CHAPTER 3
POLICY RECOMMENDATIONS

The Task Force strove to develop policy recommendations that operate within the context of competitive markets, promote overall prosperity, and offer consumers a wide range of choices. Some of these recommendations offer incentives for providers of energy and transportation services to improve environmental performance while maintaining affordability. Others strive to remove regulatory or institutional barriers to economic, environmental, and social equity goals. Table lists each policy recommendation and indicates whether it would operate through market mechanisms, whether it would entail programmatic or institutional changes, or whether changes in regulations would be required for implementation.

* Older facilities have efficiencies - energy i.input to heat output - ranging from 25-32 percent as compared to the 40-50 percent efficiencies of technologies available today.

POLICY OVERVIEW

POSSIBLE IMPLEMENTATION APPROACHES

POLICY DUPLICATIONS

Specifically, these incentives would promote several kinds of technologies that would contribute to economic, environm=ental, and equity goals. Investments in energy conservation technologies would have the most economic and environmental benefits by reducing the need for electricity. This program would increase the use of technologies that rely on the abundance of U.S. renewable energy resources. Renewables generally have fewer environmental impacts than fossil fuels, and they are gradually becoming commercially competitive with traditional power sources. Since fossil fuels will continue to be an important energy source in the future--at home and abroad--incentives would encourage greater use of cost-effective technologies available today that bum fossil fuels cleaner and more efficiently. As a result the air, water, and soil pollution associated with energy use would be reduced at lower cost.

Reward Only the Most Efficient Technologies

*In addition to natural gas technologies that already feature efficiencies of 50 percent, two coal technologies with similar conversion efficencies are expected to be in commercial operation by the year 2010. These technologies are advanced integrated gasification combined cycle and pressurized fluidized bed.

Costs Impacts

Long term rates are likely to stabilize as the newer plants reduce the risk of future rate shocks due to fuel prices, operating and maintenance cost overruns or regulatory changes arising from growing health concerns. The actual effects on consumers will vary according to region, the cost structure of the state regulators treat underpreciated assets for rate making purposes. The rate and scope of the policy may need to be adjusted to prevent unreasonable utility rate increases and costs to taxpayers. The recommendation does not address the regulatory treatment of investments at the local level.

Tax consequences depend on how targeted the program is and how much "free riders" gain benefits on investments that would have occurred without the benefit. Revenue loss could be several billion dollars per year, but program design could limit windfall gains and federal revenue losses.⁷³ A one time increase in investment activity could generate some compensating tax revenues, but this impact is not universally accepted.

KEY TRADE-OFFS AND CONSIDERATIONS

Negative--This policy recommendation would not be revenue neutral at the federal level. The impact on short term electricity rates could be negative if new investments are not managed properly. There is also a "free ride' issue in that some of these investments might occur without these incentives. The short-term costs to energy consumers and taxpayers are important issues that need to be considered in determining the scope of the policy and the pace of its implementation.

Despite the substantial efficiency gains of the past 20 years, consumers and industry can still save energy cost-effectively by using newer technologies and improved practices. Many of the least affluent in society have not yet reaped the economic gains from energy efficiency because of lack of financial resources and access to technology. And because of the toll current patterns of energy production exact on the environment, energy efficiency can directly improve environmental conditions.

Over the past two decades, energy markets have become more competitive and direct government influence has waned. This is an evolution that has brought significant benefits for consumers and contributed to more efficient energy use. However, electric power has been bought and sold in monopoly markets that evolved before the benefits of conservation were known. These monopoly markets give incentives to supply more and more energy, instead of incentives to first look for "smarter" ways to use energy. Electricity markets are currently moving from regulated monopolies toward competitive markets. However, this transition to increased competition needs to be managed with efficiency and the environment in mind. Specifically, many analysts question whether even the best demand-side management programs currently in place will survive the transition to more competitive markets.⁷⁵ Although energy efficiency investments are less expensive in the long-term, many utilities fear they will be at a disadvantage in the short term if their competitors do not provide these incentives too. Also unclear is the extent to which businesses will take advantage of opportunities in this area and might create innovative approaches to replace traditional demand-side conservation programs. Energy efficiency should continue to be emphasized during the period of transition and beyond.

Clearly, given the present trend toward competition in the electric utility industry, transitional programs and policies must promote a market-based delivery system if they are to survive. They must be designed to enhance, rather than detract from, the competitiveness of those who participate in their implementation. The National Energy Efficiency Offer policy recommendation is designed to operate in any model of broad competition that may emerge in electricity markets. The benefits of open competition can help foster a vibrant market in energy efficiency through a program which: (1) is implemented at the state level; (2) enables states to opt-out by enacting their own laws; (3) recovers incentive payments through the distribution system, creating a level playing field for all supply-side sources; and (4) remains in place for only seven years.

POLICY OVERVIEW

If implementation is to be through national legislation, the executive branch should prepare and provide to Congress proposed legislation that would set up the broad energy efficiency outlines of this temporary program, and guide states in developing specific details of the program to be implemented at the state level.

State Opt In or Out

"Sunset" Provision

*Early indicators suggest that utilities preparin gfor competition are striving to cut costs and drive their own prices down. Even those utilities that have shown willingness in the past to include demand-side management programs, will only continue to do so voluntarily where the programs clearly enhance competitive advantage. A federally-encouraged transition-period program will serve two purposes: (1) continue improvement of price competitiveness of demand-side management measures through the market transformation effect of a "created" market,- and, (2) insulate new, reluctant and/or old participants fi-om real or perceived disadvantages of participating in the delivery of "expensive" services.

POSSIBLE IMPLEMENTATION APPROACHES

Energy Efficiency Incentive Payments
Made From An Energy Efficiency Fund

A state-designated entity would administer the Fund to purchase energy efficiency services. The state-designated administrative entity could be a state utility regulatory authority or other agency, an electricity distribution company, a private, non-profit, or other organization, or another entity as determined by the state.

Any state with ongoing, market-based programs for the delivery of energy efficiency would be allowed to continue those programs and pay for them through the Energy Efficiency Fund as permitted by the appropriate state-designated administrative entity. The preexisting state energy efficiency program could be used either to supplement, or to supplant, the proposed program, provided that the program or combination of programs chosen promotes an open, competitive market for the delivery of energy efficiency services.

Energy Efficiency Payments Based on Measured Savings

All Other Details of the Policy
Established at the State Level

• The price level or range of price levels to be paid to competitors from the fund for measured savings.

• The fee to be charged through the "non-bypassable" assessment at the meter, including any variations in the level of assessment among rate classes deemed necessary in the interests of equity.*

• The amount of energy efficiency to be purchased from competitors using the Energy Efficiency Fund at any given time (for example., based on any existing state integrated resource planning process).

• Whether the incentive payment is made up front or over time;

• The parties who will be eligible to respond to the Energy Efficiency Fund offer--for example, utilities, energy services companies, and end users. This determination should include a decision on whether end users who undertook the installation of energy efficiency measures prior to enactment of the program will be eligible for the incentive payments Resolution of this question is important in order to ensure fairness among end users who also are competitors and to avoid the "free rider" problem.

• The minimum level of energy efficiency investments for which incentive payments will be available--for example, 100 kilowatts.

• Energy efficiency measures eligible to receive incentive payments.

* Due to their lack of economic resources, low income residential ratepayers tend to have low levels of participation in demand side management programs (DSM), which often require that participants share in a portion of the costs of DSM technologies and services. DSM programs can be designed to overcome these barriers so that low income users do not become defacto nonparticipants. The federal legislation should require that state programs be designed to assure participation by low income residents. Because the Energy Efficiency Fund is made tip offees collected from all electricity users, these users will be contributing their pro-rata share, and must receive the benefit of their contribution.

Macroeconomic Implications of the Policy Recommendation

The Council believes a tax system should be designed to raise sufficient revenues without discouraging capital formation, job creation, environmental improvement, and social equity. Currently, the federal government raises more than $1 trillion dollars per year, predominantly (nearly 90 percent) by taxing wages and personal and corporate income.77 And since tax policies influence individual and institutional investment patterns and consumption decisions, the Council believes that an effective use of the tax system could be a powerful tool in meeting the challenges of sustainable development. Council members wrestled with the question of whether these challenges could be met, in part, by shifting some of the nation's taxes to activities and forms of consumption that are economically bad for society--inefficiency, waste, antipollution--and away from those that are economically good--employment, income, savings, and investment.

Ideally, a tax system that supports the recommendations of the Council would promote economic growth and jobs in a socially equitable manner, while discouraging pollution and other forms of inefficiency. The Council believes substantial progress in reaching these objectives can be made through revenue- neutral system improvements--changes that shift the ways revenues are raised without increasing overall tax obligations. In addition to revenue neutrality, tax reform efforts must be guided by the following criteria:

• Tax policy must ensure that individuals and families at different income levels are treated as fairly as possible. We, as a Council, strongly believe that taxes should not place a disproportionate burden on lower income individuals and families, and we recognize the limitation of some options--such as the value added tax or a national sales tax--in meeting this criterion. Federal tax policy must address social equity to be consistent with the goals of sustainable development.

• The tax system must promote savings and investment, employment, and economic growth. Although special tax, spending, and credit provisions may have been economically justified at some time in the nation @ development, they may no longer be serving their original purposes and instead may have unintended side effects that run counter to the national economic and environmental objectives. The Council is firmly convinced that any tax shift should encourage savings, private investment, and job creation.

  Tax-based policy should also be more skillfully employed to provide for enhanced environmental performance. While there was strong support, among the Council members, to shift tax policy from "taxing goods to taxing bads," there was no consensus regarding any of the specific policy options discussed. However, the Council acknowledged that there is sufficient merit to both the market mechanism and pollution tax options to warrant further evaluation. Moreover, the Council did agree that any tax shift needs to be done gradually, will not obviate the need for legally enforceable environmental standards or agreements, and should be designed to increase the efficiency of national efforts to improve environmental quality.

Shift in Tax Policies

Begin the long-term process of shifting to tax policies that--without increasing overall tax burdens--encourage employment and economic opportunity while discouraging environmentally damaging production and consumption decisions.

To implement this policy recommendation the Council calls for the following action.

A national commission should be established to review the effect of federal tax and subsidy policies on the goals of sustainable development. The commission would have two major responsibilities. First, it should conduct an explicit assessment Of alternative tax policies and, in particular, should assess opportunities for increased use of pollution taxes while reducing reliance on more traditional income taxes. The commission should make recommendations to the President and Congress on tax reform initiatives that are consistent with the goals of economic prosperity, a healthy environment, and social equity.

TRADE-OFFS AND CONSIDERATIONS

Pros

• Raises or offsets revenues (reducing the deficit or replacing more distortionary taxes).

• Encourages pollution prevention, and spurs investment, recycling, technological innovation, and reduced use of natural resources.

• Provides greater opportunities for new markets.

• Supports concept that the polluter pay for any damages.

Cons

• May be inflationary without appropriate compensatory actions, and could reduce growth and U.S. competitiveness.

• Effects on total emissions may be less certain than under direct regulations
• Difficult to set "optimal" charges.
• May have disproportionate effects on some individuals and regions.

Second, federal research and development technology partnerships can serve not only as catalysts for innovation, but as potential economic incentives included in the alternative environmental management system. Opportunities exist for the private sector to enter technology partnerships with the federal sector in many areas. Licensing is available for technology transfer from U.S. federal laboratories for private sector demonstration and commercialization. Over 700 laboratories and facilities in the federal system are home to many unique scientific capabilities which can be accessed using a variety of cooperative mechanisms, including personnel exchanges, cooperative research and development agreements, and reimbursable work. Use of cooperative research offers both partners the opportunity to leverage scarce resources, provides an avenue for transfer of technology between partners, and indicates market priorities to the federal sector.

POLICY IMPLICATIONS

* U.S. Communities that have prepared congestion pricing pilot projects or study plans include San Francisco, CA, San Diego, CA, Los Angeles, CA, Boulder CO, Seattle, WA, Portland, MI, and the New York State Throughway Authority for Tappan Zee Bridge.

The Transportation Research Board issued a report on congestion pricing in 1993, encouraging further steps toward adoption. The World Resources Institute estimates that a nationwide congestion toll system with tolls set relative to congestion levels would reduce vehicle miles traveled at peak periods by I I percent on the busiest highways and generate annual revenues of $44 billion and net savings in travel time exceeding $4 billion. If the full social costs of accidents and delays were covered, peak period traffic would be reduced by 22 percent, saving $11 billion in hospital bills and other expenses while producing revenues totaling $98 billion per year. The equivalent amount of reduced road congestion would require approximately $50 billion in otherwise avoidable highway construction.⁸³

Congestion pricing leaves all travelers better off than a simple vehicle miles traveled fee or current transportation financing systems, because trips can be shifted to uncongested periods. High-income travelers obtain significant time savings, while low-income travelers tend to be on the road less during congested hours. Geographic impacts will vary widely with local conditions. It should be noted that vehicle miles traveled fees are more effective at reducing pollution than congestion fees. Further, because congestion is estimated to cost over $100 billion per year, modest reductions in congestion through this strategy offer very low cost-benefit ratios and promise a significant boost in long-term U. S. economic performance. Estimates of GDP impact are unavailable, but widespread application could create significant employment, growth in electronics, communications, and construction, and lead to more efficient shipping systems and transportation investments.

KEY TRADE-OFFS AND CONSIDERATIONS

The empirical basis for this proposal has been strengthened by a recent study of 27 California communities, conducted by Dr. John Holtzclaw, a consultant and chairman of the Sierra Club Transportation Committee. The study, Using Residential Patterns to Decrease Auto Dependence, commissioned by the Natural Resources Defense Council, uses regression analysis to compare mean distances cars in different California communities were driven as a function of a number of average characteristics of those communities. The strongest statistical relationship with mean community automobile driving distance was residential density, with access to transit also proving a statistically significant relationship. Other factors, including average community household income, did not show a statistically significant correlation with average distance cars were driven in the community. Using national average costs per car owned and per mile driven to calculate average household expenses for each community, he calculated that the differences in transportation costs between neighborhoods with high residential density and access to transit and other neighborhoods could be as much as $400 per month.84 Such location-related savings should be recognized in a household's qualification for mortgage financing.

Increasingly, mortgage lenders are relying on purely objective, formula-based criteria to control transaction costs. This policy is consistent with industry practice, which relies on key ratios as reliable predictors of repayment behavior. Temporary, behavior-based criteria are less likely to influence costs over the long-term of a home mortgage, due to changes in employment, commuting patterns, and household composition (such as children growing up, and so on).

POLICY IMPLICATIONS

Several policies increase residential housing affordability and sustainability by providing public- private financing for energy efficiency improvements in new, existing, and low-income housing. Cost-effective policy initiatives that promote energy-efficiency financing, home energy and environmental ratings, and cost-effective energy building standards should be continued and if possible expanded and combined with revenue-neutral tax incentives. The Climate Change Action Plan estimates that if 20 percent of existing homes were upgraded by the year 2000 using cost-effective strategies, it would stimulate $11.7 billion in private sector investments, yielding energy savings worth approximately $5.4 billion with additional savings worth up $21.6 billion for the period 2001-2010.⁸⁸

Energy-Efficiency Financing programs provide market-based incentives for energy improve through:

• Uniform underwriting policies for both federal and secondary mortgage lend

• Standardizing the incorporation of home energy efficiency ratings.

• Aggressively expanding and implementing existing federal energy efficient mortgage programs as part of the agency "reinvention" process.

Home energy and environmental ratings provide national uniform guidelines for home rating systems to incorporate environmental impacts. Ratings programs developed by the U.S. Department of Energy, Edison Electric Institute, the City of Austin, and others could be used a national model. These ratings should be required for all federally insured, new construction in areas designated as environmentally sensitive with cost sharing by the federal government, homeowner, and the utility provider. States and/or localities should be given incentives to adop cost-effective energy efficiency building standards. The Energy Policy Act of 1992 (EPAct) requires states to consider adopting model energy codes and financial incentives for adoption could be provided through the permissive use of umbrella block grant funding.⁸⁹

Moreover, investment tax credits could be provided for two percent of the sales price ($2,000 maximum) for purchasers of new homes that exceed Federal Housing Authority building energy code requirements (CABO Model Energy Code 1993) by 25 percent and three percent for purchasers of existing homes ($2,500 maximum) who install energy improvements that increase pre-retro-fit efficiency by 25 percent.

Broaden Golden Carrot^TM Manufacturer Incentives for Super-Efficient Products

The consortium has launched three new projects--to improve commercial rooftop air conditioners, residential central air conditioners, and residential clothes washers--and has several more under varying degrees of development. Manufacturer incentives should be given for improving other energy-consuming technologies in the residential, commercial, and industrial sectors. The federal government should continue, and to the extent possible increase, funding for the program through the U.S. Department of Energy (DOE) and the U.S. Environmental Protection Agency.

Federal agencies should also commit to purchase the resulting high-efficiency products to meet their procurement needs, buttressing their current commitment to purchase energy-efficient products. By encouraging direct financial incentives, a higher degree of market certainty, and/or a clear efficienct t the consortium he s manufacturers economical 'usti retooling to produce higher efficiency products. Establishing a market leadership position in energy-efficient products would provide U.S. companies with a substantial opportunity to capture world markets.

Expand Federal Procurement Efforts to Develop
Markets for Energy-Efficient Products

Federal agencies should allocate two percent of energy-related product purchasing to advanced, efficient and renewable energy technologies to help create a market for new technologies stimulated by Golden Carrot^TM incentives. A life-cycle cost of federal purchases should be based on the prevailing commercial cost of fuel and electricity, plus a modest factor for environmental externalities. State and local governments should be able to use the U.S. Government Services Administration catalogs and schedules, and to purchase efficient products through the U.S. Department of Defense, Logistics Agency. The U.S. Department of Energy should work with other agencies to publish a best-practice guide in energy-efficient purchasing.

Improve Technology and Information Transfer

Expand Cost-Effective Efficiency Standards

• Standards for new buildings could be made more stringent and/or more effectively implemented. States and certain federal agencies already have responsibility under EPAct and other legislation to periodically upgrade and effectively implement building efficiency standards, and the DOE shoul.d continue to support these efforts.

• Standards for most residential appliances and equipment, packaged heating, cooling and water heating units used in commercial buildings, fluorescent light ballasts and tubes, reflector lamps, and most 1-200 horsepower electric motors have been established by statute and DOE should continue to periodically review (usually every five years) and update these standards as required.

• Currently, DOE is determining whether standards would be technically feasible and economically justified for high-intensity discharge lamps, distribution transformers, and small (
• DOE also has authority to--and should--establish cost-effective and technically feasible standards for other (generally unspecified) categories of equipment. It has proposed standards for televisions and should establish standards for other categories, such as office equipment, where is it cost-effective.

• If necessary, new authority should be sought for economically justifiable standards in other areas (such as industrial equipment other than motors).

The energy, environmental, and economic benefits that might result from expanded and/or more stringent efficiency standards for buildings or equipment are uncertain, but could be as large as $10 billion.

Maintain Federal Research & Development Emphasis on
Renewable and Clean Fossil Energy Technologies

DOE programs are currently focusing on several areas aimed at the goal of cost competitiveness, increased efficiency and improved environ-mental performance for fossil electric generating systems. These initiatives should continue. However, in a sustainable economy, renewable electric generation technologies are preferred over those that are not renewable due to their lower overall environmental impact. Accordingly, to move toward a sustainable energy environment, federal electric generation research and development funding should continue to focus to a larger extent on renewable technologies.

To that end, a Renewable Technology Commercialization Program modeled along the lines of the Clean Coal Technology Program should be implemented. The clean coal effort has been a very successful market-driven program that leverages federal resources with a high degree of private sector funding to accelerate the commercialization of clean coal technologies.⁹⁴ Historically, renewable electric generation technologies have received less federal research development and demonstration funding as compared to other generation technologies. Although the DOE has increased funding for renewable technologies by 66 percent--to $228 million in FY 1995--funding allocations for nuclear, coal, and other generating technologies still receive 75 percent of the available funding. Furthermore, funding for fusion technologies has increased slightly in recent years and will still account for $145 million more than renewables in 1995.⁹⁵

Important fossil generation technology development programs include: the Advanced Clean/Efficient Power Systems Program, which supports advanced power systems that achieve minimal environmental impact, high thermal efficiencies, and reliability of supply; Advanced Research and Technical Development Activities, which supports research for super-clean, high efficiency coal power systems; the Clean Coal Technology Program, which supports 45 commercial projects to which the private sector has contributed 66 percent;⁹⁶ the Advanced Turbine Systems Program, which seeks to increase the efficiency of gas turbines and reduce nitrogen oxides emissions; and the Fuel Cells initiative, which is to lead to the commercialization of highly efficient, environmentally superior power systems fired by a variety of fuels.

While these initiatives continue, a meaningful market-based renewables initiative should be implemented modeled after existing programs and sharing the incremental technological and economic risks associated with the commercialization of technologies in the United States and in developing counties.

Incorporate Sustainable Development into
Federal Disaster Recovery Assistance

The federal government expended over $6 billion in disaster relief assistance in 1993, with no attempt to provide communities the opportunity to rebuild using more sustainable technologies and practices." The Federal Emergency Management Agency, the U.S. Departments of Energy, Transportation, and Housing and Urban Development, and the Small Business Administration should accelerate efforts to include the principles of sustainable development in their disaster assistance and coordinate the application of all existing public and private resources in times of emergency. An executive order and/or legislation should create a permanent interagency "swat team" to coordinate and implement this common sense work.

Focus Export Assistance to Increase U.S. Exports
and Build Markets for Renewables in Developing Countries

The major obstacle to selling U.S. renewable energy products and projects in the lesser developed countries is the lack of financing sources compared to those available to conventional fossil energy projects. This policy would provide a pool of funds to allow U.S. companies to take advantage of the emerging power markets that are now being exploited by European competitors with financing from their governments. Modular renewable technologies may bring electricity to regions of the lesser developed countries that have no electrical infrastructure at a much lower cost than building the infrastructure and central station electric generation. This fund could be established by using institutions such as the Overseas Private Investment Corporation or the Export-Import Bank. Exporting renewables helps the balance of trade and creates domestic jobs that promote global sustainability.

Support the Partnership for a New Generation of Vehicles

• Significantly improve national competitiveness in manufacturing by pursuing advances that could reduce production costs and product development times.

• Pursue and implement commercially viable advances that can lead to improvement in the fuel efficiency and emissions of conventional vehicles.

• Develop a revolutionary class of vehicles that could achieve fuel efficiencies of up to three times today's comparable vehicle.

The new vehicle would at the same time cost no more to own and operate; would maintain performance, size, and utility; and would meet or exceed safety and emission requirements. The timetable is targeted towards development of a production prototype by 2004 that meets the above criteria, with research funding that is split about evenly between government and industry. If successful, this program would increase energy security, conservation of depletable resources, and the economic standard of living.

Reauthorize the Intermodal Surface Transportation
Efficiency Act

• The shift in focus of funding from new construction to managing and maintaining existing transportation systems.

• Greatly strengthened local planning and requirements such that a broader array of concerns be considered, such as air quality, the environment, social equity, land use, energy efficiency and economic development.

• The ability of states to shift a portion of funds from highway projects to other modes.

• Aspects that promote the development of integrated, multimodal transportation systems.

• Greater public participation in the decision-making process.

• Management systems that are created to track the performance of pavement, bridge, transit, safety, congestion, and intermodal operations; and provisions to coordinate goals, implementation, and enforcement measures with other legislation, including Title VI of the Civil Rights Act, the Clean Air Act Amendments of 1990, the Americans with Disabilities Act, and so on.

During the reauthorization in 1997, ISTEA should be designed to further support efforts to reduce growth in vehicle miles traveled, curb air pollution, control greenhouse gas emissions, and help stimulate sustainable economic development. ISTEA should permit states or regions to chose to invest federal transportation funding for intercity rail projects. Specific items that could strengthen ISTEA's support of sustainable development include establishing a system that uses performance measures to determine how well transportation investments are helping to meet stated goals. Locally set land use performance measures could also be included in ISTEA reauthorization to encourage closer linkage between land use decisions and transportation investments. ISTEA's impact cannot be understated. It not only authorized the amount of federal money that would be spent for transportation ($155 billion over six years in the 1991 act) but also largely specified how that money would be spent. A similar level of funding is expected for reauthorization.