[Federal Register Volume 59, Number 194 (Friday, October 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24924]
[[Page Unknown]]
[Federal Register: October 7, 1994]
VOL. 59, NO. 194
Friday, October 7, 1994
DEPARTMENT OF ENERGY
Office of Energy Efficiency and Renewable Energy
10 CFR Part 430
[Docket No. CE-RM-93-801]
RIN 1904-AA47
Energy Conservation Program for Consumer Products: Supplemental
Advance Notice of Proposed Rulemaking Regarding Energy Conservation
Standards for Three Types of Consumer Products
AGENCY: Office of Energy Efficiency and Renewable Energy, Department of
Energy.
ACTION: Advance notice of proposed rulemaking.
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SUMMARY: On September 8, 1993, the Department of Energy published an
Advance Notice of Proposed Rulemaking (58 FR 47326) regarding energy
conservation standards for three types of consumer products. In that
Advance Notice, the Department stated that it intended to consider more
explicitly environmental and energy security externalities associated
with alternative energy efficiency standards. Specifically, the
Department expressed the intention to monetize the values of any
externalized benefits (or costs) if a sound analytic basis could be
found.
The purpose of this notice is to solicit public comments on whether
and how the Department should evaluate and consider environmental and
energy security externalities that may be associated with alternative,
candidate energy efficiency standards. It has three specific aims:
First, it requests focused public input on specific questions related
to the development and use of environmental and energy security
externality values. Second, it outlines the Department's preliminary
thinking in several of these issue areas in order to provide
stakeholders with maximum available information. Finally, it solicits
public identification of other issues relevant to the application of
externality values in the context of appliance standards, so that these
may be considered in appliance standards rulemakings.
DATES: Written comments in response to this Supplemental Advance Notice
of Proposed Rulemaking must be received by DOE by December 6, 1994.
Oral views, data, and arguments may be presented at the public
hearing on the issues raised herein to be held in Washington, DC, on
November 17, 1994. Requests to speak at the hearing must be received by
the Department no later than 4 p.m., November 4, 1994. Copies of
statements to be given at the public hearing must be received by the
Department no later than 4 p.m., November 10, 1994.
The length of each presentation is limited to 20 minutes.
ADDRESSES: Written comments, oral statements, requests to speak at the
hearing, and requests for speaker lists are to be submitted to: U.S.
Department of Energy, Office of Energy Efficiency and Renewable Energy,
EE-431, Energy Conservation Program for Consumer Products, Docket No.
CE-RM-93-801, Room 5E-066, Forrestal Building, 1000 Independence
Avenue, SW., Washington, DC 20585, (202) 586-9127.
The hearing will begin at 9:30 a.m., on November 17, 1994, and will
be held at the U.S. Department of Energy, Forrestal Building, Room 1E-
245, 1000 Independence Avenue SW., Washington, DC.
Copies of the transcript of the public hearing and public comments
received may be read at the DOE Freedom of Information Reading Room,
U.S. Department of Energy, Forrestal Building, Room 1E-190, 1000
Independence Avenue SW., Washington, DC 20585, (202) 586-6020 between
the hours of 8 a.m. and 4 p.m., Monday through Friday, except Federal
holidays.
For more information concerning public participation in this
rulemaking proceeding, see section VI, ``Public Comment Procedures,''
of this notice.
FOR FURTHER INFORMATION CONTACT:
Dr. Barry P. Berlin, U.S. Department of Energy, Office of Energy
Efficiency and Renewable Energy, Forrestal Building, Mail Station EE-
43, 1000 Independence Avenue SW., Washington, DC 20585, (202) 586-9127
Eugene Margolis, Esq., U.S. Department of Energy, Office of General
Counsel, Forrestal Building, Mail Station GC-72, 1000 Independence
Avenue SW., Washington, DC 20585, (202) 586-9507
SUPPLEMENTARY INFORMATION:
I. Introduction
a. Authority
b. Background
c. The potential impact of externalities on the determination of
appliance efficiency standard levels.
d. The structuring of the Department's analysis of
externalities.
II. Crosscutting Issues
a. Relationship to existing environmental regulation and
existing uses of externality values in the resource planning
process.
b. The role of damage-based and cost-based measures in the
development of externality values.
c. Utility pricing and incremental externality values.
III. Environmental Externalities
a. Sulfur dioxide
b. Nitrogen dioxide
c. Carbon dioxide
IV. Energy Security Externalities
V. Review under Executive Order 12866
VI. Public Comment Procedures
a. Participation in rulemaking
b. Written comment procedures
c. Public hearing
I. Introduction
a. Authority
Part B of Title III of the Energy Policy and Conservation Act, Pub.
L. 94-163, as amended by the National Energy Conservation Policy Act,
Pub. L. 95-619, the National Appliance Energy Conservation Act, Pub. L.
100-12, and the National Appliance Energy Conservation Amendments of
1988, Pub. L. 100-357,1 created the Energy Conservation Program
for Consumer Products other than Automobiles (Program). The consumer
products subject to the Program (often referred to hereafter as
``covered products'') are: Refrigerators, refrigerator-freezers, and
freezers; dishwashers; clothes washers; clothes dryers; water heaters;
central air conditioners and central air-conditioning heat pumps;
furnaces; direct heating equipment; television sets; kitchen ranges and
ovens; room air conditioners; fluorescent lamp ballasts; and pool
heaters; as well as any other consumer products classified by the
Secretary of Energy (Secretary) (section 322). To date, the Secretary
has not so classified any additional products.
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\1\Part B of Title III of the Energy Policy and Conservation
Act, as amended by the National Energy Conservation Policy Act, the
National Appliance Energy Conservation Act, and the National
Appliance Energy Conservation Amendments of 1988, is referred to in
this Supplemental Advance Notice of Proposed Rulemaking as the
``Act.'' Part B of Title III is codified at 42 U.S.C. 6291 et seq.
Part B of Title III of the Energy Policy and Conservation Act, as
amended by the National Energy Conservation Policy Act only, is
referred to as the National Energy Conservation Policy Act.
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Under the Act, the Program consists essentially of three parts:
testing, labeling, and mandatory energy conservation standards. DOE, in
consultation with the National Institute of Standards and Technology,
is required to amend or establish new test procedures as appropriate
for each of the covered products (section 323). The purpose of the test
procedures is to provide for test results that reflect the energy
efficiency, energy use, or estimated annual operating costs of each of
the covered products (section 323(b)(3)).
The Federal Trade Commission is required by the Act to prescribe
rules governing the labeling of covered products for which test
procedures have been prescribed by DOE (section 324(a)). These rules
require that each particular model of a covered product bear a label
that indicates its annual operating cost and the range of estimated
annual operating costs for other models of that product class (section
324(c)(1)). At the present time, there are Federal Trade Commission
rules requiring labels for the following products: room air
conditioners, furnaces, clothes washers, dishwashers, water heaters,
freezers, refrigerators and refrigerator-freezers, central air
conditioners and central air-conditioning heat pumps, and fluorescent
lamp ballasts. 44 FR 66475, November 19, 1979; 52 FR 46888, December
10, 1987; and 54 FR 28031, July 5, 1989.
For each of 12 of the covered products, the Act prescribes an
initial Federal energy conservation standard (section 325(b)-(h)). The
Act establishes effective dates for the standards in 1988, 1990, 1992
or 1993, depending on the product, and specifies that the standards are
to be reviewed by DOE within three to ten years, also depending on the
product (Ibid.). After the specified three- to ten-year period, DOE may
promulgate new standards for each product; however, the Secretary may
not prescribe any amended standard that increases the maximum allowable
energy use or decreases the minimum required energy efficiency of a
covered product (section 325(l)(1)).
With regard to television sets, the Act allows DOE to prescribe an
applicable standard. (section 325(i)(3)).
Three products (central air conditioners and central air-
conditioning heat pumps; furnaces; and refrigerators, refrigerator-
freezers and freezers) are the subject of this rulemaking proceeding.
For central air conditioners and central air-conditioning heat pumps,
the Act directs DOE to review each legislated standard for possible
amendment and to issue final rules as follows: for the seasonal energy
efficiency ratio, no later than January 1, 1994, for units manufactured
after January 1, 1999; and for the heating seasonal performance factor,
no later than January 1, 1994, for units manufactured after January 1,
2002. For furnaces, the Act directs DOE to review the previously
established standard for small gas furnaces (54 FR 47916, November 17,
1989), the pending standard for mobile home furnaces, and the
legislated standards for all other covered furnaces for possible
amendment and to issue final rules no later than January 1, 1994, for
units manufactured after January 1, 2002. For refrigerators,
refrigerator-freezers, and freezers, the Act directs DOE to review the
previous final rule, published November 17, 1989, for possible
amendment and to issue final rules no later than November 17, 1994, for
units manufactured after January 1, 1998.
Any new or amended standard is required to be designed so as to
achieve the maximum improvement in energy efficiency that is
technologically feasible and economically justified (section
325(l)(2)(A)).
Section 325(l)(2)(B)(i) provides that before DOE determines whether
an energy conservation standard is economically justified, it must
first solicit comments on the proposed standard. After reviewing
comments on the proposal, DOE must then determine that the benefits of
the standard exceed its burdens based, to the greatest extent
practicable, on a weighing of the following seven factors:
(1) The economic impact of the standard on the manufacturers and on
the consumers of the products subject to such standard;
(2) The savings in operating costs throughout the estimated average
life of the covered product in the type (or class) compared to any
increase in the price, initial charges, or maintenance expenses for the
covered products that are likely to result directly from the imposition
of the standard;
(3) The total projected amount of energy savings likely to result
directly from the imposition of the standard;
(4) Any lessening of the utility or the performance of the covered
products likely to result from the imposition of the standard;
(5) The impact of any lessening of competition, as determined in
writing by the Attorney General, that is likely to result from the
imposition of the standard;
(6) The need for national energy conservation; and
(7) Other factors the Secretary considers relevant.
Section 327 of the Act addresses the effect of Federal rules
concerning testing, labeling, and standards on State laws or
regulations concerning such matters. Generally, all such State laws or
regulations are superseded by the Act (section 327(a)-(c)). Exceptions
to this general rule include the following: (1) State standards
prescribed or enacted before January 8, 1987, and applicable to
appliances produced before January 3, 1988, may remain in effect until
the applicable energy conservation standard begins (section 327(b)(1));
(2) State procurement standards which are more stringent than the
applicable Federal standard (section 327(b)(2) and (e)) and certain
building code requirements for new construction, if certain criteria
are met, are exempt from Federal preemption (sections 327(b)(3) and
(f)(1)-f(4)); (3) State regulations banning constant burning pilot
lights in pool heaters; and (4) State standards for television sets
effective on or after January 1, 1992, may remain in effect in the
absence of a Federal standard for such products (sections 327(b)(6) and
(c)).
The Act directs DOE to publish an Advance Notice of Proposed
Rulemaking in advance of DOE consideration of prescribing a new or
amended standard.
b. Background
In the Advance Notice to which this is a supplement, the Department
indicated its intention more explicitly to consider environmental and
energy security externalities associated with alternative energy
efficiency standards. The Department also noted that it would attempt
to establish monetary values for externalities if a sound analytical
basis could be found for doing so.\2\ If the Department finds that a
sound analytical basis exists, externalities may be incorporated in its
analysis of the net national benefits of alternative levels for the
appliance efficiency standards covered by this rulemaking.
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\2\Energy Conservation Program for Consumer Products, Advance
Notice of Proposed Rulemaking Regarding Energy Conservation
Standards for Three Types of Consumer Products, 58 FR 47326, 47333,
September 8, 1993.
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Externalities arise when the production or consumption of goods and
services imposes costs or confers benefits on members of society
external to the transaction that are not reflected in market prices.
Environmental externalities reflect the net national reductions in the
adverse health effects or other damages associated with a reduction in
emissions of pollutants due to reductions in energy use as appliance
efficiency is increased. Energy security externalities reflect the net
national reductions in energy security vulnerability associated with
reduced reliance on external energy sources.
Many comments received in response to an earlier ANOPR in the
appliance standards program3 indicated a high level of public
interest in this issue.
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\3\Energy Conservation Program for Consumer Products; Advance
Notice of Proposed Rulemaking Regarding Energy Conservation
Standards for Nine Types of Consumer Products, 55 FR 39624,
September 28, 1990.
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The American Council for an Energy Efficient Economy
(ACEEE) suggested that DOE account explicitly for environmental costs
in its economic analysis. (ACEEE, No. 6 at 6).\4\ In addition, Public
Citizen stated that the Department should include in its analyses all
external costs and benefits, e.g., environmental quality, national
security, and reduced energy imports. (Public Citizen, No. 7 at 4).
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\4\In the Appliance Standards rulemaking record, comments are
assigned docket numbers; the second number represents the page
number from the submittal where the issue discussed may be found.
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The Sierra Club stated that the difference between
``Consumer Analysis'' and ``Life Cycle Cost Analysis'' is difficult to
ascertain. They urged DOE to evaluate, as part of the Consumer
Analysis: (a) Environmental external costs; and (b) national security
and balance of payments costs of increased/decreased oil consumption.
(Sierra Club, No. 43 at 2).
The Ohio Office of the Consumers Council (OOCC) said that
the consumer and utility analyses should include monetization of
externalities (environmental and security). Environmental externalities
include sulfur oxides, carbon monoxide, carbon dioxide, nitrogen
oxides, particulate, and other air, water, and land use impacts of
energy production and use. Such considerations should be consistent
with current trends in state utility regulations. (OOCC, No. 60 at 2).
Recognizing that the specification of monetary values for such
environmental and energy security externalities is a complex analytical
effort, the Department is now supplementing its original Advance Notice
for the three-product rulemaking. This supplement provides an
indication of the Department's intent in this area, identifies a range
of specific issues for public comment, and solicits identification of
additional relevant issues.
As indicated in the 1993 Advance Notice, the Department will
attempt to develop analytically sound estimates of the values of energy
and environmental externalities. Provided that such values can be
calculated, the Department intends to use them in the analyses
supporting the proposed and final rules establishing the standards for
the products covered by this notice. Estimates of such externalities
would be considered in conjunction with the estimates of the total net
national benefits (or costs) of the standard, rather than in the
analysis of consumer life-cycle costs. The life-cycle cost analysis is
intended to estimate the actual cost impacts on consumers. So long as
externalities are not internalized, individual consumers would not
incur these benefits (or costs) directly.
The Department believes that the relationship between price and
marginal cost, including the marginal cost of emission controls, bears
significantly on the size of the incremental adjustments to be made in
the analysis in order to incorporate environmental and energy security
externalities into the assessment of net national benefits. The
Department will consider this relationship in determining the monetary
values (if any) that should be placed on the external or marginal
environmental and energy benefits likely to result from appliance
efficiency standards. The consideration of marginal costs in this
context also raises the question of whether the Department should use
marginal electricity prices, rather than estimates of average retail
prices, for the calculation of net national benefits. The Department
invites comments on these issues.
c. The potential impact of externalities on the determination of
appliance efficiency standard levels.
As noted above, the net national benefits estimated by the
Department to result from appliance efficiency standards have, in the
past, excluded environmental and energy security externalities. The
Department recognizes that the approach taken for including these
benefits in economic analyses of alternative appliance standards may
vary, depending on issues and variables that are specific to each
standard under consideration.
Any estimates of environmental externalities would reflect ranges
of uncertainties and be considered with other national benefits
associated with appliance efficiency standards. The consideration of
externality values may or may not influence the appliance efficiency
standards selected for one or more appliances, depending on the
quantitative externality estimates and their relationship to the costs
of higher efficiency and other elements of the analysis.
d. The structure of the Department's analysis.
The Department intends to adopt a consistent approach in the
treatment of externalities and the development of externality values
throughout these rulemakings. Therefore, this analysis starts with
consideration of crosscutting issues that are likely to bear on all
standards and all types of externalities. This analysis of crosscutting
questions provides a framework for an analysis specific to each type of
externality.
The following discussion is framed around a series of focused
issues for public comment. For convenience, the main issues addressed
are numbered consecutively throughout the entire notice. The numbered
set provides a convenient summary of the Department's current view
regarding the issues that bear on the development and use of
externality values in the appliance standards analysis.
Issues related to toxins, solid waste, and discharges affecting
waste quality are not discussed in detail in this notice. However, the
Department invites comment on the potential importance of these
emissions pathways to the determination of externality values. Comments
that are structured so as to address the same generic and externality-
specific issues raised in this notice, while also identifying other
issues unique to particular pollutants or media, would be particularly
helpful.
Finally, it is worth emphasizing that the Department's current
positions on many issues outlined below is not yet firm. Responses to
issues in this supplemental Advanced Notice of Proposed Rulemaking
could substantially alter the Department's approach as the rulemaking
progresses. Parties are also encouraged to raise, and comment on,
additional issues related to evaluating externalities and the use of
such estimates in determining appliance standard levels.
II. Crosscutting Issues
a. Relationship to Existing Environmental Regulation and Existing Uses
of Externality Values in the Resource Planning Process
Issue I: The relationship between existing environmental
regulations or the use of externality values in the resource planning
process and the use of externality values in setting appliance
standards.
Based on its current information, the Department does not believe
that existing programs of environmental regulation or existing uses of
externality adders in the resource planning process preclude the use of
externality values in analyses considered in setting appliance
standards.
The relationship between externality adders and environmental
regulation has been extensively studied. One key finding is that proper
use of externality adders does not turn on whether there is
``overcontrol'' or ``undercontrol'' in existing environmental
regulation. Rather, taking the environmental control regime as given,
the use of externality adders can improve net national welfare by
moving ``private'' decisionmaking within the existing regulatory regime
closer to ``social'' decisionmaking. For example, even if there is
``overcontrol'', it is still desirable that the external impacts of
differences in residual damage resulting from differing emissions
levels associated with alternative energy supply and end-use efficiency
options be reflected in private decision-making.
Based on its current understanding, the Department also believes
that existing uses of externality values in the resource planning
process do not present a barrier to the use of externality values in
setting appliance standards. The former are largely focused on bringing
social costing considerations into capacity planning decisions, while
the latter is focused on reducing marginal electricity demand. The
Department also notes that the use of externality values in the
capacity planning process is far from universal. According to a recent
report of the Consumer Energy Council of America Research Foundation
(July 1993) only seven States and the Bonneville Power Administration
use quantitative externality values.
Issue 2: The impact if any, of existing environmental regulations
on the determination of externality values for use in the appliance
standards analysis.
Based on its current understanding, the Department believes that
the emission-reducing effects of existing programs will affect
externality values in two distinct ways.
First, the form of current environmental regulations can influence
the net emissions impact of changes in energy use associated with
alternative appliance standards. This net emissions impact reflects
both the direct impact of changes in energy use--emissions associated
with changes in primary energy either directly or to generate
additional electricity--and indirect impacts that may arise due to
emission caps, offset requirements, non-attainment rules, or other
features of existing regulations.
For example, if regulation takes a form that fully ``internalizes''
environmental externalities on all of the relevant margins, including,
in the case of electricity, not only utility decisions related to
capacity, but those related to dispatch and additions to capacity, as
well as consumer demand decisions, the role for a supplemental
externality value is difficult to identify. An emission tax equal to
marginal damage that was reflected in the market price is one example
of a policy instrument (albeit not one in widespread use) that would
align private and social decision-making on all three margins.
Second, current regulatory programs, whatever their form, have a
significant influence on ambient concentrations of pollutants. In
general, the marginal damage associated with changes in net emissions
due to alternative appliance standards is sensitive to base level of
pollutant loading.
The Department notes that existing programs, notably implementation
of the Clean Air Act Amendments of 1990, could result in significant
changes in emissions loadings, and therefore change marginal damages,
before the standards promulgated pursuant to this rulemaking take
effect. Economic growth over time would, in itself, tend to have the
opposite effect. The Department is currently considering how best to
assess the marginal damages that should be associated with any
variation in emissions due to alternative appliance standards under
these changing circumstances.
Issue 3: The geographic scope of environmental externalities that
will be considered within the analysis.
Environmental externalities associated with energy-related
emissions arise on all geographic scales. For example, attainment of
ambient air quality standards for criteria pollutants is assessed at
the level of an air quality control region, generally a county or
regional metropolitan area airshed. Concentrations of the criteria
pollutants Nitrous Oxide (NOX), Sulfur Oxide (SOX), and
ozone, the latter for which non-attainment remains a widespread
problem, may be influenced by emissions of Volatile Organic Compounds
(VOCs), NOX and SOX from the energy sector.
Acid precipitation, for which NOX and SOX emissions from
the utility sector are important precursors, is a pollution issue in
which regional transport plays a major role. In some parts of the
country, the same is also true for smog.
Some issues involving energy-related emissions can even transcend
national boundaries. Increasing attention has turned to the possibility
of climate change due to increasing atmospheric concentrations of
greenhouse gas (GHG) emissions. Carbon dioxide, primarily from the
combustion of fossil fuels, is the single most important greenhouse
gas. Because atmospheric concentrations are driven by global emissions
trends, concern with greenhouse gas emissions is truly global in
nature.
The Department believes that emissions impacts on all geographic
scales are relevant to the development of externality values for use in
the context of this rulemaking. However, because appliance efficiency
standards are implemented at the national level, environmental
externalities should be evaluated from a net national perspective.
Thus, for example, based on our current understanding, if variation in
a standard increases environmental damage in some areas while reducing
it in others, only the change in net damage to the nation would be
relevant to the comparison of alternative standards.
b. The Role of Damage-based and Cost-based Measures
Issue 4: The role of damage-based and cost-based measures in the
development of externality values.
The Department believes that both types of measures may play a role
in estimating the net national benefits of selecting alternative energy
efficiency standards. The Department does not view itself as facing a
choice between damage-based and cost-based measures; rather, different
measures are applicable in different cases. Three different cases are
described below.
Regardless of which case applies, in all cases the Department's aim
is to use economic analyses to quantify the change in net national
benefits attributable to different appliance efficiency standards.
Case 1: Changes in the efficiency standard selected will change
national emission levels.
In this case, selecting a more energy-efficient standard will
reduce emissions into the environment. The Department believes that
damage-based measures are the preferred means of valuing the external
effects of these reductions. Damaged-based estimates are a direct
measure of the external effect of variations in emissions levels.
Reductions in damage due to reduced emissions could encompass reduced
human morbidity or illness, reduced property damage, and/or improved
environmental resources.
The Department recognizes that, for many pollutants, the literature
on the damages caused by additional emissions is not well developed.
When information on damages is lacking, the Department may consider the
use of information related to the costs of emissions reduction in its
effort to values externalities. The rationale for this approach is that
control costs convey information about social willingness-to-pay for
emissions reduction. If legislative and regulatory actions to limit
emissions were economically rational (i.e., control measures were
adopted in strictly increasing order of marginal cost, stopping at the
point where marginal control cost and marginal benefits were equated),
marginal control costs would provide an indirect measure of marginal
damages. It is generally recognized, however, that actual regulatory
practice often diverges significantly from these conditions. Therefore,
the Department proposes to consider the use of control cost information
to estimate externality values in situations where changes in
efficiency standards affect emission levels only in those cases where
direct damage information is unavailable.
Case 2: The pollutant is subject to a binding emissions cap and
changes in the efficiency standard selected will not change national
emission levels.
With a binding, national emissions cap in place, the aggregate
level of emissions will not be affected by the appliance efficiency
standard selected. Because of the cap, there is no net change in
emissions and, therefore, there are usually no environmental
externalities.
Although in the case of an emissions cap there is usually no net
environmental change on a national level, and therefore no external
environmental effect, the level of appliance efficiency standard
selected may affect the net national cost of meeting the emissions cap.
For example, such a situation could arise from the need to meet
progress requirements under the Clean Air Act Amendments of 1990. In
such a case, adoption of a less stringent efficiency standard could
trigger adjustments in the State Implementation Plan to impose
additional controls on other sources to compensate for higher emissions
from electricity generation or fuel combustion. If a more stringent
appliance standard were adopted, States might avoid the imposition of
additional controls on other parties.
The Department seeks comments on whether and how the net change in
environmental control costs attributable to variation across
alternative appliance standards should be included as an external
effect. In this regard, DOE notes that the effect on control costs of
lower energy demand resulting from a more stringent appliance standard
will vary according to the structure of pre-existing regulatory
programs. In the case of sulfur dioxide, for example, control
obligations of each emission source will remain fixed, but total
compliance costs will fall. In the case of NOX and of VOCs,
however, lower energy demand could reduce the extent to which State
Implementation Plans must ratchet down control requirements or expand
the set of sources subject to emissions controls. The Department
solicits comment as to whether it is appropriate to differentiate these
two situations, and how to calculate appropriate values of net external
cost savings.
It is worth noting that a binding national emissions cap may become
non-binding over time, for example, through technology improvements.
Case 3: The pollutant is subject to regional emission caps and
changes in the efficiency standard selected will change emission levels
in some areas of the country, but not others.
For situations that fall into this category, DOE would propose to
use a combination of the previous two cases for computing external
effects. Comments on how to combine these two approaches would be
particularly helpful.
Issue 5: The use of cost information to provide a basis for
determining society's willingness-to-pay for emissions reduction.
As noted above, the preferred method for computing damages from a
change in emissions is to rely on direct information from damage-based
studies. When damage-based studies are not available, however, the
Department will consider using control cost information to develop
indirect estimates of externality values.
The Department notes that existing environmental programs may
embody an extremely wide range of marginal costs for emission
reductions for the same pollutant. Costs within existing programs may
vary by an order of magnitude or more across regions, and even across
sources in a given region. For example, some areas have failed to
implement advanced inspection and maintenance programs costing $100 per
ton, while choosing to implement other standards to reduce the same
pollutants costing $3,000 to $10,000 per ton. One issue is whether the
cost of the most expensive option adopted, the least expensive option
rejected, or some other value between the two should be considered as
most representative of revealed societal willingness-to-pay for an
emissions reduction.
Externality values used in state resource planning processes may
provide another expression of revealed willingness-to-pay for emissions
reductions. The Department recognizes that the values used in resource
planning processes are not actually ``paid'' by either consumers or
utilities. However, the use of these values appears to be directly
analogous to that contemplated by the Department in the setting of
appliance standards. As noted above, only seven states applied monetary
externality values as of July 1993. Other jurisdictions applied
qualitative externality values or no such values at all. If externality
values used by state regulators were to be considered as an expression
of willingness-to-pay, the Department would need to develop a national
average measure that fairly characterizes a widely disparate set of
policies across the fifty states. The Department now believes that any
such average should reflect differences in the size of residential
electricity markets across states. We solicit comment and suggestions
regarding how averaging across different policy types could be
implemented.
Another issue related to the possible use of externality values
from the resource planning process is that some states have applied
them in a manner that allows for the application of offsets for some or
all pollutants. With offsets, sources can reduce the quantity of
emissions to which externality values are applied by securing cost-
effective emissions reductions (or emissions sequestration), often at a
cost that is far below the official externality value. In such cases,
the product of actual emissions and the official externality value
would significantly overstate the ``effective'' externality adjustment
actually used in the planning process. The Department is considering
how, if at all, offset policies in the application of ``official''
externality values in the resource planning process bear on the
relevance of these values to the setting of appliance standards, where
offset opportunities would not be available.
Issue 6: The role of damage assessments implicit in official
decisions, such as the setting of ambient air quality standards on
damage estimates used in the appliance standards analysis.
The Department notes that the Environmental Protection Agency (EPA)
and other Federal agencies have the statutory responsibility to
establish standards that reflect their assessment of damages from
environmental externalities. For example, EPA is required to set
primary ambient air quality standards at levels that protect the public
health, including the health of sensitive populations, with an adequate
margin of safety.
On the one hand, the Department could rely on existing standards in
determining that emissions that do not contribute to a standards
violation do not impact human health in any way. Such reliance would
not, of course, preclude the finding of other types of environmental
externalities, such as ecosystem or crop damages, for emissions that do
not contribute to standards violations.
Alternatively, the Department, recognizing that appliance standards
promulgated today will have their primary effect five to ten years into
the future, and that processes for setting environmental standards
often engender significant lags, might wish to consider studies
pointing to adverse health effects at concentrations below currently
applicable standards in assessing health damages. How the Department
could decide which evidence is credible and relevant without
duplicating the review process for setting environmental standards,
which is clearly infeasible in terms of resource requirements, is an
open issue.
C. Utility Pricing and Incremental Externality Values
Issue 7: The impact of the utility sector pricing practices on the
use of externality adders in the appliance standards analysis.
State utility regulatory commissions, motivated by the historical
natural monopoly features of electric and natural gas production,
transportation, and distribution systems (although production systems
are now increasingly seen as allowing for competition), generally set
regulated prices for electricity based on embedded rather than marginal
cost. Based on its present understanding, the Department believes that
the relationship between price and marginal cost can have a major
bearing on the application of externality values in setting appliance
standards.
Some background is helpful. In the absence of externalities, the
theoretical economic conditions for social welfare maximization are met
when price equals marginal cost (a pricing condition enforced by
competition in perfectly competitive industries) and each consumer sets
demand to equate this marginal cost with his/her own marginal private
benefit (or marginal utility). With externalities, this private market
solution diverges from the necessary conditions for a social optimum
because external costs imposed on others are not reflected in decision-
making. An appropriate externality tax or adder can move private
decision-making towards the social optimum.
Within this context, consideration of the effects of a gap between
price and marginal cost on the size of incremental externality values
is straightforward. Suppose, for example, that the price charged to
end-users exceeds the marginal private cost of producing and delivering
electricity (or natural gas) to them. Then, in terms of private
decision-making, the positive gap by which price exceeds marginal cost
would have the same effect as a tax in reducing electricity consumption
(and, implicitly, the emissions and the environmental externalities
associated with production to meet incremental demand).
Because a positive difference between price and marginal cost
functions as if it were a tax, it bears significantly on the size of
the additional externality adder the Department could justifiably
employ when calculating the net national benefit of alternative
standards. For example, if the price of a marginal kilowatt were to
exceed its marginal cost by an amount equal to the value of the
marginal externality damage, the pricing distortion in utility markets
and the externality would together create a situation where utility-
customer decision-making would satisfy the marginal conditions for
social optimality without any further adjustments. An additional
externality adder in this situation would move away from the alignment
of the private and social decision-making problems that motivates
concern with externalities in the first place. Based on this reasoning,
DOE believes that application of an additional externality adder in any
situation where the price of a marginal kilowatt exceeds marginal cost
by more than the value of the marginal externality damage would be
inconsistent with the objective of maximizing net national benefits. In
fact, for this latter case, one can envision arguments in favor of
applying ``subtractors'' to utility rates used in a calculation of net
national benefits.
The Department recognizes that real-world utility pricing systems
are quite complex. Many systems employ a fixed connection or service
charge, together with prices to meet incremental demand that may vary
with the class of service, time of day, or level of demand within a
billing period. The analysis that supports the appliance standards
rulemakings does not reflect this complexity. Rather, a national
average is used to represent current and forecasted consumer prices.
Based on its present information, the Department believes that the
difference between this ``analysis price'' and marginal cost, rather
than the difference between some true marginal price and marginal cost,
is relevant to establishing the gap between price and cost that bears
on the incorporation of incremental externality values in the
Department's analysis. The Department seeks comment on alternatives to
national averages that would better reflect local and regional
differences in consumer prices, as well as the other sources of price
variation mentioned above.
Finally, in some circumstances, the price facing end-users may be
less than marginal cost. The same principles would apply. Even ignoring
externalities, prices below marginal cost encourage demand whose value
to users is less than the cost of production to meet it. To correct
this situation and at the same time reflect externalities that may also
be present, it would be necessary to apply adders larger than the
marginal damage from emissions associated with increased energy demand.
Given the above, the relationship between price and marginal cost
is clearly central to the determination of externality values for use
in setting appliance standards.
Issue 8: Evidence bearing on the relationship between the end-user
price of energy and marginal cost.
First, the Department recognizes that the price/marginal cost
relationship can vary significantly across utilities. Given the
national applicability of appliance standards, we will seek to estimate
a price/marginal cost relationship that characterizes national average
conditions. The rationale here is identical to that for focusing on
national average emission impacts.
Second, the relationship between price and marginal cost may vary
across appliances because of the differences in load shapes. For
example, refrigerators that run continuously might be considered as
contributing to ``base load'', while air conditioners, which are used
most intensively on hot afternoons, contribute primarily to ``peak
load.'' The Department solicits comment on the need to develop
information on the relationship between price and marginal cost,
relevant to each individual appliance.
Finally, there are several different marginal cost concepts. Short
run marginal cost may, in systems with excess capacity, include only
fuel and incremental fuel and operation and maintenance costs. A long-
run marginal cost concept would also include the capital costs of
generating facilities. To the extent that transmission and distribution
infrastructure costs also vary with marginal demand, these too can be
included in marginal cost.
The Department has not yet developed quantitative estimates of the
relationship between price and marginal cost, or determined which
marginal cost concept is relevant to the question of externality
adders. Evidence that would be relevant to such a quantification
includes:
(1) The gap between prices to industrial and residential consumers.
Assuming that PUC's do not permit sales to industrial users at prices
below marginal cost (to do so would force residential and commercial
customers to pick up 100 percent of system fixed costs plus a portion
of variable costs incurred for utility customers), the price of power
to industrial customers with an adjustment for any difference in
marginal transmission and distribution costs between the residential
and industrial classes, could be taken as an upper bound on marginal
supply costs to residential customers.
The Energy Information Administration (EIA) reported national
average electricity rates in 1992 for residential and industrial
consumers of $0.082 per kilowatt hour (kWh) and $0.048 per kilowatt
hour (kWh), respectively. For natural gas, EIA reports average rates in
1992 of $5.87 per thousand cubic feet and $2.82 per thousand cubic feet
for residential and industrial consumers, respectively.\5\
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\5\U.S. Department of Energy, Energy Information Administration,
Monthly Energy Review, March 1993, Tables 9.9 and 9.11.
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(2) The capital and operating cost of incremental capacity. If
meeting marginal demand requires new capacity, the relevant marginal
cost should include capacity cost. Current estimates of fully-loaded
marginal costs for natural gas combined cycle plants or pulverized coal
plants are $0.035/kwh to $0.045/kwh. Again, marginal transmission and
distribution costs, if any, would also need to be considered.
(3) The marginal cost of dispatching the least efficient capacity
in systems with excess capacity. One insight into these costs can be
gained by examining the operation and maintenance costs, on a per
kilowatt basis, of combustion turbines used for peaking purposes on
some systems. Another perspective may be provided by the cost per
kilowatt hour of peak-shaving, demand-side management programs approved
by various public utility regulatory commissions. Public comments
providing information related to these measurement approaches and their
qualification would be especially helpful.
The Department solicits comment on the relevance of the categories
of evidence cited above, as well as other types of evidence, in
establishing a reasoned estimate of the relationship between price and
marginal cost.
III. Environmental Externalities
Issue 9: The types of environmental emissions from the energy
sector to be included in the Department's consideration of the use of
externality values in the context of appliance standards.
In this section, the Department builds on the crosscutting analysis
presented above to outline an approach for analysis of three types of
energy-related emissions--sulfur oxides (SOX), nitrous oxides
(NOX), and carbon dioxide (CO2). The focus on these three
emission categories reflects a similar focus in recent U.S. legislation
and international agreements, most notably the Clean Air Act Amendments
of 1990 and the Framework Convention on Climate Change.
The Department recognizes that there are other types of emissions,
such as particulates, carbon monoxide, air toxins, volatile organic
compounds, solid wastes, and water discharges associated with energy
use. Moreover, consideration of the entire fuel cycle may reveal
additional environmental externalities at the extraction or
transportation stages of the cycle. The Department welcomes comment and
evidence regarding the importance of other types of externalities that
may arise through these and other emissions pathways that are not
discussed below. Comments that are structured so as to address the same
generic- and externality- specific issues raised in this notice, while
also identifying other issues unique to particular pollutants or media,
would be particularly helpful. Each of the discussions of the
individual pollutants addresses a common set of issues as well as
points specific to that emissions category. The common issues are:
Issue 10: The local, regional, national, and global externalities
associated with each type of emission.
Issue 11: The impact of a change in appliance efficiency standards
on emissions, taking account of both direct impacts and the indirect
effects arising from existing regulatory structures.
Issue 12: Evidence regarding the impact of change in emissions on
the level of environmental damage to external parties. Alternatively,
if damage cannot be estimated directly, evidence regarding cost-based
measures available as surrogates.
Issue 13: The impact and relevance of a change in appliance
efficiency standards on the emission control obligations of external
parties.
Finally, it is important to note that the relationship between
price and marginal cost discussed as a crosscutting issue will be
relevant to the determination of whether an application of an
incremental externality value is appropriate in those cases where an
environmental or energy security externality is identified.
a. Sulfur Dioxide
Sulfur dioxide emissions are implicated in environmental effects at
the local, regional, and global level. At the local level, sulfur
dioxide is one of the criteria pollutants for which ambient air quality
standards are established under the Clean Air Act. At the regional
level, sulfur dioxide is a precursor of acid rain, an issue addressed
in Title IV of the 1990 Clean Air Act Amendments. At the global level,
the 1992 Supplementary Scientific Assessment of Intergovernmental Panel
on Climate Change identifies sulfate aerosols as a potentially
significant offset to greenhouse warming that may be caused by
increasing atmospheric concentrations of greenhouse gases.
Based on its present information, the Department believes that
attention in this rulemaking should focus on externalities related to
the acid precipitation pathway, and therefore on the regional effects.
On the local level, there is already widespread attainment with ambient
air quality standards for sulfur dioxide. On the global level, the
effect of sulfur dioxide emissions as an offset to greenhouse warming
remains speculative, and its value may be undercut by its extremely
short duration relative to warming from greenhouse gases.
The acid precipitation issue is addressed in Title IV of the Clean
Air Act Amendments of 1990. Beginning in the year 2000, its provisions
implement a national cap on utility sulfur dioxide emissions of 8.9
million tons together with a system of tradable allowances for
allocating the burden of emissions reduction in a cost-effective
manner. The cap reflects a reduction of roughly 50 percent from 1980
emission levels.
The Department expects that the national emissions cap will be
binding and, concomitantly, that allowance prices will be positive. The
Department notes that allowance transactions at positive prices are
being recorded in increasing number, and there are no known projections
that suggest a non-binding cap.
Under a binding cap, reductions in SO2 emissions at one
location due to reductions in electricity demand would free up
emissions allowances, the use of which could increase allowable
emissions at other locations, unless allowances were ``banked''. With
no change in overall emissions, the Department has no basis for
assuming that alternative appliance standards would cause any change in
environmental damage levels. However, a net national environmental
externality benefit could occur if the pattern of emissions changes
across alternative standards is one that systematically reallocates
emissions from locations where they inflict low marginal damage to
locations where they inflict high marginal damage. Based on its current
information, the Department would assume that emissions reallocation
from reduced electricity demand is environmentally neutral.
If the Department were to determine that emissions reallocation was
not environmentally neutral, the development of damage estimates would
become an issue. In this case, the Department would rely heavily on the
current criteria document for sulfur dioxide, and on the report of the
recent National Acid Precipitation Assessment Program (NAPAP), a 10-
year, $500 Million assessment effort. The Department welcomes comment
on these and other potential sources of damage information.
The Department also solicits comment on the possibility that the
current binding national cap on SO2 emissions will become non-
binding during the time period affected by appliance standards as a
result of technology improvements or cost reduction.
With regard to economic externalities, the Department notes that
changes in electricity demand could affect the market price of
allowances. A change in allowance prices might affect the manner in
which external parties elect to meet their control obligations, but
would not affect the obligations themselves.
b. Nitrogen Dioxides
Nitrogen oxide (NOX) emissions are implicated in environmental
effects at both the local and regional levels. NOX is a precursor
of tropospheric (ground-level) ozone, one of the Clean Air Act criteria
pollutants. NOX is also an acid rain precursor. Finally, changes
in tropospheric ozone levels, by changing total column ozone, may
affect the amount of ultraviolet-B (UVB) radiation reaching the earth's
surface.
Based on its present information, the Department believes that
attention in this rulemaking should address all three of these
externality pathways. According to EPA (1993), the primary ambient air
quality standard for tropospheric ozone is violated more than one time
per year in areas where 66 million Americans live. As noted in the
discussion of sulfur dioxide, acid precipitation is another issue of
significant national and international concern. The potential
importance of the UVB issue is underlined by the fact that concern
surrounding the potential damages from a projected increase in UVB at
the earth's surface was the major reason motivating the phaseout of
chlorofluorocarbons (CFC's), required by the Montreal Protocol to the
Vienna Convention and the CAAA of 1990.
With respect to acid precipitation, the Department would consider
the same factors and information sources as outlined above for sulfur
dioxide. However, the regulatory structure for NOX emissions
outlined in Title IV of the Clean Air Act Amendments of 1990 is built
around low NOX burner technology requirements rather than an
emissions cap. Therefore, the Department would not presume that
national NOX emissions were insensitive to changes in electricity
demand.
With respect to the ambient air quality standards, the Department
believes that three main issues must be considered.
The regulatory structure and damages from emissions
changes in attainment areas (those areas not violating the ambient air
quality standards)
The regulatory structure and damages from emissions
changes in non-attainment areas.
The impact of NOX transport from outside of an area
on ambient air quality conditions in non-attainment areas.
With respect to the first and second points, the Department notes
that roughly one-third of the nation's coal-fired power plants and one-
half of its gas- and oil-fired power plants are located in non-
attainment areas. These are the types of generating plants that,
together with non-utility stationary sources and vehicles, are the
sources of NOX emissions.
Attainment areas: Abstracting from the issue of transport into non-
attainment areas, the Department would rely heavily on the information
underlying the existing ambient standards for tropospheric ozone. These
standards were issued in early 1993. However, at the time the standards
were issued, EPA noted that new studies, done after finalization of the
criteria document on which the standards were based, might suggest
health effects at lower concentration levels. The Department welcomes
comment on whether and how these newer studies, which have yet to be
formally evaluated by the EPA, should be reflected in a damage
assessment. The Department's damage assessment will also consider non-
health impacts drawing on studies included in the criteria document
underlying the latest standards.
Non-attainment areas: In non-attainment areas, reductions in
electricity demand affect the level of NOX emissions in several
ways. Any new generating plants in ozone non-attainment areas that are
needed to meet growing electricity demand would, under the regulatory
structure of Title I of the Clean Air Act, be required to fully offset
their NOX emissions before they could begin operation.
Alternatively, changes in electricity demand could simply affect the
operation rate of existing plants, without triggering offset
requirements for the operating company. In this latter case, the
initial effect would be an increase in emissions. However, Title I also
specifies milestones, or progress requirements, for emissions reduction
in non-attainment areas. These requirements are applicable to NOX
in serious and severe non-attainment areas. If these progress
requirements were binding, a change in the level of emissions from the
operation of existing power plants could affect the level of reductions
that State Implementation Plans would require from other types of
sources in order to meet these requirements. From this perspective, a
change in appliance efficiency standards could change the control
obligations of parties unrelated to appliance purchase decisions.
To develop its analysis on a national scale, DOE will try to
develop information regarding the extent to which each of the cases
described above characterizes prevailing conditions. In order to
develop an acceptable basis for estimating the external benefits
associated with NOX emission reductions in both attainment and
non-attainment areas, DOE will be seeking more information on the
likely marginal effects of appliance standards on net emissions and the
marginal control costs required to meet non-attainment area progress
requirements. DOE will also be seeking better data on how damages and
control costs might vary seasonally, which may increase or decrease the
estimated benefits of particular types of appliance efficiency
standards.
In addition, DOE recognizes the concern that transport of NOX
emissions from attainment areas may affect ozone concentrations in non-
attainment areas, even though they do not trigger offsets either
through the new source program or via progress requirements. DOE
welcomes information and analysis regarding the importance of this
issue for a national evaluation of externality damage, and recommended
approaches for incorporating it into the quantitative analysis.
Finally, the effect of increased tropospheric ozone concentrations
on the level of UVB at the surface, represents a potentially favorable
externality. The Department welcomes comment on the inclusion of this
pathway in the externality analysis, and on the use of information
developed in the context of various rulemakings and assessments related
to the impacts of stratospheric ozone depletion to estimate marginal
damages from reduced ozone.
c. Carbon Dioxide
The Department believes that the potential for climate change due
to an enhanced greenhouse effect, a global scale issue, is the only
relevant externality pathway for carbon dioxide emissions. Clearly,
this is a high priority issue. In 1992, the world community completed
negotiations for a Framework Convention on Climate Change. This
convention has already been signed by 152 nations and should achieve a
sufficient number of ramifications to enter into force by the spring of
1994.
Within the United States, President Clinton and Vice-President Gore
have both identified the threat of climate change as the environmental
issue having the highest priority for the nation and the world. The
President, on Earth Day 1993, announced our nation's commitment to
return its emissions of greenhouse gases to their 1990 levels by the
year 2000. On October 19, 1993, the Administration released a Climate
Change Action Plan outlining a set of specific programs to achieve that
objective. However, unlike SOX and NOX emissions, energy-
related emissions of carbon dioxide are not presently subject to formal
regulatory requirements that go beyond emissions monitoring and
reporting. The Administration's action plan does not include proposals
for any such requirements.
Carbon dioxide emissions in the energy sector are proportionally
related to the level of use and type of fossil fuel. For electricity,
the Department intends to estimate the effect of a change in
electricity use on carbon dioxide by evaluating the ``average'' fuel
mix used to supply marginal changes in electricity demand throughout
the country. The Department welcomes comments and suggestions regarding
these calculations. While the absence of existing regulatory programs
and the simple relationships between primary energy use and emissions
simplify the externality analysis compared to that applicable to
SOX and NOX, the evaluation of marginal damages is far more
challenging for CO2. The effect of domestic emissions levels on
changes in the global emissions trends that determine atmospheric
concentrations of CO2, the effect of these concentrations on the
both the global climate and the U.S. climate, and the timing of any
such effects are all highly uncertain. The effects of changes in
climate on human activities and unmanaged ecosystems are even more
uncertain.
Given the difficulties in estimating the impacts of global climate
change, which is a necessary preliminary step in estimating marginal
damages from emissions changes, only the most rudimentary calculations
have been made. Studies made by the EPA (1989), Nordhaus (1991 and
1992) and Cline (1992) are particularly noteworthy. These authors
candidly admit the preliminary and often speculative nature of their
calculations, and their inability to estimate impacts for important
categories of damages, such as impacts on unmanaged ecosystems.
Based on its present evaluation, the Department believes that the
existing literature does not provide a sufficient basis for developing
estimates of marginal damage. Therefore, the Department is considering
using revealed willingness-to-pay for emissions reductions as a proxy
to represent the social value of emissions reduction.
The October 1993 Climate Change Action Plan represents the most
aggressive national policy statement on emissions reductions to date.
The major portion of energy-related actions in the plan aim to increase
end-use efficiency. These programs are generally voluntary in nature,
and rely on the attractive economics of the targeted energy-efficiency
improvements to attract public participation. It is projected that
reprogramming federal expenditures of $1.9 billion into these areas
will encourage private investments of approximately $61 billion
(undiscounted 1991 dollars) through the end of the decade. These
investments are projected to reduce energy costs (undiscounted 1991
dollars) by $60 billion through the end of the decade, and by an
additional $207 billion though 2010.
Because the plan calls only for investments in efficiency projects
that have a high rate of return, and generally does not mandate these
investments in the event that private parties judge them to be
unattractive, it should not impose any net costs on the private sector.
The exclusion of measures that would impose net costs on the private
sector could itself suggest that, at present, the willingness to pay
for emission reductions is at or near zero. The Department notes,
however, that the plan reflects only those actions taken to achieve a
near-term objective. The President and Vice-President have noted that
the plan is only a first step. Moreover, it is not clear what
amendments or protocols may be made to the Climate Convention, and on
what timescale. For these reasons, an evaluation of willingness-to-pay
implicit in the action plan may not provide an adequate basis for
evaluating the longer term willingness-to-pay for sustained emissions
reduction. The Department notes that estimates of the long-run cost of
emissions reduction varies widely, with bottom-up engineering models
generally providing much lower cost estimates than top-down economic
models.
The Department also notes that utility regulators in several states
employ quantitative externality values for carbon dioxide in the
resource planning process. The Department invites comments on the
relevance of these values to the present rulemaking. Comments that
provide a basis for determining how a national average ``effective''
value might be calculated, taking account of states with and without
CO2 externality values and varying offset provisions, would be
especially helpful.
The Department invites public comment on the most appropriate
methods for estimating the monetary value of reducing CO2
emissions, recognizing the many uncertainties involved.
IV. Energy Security Externalities
Issue 14: The major components of energy security externalities
associated with oil consumption that DOE should consider in this
rulemaking.
Issue 15: The relative importance of the level of oil imports and
the overall level of oil usage within the economy as determinants of
energy security.
The literature on this subject identifies five main avenues through
which energy security externalities can be generated. Authors generally
reach widely varying conclusions about their significance. DOE intends
to study each of these five areas and invites comments on their
significance.
The importance of several of the pathways listed below depends
partially or wholly on the amount oil prices rise in response to an oil
supply disruption. Thus, as a part of its study of energy security
externality values, DOE will consider the likelihood of a disruption,
its size, excess production capacity in other regions of the world, and
how the price shock associated with the disruption might be mitigated
by drawing down strategic petroleum stockpiles. DOE invites comments on
the best approach to study these issues.
With the exception of externalities #3 and perhaps #5 listed below,
the external effects of oil consumption are more closely associated
with the total amount of oil consumed in the U.S. economy, and not oil
imports.
(1) Gross Domestic Product losses resulting from oil price shocks:
Increased world oil prices caused by supply disruptions may cause
macroeconomic shocks to the economy that result in unemployment and
Gross Domestic Product losses. Different studies reach different
conclusions regarding the significance of oil price shocks on
macroeconomic performance. For example, a DOE study (1987) cites
macroeconomic stabilization as one justification for energy security
policy. In contrast, a study by Bohi (1991) finds little, if any, link
between oil price shocks and macroeconomic performance.
(2) Inflationary losses that accompany oil price rises: If oil
prices rise, then the rate of inflation in the economy increases.
Policies to fight inflation can cause increased unemployment and
heighten Gross Domestic Product losses. Further, because many
government payments are indexed to inflation, oil price shocks can
increase the size of the budget deficit. DOE intends to treat these
inflationary losses as part of the Gross Domestic Product loss
component cited previously.
(3) Monopsony price effects: Some economists argue that decreased
domestic oil consumption will lower world oil prices and reduce
payments for imported oil. The reduced U.S. payments for imported oil
benefit U.S. and foreign consumers, but they hurt domestic and foreign
producers. From a U.S.-centric accounting stance, this outcome would be
beneficial because the U.S. consumes more oil than it produces.
Adopting a U.S.-centric stance might be problematic in light of
continuing U.S. policies to encourage free trade. For example, U.S.
exports of products other than oil to both oil exporting countries and
other countries could be reduced as the effects of a reduction in the
value of oil imports work through the trading system.
Recognizing that monopsony-like arguments could be raised to
justify externality values for many types of imported goods, DOE
intends to consider whether there is anything special about oil that
justifies an externality for it, while excluding one for other
products.
(4) Terms of trade effect: Decreased oil imports would improve the
balance of trade and strengthen the U.S. dollar. This would leave U.S.
consumers unambiguously better off. This balance-of-trade effect is not
considered in private decision-making. However, like the monopsony
effect, counting this as an externality raises broader issues regarding
free trade. DOE intends to consider whether there is anything special
about oil that justifies an externality value for it, while excluding
one for other products.
(5) Financing of government strategic stockpiles and military
operations associated with oil: Some analysts have suggested that the
costs of stocking the strategic petroleum reserve and, more
importantly, maintaining the military power needed to minimize oil
supply disruptions are an additional source of externalities. DOE
intends to study this source of externality in more detail, with
particular emphasis on whether the size of the change in import
dependence that might be attributed to alternative appliance efficiency
standards would have any effect on government expenses.
In addition to these quantifiable aspects of energy security
externalities, some analysts contend that reduced oil consumption will
increase U.S. flexibility in conducting foreign policy. DOE intends to
consider this issue, recognizing that any benefit here would again
relate to the size of the impact of the efficiency standards.
Issue 19: The impact of incremental appliance efficiency standards
on oil consumption.
A central issue in trying to estimate the energy security value to
reduced oil imports is the quantitative effect of incremental
efficiency standards on domestic oil consumption. The appliances being
considered in this rule affect oil consumption either directly, as is
the case with oil-fired furnaces, or indirectly by reducing the use of
oil to generate electricity.
In 1990, according to the Annual Energy Outlook for 1993 (AEO93),
about 2 percent of total U.S. oil consumption was used for residential
space heating. By 2010, the same source projects that oil used for
residential space heating will decrease significantly, and account for
only about 1 percent of a higher total oil consumption.
The current efficiency standard for residential oil-fired furnaces
is 78 percent. Moving from the current standard to 95 percent, for
example would after complete stock replacement, reduce oil consumption
in this category by less than 20 percent, and by less if there is a
``rebound'' effect. Marginal changes in this standard could have only
an extremely small effect on total oil consumption.
In the case of appliance standards that affect electricity
consumption, the amount by which oil consumption is reduced depends
upon the fuels used to generate electricity. According to the AEO93,
about 4 percent of the primary energy consumption used for electricity
generation in 1990 was oil-based. That percentage is projected to
remain approximately constant through 2010. Because oil's share of
electricity generation is so small, changes in appliance efficiency
standards for electric appliances will not significantly alter total
oil consumption in the nation.
Based on the national fuel mix used in 1990, each kilowatt hour of
electricity saved will reduce oil consumption by 0.000072 barrels.
Given this ratio, each dollar of externality value attached to a barrel
of oil translates into only 0.007 cents per kilowatt hour on a national
average basis.
Oil-based electricity might be significant in some regions of the
country. Additionally, oil tends to be used for peaking power. DOE
intends to study whether regional and peak-load considerations might
cause significant divergences from the national ratio of barrels of oil
per kilowatt hour. However, because the national ratio is so low, it
seems unlikely that even taking into account regional and peak-load
considerations could result in large energy security externality values
for electric appliances even if a high per-barrel externality value
were deemed appropriate.
Issue 17: The impact of efficiency standards on domestic oil
production and oil imports.
DOE believes that the preponderant share of reduced oil consumption
caused by incremental appliance efficiency standards, will come from
imports. The price of oil is set in a world market and domestic energy
producers supply as much oil as is profitable given that world price.
Unless appliance efficiency standards significantly affect the world
oil price, domestic production will remain largely unchanged and
imports will fall.
The Department has considered, in several recent policy exercises,
the impact of changes in domestic oil consumption on world market
prices. The change in price determines how reduced consumption is split
between reduced imports and reduced domestic production. Current
modeling generally shows that domestic production falls by only about
ten percent of the decrease in domestic consumption. The Department of
Interior's Minerals Management Service also studied this issue in
detail as a part of their 1992 5-Year Leasing Program, and reached
similar conclusions.
Issue 18: The possibility of energy security externalities
associated with non-oil fuels.
The Department does not believe that there are comparable energy
security externalities associated with fuels other than oil. That is
because non-oil fuels consumed in the U.S. are obtained primarily from
domestic sources. The prices of these fuels are primarily determined in
national markets, and are not particularly susceptible to price spikes
caused by supply disruptions in other areas of the world. Because of
these factors, DOE does not intend to consider energy security
externalities for fuels other than oil.
Finally, it is important to note that the generic issue of the
relationship between price and marginal cost outlined in the
Crosscutting Issues section must be considered in the determination of
whether an application of an incremental externality value is
appropriate in those cases where an energy security externality related
to the use of oil in electricity generation is identified. However,
given the competitive market structure of the fuel oil industry, the
Department, based on its current information, presumes that oil sold
directly to residential end-users is competitively priced.
V. Review under Executive Order 12866
The rulemaking on energy efficiency standards for central air
conditioners, heat pumps, furnaces, refrigerators, refrigerator-
freezers and freezers has been determined to be an ``economically
significant regulatory action'' under Executive Order 12866,
``Regulatory Planning and Review,'' (58 FR 51735, October 4, 1993).
Accordingly, today's action was subject to review under the Executive
Order by the Office of Information and Regulatory Affairs (OIRA).
There was no substantive changes between the draft submitted to
OIRA and today's action.
The draft of today's action and any other documents submitted to
OIRA for review have been made part of the rulemaking record and are
available for public review in the Department's Freedom of Information
Reading Room, 1000 Independence Avenue SW., Washington, DC 20585
between the hours of 9 and 4, Monday through Friday, telephone (202)
586-6020.
VI. Public Comment Procedures
a. Participation in Rulemaking
The Department encourages the maximum level of public participation
possible in this rulemaking. Individual consumers, representatives of
consumer groups, manufacturers, associations, States or other
governmental entities, utilities, retailers, distributors,
manufacturers, and others are urged to submit written statements on the
proposal. The Department also encourages interested persons to
participate in the public hearing to be held in Washington, DC at the
time and place indicated at the beginning of this notice.
The DOE has established a period of 60 days following publication
of this notice for persons to comment on this proposal. All public
comments received and the transcript of the public hearing will be
available for review in the DOE Freedom of Information Reading Room.
b. Written Comment Procedures
Interested persons are invited to participate in this proceeding by
submitting written data, views, or arguments with respect to the
subjects set forth in this notice. Instructions for submitting written
comments are set forth at the beginning of this notice and below.
Comments should be labeled both on the envelope and on the
documents, ``Three Products Rulemaking (Docket No. CE-RM-93-801)'', and
must be received by the date specified at the beginning of this notice.
Ten copies are requested to be submitted. Additionally, the Department
would appreciate an electronic copy of the comments to the extent
possible. The Department is currently using WordPerfectTM 5.1. All
comments received by the date specified at the beginning of this notice
and other relevant information will be considered by DOE in the
proposed rule.
All written comments received on the Advance Notice of Proposed
Rulemaking will be available for public inspection at the Freedom of
Information Reading Room, as provided at the beginning of this notice.
Pursuant to the provisions of 10 CFR 1004.11, any person submitting
information or data that is believed to be confidential and exempt by
law from public disclosure should submit one complete copy of the
document and ten (10) copies, if possible, from which the information
believed to be confidential has been deleted. The Department will make
its own determination with regard to the confidential status of the
information or data and treat it according to its determination.
Factors of interest to DOE, when evaluating requests to treat
information as confidential, include: (1) A description of the item;
(2) an indication as to whether and why such items of information have
been treated by the submitting party as confidential, and whether and
why such items are customarily treated as confidential within the
industry; (3) whether the information is generally known or available
to others; (4) whether the information has previously been available to
others without obligation concerning its confidentiality; (5) an
explanation of the competitive injury to the submitting person that
would result from public disclosure; (6) an indication as to when such
information might lose its confidential character due to the passage of
time; and (7) whether disclosure of the information would be in the
public interest.
c. Public Hearing
1. Procedure for Submitting Requests to Speak
The time and place of the public hearing are indicated at the
beginning of this notice. The Department invites any person who has an
interest in these proceedings, or who is a representative of a group or
class of persons having an interest, to make a written request for an
opportunity to make an oral presentation at the public hearing. Such
requests should be labeled both on the letter and the envelope, ``Three
Products Rulemaking (Docket No. CE-RM-93-801),'' and should be sent to
the address and must be received by the time specified at the beginning
of this notice. Requests may be hand-delivered or telephoned to such
address between the hours of 8:30 a.m. and 4:30 p.m., Monday through
Friday, except Federal holidays.
The person making the request should briefly describe the interest
concerned and, if appropriate, state why he or she is a proper
representative of the group or class of persons that has such an
interest, and give a telephone number where he or she may be contacted.
Persons selected to be heard will be notified by DOE as to the time
they will be speaking.
Each person selected to be heard is requested to submit ten (10)
copies of the statement at the beginning of the hearing. In the event
any person wishing to testify cannot meet this requirement, that person
may make alternative arrangements with the Office of Codes and
Standards in advance by so indicating in the letter requesting to make
an oral presentation.
2. Conduct of Hearing
The Department reserves the right to select the persons to be heard
at the hearing, to schedule the respective presentations, and to
establish the procedures governing the conduct of the hearing. The
length of each presentation is limited to 20 minutes.
A DOE official will be designated to preside at the hearing. The
hearing will not be a judicial or an evidentiary-type hearing, but will
be conducted in accordance with 5 U.S.C. 533 and section 336 of the
Act. At the conclusion of all initial oral statements at each day of
the hearing, each person who has made an oral statement will be given
the opportunity to make a rebuttal statement, subject to time
limitations. The rebuttal statement will be given in the order in which
the initial statements were made. The official conducting the hearing
will accept additional comments or questions from those attending, as
time permits. Any interested person may submit to the presiding
official written questions to be asked of any person making a statement
at the hearing. The presiding official will determine whether the
question is relevant and whether time limitations permit it to be
presented for answer.
Further questioning of speakers will be permitted by DOE. The
presiding official will afford any interested person an opportunity to
question, with respect to disputed issues of material fact, other
interested persons who made oral presentations as well as employees of
the United States Government who have made written or oral
presentations relating to the proposed rule. This opportunity will be
afforded after any rebuttal statements to the extent that the presiding
official determines that such questioning is likely to result in a more
timely and effective resolution of disputed issues of material fact. If
the time provided is insufficient or inconvenient, DOE will consider
affording an additional opportunity for questioning at a mutually
convenient time. Persons interested in making use of this opportunity
must submit their request to the presiding official no later than
shortly after the completion of any rebuttal statements and be prepared
to state specific justification, including why the issue is one of
disputed fact and how the proposed questions would expedite their
resolution.
Any further procedural rules regarding proper conduct of the
hearing will be announced by the presiding official.
A transcript of the hearing will be made and the entire record of
this rulemaking, including the transcript, will be retained by DOE and
made available for inspection at the DOE Freedom of Information Reading
Room as provided at the beginning of this notice. Any person may
purchase a copy of the transcript from the transcribing reporter.
Issued in Washington, DC September 21, 1994.
Christine A. Ervin,
Assistant Secretary, Energy Efficiency and Renewable Energy.
[FR Doc. 94-24924 Filed 10-6-94; 8:45 am]
BILLING CODE 6450-01-P