2
Slowing the Growth of Energy Consumption

It is wrong to think of the nation’s energy troubles as simply difficulties in energy supply. The real problem is finding a new balance between energy supply and energy demand, consistent with generally satisfactory overall economic performance.* The generally rising real price of energy lends advantage to higher investments in both supply and conservation. The economic, environmental, and political trade-offs between these two coordinate efforts are not perfectly understood, but it is clear that in many activities throughout the economy it is cheaper now to invest in saving a Btu than in producing an additional one. As prices rise in the coming decades, more such opportunities will appear.

Until only the past few years, falling real prices and the availability of new sources made energy supplies seem virtually inexhaustible. The cheapness of energy fostered buildings, consumer products, industrial processes, and personal habits that used energy in ways that are by today’s standards—and by tomorrow’s no doubt even more—inefficient.

During this period the prices consumers paid for energy did not fully reflect its costs to society (as they still do not, though some steps have been made). Some resource costs and diverse social costs were borne by society at large rather than directly by the producers and users of energy. Subsidies, for example, were applied to the production and use of various

*

See statement 2–1, by R.H.Cannon, Jr., Appendix A.



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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems 2 Slowing the Growth of Energy Consumption It is wrong to think of the nation’s energy troubles as simply difficulties in energy supply. The real problem is finding a new balance between energy supply and energy demand, consistent with generally satisfactory overall economic performance.* The generally rising real price of energy lends advantage to higher investments in both supply and conservation. The economic, environmental, and political trade-offs between these two coordinate efforts are not perfectly understood, but it is clear that in many activities throughout the economy it is cheaper now to invest in saving a Btu than in producing an additional one. As prices rise in the coming decades, more such opportunities will appear. Until only the past few years, falling real prices and the availability of new sources made energy supplies seem virtually inexhaustible. The cheapness of energy fostered buildings, consumer products, industrial processes, and personal habits that used energy in ways that are by today’s standards—and by tomorrow’s no doubt even more—inefficient. During this period the prices consumers paid for energy did not fully reflect its costs to society (as they still do not, though some steps have been made). Some resource costs and diverse social costs were borne by society at large rather than directly by the producers and users of energy. Subsidies, for example, were applied to the production and use of various * See statement 2–1, by R.H.Cannon, Jr., Appendix A.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems energy resources, and many of the environmental and other social impacts of producing and using energy were simply unaccounted for. The underpricing of energy encouraged rapid increases in the use of our most convenient and irreplaceable fossil fuels. At the same time, it provided inadequate incentives to search for additional supplies or substitutes. It is precisely because of this cheap-energy climate, and the consumption patterns it fostered, that there is now so much room for improvement in the efficiency of energy use before we shall begin to feel any serious economic penalties. Transportation (particularly via highway vehicles), comfortably warm or cool buildings, and industrial heat can be provided by much less energy than has been customary. In the future, if current trends in the cost of energy continue, the amount of energy consumed to provide a given economic product will gradually decrease. As the economy moves toward a new economic balance between the costs of energy and those of capital, labor, and other factors of production, it will surely come to produce goods and services with much improved energy efficiency. DETERMINANTS OF ENERGY DEMAND Energy is an intermediate good, valued not for itself but for the services it can provide. The amounts and kinds of energy needed to perform a given set of tasks are not fixed but vary from time to time and place to place, depending on a number of technological, economic, and demographic variables. The most important independent variables in this case are the level of economic activity, measured by the gross national (or gross domestic) product,1 and the relative prices of energy in its various forms. These in turn influence the composition of GNP and the efficiency with which energy is used. Secondary influences are provided by such factors as climate and the geographical distribution of population and industry.* A useful measure of the energy intensity of a society is the ratio of its energy consumption to its economic output, measured in dollars of constant purchasing power. This ratio is expressed for convenience as energy/GDP or energy/GNP. Among the advanced industrial societies it varies by a factor of about 2. The United States energy-to-output ratio is one of the highest. Some, but not all, of this difference is due to geographical and demographic differences. European configurations of industry and settlement, for example, are more compact than those of this country, and * See statement 2–2, by J.P.Holdren, Appendix A.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems transport distances are correspondingly shorter. International variations in this ratio depend most importantly, however, on the price of energy, as it influences the efficiency with which energy is used. Most nations tax energy and energy-consuming equipment in ways calculated to induce efficiency, and such policies have tended to constrain energy consumption. For example, Western European countries have generally taxed gasoline to price levels double those in the United States, and have instituted purchase taxes on automobiles more or less scaled to their fuel consumption. This has resulted in cars with better fuel economy, in heavier use of public transportation, and generally in fewer miles driven per vehicle per year. Higher fuel prices have induced Western European and Japanese industries also to be relatively economical of energy, and to take advantage of technical innovations in energy efficiency that in this country have been of little or no economic benefit until recently. From the end of World War II until the 1973–1974 OPEC price rise, the real prices of most forms of energy declined steadily, as energy producers took advantage of economies of scale and technical innovation, as well as subsidies like the oil depletion allowance. Declining real prices stimulated demand for energy in all countries, including the United States. Still, the U.S. energy/GNP ratio declined from 1920 until 1945 and then remained fairly constant until very recently, when signs of a further decline began to appear as a consequence of rising prices. The abrupt oil price rise after the 1973 embargo and the accompanying rise in the prices of other fuels have brought about declines in the energy-to-output ratios of all the industrial nations. However, the full effects on energy consumption have not yet been seen. This is because energy, as an intermediate good, depends on durable goods such as furnaces, automo biles, refrigerators, or buildings to provide its ultimate service. The economy’s adjustment to higher energy prices thus depends largely on the replacement of capital goods and consumer durables with more efficient models as the old ones reach the ends of their useful lives, and only secondarily on such immediate consumer responses as driving less or turning thermostats down. The response of energy consumption to changes in price is usually specified by a number called the price elasticity of demand, defined as the ratio of a percentage change in consumption to the percentage change in the price of energy that evokes it. Thus, if a 10 percent price rise evokes a 5 percent decrease in consumption, we speak of a price elasticity of demand for energy of −0.5. Because it takes time for consumption to adjust fully to a new price level, economists refer to short-term and long-term elasticities, with implied lags for adjustment. The values of price elasticities are usually deduced from historical data, from international or interregional comparisons, and from microeconomic estimates and engineering

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems analyses of the feasibility and costs of substituting new, more efficient ways of using energy. These estimates are subject to large uncertainties, and their values have been much debated. The response of U.S. energy consumption to the OPEC price rise of 1973–1974, for example, is compatible with a wide range of different models. It is equally consistent with a small long-term elasticity and a short adjustment time or a large long-term elasticity and a long adjustment time. Yet the energy consumption for 2010 extrapolated using these two models could vary by almost a factor of 2.2 This matter is pursued further in a later section of this chapter, which describes the CONAES Modeling Resource Group’s econometric analysis of just this question. It is enough to say here that the elasticity value one chooses makes the difference between negligible and profound reduction in GNP growth as a result of large reductions in the energy intensity of the economy. The larger the price elasticity in absolute value, the more it is possible to moderate energy demand without depressing economic growth. ENERGY PRICES AND EXTERNALITIES Two obvious questions arise from the foregoing discussion: What is the likely future course of energy prices, and to what extent are they subject to control by policy? In addressing these questions it is important to realize that the historical decline in the price of energy, due to technical refinements, economies of scale, and neglect of social costs, was reinforced by a variety of direct and indirect subsidies to energy producers and consumers. Examples are the oil depletion allowance, income tax treatment of foreign royalties, and special tax treatment of drilling expenses. This is a complex and controversial question, however. Some policies—notably the oil import quotas of the late 1950s and the oil production controls imposed by the Texas Railroad Commission (applied until the late 1960s)—acted as countervailing factors, tending to raise prices. Whatever the magnitude of the effect, it is clear that the low price of energy has encouraged consumption and discouraged production and exploration for new supplies. Even after the OPEC price rise, the entitlement policies of the federal government (which spread the costs of imported oil relatively evenly over the domestic market), along with the continuation of price controls on domestic oil and gas, provided effective subsidies to imported oil. The trend begun in the late 1960s toward incorporating more of the environmental and other social costs of energy into its price is likely to continue pushing prices up. The need to search for and produce energy resources in increasingly inaccessible areas, often in hostile environments,

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems will also contribute to the upward trend, as will the ability of foreign producers to demand higher prices in an oil market that belongs more and more to the sellers. Energy in most forms is likely to rise in price faster than the rate of general inflation, and consumption will therefore tend to grow more slowly relative to GNP than in the past. THE ROLE OF MANDATORY STANDARDS Tax, tariff, and price control policies, as we have seem, are important influences on the demand for energy. But energy consumption can also be molded directly—for example, by the imposition of mandatory standards for the efficiency of energy-using equipment (miles-per-gallon standards for automobiles, thermal performance requirements for new buildings, and so on). There are reasons to believe that such standards will be necessary in some cases to encourage economically rational demand responses to higher energy prices. This is because most energy-consuming equipment embodies trade-offs between initial costs and lifetime energy consumption; in general one must use extra insulation, larger heat exchangers, or the like to reduce the amount of energy consumed in performing the given task. This increases the initial cost, in exchange for future savings in energy costs. Consumers tend to be more influenced by first cost than by prospective operating costs. Where this is true, they have less economic incentive to purchase equipment on the basis of its energy consumption, even if that would be economically advantageous over its lifetime.* Mandatory standards applied to manufacturers and calculated to minimize life cycle costs (at some increase in initial cost) could serve the need for conservation while actually saving money for consumers in the long term.† DEMAND AND CONSERVATION PANEL RESULTS The Demand and Conservation Panel of this study developed a range of energy demand projections for the period 1975–2010.3 They vary from a long-term decrease in per capita energy consumption to a large increase, and were the products of a series of scenarios embodying different assumptions about movements in energy prices. The prices assumed are those experienced by the consumer at the point of consumption and include the effects of any taxes or subsidies. These prices could also be * See statement 2–3, by H.Brooks, Appendix A. † See statement 2–4, by E.J.Gornowski, Appendix A.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems regarded as surrogates for various nonprice conservation policies, although no correspondence between prices and policies was actually worked out. Scenarios of this kind, it should be noted, are not predictions. They are rather the results of calculations based on simplified models of the economy and on more or less plausible and self-consistent assumptions about the future. The panel’s four basic scenarios depend on a 2 percent average annual real GNP growth rate between 1975 and 20104 corresponding to a real GNP in 2010 twice that in 1975. A variant explored the implications of a 3 percent growth rate, corresponding to a 2010 GNP 2.8 times as high as in 1975. (Table 2–1 traces, for reference, the growth of GNP in the United States from 1945 to 1975.)* The use of GNP as a measure of public welfare, of course, has its limitations. The appendix to this chapter discusses them briefly and offers an approach to a more accurate measure. The basic assumptions included population growth to 279 million people in 2010, labor-force participation somewhat higher than today’s, and other assumptions about key economic variables, including a substantial decline below the historical (pre-1970) rate of increase in labor productivity. Table 2–2 gives the central features of the scenarios, including price assumptions and energy consumption values resulting from them. (For a more detailed account of these assumptions see chapter 11 and the report of the Demand and Conservation Panel.) In general the movement of primary energy prices tends to be greater than that of prices to the consumer. For example, the 100 percent rise in average primary energy prices between 1970 and 1978 corresponds to only a 30 percent average increase in final energy prices. The Demand and Conservation Panel scenario with the highest annual rate of secondary energy real-price increase uses a value of 4 percent. This is slightly less than the rate experienced between 1972 and 1978 and substantially less than that experienced between 1972 and 1979 (including the 1978–1979 price rises). However, it is hard to make a plausible case that rates of increase significantly greater than this could be sustained out to 2010. The scenario analysis was made under the assumption that most characteristics of the national economy will behave in the coming decades much as they have in the past. The kinds of goods and services purchased by a consumer with a given income, for example, were assumed to change little, as were general attitudes and ways of life, although shifts in purchasing habits associated with increased affluence were accounted for. ‡ Statement 2–5, by R.H.Cannon, Jr.: Over the 33-yr period 1946 to present, GNP follows a 3.4 percent growth line remarkably closely. Using 2 percent here predestined dangerously low energy demand projections. * Statement 2–6, by R.H.Cannon, Jr.: Table 2–1 simply displays short-term variations. See my previous note.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 2–1 Past Economic Growth in the United States Year GNP (billions of 1975 dollars)a Five-Year Average Growth Rate (percent) 1945 679       0.0 1950 679       4.2 1955 833       2.4 1960 937       4.7 1965 1178       3.0 1970 1368       2.1 1975 1516   aSource: U.S. Department of Commerce, The National Income and Product Accounts of the United States, 1929–1974: Statistical Tables, Bureau of Economic Analysis (Washington, D.C.: U.S. Government Printing Office (003–010–00052–9), 1976). Fuel price elasticities used in certain analyses of the transportation and buildings sectors are extrapolations consistent with historical data and with engineering projections for each price. No major technical breakthroughs are assumed. The panel used engineering and microeconomic methods in each of the three key sectors of energy use (buildings and appliances, industry, and transportation) to determine likely changes in energy intensities and overall sectoral energy consumption as responses to changes in price. Each of the sectors was analyzed separately, and the results were integrated into a total demand projection using input-output techniques to ensure internal consistency. Over the first decade of its projections, the panel used in addition conventional econometric analysis, which relies heavily on empirical evidence from the recent past and from international comparisons. Consumption, price, income, and other data were used in calculations that reflect the characteristics of existing capital stock, population, and economic activity. In the panel’s scenarios for 2010, the ratio of energy use to GNP ranged from half its 1975 value to about 20–30 percent higher. The panel found this entire range to be consistent with a level of GNP substantially greater than the present one.4 In physical terms this would be accomplished by consumers’ substituting capital for energy (e.g., insulation for fuel) or vice versa, depending on whether energy were cheap or costly, scarce or

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 2–2 Scenarios of Energy Demand: Totals Scenarioa Average Delivered Energy Price in 2010 as Multiple of Average 1975 Price (1975 dollars)b Average Annual GNP Growth Rate (percent) Energy Conservation Policy Energy Consumption (quads) Buildings Industry Transportation Total Lossesc Primary consumptiond Actual 1975 —   — 16 21 17 54 17 71 A* (2010) 4 2 Very aggressive, deliberately arrived at reduced demand requiring some life-style changes 6 26 10 42 16 58 A (2010) 4 2 Aggressive; aimed at maximum efficiency plus minor life-style changes 10 28 14 52 22 74

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems B (2010) 2 2 Moderate; slowly incorporates more measures to increase efficiency 13 33 20 66 28 94 B′ (2010) 2 3 Same as B, but 3 percent average annual GNP growth 17 46 27 90 44 134 Ce (2010) 1 2 Unchanged; present policies continue 20 39 26 85 51 130 aScenario D is not included in this table; its price assumption (a one-third decrease by 2010) appears implausible. bOverall average; assumptions by specific fuel type were made reflecting parity and supply; price increases were assumed to occur linearly over time. cLosses include those due to extraction, refining, conversion, transmission, and distribution. Electricity is converted at 10,500 Btu/kWh: coal is converted to synthetic liquids and gases at 68 percent efficiency. dThese totals include only marketed energy. Active solar systems provide additional energy to the buildings and industrial sectors in each scenario. Total energy consumption values are 63, 77, 96, and 137 quads in scenarios A, A*, B, and C, respectively. eThe Demand and Conservation Panel did not develop a scenario combining the assumptions of unchanging price and 3 percent average GNP growth. If scenario B′ is used as an approximate indicator, such an assumption would entail a primary energy demand of about 175 quads.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems abundant (Scarcity and abundance in this context can be thought of as induced by taxes, subsidies, or regulations, as well as by realizations of the actual quantities of various resources available.) Outside this range, the Demand and Conservation Panel hesitated to offer statements based on its analyses. But at some point not far below the lowest energy scenarios examined, appreciable reductions in GNP should be expected. The panel’s analysis assumed that large variations in the energy required per unit output were compatible with a given level of labor productivity. That this will be so is not certain; there is no available research to indicate the possible effect of energy intensity on labor productivity. Capital requirements for the entire economy were shown to be relatively constant for all scenarios; investment simply shifts between energy production and energy conservation. (In practice, if there are large shifts in the required allocation of capital, there may be temporary bottlenecks of capital availability to particular sectors for institutional reasons.) Actually, the panel found that at present it takes considerably less capital to save a Btu than to produce one. As the more productive opportunities for saving energy are exploited, this will become less generally true. The following sections, based on the work of the Demand and Conservation Panel and others, describe this study’s assessments of the opportunities for conservation over the next several decades within the framework of the demand scenarios. TRANSPORTATION Energy savings in transportation can be achieved through modest investments in existing technology and improved management. The greatest such savings can be realized in automobiles, aircraft, and freight trucks. Because of the typically dispersed U.S. settlement patterns, the energy-saving potential of mass transportation, particularly fixed-rail transit, is far less, except over periods longer than the 35 years considered in this study. In total, it may be possible to halve the energy requirement per passenger- or ton-mile in the United States over the next 25–35 years. This could offset the large expected increase in the amount of transportation, and in turn lead to total energy consumption of, for example, 27 quadrillion Btu (quads) for transportation in the Demand and Conservation Panel’s scenario B′, in which real energy prices double and GNP rises by an annual average of 3 percent (corresponding to a total GNP 2.8 times higher in 2010 than in 1975). Under the scenario A assumptions that real energy prices quadruple and GNP growth averages 2 percent, total energy consumption for transportation in 2010 could be as low as 14 quads, below the present total of 17 quads.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems Automobiles The automobile offers the greatest single opportunity to improve the energy efficiency of the U.S. transportation system. The fuel economy of the automobile fleet could be raised to 30–37 miles per gallon by 2010 for less than a 10 percent increase in manufacturing costs (in constant dollars).5 The fuel-efficient automobile fleet for 2010 would consist of light, energy-conserving, 2-, 5-, and 6-passenger cars with performance, comfort, and safety similar to those of 1975 cars except for lower acceleration and somewhat smaller interior size. Energy savings much beyond this, however, would involve major advances in technology, compromises in performance, or higher costs. The fuel savings themselves should be considered in context; steady improvements in fleet fuel economy over the next few years must be achieved, but at the same time efforts must be made to meet increasingly stringent standards for engine emissions. Gains toward one make gains toward the other more difficult. The potential for energy conservation in replacing today’s automobiles with more efficient ones after their 10–15 years on the road is so great that total annual fuel consumption by automobiles could remain relatively constant over the next 30 years, over which time the total national mileage driven can be expected to increase by 50–100 percent. The total cost of owning and operating an automobile, however, is not very sensitive to fuel economy, and even a well-informed buyer may find little to prefer in a fuel-efficient car. Thus, fuel economy standards must augment the incentives of the marketplace if the potential energy savings are to be realized.* Other policies might include one or more of the following: allowing the price of gasoline to rise toward its free-market value; advertising accurate miles-per-gallon figures for each model; setting yearly registration fees by vehicle efficiency or weight; taxing new cars according to fuel efficiency; and enacting a gradual rise in gasoline taxes. Electric vehicles offer some opportunity to moderate the demand for petroleum in the transportation sector, if the electricity is generated from sources other than oil. They may offer other advantages too—for example, shifting pollution from the vehicle to the power plant and raising the off-peak demand for electricity. Available electric vehicles have important limitations (such as range), but may with improvement find an appropriate market, such as driving within metropolitan areas. The energy-conserving potential of electric vehicles depends on the availability and costs of liquid fuels, on institutional and environmental issues, and on the development of high-energy-density batteries. Their attractiveness for a growing number of * Statement 2–7, by E.J.Gornowski: My statement 2–4, Appendix A, also applies here.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 2–6 Opportunities for Technological Research and Development in Support of Energy Conservation   Buildings and Appliances Transportation Industry Basic studies Properties of materials Automatic control technology Materials properties, e.g., strength-to-weight Thermodynamics of internal/external combustion engines Chemical energy storage Automatic control technology Materials properties at high temperatures Characteristics of industrial combustion Heat transfer and recovery methods Automatic control technology Near-term energy-use patterns Automatic set-back thermostats Pilot/burner retrofit Specific data on factors that influence fuel economy of existing cars Improved methods for energy monitoring and housekeeping Improved methods for scrubbing combustion gases Intermediate-term retrofit Reinsulation methodologies Solar water heating and passive design Metering for time-dependent utility pricing Automatic ventilation control for building and appliances (e.g., clothes dryers) Improved power-to-weight ratios, as well as interior volume-to-weight ratio Instrumentation to provide driver with real-time data on fuel efficiency Improved intermodal freight and passenger terminals Improved traffic control Process retrofit technologies Improved combustion of marginal fuels Cogeneration of heat and electricity Automated monitoring of energy performance Low-temperature heat utilization Long-term technologies High-performance electric and heat-driven heat pumps Solar space cooling Sophisticated appliance controls and integrated appliance design More sophisticated design of buildings to provide desired amenities at low energy demand New motors Improved aerodynamic design for cars, trucks New primary energy sources (liquid, electric) Improved intermodal transfer technology Technology for improved energy efficiency in air transport Basic new processes that reduce overall requirements for energy and other resources (e.g., recycling, durability) per unit output Modification of material properties to enable replacement of energy-intensive materials with less energy-intensive material in specific applications

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 2–7 Opportunities for Economic, Social, and Behavioral Research in Support of Energy Conservation   Buildings and Appliances Transportation Industry Basic studies Consumer motivation and decision processes Demand as a function of price, income, and demographic factors Influence of taxes, social factors on first cost or life cycle cost decisions Standardized data (e.g., performance data on new stocks) Analysis of effects of initial cost and energy use on purchase patterns for consumer durables Basic consumer purchase motivations Standardized data (e.g., fleet average miles per gallon for cars and trucks, by function) Effect of relative prices on choice of transportation mode Identification of energy subsidies and effects Relationship between industrial demand, national economics, and demographic features of our society Consequences for energy use of alternative long-term raw material programs Standardized data (e.g., energy per unit output statistics) Near-term energy-use patterns Identification of information useful in modifying consumer behavior to reduce energy waste (e.g., effects of thermostat setbacks) Ways to induce near-term commitment to solve long-term energy problems (investment choices and behavior patterns) Ways to influence drivers’ habits that affect energy consumption in existing cars Ways to induce actions in the near term in response to a long-term problem Development and demonstration of improved techniques for corporate energy management (e.g., energy audits, energy accounting, energy information systems, etc.) Evaluation and demonstration of mechanisms, motivation factors, and procedures for minimum life cycle cost

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems       decisions in procurement (e.g., light-weight steel versus plastic for lighter automobiles) Development and demonstration of systems to increase recycling of basic materials (e.g., steel, glass) Intermediate-term energy-use patterns Improved information on benefit/cost of energy performance in new and retrofitted housing, appliances Intermodal shifts of freight Reform of driver-training programs Identification and removal of regulatory constraints to more efficient passenger and freight transport Ways to encourage energy-related corporate investment decisions on the basis of applicable marginal or future energy costs Long-term technologies Improved quality and craftsmanship in manufacturing and construction Matching desired level and comfort to minimal resource demands Increased use of mass transportation Improved design for energy consumption Zoning and land-use strategies that sustain and enhance mass transportation, modal shifts Experimentation and analysis of incentives for innovation in industrial energy use Identification and evaluation of incentives to increase product durability

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems efficiency of energy conversion and end-use, the composition of energy consumption, and movements in energy prices. The energy/GDP ratios of industrialized countries with similarly high levels of GDP per capita vary over a significant range. Although many differences help account for this variance, past energy prices in the different countries are major factors. The analyses of the Demand and Conservation Panel indicate that the energy necessary to produce a given unit of economic output can be substantially reduced by (1) lowering the energy intensity of production, (2) changing the composition of energy consumption, and (3) shifting to an inherently less energy-intensive mix of goods and services. The critical parameter for estimating the extent to which these energy-conserving measures will actually be used in any assumed scenario of future energy prices, and the feedback of this reduction in energy use on GNP, is the long-term price elasticity of demand for energy. For small reductions in energy consumption—10–20 percent below the Modeling Resource Group’s market-equilibrium base case value for 2010—assumed price elasticities between −0.25 and −0.50 yield approximately the same feedback effect on cumulative GNP between 1975 and 2010 (a 1 percent decline). For larger reductions, the high and low elasticity values yield widely different results. This uncertainty in estimating the price elasticity of demand for energy produces a considerable range in estimates of energy demand over the next three decades. Nevertheless, the projections by the Modeling Resource Group all imply a gradual long-term decline in the energy/GNP ratio, without substantial impacts on economic growth. The most powerful influence acting to moderate the growth of energy consumption in the analyses of this study is smoothly rising prices for energy, although realizing the effect of prices may require supplementation by regulations and minimum standards of performance for energy-using equipment.* The economy will need time to change. Opportunities to reduce the consumption of energy are realized primarily through the replacement of present capital stock with less energy-intensive stock; this will generally take 10–40 years even under the pressure of rising energy prices and other incentives. In sum, it appears that the energy-to-economic-output ratio in the U.S. economy can be lessened, over the long term, and that prudent, sustained * Statement 2–19, by E.J.Gornowski: My statement 2–4, Appendix A, also applies here.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems policies can help the economy continue growing with constrained growth of energy consumption. POLICY RECOMMENDATIONS The analyses described in this chapter depend generally on the plausible assumption that energy prices will continue rising to reflect scarcity and intensified world competition for supplies; increasingly expensive discovery, extraction, and conversion of energy resources; the costs of environmental protection and repair; and so on. The willingness to invest in capital substitutions for energy and to practice energy conservation clearly rises or falls with changes in the anticipated price of energy. Conservation of energy represents a middle- to long-range investment; if the investment is to be made, the signals the economy reads from prices for energy must be unambiguous, and the trends reasonably predictable over the lifetimes of normal investments. However, because even accurate, widely noted market signals are sometimes insufficient to guide market decisions in the direction of energy conservation—as, for example, when the total cost of owning and operating a particular facility, appliance, or process is relatively insensitive to energy efficiency—price alone cannot carry the burden of effective conservation policy.* At a minimum, energy prices should rise smoothly to levels that reflect the incremental cost to society of producing and using additional secure sources of energy. Environmental costs—coal mine reclamation, emission controls, and the like—must be incorporated in the price of energy. Subsidies to energy users, such as price controls and crude oil entitlements, should be eliminated over time. For such a pricing policy to have its greatest effect, consumers must be provided with the most accurate possible information on its implications. That is, the energy costs of appliances, building features, and industrial equipment must be as clearly as possible referrable to the corresponding initial costs, so that consumers can make the necessary cost trade-offs with ease. Labeling appliances to indicate their energy consumptions is a good first step for the benefit of individual consumers; publicizing the energy trade-offs in various forms of insulation and other building improvements would also yield substantial benefits. For many industrial processes, adoption of energy-conservative technology is balked by uncertainty about its costs and benefits, and most industrial establishments tend to be conservative in making such decisions * Statement 2–20, by E.J.Gornowski: My statement 2–4, Appendix A, also applies here.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems in the face of uncertainty (though when the benefits are obvious, industrial energy consumers are probably quicker to seize them than household consumers). It might therefore be beneficial to carry on a few governmentsupported demonstrations of promising technologies in actual industrial situations. Investment tax credits to encourage conservation investments would also be useful, especially for inducing more efficient use of oil and natural gas, as in cogeneration or integrated utility systems. Where energy prices are insufficient to induce the appropriate, economically rational responses from consumers—as they are, for example, in the case of the automobile—they could be supplemented by nonprice measures.* Mandatory fuel economy standards, installation of peak load charges or cutoff devices on certain energy-intensive equipment, thermal integrity standards for buildings, and other similar measures may all be useful policy instruments. The scope of this study did not allow us to explore deeply the potential conflicts between energy policy and other national goals. We are particularly concerned that higher prices for energy may affect inequitably those least able to pay—low-income households in rental housing, small businesses—or particular regions of the country. Public policy must attend to the untoward consequences of higher prices. However, compensation to disadvantaged consumers should take the form of discretionary funds rather than being tied directly to energy (as it would be, for example, with “energy stamps”). Otherwise such consumers would have no incentive to make energy-conserving investments. Several economic analyses suggest that policies tending to reduce energy consumption per unit of output also tend to increase labor inputs. Thus, investing capital to increase energy efficiency is likely to generate more employment than investing the same capital to increase energy supply, It has been suggested that taxing energy to increase energy prices and devoting the revenue thus derived to reducing employment taxes is likely to reinforce the substitution of labor for energy.49 The committee has not discussed these arguments in detail, nor has it addressed the political feasibility of such adjustments, The several implications for policy justify further investigation and evaluation. Federal and state programs to provide financial resources for conservation investments also encourage job creation.† While conservation measures can be selected with an eye to other national objectives—the most important of which may be social equity—they should not be unduly encumbered by competing demands. The * Statement 2–21, by E.J.Gornowski: My statement 2–4, Appendix A, also applies here. † Statement 2–22, by E.J.Gornowski: The paper hypothesizes—but does not assert—that conservation investments create more employment than production investments. This has not been substantiated.

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems resolution of social inequity, for example, deserves its own instruments. The amount of energy consumed in the future will be determined by economic evolution in the market place, and by events and forces many of which cannot now be foreseen. General directions can be selected for the growth of consumption, but attempts to plot the future in detail are likely to founder on the unexpected cumulative effects of many small decisions. We have attempted here only to sketch possible patterns of growth, and to indicate how these might be affected by various near-term choices. APPENDIX: A WORD ABOUT GNP GNP is a composite of many items that mean different things to different people—the summation of apples, can openers, bus rides, homes, and other things. Its calculation is made possible by the use of their market prices, a rough reflection of their economic costs of production in quantities determined by the preferences and purchasing power of consumers. Statistical observation of these quantities and market-balancing prices yields GNP estimates for many nations. It also results in a bias toward items whose prices are determined by the market at the expenses of items, perhaps at least as important, for which no market prices exist Several corrections have been made or proposed for a more ample concept that expresses aggregate economic welfare. One such attempt, for example, is the recent proposal by Nordhaus and Tobin,50 for a measure of economic welfare (MEW), illustrated by their estimates for 1 year as shown in Table 2-A1. The corrections and extensions made in this table are of two kinds. Some eliminate the cost of necessary activities that do not directly add to welfare but are aimed at preventing its impairment; these are more correctly regarded as inputs than as outputs. Other corrections add nonmarket activities and uses of time that contribute very substantially to welfare. The economic values of these additions are estimated by the market prices on alternative uses of the time or other resources devoted to these activities. There is one specifically “environmental” effect in the list of corrections, that for disamenities of urbanization, estimated from the wage differential for comparable work that holds people in the cities. The energy problems that are the focus of the CONAES study involve a great many more environmental effects that are difficult to assess economically. The costs of abating air and water pollution by standards already enforced are included in current GNP estimates as costs of production and consumption. These

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems TABLE 2-A1 Gross National Product (GNP) and Measure of Economic Welfare (MEW), United States, 1965 (billions of dollars at 1958 prices) Gross national product   618 Allowance for depreciation of capital −55   Net national production   563 Regrettable necessities (defense, police, sanitation, etc.) −94   Value imputed to desired leisure (at wage rate) 627   Value imputed to housework and other nonmarket work 295   Disamenities of urbanization −35   Services of public and private capital, not included in GNP 79   Additional depreciation of capital −93   Measure of economic welfare for 1 year   1343 Investment needed to sustain per capita MEW over subsequent years as population grows −102   Sustainable MEW   1241 costs have therefore been reclassified from environmental to economic costs. Instances are the cost of stack gas scrubbers in coal combustion, or the higher price of low-sulfur coal and oil. Direct economic assessment of the health, safety, and other risks not removed by a given level of protection is much more difficult than estimating the cost of that level of protection. As more experience in measurement and policy is gained, greater consistency between policies addressed to different environmental effects can be expected to help in the measurement of the remaining effects. It is, of course, hard to imagine a market in alleviation of environmental damage. However, one may expect that the inevitable policy debates and struggles will, as time goes on, settle into a more balanced pattern of policies, reflecting with some internal consistency the people’s willingness to pay for the various forms and degrees of protection. If and when this comes about, the economic cost of a given decrease in the ambient standard for sulfur dioxide, or of the further decrease by 1000 tons of the inventory of radioactive waste awaiting safe ultimate disposal, may allow an extrapolation that estimates the remaining unabated detriment as perceived by its representatives. These estimated detriments would be among the items still to be subtracted from GNP or from MEW to form an index of economic welfare. Any particular standards would from there on be further improved if and when the cost of doing so were to fall below the resulting estimated gain in welfare. The

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems balance of policies might then take the place of the market mechanisms in providing weights by which environmental benefits are combined to measure quality of life. Meanwhile, the state of the art of energy scenario projection uses the GNP as a stand-in for MEW or quality of life. CONAES has made use of this stand-in, recognizing the limitations it imposes on the findings reported. NOTES    1. The gross national product (GNP) of a nation is the total market value of the goods and services produced in the national economy, during a given year, for final consumption, capital investment, and government use. (Note that GNP does not include the value of intermediate goods and services sold to producers and used in the production process itself.) Gross domestic product (GDP) is defined as GNP minus net factor payments abroad (such as income from foreign investments and wages paid to foreign workers). GDP is generally the preferred measure for international comparisons. For the United States the difference between the two measures is for most purposes insignificant—of the order of 1 percent,    2. W.W.Hogan, Dimensions of Energy Demand, Discussion Paper Series (Cambridge, Mass.: Kennedy School of Government, Harvard University (E-79–02), July 1979).    3. National Research Council, Alternative Energy Demand Futures, Committee on Nuclear and Alternative Energy Systems, Demand and Conservation Panel (Washington, D.C.: National Academy of Sciences, 1979).    4. The GNP level assumed for 2010 was twice the 1975 level. If faster economic growth were assumed, the spread could be wider, because a smaller percentage of 2010 energy-consuming capital stock would be of pre-1975 vintage. In addition, one could expect that with higher incomes people would tend to consume more energy.    5. Demand and Conservation Panel, op. cit., chap. 5.    6. U.S. Department of Transportation, Report to the Congress by the Federal Aviation Administration: Proposed Programs for Aviation Energy Saving (Washington, D.C.: U.S. Government Printing Office, 1976).    7. Federic P.Povinelli, John M.Lineberg, and James J.Kramer, “Toward a National Objective: Improving Aircraft Efficiency,” Astronautics and Aeronautics, February 1976, p. 30.    8. The 1975 load factor was 52.2 percent; the projected load factor is 75 percent.    9. Demand and Conservation Panel, op. cit., chap. 5.    10. Ibid.    11. Ibid.    12. “Cain’s Trucks Ended 40-Year-Old I.C.C. Rule,” New York Times, November 22, 1978, p. D-2.    13. Brian L.Berry, Demographic and Settlement Trends: Their Transportation Implications—A Background Paper Prepared for the U.S. Department of Transportation (Washington, D.C.: U.S. Department of Transportation, June 1, 1976).    14. M.Pikarsky, “Land Use and Transportation in an Energy Efficient Society,” in National Research Council, Transportation and Land Development, Conference Proceedings, Special Report 183, Commission on Sociotechnical Systems, Transportation Research Board (Washington, D.C.: National Academy of Sciences, 1978).

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems       15. E.Hirst, Energy Intensiveness of Passenger and Freight Transport Modes, 1950–1970 (Oak Ridge, Tenn.: Oak Ridge National Laboratory (ORNL-NSF-EP-44), 1973).    16. Demand and Conservation Panel, op. cit., chap. 5.    17. Ibid., chap. 3.    18. Ibid.; and Marquis R.Seidel et al., Energy Conservation Strategies (Washington, D.C.: U.S. Environmental Protection Agency, July 1973).    19. R.Socolow, “Twin Rivers Project on Energy Conservation and Housing: Highlights and Conclusions,” Energy and Building 1, no. 3 (April 1978):207–243.    20. In community-based utility systems, fuel is converted locally into electricity, space heating and cooling, and water heating for a large number of commercial or residential units, or both.    21. Thermal integrity refers to a building’s ability to retain its heated or cooled interior temperature.    22. National Association of Home Builders, personal communication, November 28, 1978.    23. For example, district heating or cogeneration. See, for example, Governor’s Commission on Cogeneration, 152 Cogeneration: Its Benefits to New England (Commonwealth of Massachusetts, October 1978).    24. The Conference Board, Energy Consumption in Manufacturing (Cambridge, Mass.: Ballinger Publishing Co., 1974).    25. G.A.Schroth, “Suspension Preheater System Consumes Less Fuel,” Rock Products, May 1977.    26. Composite average improvement of 40 percent based on calculated potential improvements in energy intensity for new plants built in each of 10 industry classifications, For details, see Demand and Conservation Panel, op. cit., chap. 4.    27. The American Economy—Prospects for Growth to 1988 (New York: McGraw-Hill Publications Economics Department, 1974).    28. For a detailed discussion of each of these estimates, see Demand and Conservation Panel, op. cit., chap. 4.    29. R.S.Spencer et al., Energy Industrial Center Study, prepared for the National Science Foundation (Midland, Mich.: Dow Chemical Company, June 1975). See also S.E.Nydick et al., A Study of Inplant Electric Power Generation in the Chemical, Petroleum Refining and Paper and Pulp Industries, monograph prepared for the Federal Energy Administration (Waltham, Mass.: Thermo-Electron Corporation, July 1976).    30. Spencer et al., op. cit. See also F.Von Hippel and R.Williams, Energy Work and Nuclear Power Growth, draft report of the Center for Environmental Studies (Princeton, New Jersey: Princeton University, August 1976).    31. Demand and Conservation Panel, op. cit., chap. 4.    32. Governor’s Commission on Cogeneration, Cogeneration: Its Benefits to New England (Commonwealth of Massachusetts, October 1978).    33. For a detailed analysis of historical trends in the relationship of energy consumption to GNP (or GDP), see Jack Alterman, The Energy/Real Gross Domestic Product Ratio—An Analysis of Changes During the 1966–1970 Period in Relation to Long-Run Trends, Bureau of Economic Analysis Staff Paper 30 (Washington, D.C.: U.S. Department of Commerce, October 1977).    34. This subject is explored in Joel Darmstadter, Joy Dunkerley, and Jack Alterman, How Industrial Societies Use Energy: A Comparative Analysis (Baltimore, Md.: The Johns Hopkins University Press, 1977).    35. National Research Council, Supporting Paper 2: Energy Modeling for an Uncertain Future, Committee on Nuclear and Alternative Energy Systems, Synthesis Panel, Modeling Resource Group (Washington, D.C.: National Academy of Sciences, 1978).

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Energy in Transition, 1985-2010: Final Report of the Committee on Nuclear and Alternative Energy Systems       36. Institute for Energy Studies, Energy and the Economy, Energy Modeling Forum Report no. 1, vols. 1 and 2 (Stanford, Calif.: Stanford University, 1977).    37. Hogan, op. cit.    38. See note 1 above.    39. Demand and Conservation Panel, op. cit.; and see note 34 above.    40. S.Schurr, J.Darmstadter, H.Perry, W.Ramsay, and M. Russell, An Overview and Interpretation of Energy in America’s Future: The Choices Before Us (Washington, D.C.: Resources for the Future, June 1979).    41. See note 33 above.    42. See note 34 above.    43. Lee Schipper, “Raising the Productivity of Energy Utilization,” in Annual Review of Energy, ed. Jack M.Hollander, vol. 1 (Palo Alto, Calif.: Annual Reviews, Inc., 1976), pp. 455–517.    44. Synthesis Panel, Modeling Resource Group, op. cit.    45. L.A.Taylor, The Demand for Energy: A Survey of Price and Income Elasticities, working paper prepared for CONAES. (Available in CONAES public file, April 1976.)    46. Hogan, op. cit.    47. Demand and Conservation Panel, op. cit.    48. Institute for Energy Studies, op. cit.    49. D.Chapman, “Taxation, Energy Use, and Employment,” statement presented at hearings, Subcommittee on Energy, Joint Economic Committee, U.S. Congress, 95th Cong., 2d Sess., March 15–16, 1978.    50. W.Nordhaus and J.Tobin, “Is Growth Obsolete?” in Economic Growth. National Bureau of Economic Research (New York: Columbia University Press, 1972).