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Abstract:
Enhanced energy efficiency occupies a central role in evaluating the efficacy and cost of climate change policies. Ultimately, total greenhouse gas (GHG) emissions are the product of population, economic activity per capita, energy use per unit of economic activity, and the carbon intensity of energy used. Although greenhouse gas emissions can be limited by reducing economic activity, this option obviously has little appeal even to rich countries, let alone poor ones. Much attention has therefore been placed on the role that technological improvements can play in reducing carbon emissions and in lowering the cost of those reductions. In addition, the influence of technological changes on the emission, concentration, and cost of reducing GHGs will tend to overwhelm other factors, especially in the longer term. Understanding the process of technological change is therefore of utmost importance. Nonetheless, the task of measuring, modeling, and ultimately influencing the path of technological development is fraught with complexity and uncertainty?as are the technologies themselves.

Although there is little debate over the importance of energy efficiency in limiting GHG emissions, there is intense debate about its cost-effectiveness and about the government policies that should be pursued to enhance energy efficiency. At the risk of excessive simplification, we can characterize "technologists" as believing that there are plentiful opportunities for low-cost, or even "negative-cost" improvements in energy efficiency, and that realizing these opportunities will require active intervention in markets for energy-using equipment to help overcome barriers to the use of more efficient technologies. Most economists, on the other hand, acknowledge that there are "market barriers" to the penetration of various technologies that enhance energy efficiency, but that only some of these barriers represent real "market failures" that reduce economic efficiency.

In this essay, we examine what lies behind this dichotomy in perspectives. Ultimately, the veracity of different perspectives is an empirical question and reliable empirical evidence on the issues identified above is surprisingly limited. We review the evidence that is available, finding that although energy and technology markets certainly are not perfect (no markets are), the balance of evidence supports the view that there is not as much "free lunch" in energy efficiency as some would suggest. On the other hand, a case can be made for the existence of certain inefficiencies in energy technology markets, thus raising the possibility of some inexpensive GHG control through energy-efficiency enhancement. We conclude with some reflections on the role of appropriate energy efficiency policy in climate change mitigation.

Abstract:
Environmental policy discussions increasingly focus on issues related to technological change. This is partly because the environmental consequences of social activity are frequently affected by the rate and direction of technological change, and partly because environmental policy interventions can themselves create constraints and incentives that have significant effects on the path of technological progress. This paper, prepared as a chapter draft for the forthcoming Handbook of Environmental Economics (North-Holland/Elsevier Science), summarizes current thinking on technological change in the broader economics literature, surveys the growing economic literature on the interaction between technology and the environment, and explores the normative implications of these analyses. We begin with a brief overview of the economics of technological change, and then examine theory and empirical evidence on invention, innovation, and diffusion and the related literature on the effects of environmental policy on the creation of new, environmentally friendly technology. We conclude with suggestions for further research on technological change and the environment.

Abstract:
Environmental policy discussions increasingly focus on issues related to technological change. This is partly because the environmental consequences of social activity are frequently affected by the rate and direction of technological change, and partly because environmental policy interventions can themselves create constraints and incentives that have significant effects on the path of technological progress. This paper, prepared as a chapter draft for the forthcoming Handbook of Environmental Economics (North-Holland/Elsevier Science), summarizes for environmental economists current thinking on technological change in the broader economics literature, surveys the growing economic literature on the interaction between technology and the environment, and explores the normative implications of these analyses. We begin with a brief overview of the economics of technological change, and then examine three important areas where technology and the environment intersect: the theory and empirical evidence of induced innovation and the related literature on the effects of environmental policy on the creation of new, environmentally friendly technology; the theory and empirics of environmental issues related to technology diffusion; and analyses of the comparative technological impacts of alternative environmental policy instruments. We conclude with suggestions for further research on technological change and the environment.

Abstract:
Environmental policy discussions increasingly focus on issues related to technological change. This is partly because the environmental consequences of social activity are frequently affected by the rate and direction of technological change, and partly because environmental policy interventions can themselves create constraints and incentives that have significant effects on the path of technological progress. This paper, prepared as a chapter draft for the forthcoming Handbook of Environmental Economics (North-Holland/Elsevier Science), summarizes for environmental economists current thinking on technological change in the broader economics literature, surveys the growing economic literature on the interaction between technology and the environment, and explores the normative implications of these analyses. We begin with a brief overview of the economics of technological change, and then examine three important areas where technology and the environment intersect: the theory and empirical evidence of induced innovation and the related literature on the effects of environmental policy on the creation of new, environmentally friendly technology; the theory and empirics of environmental issues related to technology diffusion; and analyses of the comparative technological impacts of alternative environmental policy instruments. We conclude with suggestions for further research on technological change and the environment.

technological change, environment, invention, innovation, diffusion

Abstract:
The relationship between technological change and environmental policy has received increasing attention from scholars and policy makers alike over the past ten years. This is partly because the environmental impacts of social activity are significantly affected by technological change, and partly because environmental policy interventions themselves create new constraints and incentives that affect the process of technological developments. Our central purpose in this article is to provide environmental economists with a useful guide to research on technological change and the analytical tools that can be used to explore further the interaction between technology and the environment. In Part 1 of the article, we provide an overview of analytical frameworks for investigating the economics of technological change, highlighting key issues for the researcher. In Part 2, we turn our attention to theoretical analysis of the effects of environmental policy on technological change, and in Part 3, we focus on issues related to the empirical analysis of technology innovation and diffusion. Finally, we conclude in Part 4 with some additional suggestions for research.

Abstract:
The New Zealand ITQ system is a dynamic institution that has had many refinements since its inception more than 15 years ago. Nonetheless, the basic tenets of the system - setting a total allowable catch and leaving the market to determine the most profitable allocation of fishing effort - have remained intact. This paper assesses the New Zealand system to identify areas of success and/or possible improvement or expansion within it. The reasons for doing so are to highlight beneficial features and to identify features of the New Zealand ITQ system that are relevant to other potential tradable permit markets. Beneficial features include simple standardized rules for quota definition and trading across species and areas; very few restrictions on quota trading and holding; relative stability in the rules over time; and low levels of government involvement in the trading process. We find evidence that supports the assertion that fishers behave in a reasonably rational fashion and that the markets are relatively efficient. We do not find major changes in participation in these fisheries as a result of the system. We find evidence that suggests that the ITQ system is improving the profitability of fisheries in New Zealand. In general the evidence thus far suggests that the market is operating in a reasonably efficient manner and is providing significant economic gains. These factors suggest that New Zealand would want to have non-economic justifications for any significant changes to the system.

Tradeable permits, quota, fisheries

Abstract:
Policy makers and policy analysts in the environmental realm are frequently faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional command-and-control approaches. We develop some simple rules-of-thumb that can be employed with minimal amounts of information to estimate the potential cost savings that can be anticipated from designing and implementing market-based policy instruments. Because our analytical models are simple, yet capture key properties of pollution abatement cost functions, they can be used to predict potential cost savings through simple formulae. Our hope is that these simple formulae can aid policy analysts and policy makers in the early stages of exploring alternative policy instruments by helping them identify approaches that merit greater attention and more detailed analysis.

Abstract:
The possibility of encouraging the growth of forests as a means of sequestering carbon dioxide has received considerable attention because of concerns about the threat of global climate change due to the greenhouse effect. In fact, this approach is an explicit element of both U.S. and international climate policies, partly because of evidence that growing trees to sequester carbon can be a relatively inexpensive means of combating climate change. But how sensitive are such estimates to specific conditions? We examine the sensitivity of carbon sequestration costs to changes in critical factors, including the nature of the management and deforestation regimes, silvicultural species, agricultural prices, and discount rates. We find, somewhat counter-intuitively, that the costs of carbon sequestration can be greater if trees are periodically harvested, rather than permanently established. In addition, higher discount rates imply higher marginal costs, and they imply non-monotonic changes in the amount of carbon sequestered. Importantly, retarded deforestation can sequester carbon at substantially lower costs than increased forestation. These results depend in part on the time profile of sequestration and the amount of carbon released upon harvest, both of which may vary by species, geographic location, and management regime, and are subject to scientific uncertainty.

Abstract:
It follows from Hicks' induced innovation hypothesis that rising energy prices in the last two decades should have induced energy-saving innovation. We formulate the hypothesis concretely using a product-characteristics model of energy-using consumer durables, augmenting Hicks' hypothesis to allow for the possibility that government efficiency standards also induce innovation. Through estimation of characteristics transformation surfaces, we find that technological change reduced the total capital and operating costs of air air conditioning by half and water heating by about one-fifth. Although the rate of overall innovation in these products appears to be independent of energy prices and regulations, the evidence suggests that the direction of innovation has been responsive to energy price changes. In particular, energy price increases induced innovation in a direction that lowered the capital cost tradeoffs inherent in producing more energy-efficiency products. In addition, energy price changes induced changes in the subset of technically feasible models that were offered for sale. Our estimates indicate that about one-quarter to one-half of the improvements in mean energy-efficiency of the menu of new models for these products over the last two decades were associated with rising energy prices since 1973. We also find that this responsiveness to price changes increased substantially after product labeling requirements came into effect, and that minimum efficiency standards had a significant positive effect on average efficiency levels. Nonetheless, a sizeable portion of efficiency improvements in these technologies appears to have been autonomous.

Abstract:
We develop a methodology for testing Hick's induced innovation hypothesis by estimating a product-characteristics model of energy-using consumer durables, augmenting the hypothesis to
allow for the influence of government regulations. For the products we explored, the evidence suggests: (i) that the rate of overall innovation was independent of energy prices and regulations, (ii) the direction of innovation was responsive to energy price changes for some products but not for others,
(iii) energy price changes induced changes in the subset of technically feasible models that were offered for sale, (iv) this responsiveness increased substantially during the period after energy-efficiency product labeling was required, and (v) nonetheless, a sizeable portion of efficiency improvements were autonomous.

Abstract:
We develop a methodology for testing Hick?s induced innovation hypothesis by estimating a product-characteristics model of energy-using consumer durables, augmenting the hypothesis to
allow for the influence of government regulations. For the products we explored, the evidence suggests: (i) that the rate of overall innovation was independent of energy prices and regulations, (ii) the direction of innovation was responsive to energy price changes for some products but not for others,
(iii) energy price changes induced changes in the subset of technically feasible models that were offered for sale, (iv) this responsiveness increased substantially during the period after energy-efficiency product labeling was required, and (v) nonetheless, a sizeable portion of efficiency improvements were autonomous.

Abstract:
Energy efficiency and conservation are considered key means for reducing greenhouse gas emissions and achieving other energy policy goals, but associated market behavior and policy responses have engendered debates in the economic literature. We review economic concepts underlying consumer decisionmaking in energy efficiency and conservation and examine related empirical literature. In particular, we provide an economic perspective on the range of market barriers, market failures, and behavioral failures that have been cited in the energy efficiency context. We assess the extent to which these conditions provide a motivation for policy intervention in energy-using product markets, including an examination of the evidence on policy effectiveness and cost. While theory and empirical evidence suggest there is potential for welfare-enhancing energy efficiency policies, many open questions remain, particularly relating to the extent of some of the key market and behavioral failures.

energy efficiency, appliance standards, energy policy, market failures, behavioral failures

Abstract:
Using a simple analytical model incorporating benefits of a stock, costs of adjusting the stock, and uncertainty in costs, we uncover several important principles governing the choice of price-based policies (e.g., taxes) relative to quantity-based policies (e.g., tradable permits) for controlling stock externalities. As in Weitzman (1974), the relative slopes of the marginal benefits and costs of controlling the externality continue to be critical determinants of the efficiency of prices relative to quantities, with flatter marginal benefits and steeper marginal costs favoring prices. But some important adjustments for dynamic effects are necessary, including correlation of cost shocks across time, discounting, stock decay, and the rate of benefits growth. Applied to the problem of greenhouse gases and climate change, we find that a price-based instrument generates several times the expected net benefits of a quantity instrument.

Stock, externality, policy, regulation, uncertainty, prices, quantities, taxes, tradable permits

Abstract:
Using a simple analytical model incorporating benefits of a stock, costs of adjusting the stock, and uncertainty in costs, we uncover several important principles governing the choice of price-based policies (e.g., taxes) relative to quantity-based policies (e.g., tradable permits) for controlling stock externalities. Applied to the problem of greenhouse gases and climate change, we find that a price-based instrument generates several times the expected net benefits of a quantity instrument. As in Weitzman (1974), the relative slopes of the marginal benefits and costs of controlling the externality continue to be critical determinants of the efficiency of prices relative to quantities, with flatter marginal benefits and steeper marginal costs favoring prices. But some important adjustments for dynamic effects are necessary, including correlation of cost shocks across time, discounting, stock decay, and the rate of benefits growth. We also demonstrate an important link between instrument choice and policy stringency, based on the observation that both of these elements of policy design depend on the same underlying information, namely the marginal benefit and cost slopes. This result is especially useful when there is disagreement about benefits, since it can be used to restrict the set of efficient policies even in such cases. For negative externalities, we find that less stringent controls and price instruments are both associated with flatter marginal benefits, while aggressive controls and quantity instruments are associated with steeper marginal benefits. Intuitively, damages (marginal benefits) can only be steep enough to recommend quantity controls in the near term if they are steep enough to recommend substantial reductions. Furthermore, as long as the existing stock is large relative to the annual flow, marginal benefits either (i) will appear very flat over range of emissions in a single year, or (ii) will be sufficiently high to warrant near complete abatement. This generic characteristic of what it means to be a stock externality therefore weighs heavily in favor of price instruments for their control, so long as the optimal control falls short of stabilization at the current stock level. In the case of greenhouse gas policy, we show that any benefit slope consistent with quantity controls would imply an optimal emission level of zero. Under more general conditions we further demonstrate that price instruments are preferred in cases where optimal abatement rates are below about 40 percent, unless the initial stock level is small (less than twenty times the flow rate) or benefits and costs diverge quickly (by more than 10 percent annually). This result has important implications for the Kyoto Protocol, which mandates reductions among industrialized countries equal to roughly 5 percent of forecast global emissions. Regardless of one?s beliefs about various climate change parameters, these relatively low aggregate abatement levels are inconsistent with quantity-based emission limits.

Abstract:
Costs and benefits in the distant future, such as those associated with global warming, long-lived infrastructure, hazardous and radioactive waste, and biodiversity often have little value today when measured with conventional discount rates. We demonstrate that when the future path of this conventional rate is uncertain and persistent (i.e., highly correlated over time), the distant future should be discounted at lower rates than suggested by the current rate. We then use two centuries of data on U.S. interest rates to quantify this effect. Using both random walk and mean-reverting models, we compute the certainty-equivalent rate that is, the single discount rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future. Using the random walk model, which we consider more compelling, we find that the certainty-equivalent rate falls from 4%, to 2% after 100 years, 1% after 200 years, and 0.5% after 300 years. If we use these rates to value consequences at horizons of 400 years, the discounted value increases by a factor of over 40,000 relative to conventional discounting. Applying the random walk model to the consequences of climate change, we find that inclusion of discount rate uncertainty almost doubles the expected present value of mitigation benefits.

Discounting, uncertainty, interest rate forecasting, climate policy,intergenerational equity

Abstract:
Costs and benefits in the distant future, such as those associated with global warming, long-lived infrastructure, hazardous and radioactive waste, and biodiversity often have little value today when measured with conventional discount rates. We demonstrate that when the future path of this conventional rate is uncertain and persistent (i.e., highly correlated over time), the distant future should be discounted at lower rates than suggested by the current rate. We then use two centuries of data on U.S. interest rates to quantify this effect. Using both random walk and mean-reverting models, we compute the certainty-equivalent rate that is, the single discount rate that summarizes the effect of uncertainty and measures the appropriate forward rate of discount in the future. Using the random walk model, which we consider more compelling, we find that the certainty-equivalent rate falls from 4%, to 2% after 100 years, 1% after 200 years, and 0.5% after 300 years. If we use these rates to value consequences at horizons of 400 years, the discounted value increases by a factor of over 40,000 relative to conventional discounting. Applying the random walk model to the consequences of climate change, we find that inclusion of discount rate uncertainty almost doubles the expected present value of mitigation benefits.

Discounting, uncertainty, interest rate forecasting, climate policy,intergenerational equity

Abstract:
Policy makers and analysts are often faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional uniform standards. We develop analytic expressions that can be employed with modest amounts of information to estimate the potential cost savings associated with market-based policies, with an application to the environmental policy realm. These simple formula can identify instruments that merit more detailed investigation. We illustrate the use of these results with an application to nitrogen oxides control by electric utilities in the United States.

Environment, Policy Instruments, Market-based, Tradable Permits, Pollution Taxes, Uniform Standards

Abstract:
Policy makers and analysts are often faced with situations where it is unclear whether market-based instruments hold real promise of reducing costs, relative to conventional uniform standards. We develop analytic expressions that can be employed with modest amounts of information to estimate the potential cost savings associated with market-based policies, with an application to the environmental policy realm. These simple formulae can help increase intuition and understanding of the sources of cost savings, and help identify and design instruments that merit more detailed investigation. We illustrate the use of these results with an application to nitrogen oxides control by electric utilities in the United States.

Environmental Policy, Market-based Instruments, Cost Heterogeneity, Cost Effectiveness

Abstract:
Theory suggests that economic instruments, such as pollution taxes or tradable permits, can provide more efficient technology adoption incentives than conventional regulatory standards. We explore this issue for an important industry undergoing dramatic decreases in allowed pollution-the U.S. petroleum industry's phasedown of lead in gasoline. Using a duration model applied to a panel of refineries from 1971-1995, we find that the pattern of technology adoption is consistent with an economic response to market incentives, plant characteristics, and alternative policies. Importantly, evidence suggests that the tradable permit system used during the phasedown provided incentives for more efficient technology adoption decisions.

technology, adoption, diffusion, environment, regulation, lead, gasoline,tradable permit, incentive-based policy

Abstract:
This paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs, damage valuation, policy instrument choice, technological innovation, and international climate policy. We begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be, both under cost-effective stabilization of global climate and under net benefit maximization or Pigouvian emissions pricing. The remainder of the paper focuses on the appropriate scope of regulation, issues in policy instrument choice, complementary technology policy, and international policy architectures.

global warming damages, mitigation cost, climate policy, instrument choice, technology policy

Abstract:
On efficiency grounds, the economics community has to date tended to emphasize price-based policies to address climate change - such as taxes or a "safety-valve" price ceiling for cap-and-trade - while environmental advocates have sought a more clear quantitative limit on emissions. This paper presents a simple modification to the idea of a safety valve - a quantitative limit that we call the allowance reserve. Importantly, this idea may bridge the gap between competing interests and potentially improve efficiency relative to tax or other price-based policies. The last point highlights the deficiencies in several previous studies of price and quantity controls for climate change that do not adequately capture the dynamic opportunities within a cap-and-trade system for allowance banking, borrowing, and intertemporal arbitrage in response to unfolding information.

climate change, regulation, uncertainty, welfare, prices, quantities

Abstract:
Within the field of environmental economics, the role of technological change has received much attention. The long-term nature of many environmental problems, such as climate change, makes understanding the evolution of technology an important part of projecting future impacts. Moreover, in many cases environmental problems cannot be addressed, or can only be addressed at great cost, using existing technologies. Providing incentives to develop new environmentally-friendly technologies then becomes a focus of environmental policy. This chapter reviews the literature on technological change and the environment. Our goals are to introduce technological change economists to how the lessons of the economics of technological change have been applied in the field of environmental economics, and suggest ways in which scholars of technological change could contribute to the field of environmental economics.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Theory suggests that economic instruments, such as pollution taxes or tradable permits, can provide more efficient technology adoption incentives than conventional regulatory standards. We explore this issue for an important industry undergoing dramatic decreases in allowed pollution - the U.S. petroleum industry's phasedown of lead in gasoline. Using a duration model applied to a panel of refineries from 1971-1995, we find that the pattern of technology adoption is consistent with an economic response to market incentives, plant characteristics, and alternative policies. Importantly, evidence suggests that the tradable permit system used during the phasedown provided incentives for more efficient technology adoption decisions.

Abstract:
This paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs, damage valuation, policy instrument choice, technological innovation, and international climate policy. We begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be, both under cost-effective stabilization of global climate and under net benefit maximization or Pigouvian emissions pricing. The remainder of the paper focuses on the appropriate scope of regulation, issues in policy instrument choice, complementary technology policy, and international policy architectures.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Energy efficiency and conservation are considered key means for reducing greenhouse gas emissions and achieving other energy policy goals, but associated market behavior and policy responses have engendered debates in the economic literature. We review economic concepts underlying consumer decision making in energy efficiency and conservation and examine related empirical literature. In particular, we provide an economic perspective on the range of market barriers, market failures, and behavioral failures that have been cited in the energy efficiency context. We assess the extent to which these conditions provide a motivation for policy intervention in energy-using product markets, including an examination of the evidence on policy effectiveness and cost. Although theory and empirical evidence suggests there is potential for welfare-enhancing energy efficiency policies, many open questions remain, particularly relating to the extent of some key market and behavioral failures.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
We investigate the applicability of the present-value asset pricing model to fishing quota markets by applying instrumental variable panel data estimation techniques to 15 years of market transactions from New Zealand's individual transferable quota (ITQ) market. In addition to the influence of current fishing rents, we explore the effect of market interest rates, risk, and expected changes in future rents on quota asset prices. The results indicate that quota asset prices are positively related to declines in interest rates, lower levels of risk, expected increases in future fish prices, and expected cost reductions from rationalization under the quota system.

Abstract:
On efficiency grounds, the economics community has to date tended to emphasize price-based policies to address climate change -- such as taxes or a "safety-valve" price ceiling for cap-and-trade -- while environmental advocates have sought a more clear quantitative limit on emissions. This paper presents a simple modification to the idea of a safety valve: a quantitative limit that we call the allowance reserve. Importantly, this idea may bridge the gap between competing interests and potentially improve efficiency relative to tax or other price-based policies. The last point highlights the deficiencies in several previous studies of price and quantity controls for climate change that do not adequately capture the dynamic opportunities within a cap-and-trade system for allowance banking, borrowing, and intertemporal arbitrage in response to unfolding information.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Recent efforts to endogenize technological change in climate policy models demonstrate the importance of accounting for the opportunity cost of climate R&D investments. Because the social returns to R&D investments are typically higher than the social returns to other types of investment, any new climate mitigation R&D that comes at the expense of other R&D investment may dampen the overall gains from induced technological change. Unfortunately, there has been little empirical work to guide modelers as to the potential magnitude of such crowding out effects. This paper considers both the private and social opportunity costs of climate R&D. Addressing private costs, we ask whether an increase in climate R&D represents new R&D spending, or whether some (or all) of the additional climate R&D comes at the expense of other R&D. Addressing social costs, we use patent citations to compare the social value of alternative energy research to other types of R&D that may be crowded out. Beginning at the industry level, we find some evidence of crowding out in sectors active in energy R&D, but not in sectors that do not perform energy R&D. This suggests that funds for energy R&D do not come from other sectors, but may come from a redistribution of research funds in sectors that are likely to perform energy R&D. Given this, we proceed with a detailed look at climate R&D in two sectors - alternative energy and automotive manufacturing. Linking patent data and financial data by firm, we ask whether an increase in alternative energy patents leads to a decrease in other types of patenting activity. We find crowding out for alternative energy firms, but no evidence of crowding out for automotive firms. Finally, we use patent citation data to compare the social value of alternative energy patents to other patents by these firms. Alternative energy patents are cited more frequently, and by a wider range of other technologies, than other patents by these firms, suggesting that their social value is higher.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
Seminal work by Weitzman (1974) revealed prices are preferred to quantities when marginal benefits are relatively flat compared to marginal costs. We extend this comparison to indexed policies, where quantities are proportional to an index, such as output. We find that policy preferences hinge on additional parameters describing the first and second moments of the index and the ex post optimal quantity level. When the ratio of these variables' coefficients of variation divided by their correlation is less than approximately two, indexed quantities are preferred to fixed quantities. A slightly more complex condition determines when indexed quantities are preferred to prices. Applied to climate change policy, we find that the range of variation and correlation in country-level carbon dioxide emissions and GDP suggests the ranking of an emissions intensity cap (indexed to GDP) compared to a fixed emission cap is not uniform across countries; neither policy clearly dominates the other.

Abstract:
We review literature on several types of energy efficiency policies: appliance standards, financial incentive programs, information and voluntary programs, and management of government energy use. For each, we provide a brief synopsis of the relevant programs, along with available existing estimates of energy savings, costs, and cost-effectiveness at a national level. The literature examining these estimates points to potential issues in determining the energy savings and costs, but recent evidence suggests that techniques for measuring both have improved. Taken together, the literature identifies up to four quads of energy savings annually from these programs-at least half of which is attributable to appliance standards and utility-based demand-side management, with possible additional energy savings from the U.S. Department of Energy's (DOE's) ENERGY STAR, Climate Challenge, and Section 1605b voluntary programs to reduce carbon dioxide (CO2) emissions. Related reductions in CO2 and criteria air pollutants may contribute an additional 10% to the value of energy savings above the price of energy itself.

appliance standards, demand-side management, demand-side management, incentives, information, voluntary programs

Abstract:
The determinants of energy-saving innovation, and particularly the roles of energy prices and efficiency standards in affecting the development of new energy-saving technologies, are exceptionally important considerations in modeling global climate change and evaluating alternative policy options. We analyze the effects of energy prices and energy-efficiency regulations on the menu of air conditioner and water heater models available on the market over approximately a 30-year period. By adapting the induced innovation model to a product characteristics framework, we develop econometric estimates that indicate that a large portion of the improvement in energy efficiency in these technologies has taken the form of neutral (equiproportional) improvement in all product characteristics, and that this neutral innovation does not appear to be responsive to energy prices or regulations. There is also a significant non-neutral component of innovation, which was tilted away from energy efficiency before 1970, but later shifted to favor energy efficiency. This non-neutral component of innovation was substantially and significantly influenced by energy prices, by product labeling requirements, and by mandatory efficiency standards. Looking forward, we estimate that if energy prices remain at current levels, declining rates of neutral innovation combined with a return to non-neutral innovation tilted away from energy efficiency will result in little further improvement in the energy-efficiency of new models. Energy taxes of 10 to 30 percent of retail prices could significantly change this prediction. We predict that such taxes would lead to further energy efficiency increases of 10 to 50 percent for air conditioners by the year 2025.