Federal Climate Change Expenditures and Performance Metrics
Rather than provide performance and results measures for each appropriations account, the administration in its April 20, 1999 report to Congress offers performance and results metrics on a program‐by‐program basis. This makes it difficult to examine the performance metric for any specific appropriations account given that each appropriations account is typically involved in a myriad of programs. Accountability thus suffers and outside analysts are largely unable to zero‐in on specific budgetary successes and failures. This alone should be a red flag to lawmakers that something is amiss.
That having been said, the administration chooses to organize its activities to address global climate change in four major programs: the Climate Change Technology Initiative (CCTI); the U.S. Global Change Research Program; International Assistance programs; and other more tangentially climate‐related programs. I briefly discuss the three DOE-EPA related program elements below.
Climate Change Technology Initiative
The CCTI is made up of an amalgamation of tax credits for energy efficiency and renewable energy investments, energy efficiency and renewable energy R&D, labeling and public awareness programs, demonstration projects, industry subsidies, and regulatory programs to mandate tighter energy efficiency standards for appliances and machine equipment. Five separate cabinet departments and over a dozen appropriation accounts are involved in the CCTI.2
Instead of providing performance and results measures for each of the appropriations accounts engaged in the CCTI, the administration provides performance and results measures for each industrial sector targeted by the CCTI. The administration primarily suggests that increases in energy efficiency will be the main program output of the CCTI. It then calculates how many tons of carbon emissions will be saved by this increased efficiency.
According to the administration, the EPA’s activities will reduce energy consumption by approximately 59 billion‐kilowatt hours and thereby reduce greenhouse gases by 58 million metric tons of carbon equivalent next year. By 2010, the administration suggests that those programs will reduce greenhouse gas emissions by 354 million metric tons of carbon equivalent. Likewise, the administration believes that DOE’s activities will reduce greenhouse gas emissions by 112 million metric tons of carbon equivalent by the year 2010.
U.S. Global Change Research Program
The U.S. Global Change Research Program involves six separate cabinet departments (the Department of Health and Human Services, DOE, USDA, the Department of Commerce, the Department of the Interior, and EPA) and three agencies (the National Aeronautics and Space Administration, the National Science Foundation, and the Smithsonian Institution). Virtually no concrete performance or result measures are provided by the administration for the various activities of this program, much less for the various appropriation accounts of the DOE (biological and environmental research) or the EPA (general science and technology work).
Other Climate‐Related Programs
The DOE and EPA are engaged in a host of disparate programs that the administration considers related to global climate change. DOE programs include the Weatherization Assistance Program (which subsidizes energy efficiency investment for low income households) and general R&D directed to coal, natural gas, and nuclear technologies, and the Partnership for a New Generation of Vehicles. EPA programs include the Clean Air Partnership Fund. Myriad appropriation accounts are involved from both agencies, yet no concrete performance or result measures are provided by the administration for the various activities of this program, much less for the various appropriation accounts of the DOE or the EPA.
Inappropriate Performance and Results Measures
There are so many problems with the performance and results measures offered by both the DOE and EPA that it’s difficult to know where to begin. I will start with the smaller problems first.
No Third‐Party Verification is Possible
Congress will find it impossible to ascertain whether the administration’s performance goals have been met because both the DOE and EPA rely heavily upon conjecture, assertions, and theoretical — not actual — measurements of performance.
First, the administration relies upon engineering calculations to estimate energy savings for the technologies it claims responsibility for in the marketplace. The actual performance of technologies is unexamined. Numerous studies at the state and local level demonstrate that engineering calculations are wildly inaccurate predictors of the performance of technologies.3 Indeed, they typically overestimate energy savings by a large degree.
Second, DOE and EPA programs implicitly assume that, were it not for those programs, the worthy technologies being subsidized would not attract enough research, development, or marketing dollars to penetrate the marketplace. In other words, both departments take full responsibility and credit for the technologies being promoted. This, of course, ignores the possibility that “free riders” are being attracted to the programs (it’s certainly possible that some of the technologies in question would have been produced by the market without government help; perhaps immediately, perhaps only a few years down the road), or that the federal assistance perhaps contributed only at the margin and thus is due only a small part of the credit and not the full degree of credit sought by the DOE and EPA. In fact, when the U.S. General Accounting Office reviewed a recent document by the DOE regarding its R&D success stories, it found that such faulty assumptions destroyed the credibility of DOE cost benefit analyses.4
The Energy Information Administration recognizes the difficulty of connecting government R&D subsidies to concrete performance goals. In testimony last month, EIA administrator Jay Hakes frankly conceded that “we are not able to link research and development expenditures directly to program results or to separate impacts of incremental funding requested for FY 2000 from ongoing government expenditures.“5 Likewise, Hakes noted that “it is also difficult to analyze the impacts of information programs, voluntary initiatives, and partnerships on realized technology development and deployment.“6
Thus, Congress will find it impossible to verify whether most CCTI programs actually achieved the goals laid out by the administration.
Flawed Cost‐Benefit Analysis
While the GPRA does not require cost‐benefit analysis for appropriation accounts, the administration frequently offers benefit estimates for the various programs of the CCTI. Typical is the administration’s claim that a 20 percent tax credit to encourage the purchase of residential electric heat pumps and air conditioners will benefit the economy by encouraging investments that will ultimately save consumers billions of dollars in energy costs.
The claim is misleading because it is divorced from any discussion of the investment required to obtain those energy savings. For instance, the EIA estimates that the cost of a current model heat pump is $4,400 while the cost of a model that would qualify for the tax credit is $5,500 (the 20 percent tax credit would, conveniently enough, cover the differential in cost). EIA data suggests that the energy‐efficient heat pump will save an average of 1,676 kWh per year on average. Assuming a 10 percent discount rate, electricity prices of 8.3 cents per kWh, and an 11‐year operating life for the heat pump, the consumer will save a total of $783 in energy costs.7 At the very least, spending $1,100 to save $783 hardly represents a net plus for the economy. The calculation also indicates that “market barriers” are not necessarily the primary obstacles faced by many energy efficient technologies; high cost is.
A calculation of consumer benefit would require a consideration of total costs: in this case, $1,100 times the total number of rebates provided plus management expenses that would probably add another 10–15 percent. The total consumer benefit from purchasing the more efficient heat pump would require a calculation of the total willingness to pay minus actual payments. Once we consider the fact that a number of participants are likely to be “free riders” (households that would have purchased the technology even without the rebate), it’s likely that the benefit to consumers who otherwise would not have purchased the heat pump save for the tax credit will be one‐half the cost or less.
For the purposes of the CCTI, however, a cost‐benefit test requires us to consider the cost of the program in relation to the amount of greenhouse gas emission reductions achieved. In this case, dividing the cost of the tax credit ($1,100) by the amount of greenhouse gas emissions avoided through more efficient energy use results in a total cost of $349 per ton. With a 10 percent discount rate, the cost of reducing greenhouse gas emissions via the tax credit rises to $666 per ton.8
Since no credible economist would support a carbon tax of $666 per ton to reduce greenhouse gas emissions (most proposals range from $5–50 per ton), why should the Congress accept a program that levies an implicit tax that they wouldn’t be caught dead advocating explicitly?
Contrast the above calculation with the administration’s argument that for every tax dollar invested in the CCTI, $70 dollars of economic benefits will result (if such figures were actually seriously believed, one could make a pretty strong argument that ALL discretionary federal spending should be plowed into the CCTI). If the administration is determined to argue the economic merits of the CCTI, it appears that a refresher course in Econ 101 would be in order.
Programs Aim at Solving Problems that do not Exist
Underlying the CCTI is the belief that market barriers — such as lack of information, shortage of investment capital, and inexplicably negative consumers biases against energy efficiency investments — prevent the market place from investing optimally in the technologies peddled by the two departments. The administration’s heavy reliance on product labeling, demonstration projects, public awareness, and subsidized research, development, and marketing is largely designed to overcome those market barriers. DOE and EPA’s energy efficiency performance goals will only succeed if those market barriers truly exist. Otherwise, consumers will continue to reject those technologies.
Economists, however, are deeply skeptical about the underlying assumptions of the CCTI.9 First, market barriers do not necessarily contribute to economic inefficiency or sub‐optimal investment. As economist Ronald Sutherland explains, “A fallacy in the conservation paradigm is the presumption that market barriers produce inefficient outcomes that justify government policy. So‐called market barriers may not be sources of inefficiency, but rather are benign characteristics of well functioning markets.“10
Second, studies of consumer behavior involving home heating and cooling find that the implicit rates of return used by consumers in making energy conservation investment decisions are consistent with returns available on other investments.11
Third, the variance in energy prices over time creates uncertainty about the return on energy conservation investments. Because such investments are irreversible and much more illiquid than other investments, consumers rationally demand high returns on home conservation investments to compensate for the uncertainty that they face.12
Fourth, the estimates of alleged energy savings that consumers pass up are based on engineering estimates rather than actual changes in use. A study based on changes in actual use of electricity, rather than engineering estimates, concluded that consumers actually choose conservation investments rationally in light of the cost of capital and the returns on alternative investments.13
Think of the CCTI as being made up of a bunch of economic “carrots.” If the rabbits (consumers) cannot be induced by the “carrots” to purchase favored technologies, then the programs will largely fail. Since the administration’s “carrots” are designed to remedy problems that don’t exist, its unlikely that the technologies will gain enough consumer acceptance to make much difference in overall greenhouse gas emissions.
Performance Measures Are Implausible on Their Face
The EPA estimates that its programs will reduce annual greenhouse gas emissions by 354 million metric tons of carbon equivalent by 2010.14 DOE estimates that its programs will reduce greenhouse gas emissions by another 112 million metric tons of carbon equivalent,15 yielding an estimated reduction of 452 million metric tons of greenhouse gas emissions by 2010. Those performance measures are so unrealistic that they cast doubt on the seriousness of the administration’s attempts to comply with the GPRA.
To put this in perspective, the DOE’s own “5‐Labs” study estimates that a “high efficiency” scenario for the economy would reduce emissions by only 120 million metric tons of carbon equivalent by 2010. The EIA is less bold, suggesting that reductions of only 79 million metric tons of carbon equivalent are possible under a “high efficiency” economic scenario.
The fundamental explanation for the administration’s wildly inflated program estimates is two‐fold. First, the administration overestimates the potential for government directed R&D, marketing, and technology deployment to improve economic performance. Second, it engages in unrealistic projections about the speed with which new technologies can migrate into the marketplace.
As to the former, the DOE and EPA evince the mind‐set of those entering into a second marriage: the triumph of hope over experience. Numerous third‐party examinations of the history of government technology‐forcing programs conclude that programs such as the CCTI have failed miserably over the past 30 years.16 Typical is the assessment by M.I.T.‘s Thomas Lee, Ben Ball, Jr., and Richard Tabors: “the experience of the 1970s and 1980s taught us that if a technology is commercially viable, then government support is not needed; and if a technology is not commercially viable, no amount of government support will make it so” [emphasis in original].17
As to the latter, we need to remember that the potential for new energy‐efficient technologies to reduce greenhouse gas emissions — especially within a decade — is limited because new technologies are only incremental additions to the capital stock, capital stock turns over slowly, and total capital stock increases with economic growth. Thus, even if the administration is correct about the benefits of their technology investments and promotional activities, there is only so much that those technologies can accomplish in the short or mid term.
The above problems are so severe that when the Energy Information Administration ran the administration’s tax credit proposal through its computer models, it found that rebates proposed in the CCTI would reduce energy consumption by less than 0.1 percent and greenhouse gas emissions by 0.17 percent by 2010, figures far less than the performance measures offered by the administration.18
Moreover, when the President’s Council of Economic Advisors (CEA) produced a plan to comply with the Kyoto Protocol at the lowest possible economic cost, they ignored the claims peddled by the DOE and EPA regarding the potential for the CCTI to significantly reduce greenhouse gas emissions. The CEA report instead relied upon a liberal emissions trading program to reduce greenhouse gases and made no mention of the CCTI’s ability to contribute to Kyoto compliance.19 If the DOE and EPA claims of program savings could not persuade the administration’s own economists to include them in its main planning document, they should probably not be taken seriously by Congress.
Energy Efficiency May Hinder Carbon Efficiency
Another fundamental problem with the CCTI its focus on energy efficiency rather than carbon efficiency. For instance, if electricity were generated largely by natural gas and nuclear power, it would make little difference how efficient our end‐use technologies were; greenhouse gas emissions would be minimal either way. In fact, the president’s Council of Economic Advisors relies upon the elimination of the domestic coal industry and the accelerated emergence of natural gas fired electricity to meet the standards of the Kyoto Protocol.20 Correspondingly, if electricity were generated largely by coal, all the increased efficiency in the world would do little to control total greenhouse gas emissions.
Consider, for instance, advanced water heaters. Among the most efficient water heaters on the market are electric heat pumps with an “energy factor” of 1.65. The most efficient gas water heaters, however, have an “energy factor” of only .54. Under the administration’s plan, the electric heat pump would qualify for a 20 percent tax credit and would be aggressively promoted to consumers by the government. According to the DOE’s own data, however, the electric heat pump would generate 4,872 pounds of carbon dioxide a year compared to 3,862 pounds of carbon dioxide generated by the natural gas heater.21
The reason is simple. Approximately 70 percent of the total energy consumed by an appliance is actually consumed in the production, generation, transmission, and distribution of energy. Since more electricity is generated from coal than any other fuel source, the “energy efficient” electric heat pump would be inferior — from a greenhouse gas emissions standpoint — than the less efficient natural gas heat pump.
Energy Efficiency Improvements Do Not Necessarily = Reductions in Greenhouse Gas Emissions
Aside from the difficulty in reconciling energy efficiency with carbon efficiency, the suggestion that increased energy efficiency as a program output will lead to energy consumption as an intermediate outcome is questionable. The reason is that energy efficiency reduces the marginal cost of consuming energy. If the marginal cost of energy goes down, energy consumption at the margin will increase. The increased energy consumption that results will offset some if not all the gains achieved by enhanced energy efficiency.
For example, assume that DOE helps develop and market an incredibly energy efficient air conditioner. The upshot for the residential consumers is that they will be able to substantially reduce the cost of keeping their homes at 75 degrees in the summertime. Perhaps, however, they are most comfortable if indoor temperatures are 70 degrees. They might not have been able to afford to keep the thermostat down that low in the past, but thanks to DOE’s new air conditioner, now they can. So the thermostat is lowered, energy consumption increases, and the greenhouse gas emissions go back up.
Economists who have studied the phenomenon of energy efficiency and increased energy consumption (sometimes known as the “snap‐back effect”) have documented the relationship.22 We can also see it by examining macroeconomic data. According to the EIA, energy efficiency (measured as total energy consumption per unit of GDP) improved by 57 percent from 1949–1997. Yet total energy consumption increased by 323 percent over that same period. Population growth, economic growth, and yes, the “snap‐back” effect are the main reasons for the lack of correlation between energy efficiency and energy consumption.
No Outcome Measurements of Success Offered
Finally, the administration failed to comply with the spirit of the GPRA by refusing to directly connect the reduction of greenhouse gas emissions to the well being of the American people. Recall President Clinton’s desire to ask of his budget, “Is it changing people’s lives for the better? Can we say after we take money and put it into a certain endeavor that it was worth actually [taking] away from the taxpayers [and putting] into this endeavor and [that] their lives are better [sic]?” In the case of the CCTI, there are two appropriate questions to ask. First, how much global warming will be abated by these programs? Second, how will the American public then benefit from the alleviation of global warming?
In a spirit of generosity, I will attempt to do the administration’s homework for them. For the sake of argument, assume my critique of the program is incorrect and the administration’s claims can be taken at face value. Assume, therefore, that the CCTI meets all the performance measures and results offered by the administration.
If every nation meets its commitments under the Kyoto Protocol, the world’s most advanced climate model predicts that temperatures will be 0.07 degrees Celsius cooler than they otherwise would be under a business as usual scenario by the year 2050.23 Since the U.S. emits 20 percent of the world’s greenhouse gases, we can infer that U.S. compliance with the Kyoto Protocol would reduce global temperatures by 0.014 degrees Celsius.24 According to the DOE and EPA, their contribution to the CCTI will reduce greenhouse gas emissions by 452 million metric tons of carbon equivalent annually by 2010 (the midpoint of the Kyoto compliance period). That means that about 65 percent of the greenhouse gas emission reductions required of the United States under the Kyoto Protocol can be met through the budgetary programs we’re discussing today, implying that the CCTI will reduce temperatures by .0091 degrees Celsius (16–1,000ths of a degree Fahrenheit) below where they otherwise would be by the year 2050.
Such a change in temperature is too small to measure. Moreover, I defy the administration to argue that this infinitesimal reduction in temperature will affect the lives of the American people one whit.
The importance of stepping back from the GPRA budgetary “trees” to appreciate the policy “forest” was perhaps best articulated by Wilhelm von Humboldt in his famous description of the intellectual opportunity costs of examinations such as ours today: