakthroughs; (9) however, most of the representatives of the seven
industries that used about 80 percent of the manufacturing energy
consumed in the United States in 1994 indicated this assumption may be
too optimistic given their current capital constraints, market
conditions, and existing manufacturing processes; (10) on the other
hand, some groups believed that certain assumptions in the study appear
reasonable; (11) the study has been cited as one of many documents
considered in formulating the administration's October 1997 climate
change proposal; and (12) according to the Department's Assistant
Secretary for Energy Efficiency and Renewable Energy, the study was one
of the documents considered in formulating the emission-reduction goals
for the United States at the December 1997 Kyoto Conference.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-98-239
TITLE: Climate Change: Information on Limitations and Assumptions
of DOE's Five-Lab Study
DATE: 09/08/98
SUBJECT: Environmental monitoring
International agreements
Energy research
Air pollution control
Atmospheric research
Thermal pollution
Hazardous substances
Economic analysis
Environmental policies
Energy efficiency
IDENTIFIER: Kyoto Protocol
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Cover
================================================================ COVER
Report to Congressional Requesters
September 1998
CLIMATE CHANGE - INFORMATION ON
LIMITATIONS AND ASSUMPTIONS OF
DOE'S FIVE-LAB STUDY
GAO/RCED-98-239
Climate Change
(160422)
Abbreviations
=============================================================== ABBREV
AAMA - American Automobile Manufacturers Association
ACEEE - American Council for an Energy-Efficient Economy
API - American Petroleum Institute
DOE - Department of Energy
EIA - Energy Information Administration
GAO - General Accounting Office
OMB - Office of Management and Budget
Letter
=============================================================== LETTER
B-280459
September 8, 1998
The Honorable Larry Craig
The Honorable Chuck Hagel
The Honorable Jesse Helms
The Honorable Frank Murkowski
United States Senate
Human activities, primarily those related to energy production and
use, are increasing the concentrations of carbon dioxide and other
"greenhouse gases" in the atmosphere. These heat-trapping gases are
believed to contribute to global warming, which could lead to future
climatic changes. To address the potential consequences of climate
change, the United States and other countries have entered into
international negotiations and agreements. In October 1997, the
administration proposed stabilizing U.S. emissions of greenhouse
gases at 1990 levels by no later than 2012. The most recent
agreement, known as the Kyoto Protocol, was negotiated in December
1997 in Kyoto, Japan, and calls for even greater reductions in U.S.
greenhouse gases.\1 Of the six greenhouse gases covered by the Kyoto
Protocol, carbon dioxide is of significant concern for the United
States, constituting more than 80 percent of U.S. greenhouse gas
emissions in 1996.
Prior to the Kyoto conference, a September 1997 Department of Energy
(DOE) study\2 by five DOE national laboratories quantified the
potential for energy-efficient and low-carbon\3 technologies to
reduce U.S. carbon emissions\4 to 1990 levels by 2010. Among other
things, the study (also known as the five-lab study) concluded that
an aggressive national commitment to energy-efficient and low-carbon
technologies--coupled with an increase in the price of carbon-based
fuels of $50 per metric ton\5 --could reduce carbon emissions to the
levels they were in 1990, with energy savings estimated to roughly
equal or exceed costs. In view of the study's potential influence on
U.S. climate change policy, as requested, we are providing you with
information on (1) how the study's scope and methodology may limit
its usefulness, (2) key assumptions that may have influenced the
study's results, and (3) the study's role in the formulation of the
October 1997 climate change proposal and the Kyoto Conference's
emission-reduction goals for the United States.
--------------------
\1 The Kyoto Protocol to the United Nations Framework Convention on
Climate Change would require the United States to reduce its
anthropogenic, or man-made, carbon dioxide equivalent emissions
during the period from 2008 to 2012 to 7 percent below 1990 levels;
however, this protocol has not yet been ratified by the U.S. Senate.
\2 Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy
Technologies by 2010 and Beyond Interlaboratory Working Group on
Energy-Efficient and Low-Carbon Technologies (Sept. 22, 1997).
\3 Low-carbon technologies can reduce carbon emissions by employing a
less carbon-intensive fuel, such as switching from coal to natural
gas.
\4 In the laboratories' study, carbon dioxide is measured in units of
carbon, defined as the weight of the carbon content of the carbon
dioxide molecule (carbon constitutes 12/44 of the molecule).
\5 A metric ton is 1,000 kilograms, or about 2,200 pounds.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
The five-lab study is an important step in evaluating the role that
energy-efficient and low-carbon technologies can play in the nation's
efforts to reduce global warming gases. However, the study's
usefulness is limited because it does not discuss the specific
policies needed to achieve its estimate of 394 million metric tons of
carbon reductions by 2010 and does not fully consider the costs to
the nation's economy of reaching this goal. For example, a policy
involving tax credits as an incentive for consumers to make
energy-efficient purchases could have different economic and
budgetary impacts from a policy requiring manufacturers to meet
minimum energy-efficiency levels for products. According to DOE
laboratory officials, specifying the types of policies needed to
achieve such significant reductions by 2010 was not one of the
study's objectives. Furthermore, the study assumes a fee of $50 per
ton for carbon emissions, which would increase the cost of energy;
however, the study does not evaluate the broader impacts that this
cost may have on the economy. DOE laboratory officials acknowledge
that the study does not examine the broader economic impacts of such
a carbon fee on the U.S. economy but said that, in their opinion,
these broader economic impacts would be minor.
The study's finding that the widespread adoption of energy-efficient
technologies can be achieved with low to no net cost to the nation is
heavily dependent on the assumptions made for four sectors of the
U.S. economy--buildings, industry, transportation, and electricity
production. Among the groups that we interviewed, we found a
disparity of views on key assumptions that may have influenced the
study's results. Several of the groups\6 questioned some of these
assumptions as being too optimistic, such as those about the payback
period, rate of adoption of new technologies, or timing of
technological breakthroughs. For example, the study assumes that
industry will change the length of time expected for a capital
investment to recover its costs--known as the payback period--from
about 3 years to nearly 7 years. However, most of the
representatives of the seven industries that used about 80 percent of
the manufacturing energy consumed in the United States in 1994
indicated this assumption may be too optimistic given their current
capital constraints, market conditions, and existing manufacturing
processes. On the other hand, some groups believed that certain
assumptions in the study appear reasonable. For example, the
Legislative Director of the International District Energy Association
said that the study is not only reasonable, but may underestimate the
potential carbon savings that industry might realize by 2010 from new
technologies, such as cogeneration power systems that use waste heat
to supplement an industry's energy needs.
The study has been cited as one of many documents considered in
formulating the administration's October 1997 climate change
proposal. Additionally, according to the Department's Assistant
Secretary for Energy Efficiency and Renewable Energy, the study was
one of the documents considered in formulating the emission-reduction
goals for the United States at the December 1997 Kyoto Conference.
--------------------
\6 Of the 52 groups that we contacted to obtain views on the
energy-efficient and low-carbon technologies in the study, 31
provided their views on the study. App. I provides the details of
our scope and methodology, including our selection of these groups.
App. II lists the groups.
BACKGROUND
------------------------------------------------------------ Letter :2
The study by five DOE national laboratories\7 was prepared in
response to a growing recognition that any national effort to reduce
the growth of greenhouse gas emissions must consider ways of
increasing energy productivity. According to DOE laboratory
officials, project discussions began in the summer of 1996, a peer
review committee was formed in November 1996, and official
authorization and a budget of $500,000 were provided in December 1996
to "analyze the impact of energy efficiency technology on energy
demand growth in the United States." Requested by DOE's Office of
Energy Efficiency and Renewable Energy, the five-lab study had a
central goal of quantifying the potential for energy-efficient and
low-carbon technologies to reduce carbon emissions in the United
States by 2010 for four sectors of the U.S. economy--buildings,
industry, transportation, and electricity production. The building
sector includes residential and commercial buildings, where energy is
used for heating and cooling, lighting, refrigeration, cooking,
heating water, and operating electrical appliances. The industrial
sector includes all manufacturing, as well as agriculture, mining,
and construction activities. The transportation sector includes
passenger cars and light-duty trucks, freight trucks, railroads,
aircraft, and marine vessels. The electricity-producing sector
includes electric power produced from coal, oil, natural gas, nuclear
energy, hydroelectric systems, wind, solar energy, and biomass.
Initially, the study's focus was on energy efficiency from technology
and the carbon savings that may accrue from such technologies.
Subsequently, DOE laboratory officials said that the study's
objectives were expanded about March 1997 to include not only the
potential for carbon savings from energy efficiency, but also carbon
savings from switching fuel supply options for electric power
generation, such as from coal to natural gas. Because it was
recognized that few low-carbon technologies would be implemented by
the electricity sector without some type of external incentive or
regulation, the officials told us that the study's objectives were
also expanded to include an assessment of the impact of increasing
the price of carbon-based fuels by $25 and $50 per ton.\8 The
officials noted that it is not unusual for a study to evolve over
time and that the expansion of the study's objectives was in large
part due to early comments from peer reviewers.
In calculating the carbon savings that could be achieved for each of
the four sectors of the U.S. economy, the study uses three
different, increasingly more aggressive, scenarios: (1) an
efficiency scenario that assumes the United States takes an active
role in public and private efforts to promote energy efficiency
through enhanced research and development and market transformation
activities; (2) a high-efficiency/low-carbon scenario that assumes a
more aggressive national commitment to energy efficiency coupled with
a $25 per ton carbon fee; and (3) a high-efficiency/low-carbon
scenario that, in addition to the aggressive national commitment to
energy efficiency, assumes a $50 per ton carbon fee. As shown in
table 1, the study's estimate of carbon savings for the most
aggressive scenario is more than 200 percent greater than its
estimate for the first scenario.
Table 1
Potential Carbon Savings by 2010 Under
the Five-Lab Study's Three Scenarios
(Metric tons in millions)
Economic First Second Third Percent
sector scenario scenario scenario increase\a
---------------------- ---------- ---------- ---------- ----------
Buildings 25 44 62 148
Industry 28 54 93 232
Transportation 73 88 103 41
Electricity production \b 48 136 \b
Total 126 234 394 213
----------------------------------------------------------------------
\a Compares savings under the third scenario with those under the
first scenario.
\b Unlike the second and third scenarios, the first scenario assumes
no carbon savings from fuel switching among utilities to reduce
carbon in the production of electricity, such as converting from
coal-fired to natural gas-fired power plants.
It is important to note that, at numerous points, the five-lab study
qualifies its 2010 estimates by noting, among other things, that the
calculations generally represent an "optimistic but feasible
potential" for carbon savings. In some cases, particularly
transportation, major breakthroughs in technologies would be needed
to achieve these savings.\9 DOE laboratory officials noted that, with
the exception of the transportation sector, they believe the majority
of the study's 394 million metric tons of emissions reductions come
from technologies that exist now or are near the end of their
development phase. For example, the officials said that the 62
million metric tons of carbon emissions reductions estimated for the
building sector can be achieved solely from technologies that exist
today. Additionally, the officials emphasized that the study was not
a projection of what would happen by 2010 but of what could happen if
the nation embarked on a path to reduce carbon emissions that
included aggressive federal policies and programs, strengthened state
programs, and very active private sector involvement, beginning in
2000 and being progressively phased in by 2010.
--------------------
\7 Argonne National Laboratory, Lawrence Berkeley National
Laboratory, National Renewable Energy Laboratory, Oak Ridge National
Laboratory, and Pacific Northwest National Laboratory.
\8 According to the study, a $50 per ton increase in the price of
carbon-based fuels would increase the price of a gallon of gasoline
by 12.5 cents, increase the price of electricity produced from
natural gas (at 53-percent efficiency) by 0.5 cents per
kilowatt-hour, and increase the price of electricity produced from
coal (at 34-percent efficiency) by 1.3 cents per kilowatt-hour.
\9 By 2010, scenarios 1 and 2 would achieve only about 32 and 60
percent, respectively, of the 394 million metric tons achieved by the
study's most aggressive scenario; unless otherwise specified,
assumptions relate to the scenario described as an aggressive
national commitment to energy-efficient and low-carbon technologies
coupled with a $50 per ton carbon fee.
LIMITATIONS OF THE STUDY
------------------------------------------------------------ Letter :3
The five-lab study is an important step in evaluating the role that
energy-efficient and low-carbon technologies can play in the nation's
efforts to reduce global warming gases, according to several groups
that we contacted; however, the study's scope and methodology may
limit its usefulness. For example, the study does not identify the
type of policies that would be needed to get consumers and businesses
to reduce carbon emissions by 394 million metric tons by 2010, and it
does not indicate how these policies would be implemented.
Additionally, the study does not address the broader economic effects
on the nation's economy, such as how the $50 per ton carbon fee may
affect energy prices, energy consumption; and, eventually, economic
activity and employment levels in the rest of the economy.
UNSPECIFIED POLICIES
---------------------------------------------------------- Letter :3.1
The study bases its results on a package of unspecified policies that
could bring about substantial increases in public and private
research and development, acceleration of the adoption and use of
energy-efficient technologies, advancement of the timing of
postulated technological breakthroughs, and changes in the historical
patterns of consumer and industry behavior. However, the study
provides few suggestions as to what these policies would be, how they
would be designed and implemented, or how they could be paid for.
For example, a policy involving tax credits as an incentive for
consumers to make energy-efficient purchases could have different
economic and budgetary impacts from a policy involving regulations
and standards, such as requiring manufacturers to meet minimum
energy-efficiency levels for appliances. In its August 1997 peer
review comments to DOE, the Treasury Department wrote that the
five-lab study does not
"shed much light on what government can or should do to enhance
the role technology will play in mitigating the growth of carbon
emissions. In particular, the contribution of the report is to
document energy savings and emissions reductions that would
accrue if U.S. consumers and businesses move closer to the
current (and, in some cases, reasonably anticipated) technology
frontier. Despite its efforts to justify these moves as
'cost-effective,' the report does not address the policies that
would be needed to actually get consumers and businesses to
adopt the technologies described in the report, nor does it
present a rigorous assessment of the societal costs that would
accrue if they did."
In its August 1997 peer review comments to DOE, the Council of
Economic Advisors was also critical of the study's failure to present
the specific policies that would stimulate the adoption of these
technologies. Similarly, according to an October 1997 study,\10 the
kinds of policies implemented to achieve any particular target for
reducing greenhouse gas emissions "will have a significant impact on
the costs." While acknowledging that the types of policies chosen can
have an impact, officials of DOE's Office of Energy Efficiency and
Renewable Energy noted that, in their view, the main point of the
October 1997 study is that there are many policies that could be
implemented and have a low, if any, net cost.
DOE laboratory officials agreed that the study does not discuss the
policies needed to achieve carbon savings by 2010 but explained that
this was not a study objective or task from DOE. However, the
officials also noted that there is fairly recent historic precedent
for the types of behavior by consumers and industry modeled under the
study's most aggressive scenario. For example, the officials said
the growth in the demand for energy assumed under this scenario (0.13
percent annually through 2010) is more conservative than the actual
growth in demand from 1973 through 1986 when the nation's economy
grew by about 35 percent while primary energy demand remained
unchanged. Additionally, the American Council for an
Energy-Efficient Economy (ACEEE) indicated that the study's message
is clearer because its focus on technology is unencumbered by policy
discussions.
--------------------
\10 The Economics of Climate Change, S. DeCanio, Department of
Economics, University of California at Santa Barbara (Oct. 1997).
OTHER ECONOMIC EFFECTS
---------------------------------------------------------- Letter :3.2
The study does not address the various broader economic effects on
the nation's economy. The study employed a methodology that, in
essence, involved adding together the estimated net cost or savings
to the economy for the adoption and use of each individual
energy-efficient, carbon-reducing technology, with the savings based
on the direct cost of adopting these technologies compared to the
study's estimated energy savings over the life of these
technologies.\11 However, this methodology focuses on one aspect of
the economy--energy--and does not consider the broader impacts on
other non-energy related aspects of the U.S. economy. Without
considering the interrelationships between the changes that the
five-lab study proposes--such as imposing a $50 per ton carbon
fee--and other sectors of the economy, the full effects of these
changes are not known. For example, the study does not include any
analysis of the impacts of a $50 per ton carbon fee on energy
consumption or economic activities elsewhere in the U.S. economy,
including the impacts of these fees on energy prices and energy
demand, as well as potential employment impacts. Several of the
groups we contacted, such as the Global Climate Coalition and the
International Project for Sustainable Energy Paths, believe the lack
of an economic "feedback effect" in the study's methodology limits
the usefulness of the study's results.
DOE laboratory officials recognized that the study does not address
these broader economic feedback effects. In their opinion, these
impacts would be minor because only one sector--electricity
generation--relies primarily on the increased price of carbon as an
economic stimulus to achieve significant carbon reductions. The
officials noted that the study assumes that the estimated carbon
reductions for two sectors--buildings and industry--rely primarily on
more aggressive policies, and for another sector--transportation--the
estimated carbon reductions rely on technological breakthroughs.
Regarding increased prices for electricity generation, the officials
envisioned that the overall net impact of the most aggressive
scenario on the nation's economy would be small.\12 Additionally, the
officials acknowledged that the study does not provide a quantitative
analysis to support their view that the broader effects would be
minor. Officials of DOE's Office of Energy Efficiency and Renewable
Energy agreed that the full costs to the nation's economy are not
considered in the study but emphasized that neither are the full
range of benefits from energy-efficient technologies, such as the
lower cost of state compliance with Clean Air Act regulations or the
decreases in the costs for oil imports.
--------------------
\11 Direct cost includes the incremental cost of investment in the
technologies as well as an allowance for the overall cost of a
package of programs and policies required to achieve the carbon
emissions reductions.
\12 According to these officials, the impact of the most aggressive
scenario would be less than 0.2 percent for the nation's
approximately $10 trillion gross domestic product by 2010.
DISPARITIES IN VIEWS ABOUT KEY
ASSUMPTIONS
------------------------------------------------------------ Letter :4
The study's calculations of carbon savings depend, in large measure,
on the assumptions made about a host of factors in four sectors of
the U.S. economy, including assumptions about consumers' purchasing
behavior, loan rates, appliance standards, industrial capital
constraints, the commercialization of near-term technologies,
technological breakthroughs, future costs, and future benefits.
Comments from interested and affected parties\13 about the
reasonableness of selected assumptions illustrated disparities in
their views on some key assumptions, including those on discount
rates, capital recovery factors, the rate of adoption of new
technologies, the timing of technological breakthroughs, and the
impact of changing the electricity-generating sector by 2010.
--------------------
\13 See footnote 6.
DISCOUNT RATES
---------------------------------------------------------- Letter :4.1
The choice of a discount rate is a key assumption because it can
affect whether an investment is viewed as cost-beneficial or not. In
the five-lab study, the discount rate is used to value the stream of
future benefits, such as estimated energy savings, accruing
throughout the lifetime of an investment. Once these accumulated
benefits have been calculated, they are used to determine the
cost-effectiveness of a technology (energy savings less added
investment cost). The study assumes that only cost-effective
technologies will be adopted to achieve the level of carbon
reductions estimated for each scenario. Assuming a higher discount
rate will, among other things, cause fewer technologies to be viewed
as cost-beneficial, whereas a lower discount rate means that more
long-term investments with higher initial costs will be viewed as
cost-beneficial. The study evaluates costs and benefits from two
perspectives. The first, or more optimistic, case uses real discount
rates\14 of 7 percent for buildings, 10 percent for transportation,
and 12.5 percent for industry. The second case uses higher discount
rates--15 percent for buildings and 20 percent for transportation and
industry, thus reducing the value of energy savings. According to
DOE laboratory officials, the technologies included in the study are
cost-effective even with the higher discount rates, and these rates
are higher than those recommended by the Office of Management and
Budget (OMB) for evaluating the costs and benefits of public
policies.
The study's assumed discount rates for the transportation sector were
not a significant issue among the groups we contacted; however, some
groups were skeptical of the assumption of a 7-percent real discount
rate for the building sector. For example, the Association of Home
Appliance Manufacturers told us that the consumer discount rate for
most replacement appliances, such as refrigerators, clothes washers,
clothes dryers, and dishwashers, ranges from 12 to 15 percent.
Similarly, officials from the Energy Information Administration
(EIA)\15 noted that consumers often charge such items on credit cards
where the discount rate would range from about 12 to 16 percent, or
more. Representatives of the Global Climate Coalition, National
Association of Home Builders, and others also found the study's
assumption of a 7 percent discount rate for the building sector too
optimistic. Some noted, however, that the 7 percent would be
reasonable for appliances included in new home purchases. EIA
officials and others also noted that some replacement
appliances--such as hot water heaters--are often purchased without
regard to energy efficiency or cost-effectiveness. The officials
explained that, although water heaters are a significant energy item
in most homes, when water heaters fail, consumers rarely calculate a
life cycle cost analysis, choosing instead to take what the plumber
or local appliance store has most readily available.
Representatives of other groups considered the 7-percent rate for the
building sector reasonable and pointed out that rebates and
low-interest financing, such as past utility-administered
energy-efficiency programs, could lower the effective discount rate
on building sector purchases to 7 percent. DOE laboratory officials
explained that the 7-percent rate for the building sector would be
consistent with a scenario in which the nation embarked on a path to
reduce carbon emissions that included aggressive federal policies and
programs. Additionally, the officials noted that the higher discount
rates that some groups were more comfortable with are still within
the range of discount rates that the study's most aggressive scenario
concludes are still cost-effective.
--------------------
\14 Real discount rates have been adjusted for inflation.
\15 EIA is an independent statistical and analytical agency that is
required to prepare an annual report containing trends and
projections in energy consumption and supply.
CAPITAL RECOVERY FACTORS FOR
THE INDUSTRIAL SECTOR
---------------------------------------------------------- Letter :4.2
A key assumption for the industrial sector involves the length of
time expected for a capital investment to recover its costs--known as
the payback period. The study assumes that, for investment planning
purposes, industry can be persuaded to change the length of time
expected for a capital investment to recover its costs for
energy-efficiency investments from about 3 years to nearly 7
years.\16 Under this scenario, the study assumes industry would
install new energy-efficient technologies on twice as many operations
as they would normally.
Most of the representatives of seven industries that used about 80
percent of the manufacturing energy consumed in the United States in
1994 indicated that the capital recovery factor assumed for the
industrial sector may not realistically consider the capital
constraints, market conditions, and existing manufacturing processes
these industries operate under today. For example, in a November
1997 letter to the Secretary of Energy, the Chemical Manufacturers
Association noted that the study's assumption that the industry could
double the rate of capital stock turnover is "impossible or at a
minimum, highly improbable." Representatives of the American
Petroleum Institute explained that, in a business investment, (1)
there is nothing special about energy-efficiency investments; (2)
such investments have to compete directly with other investments for
limited capital assets; and (3) the longer the payback period, the
greater the risk and the uncertainty associated with an investment.
Most of the representatives of the seven industries indicated that
they would not be able to accept more than a 4-year payback; several
said 3 years or less would remain their industry's normal payback
period. Generally, the representatives said that a 7-year payback is
not realistic because of the higher risks and uncertainties
associated with longer investments, the competing demands within
their firms for investment capital, and their increasingly global
competition.
On the other hand, the Director of ACEEE believed that industry could
achieve this goal with little difficulty, and pointed out that this
is consistent with the Council's 1997 report,\17 which noted that
industry often does not fully account for all the savings (both
energy and nonenergy) in its financial analyses of such projects.
DOE laboratory officials also believed that, given an aggressive
package of federal policies promoting low-carbon technologies, along
with federal research and development funds, industries would begin
to look at such investments more favorably. They noted that for some
larger investments--known as strategic investments--industry has been
willing in the past to look at payback over a longer period of time.
This is consistent, they noted, with a 1986 study\18 which found that
the capital budgeting practices of 12 large manufacturers varied
based on the size of the project, with large projects having capital
recovery rates ranging from 15 to 25 percent (paybacks ranging from
about 7 to 4 years, respectively), and small- and medium-sized
projects having capital recovery rates ranging from 35 to 60 percent
(paybacks ranging from about 3 to less than 2 years,
respectively).\19 Many energy-efficiency projects in the industrial
sector would be viewed as large projects.
--------------------
\16 According to the study, the historical capital recovery factor
(or payback period) for energy-efficiency investments by industry is
about 33 percent (a 3-year payback); the study assumes that industry
will change its capital recovery factor for energy-efficiency
investments to 15 percent (nearly a 7-year payback).
\17 Energy Innovations: A Prosperous Path to a Clean Environment,
Alliance to Save Energy, ACEEE, Natural Resources Defense Council,
Tellus Institute, and Union of Concerned Scientists (June 1997).
\18 Capital Budgeting Practices of Twelve Large Manufacturers, M.
Ross (Winter 1986).
\19 According to DOE, under the most aggressive scenario, investments
in energy-efficient technologies would be on the lower end of the
range (15 percent for large projects and 35 percent for small- and
medium-sized projects).
TECHNOLOGY ADOPTION RATE FOR
THE BUILDING SECTOR
---------------------------------------------------------- Letter :4.3
One of the study's key assumptions involves the choice of
"penetration rates," or the rates of adoption and use of
energy-efficient technologies within a certain time frame. For the
building sector, the study assumes a 65-percent penetration rate for
its most aggressive scenario. This means that 65 percent of the
energy savings achievable from maximum cost-effective
energy-efficiency improvements are realized in residential and
commercial buildings constructed or renovated from 2000 to 2010 and
in the equipment subject to replacement during this time period.
Among the groups we contacted, we found a disparity of views on the
reasonableness of the assumed 65-percent penetration rate. Several
were skeptical of this level of penetration and questioned its
reasonableness for some categories of new and retrofitted
structures--such as low-cost, or entry-level, housing and rental
properties. For example, the National Association of Home Builders
told us that the entry-level housing market is extremely
cost-sensitive and questioned whether builders of these structures
would install the higher initial cost but more energy-efficient
technologies described in the five-lab study. They were also
skeptical that such homes would be equipped with higher initial cost,
but more energy-efficient appliances. Similarly, the
Air-Conditioning and Refrigeration Institute noted that the study's
assumption of a 65-percent penetration rate is unrealistic, noting
that generally "the people making the purchasing decision of air
conditioning equipment are usually not the ones who will be paying
the energy bills, so first cost becomes more important than operating
cost."
Conversely, officials from the Alliance to Save Energy and ACEEE said
that, in their view, the study's assumptions for the building sector
are probably conservative. The officials said that, in the building
sector, such things as aggressive national codes and standards over
the home building industry and significantly higher energy-efficiency
standards for appliance manufacturers could achieve the level of
carbon emissions reductions estimated in the study. DOE laboratory
officials noted that the 65-percent penetration rate was based on
retrospective studies and their judgment of the percentage of
cost-effective technologies that can reasonably be adopted over time
with strong policy incentives. Additionally, the officials said that
the 65-percent penetration rate for the building sector is
conservative in their opinion because their analysis of this sector
does not rely on any technological breakthroughs.
TIMING OF TECHNOLOGICAL
BREAKTHROUGHS FOR THE
INDUSTRIAL AND
TRANSPORTATION SECTORS
---------------------------------------------------------- Letter :4.4
Some industry groups we talked with questioned the study's
assumptions about the feasibility of some technologies being
available by the 2010 time frame, noting that, in a few cases, the
study's description of these technologies as "incremental" is
incorrect because they still require fundamental breakthroughs. For
example, according to officials of The Aluminum Association, the
study's assumption that the aluminum industry will be able to use
inert anode\20 technology to cost effectively smelt aluminum by 2010
is overly optimistic, with a more realistic time frame for
implementing this breakthrough technology being 2020. To be
cost-effective, the officials explained, anodes must last for 8 to 10
years, but anode life in ongoing experiments has ranged from a matter
of hours to several weeks.
Similarly, some groups were skeptical that the breakthrough
technologies envisioned for the transportation sector will be
forthcoming soon enough to substantially reduce carbon emissions by
2010. According to representatives of the American Automobile
Manufacturers Association (AAMA), the technology relied on for much
of the carbon savings envisioned for light-duty vehicles is not
expected to be available as quickly as the study assumes, and even if
the technologies are demonstrated as viable, the benefits will
probably not be realized until after 2010. For example, a
substantial amount of the assumed reduction in light-duty vehicles'
carbon emissions is expected to come from lean-burn engines that
improve fuel economy but produce excessive amounts of nitrogen oxide,
a Clean Air Act-regulated pollutant and an ozone precursor.
According to AAMA officials, these engines still require significant
technological development before they can be used in the U.S.
market. They said that U.S. automotive manufacturers have been
working on this type of engine for over 20 years, and--while it is
technically feasible--it is still a question of technological
cost-effectiveness today. They also pointed out that the median
expected lifetimes of passenger cars and light-duty trucks--now about
14 and 16 years, respectively--are increasing, making it more
difficult to achieve part of the carbon reductions estimated for the
transportation sector by 2010. Officials of DOE's Office of Energy
Efficiency and Renewable Energy noted that longer vehicle lifetimes
will slow the pace of technological change but emphasized that the
study scenarios consider these extended lifetimes.
The AAMA representatives and others pointed out that the study
acknowledges that transportation sector reductions are not likely to
materialize without a major change in U.S. policy to foster
transportation modes that are more energy-efficient, as well as an
intensification of research efforts. With respect to transportation
sector technologies, the study cautions that
"because the outcomes postulated in the
high-efficiency/low-carbon scenario require technological
breakthroughs, they require a certain degree of luck to be
achieved by 2010. There are no credible methods to accurately
gauge the probability of such breakthroughs; we believe they
stand a decent chance of occurring with an intensification of
research efforts, but we stop short of claiming that they are a
likely outcome of such an intensification."
DOE laboratory officials acknowledged that, in some areas such as the
transportation sector, technological breakthroughs will be needed but
noted that it is plausible that additional funding for research and
development activities could accelerate such breakthroughs.
Additionally, officials of DOE's Office of Energy Efficiency and
Renewable Energy noted that the study's most aggressive scenario does
not anticipate that fuel cell vehicles will enter the market until
2007, yet, according to DOE, a number of manufacturers, including
Daimler Benz, have announced that they plan to have such vehicles on
the road before 2007. Also, according to DOE, Toyota has announced
that it plans to introduce a hybrid vehicle in the U.S. market in
2000, several years ahead of the entry year assumed in the study's
most aggressive scenario. Furthermore, officials from the American
Forest and Paper Association said the assumptions about some
breakthrough technologies for their industry, such as impulse drying,
multiport cylinder drying, and on-machine sensors, are reasonable.
--------------------
\20 According to the February 1998 Inert Anode Roadmap, there are a
number of barriers to the use of this technology, with some of the
most critical barriers being the durability and longevity of the
anode material, which fails to maintain the thermal and chemical
properties needed.
CHANGES IN THE ELECTRICITY
SECTOR
---------------------------------------------------------- Letter :4.5
Some groups believed the study's assumptions about changes that would
occur in the electricity sector may be too optimistic. For example,
the study's cost-benefit analysis assumes that a large segment of the
electricity-generating sector can change from coal to natural gas
without causing the price of natural gas to increase. However,
officials from EIA, the American Petroleum Institute, and the Edison
Electric Institute said that it is optimistic to assume that
significant switching from coal to natural gas can occur without
resulting in an increase in gas prices. DOE laboratory officials
explained that this could happen due partly to the study's assumed
reduction in overall energy demand for the building sector, after
this sector adopts more energy-efficient technologies, such as highly
efficient windows, doors, and appliances.\21 One group questioned
whether the assumed carbon savings would occur. A June 1998 American
Petroleum Institute report\22 asserts that a $50 increase in the
price of carbon-based fuels would not cause coal plants to convert to
natural gas, and that--in order to achieve such conversions--the
five-lab study further assumes that coal plants incur an additional
environmental compliance cost of $1,400 per ton for nitrogen oxides
and $100 per ton for sulfur dioxides.\23 DOE laboratory officials
disagreed with this report and emphasized that the five-lab study's
analysis of opportunities to convert coal plants to natural gas was
based on a detailed plant-by-plant assessment of conversion costs.
--------------------
\21 By 2010, the study assumes that the building sector's energy
demand decreases by about 5 percent, or about 2 quads, from 1997
levels, for the most aggressive scenario.
\22 A Critique of the "Five Lab" Study, R. Sutherland, American
Petroleum Institute (June 23, 1998).
\23 DOE officials pointed out that the study also analyzes the impact
of lower costs of $700 per ton for nitrogen oxides and no additional
costs for sulfur dioxides. Using EIA's forecasted 2010 prices for
coal and natural gas, however, shows that the incremental carbon
reductions are less than one-third of the amount removed when the
higher costs are assumed.
STUDY'S ROLE IN FORMULATING
POLICY
------------------------------------------------------------ Letter :5
In October 1997, the administration announced key elements of its
proposal to reduce the emissions of greenhouse gases to the levels
they were in 1990 by no later than 2012, with additional reductions
below the 1990 levels in the ensuing 5-year period. Among other
things, this proposal provided the framework for the level of
greenhouse gas emissions reductions that the United States would
commit to achieve in the next international negotiation to be held in
December 1997 in Kyoto, Japan. Unlike the 1992 international climate
change agreement that had called for voluntary reductions, the Kyoto
conference was to establish binding commitments for reductions in
greenhouse gases.
In the administration's October 1997 proposal, the five-lab study was
cited as illustrating how greater use of many existing technologies
could reduce carbon emissions. Also, the OMB Associate Director of
Natural Resources, Energy and Science, told us that the
administration relied on several key studies, including the five-lab
study, in determining which activities should be a part of the
administration's climate change initiatives. According to the
five-lab study, the estimated amount of carbon that the United States
would need to reduce in order to meet 1990 levels by 2010 is 390
million metric tons per year. The study found that, for its most
aggressive scenario, the United States could reduce its emissions by
394 million metric tons by 2010 with a low to no net cost to the
economy. According to the Principal Deputy Assistant Secretary for
Energy Efficiency and Renewable Energy, the five-lab study increased
in its importance as support for the administration's climate change
proposal when, in June 1997, a major study\24 dealing with the
economic effects of global climate change policies could not be
finalized.
In its December 1997 Kyoto Protocol negotiations, the United States
agreed--subject to Senate ratification--to reduce the emissions of
six greenhouse gases\25 to 7 percent below 1990 levels.\26 However,
one greenhouse gas--carbon dioxide--is by far the largest contributor
to total U.S. greenhouse gas emissions, constituting more than 80
percent of total U.S. emissions in 1990 and projected to represent
more than 80 percent in 2010. With its technological focus on the
ability of the nation to significantly reduce carbon emissions, the
five-lab study was also one of the key documents cited as support for
the December 1997 Kyoto Protocol's emission-reduction commitments for
the United States, according to DOE's Assistant Secretary for Energy
Efficiency and Renewable Energy.
--------------------
\24 Draft report, Economic Effects of Global Climate Change Policies:
Results of the Interagency Analytical Team (June 1997).
\25 Carbon dioxide, methane, nitrous oxide, hydrofluorocarbons,
perfluorocarbons, and sulfur hexaflouride.
\26 According to the Chair of the Council of Economic Advisors, after
accounting for changes in the definition of the baseline for three of
the six gases from 1990 to 1995 and the way that carbon sinks are
figured, the actual reduction is no more than 2 to 3 percent more
than the administration originally proposed as a negotiating
position.
AGENCY COMMENTS
------------------------------------------------------------ Letter :6
We provided a draft of this report to the Department of Energy (DOE)
for review and comment. The agency generally agreed with the overall
message of the report, noting that it showed reasonable balance and
was consistent with information DOE had received following
publication of the five-lab study. DOE suggested several changes to
clarify information in the report. For example, the agency suggested
that we note in the section on other economic effects that, while the
five-lab study did not consider the full range of costs to the
nation, it also did not consider the full range of benefits of
employing these energy-efficient and low carbon technologies, such as
a lower cost of compliance with Clean Air Act regulations. We made
this change and incorporated DOE's other comments where appropriate.
The agency expressed concern with the section on the study's
limitations. While noting that the agency did not disagree with the
two principal limitations presented in our report, DOE suggested that
we state in that section that these limitations do not invalidate the
conclusions of the five-lab study, most notably the study's essential
conclusion that "a vigorous national commitment to develop and deploy
energy efficient and low-carbon technologies has the potential to
restrain the growth of U.S. energy consumption and carbon emissions
. . . and can produce energy savings that are roughly equal to or
exceed costs." We did not make this change, however, because the
types of policies that might be needed to actually get consumers and
businesses to adopt the technologies described in the report are not
specified, and some have expressed concerns about the costs of these
policies. For example, the Treasury Department questioned the
study's conclusion that carbon emissions can be reduced in ways that
reduce energy costs more than they increase other societal costs,
noting that in its view the study "substantially understates the
costs of government policies to promote technology." Additionally, as
noted in the section on key assumptions, the study's finding that a
widespread adoption of energy-efficient technologies can be achieved
with a low to no net cost to the nation is heavily dependent on the
assumptions made, and we found a disparity of views on some of the
key assumptions that may have influenced the study's results.
DOE also suggested that we include in our report that, since
publication of the five-lab study, the administration has provided
many of the elements of the policy roadmap in its announcement of a
Climate Change Technology Initiative, which is a combination of
higher budgets for technology research and tax incentives to
accelerate the use of energy-efficient and low-carbon technologies.
We did not include this in our report, however, since this initiative
was outside the scope of our review. Also, in our April 1998 report
Department of Energy: Proposed Budget in Support of the President's
Climate Change Technology Initiative (GAO/RCED-98-147, Apr. 10,
1998), we raised several questions regarding DOE's proposed budget
that the Congress may want DOE to address before the agency
implements this initiative. Additionally, uncertainties regarding
the lack of specific performance goals associated with this
initiative were discussed in our June 1998 testimony Global Warming:
Administration's Proposal in Support of the Kyoto Protocol
(GAO/T-RCED-98-219, June 4, 1998).
DOE also questioned the relevancy of including comments from
organizations that criticized some assumptions of the five-lab study
as optimistic when compared to current conditions. We believe the
viewpoints of these organizations are relevant and appropriately
reflect their opinions of the reasonableness of certain key
assumptions used in the study, taking into consideration current
conditions and historical trends. Appendix III contains the full
text of the agency's written comments and our responses.
---------------------------------------------------------- Letter :6.1
We conducted our review from December 1997 through August 1998 in
accordance with generally accepted government auditing standards. A
detailed discussion of our scope and methodology is provided in
appendix I.
As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 15 days after its date. At that time, we will send copies of
the report to the Secretary of Energy and other interested parties.
We will also make copies available to others upon request.
Please call me at (202) 512-6111 if you or your staff have any
questions. Major contributors to this report are listed in appendix
IV.
Peter F. Guerrero
Director, Environmental
Protection Issues
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I
In view of the Department of Energy's (DOE) five-lab study's
potential influence on U.S. climate change policy,\1 Senators Larry
Craig, Chuck Hagel, Jesse Helms, and Frank Murkowski asked us to
provide information on (1) how the study's scope and methodology may
limit its usefulness, (2) key assumptions that may have influenced
the study's results, and (3) the study's role in the formulation of
the October 1997 climate change proposal and the Kyoto Conference's
emission-reduction goals for the United States.
To obtain information on the study's limitations and assumptions, we
obtained and reviewed the final study, drafts of the study, and
intramural and extramural peer reviewers' comments on drafts of the
study. We also reviewed DOE's Energy Information Administration's
(EIA) 1997 Annual Energy Outlook, which served as the principal basis
for the estimated 2010 carbon emission levels under the five-lab
study's business-as-usual case,\2 and we discussed various
assumptions in the study with EIA officials associated with the
development of the 1997 Annual Energy Outlook, as well as EIA's more
recent 1998 Annual Energy Outlook. Additionally, we interviewed
officials and obtained documents from Oak Ridge National Laboratory
and Lawrence Berkeley National Laboratory, the two key laboratories
in developing the study. We also contacted 52 organizations that we
selected as being interested and affected parties, many with
energy-efficiency expertise or able to offer informed opinions about
the study's assumptions and limitations based on a particular field
of expertise. In selecting these representatives, we contacted
potentially interested and affected parties that were identified as
being knowledgeable of the study, as well as energy-efficiency,
industry, and environmental experts and other groups we identified
from Internet searches, discussions with energy-efficiency experts,
and our previous experiences. We selected organizations that
represent different aspects of the four sectors of the U.S. economy
discussed in the study--buildings, industry, transportation, and
electricity production--as well as environmental groups. Not all of
the representatives we contacted had read the study or wanted to
express their views on it. Others had read and analyzed only those
parts of the study that related to their sector, and they limited
their comments accordingly. Of the 52 groups contacted, 31 commented
on one or more aspects of the study. A list of the groups commenting
appears in appendix II. Additionally, while we discussed some
aspects of the assumptions associated with the engineering-economic
modeling approach used in some parts of the study, we did not attempt
to verify the adequacy of these models or the alterations made to
them for analyzing various study scenarios, such as the alterations
of EIA's National Energy Modeling System model.
To describe the extent to which the final report's results were
reflected in the October 1997 climate change proposal and the
December 1997 Kyoto Conference's greenhouse gases emission-reduction
goals for the United States, we relied on interviews, memorandums,
press, and other briefings by the administration that cited the study
as partial support for these proposals, the proposal and conference
documents themselves, and testimony before the U.S. Senate. We
conducted our review from December 1997 through August 1998 in
accordance with generally accepted government auditing standards.
--------------------
\1 Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy
Technologies by 2010 and Beyond (Sept. 22, 1997).
\2 The study bases its savings estimates on the amount of carbon that
would be emitted in 2010 if the nation continued on its current
energy consumption and production path. This approach is generally
known as the business-as-usual scenario.
LIST OF NONFEDERAL GROUPS
COMMENTING ON THE FIVE-LAB STUDY
========================================================== Appendix II
Air-Conditioning and Refrigeration Institute
Alliance to Save Energy
American Automobile Manufacturers Association
American Council for Capital Formation
American Council for an Energy-Efficient Economy
American Forest and Paper Association
American Foundrymen's Society
American Iron and Steel Institute
American Metalcasters Consortium
American Petroleum Institute
Association of Home Appliance Manufacturers
Chemical Manufacturers Association
Consumer Energy Council of America/Research Foundation
Edison Electric Institute
Environmental and Energy Study Institute
Global Climate Coalition
International District Energy Association
International Project for Sustainable Energy Paths
National Association of Home Builders
National Association of Manufacturers
National Hydropower Association
National Mining Association
Natural Gas Supply Association
Natural Resources Defense Council
Nuclear Energy Institute
Primary Glass Manufacturers Council
Reason Public Policy Institute
Renewable Fuels Association
Resources For the Future
Steel Founders Society of America
The Aluminum Association
(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
ENERGY
========================================================== Appendix II
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
The following are GAO's comments on the Department of Energy's letter
dated July 27, 1998.
GAO COMMENTS
1. We agreed with this comment and have revised the report
accordingly.
2. See comment 1.
3. See comment 1.
4. The statement suggested by DOE has not been included because this
section of our report only addresses the building sector and because
the adoption rate of new technologies for the transportation sector
was questioned by officials of the American Automobile Manufacturers
Association.
5. This sentence was clarified to note that, because the entry-level
housing market is so cost-sensitive, the National Association of
Homebuilders questioned whether builders of entry level housing would
install the higher-initial-cost but more energy-efficient
technologies described in the study.
6. The study in question does not use the term "strategic
investments" to describe the capital budgeting practices of firms, as
suggested by DOE. The study does indicate that the capital budgeting
practices of firms varied based on the size of the project, with
large projects having capital recovery rates ranging from 15 to 25
percent, medium-sized projects, from 25 to 40 percent, and small
projects, from 35 to 60 percent. We have added a clarifying note
that DOE's interpretation of the study in question is that, under the
most aggressive scenario, investments in energy-efficient
technologies would be on the lower end of the range (according to
DOE, about 15 percent for large projects and 35 percent for small-
and medium-sized projects).
7. DOE's views have been added to this section of the report.
8. Due to a typographical error in the draft sent to DOE, the words
"resulting in" were omitted, which distorted the meaning of the
sentence. We have revised the report accordingly.
9. The information suggested by DOE has been added to this section
of the report.
10. Although our draft report already noted that DOE laboratory
officials disagreed with the American Petroleum Institute report, we
added DOE's suggested language about the analyses supporting the
five-lab study's assessment of conversion costs.
11. We agreed with this comment and have added a clarifying note to
this section of our report.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV
RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION
William F. McGee, Assistant Director
Mehrzad Nadji, Assistant Director, Economic Analysis Group
James R. Beusse, Evaluator-in-Charge
Philip L. Bartholomew, Evaluator
Hamilton C. Greene, Jr., Evaluator
*** End of document. ***