# Presentation: 782332

## Modeling Energy and Climate Change Policies:

***Characterizing New Policies, Changing Behaviors, and Technology Returns***

**John A. “Skip” Laitner**
**Economic Analysis Director**
**American Council for an Energy-Efficient Economy (ACEEE)**
***NREL Energy Collaborative Analysis Initiative***
**Web Forum: Modeling Impacts of Policy Options**
**May 15, 2008**

## Following the Key Modeling Workshop    Outcomes, 

**“****Hey, Bob. . . did I scare you or what?”**

***Where the “Masked Spider” = standard economic policy models. . .***

***“******Bob” = policymakers***

***and***

***who have just learned that such models reflect only limited behavioral and technological responses in their assessments?***

**Would this be true. . . .**

*****

*** See, http://www.aceee.org/conf/06modeling/**

## The Good News About Energy Efficiency Investments and Climate Change Policies

- It is does _not_ have to be about ratcheting down our economy;
- Rather, _it can be_ all about:
- using innovation and our technological leadership;
- investing in more productive technologies (including both existing and new technologies); and
- developing new ways to make things, and new ways to get where we want to go, where we want to work, and where we want to play.
***But again, most economic models             appear to assume the former.***

## Economics Science Has Not Solved. . . .

-   Its first problem – namely, what determines the price of a commodity?  (Robinson 1947)
-  Among things that can influence commodity prices:
-   Belief
-  Value
-  Habit
-  Alternatives
-  Necessity
-  Income
-  All of which can be shaped by changed perceptions, clear and persistent policy signals, as well as new or expanding programs (Brown 2001).

## An Admittedly Simple Heuristic Policy Modeling Exercise

- Starting from today’s prices of ~$4.00 per gallon of gasoline equivalent, suppose we need to reduce energy by 25 percent.
- Let us further assume in our policy model that there is a price elasticity of -0.25.  So if. . . .
- Then the new energy price will need to be just over $13.26 per gallon equivalent, or ~3.2 times higher than today.
- Clearly this is not good for the economy; and most economic policy models indicate exactly that kind of bad news – to the detriment of smart energy and climate policy.
*And while prices matter, they are not all that matter!*

## A very small difference in assumptions can have a huge impact in the eventual outcome.

***A very small difference in assumptions can have a huge impact in the eventual outcome.***

## Comparing Hardware and Energy Costs with “Soft” Search and Transaction Costs

***Impacted by policies, programs, awareness, and by shifting preferences – all roughly approximated by the “hurdle rate” or the “implicit discount rate”***

***Impacted by policies, R&D programs, experience, growing expectations, and new innovations***

**Capital**

**Capital**

**Fuel**

**Fuel**

**Standard**
**Technology**

**Efficiency**
**Technology**

**Information**
**Costs**

**Search Costs**

** ****Preferences, Perceived Risk**
**Transaction Costs**

**Cost or Cost Equivalent**

**All areas that can benefit from policy development**

## Suppose, Now, We Have an Integrated Technology-Behavior Policy Model

- That instead of a simple (probably invariant) price elasticity, we employ a substitution elasticity which allows a more productive use of capital  to displace the inefficient use of energy; and
- That combines shifts in awareness, preferences, and norms as they motivate the production and the adoption of improved technology – all in response to some changed circumstance, or some combination of prices and other policy signals.

*****

*** See, http://www.aceee.org/conf/06modeling/**

*** Where productive capital implies a greater than average return on investment**

## The Maryland Example for Electricity

***Collectively, a 29% reduction***

**. . . .a 29% reduction in conventional resources driven by:**
**~$3.4 billion in program spending, **
**~a $9.3 billion efficiency investment, **
**displacing the need for ~$3.9 billion in MD utility investments, **
**and all of which saves consumers ~$21 billion in avoided **
**energy bills over the period 2008 through 2025**

- Source: "Energy Efficiency: the First Fuel for a Clean Energy Future Resources for Meeting Maryland’s Electricity Needs," ACEEE 2008

**And, oh yes, generates a small but net positive gain in GSP as well as ~12,000 net new jobs by 2025**

## With Now Three Critical Differences Integrated into Our “Policy Model”

- First, we enable a more productive technology to substitute for inefficient use of energy
- Second, we allow for a shift in preferences and behavior which motivate the development, production, and adoption of that technology
- Finally, rather than an assumed inflationary cost we now have a return on investment
- All of which provides for a more satisfying modeling result that, in turn, might encourage the adoption of a smart energy and/or climate change policy

## Slide 11

## A Selected Modeling and Technology Characterization Bibliography

**Elliott, R. Neal, Therese Langer, and Steven Nadel. ** 2006.  “Reducing Oil Use through Energy Efficiency: Opportunities Beyond Cars and Light Trucks,” Washington, DC: American Council for an Energy Efficient Economy, January.
**Elliott, R. Neal and Shipley, Anna Monis.** "Impacts of Energy Efficiency and Renewable Energy on Natural Gas Markets: Updated and Expanded Analysis," Washington, DC: American Council for an Energy Efficient Economy, 2005.
**Geller, Howard, Philip Harrington, Arthur H. Rosenfeld, Satoshi Tanishima, and Fridtjof Unander.** “Polices for increasing energy efficiency: Thirty years of experience in OECD countries,” *Energy Policy*, 34 (2006) 556–573.
**Koomey, Jonathan G., Paul Craig, Ashok Gadgil, and David Lorenzetti.** 2003. “Improving long-range energy modeling:  A plea for historical retrospectives.” *The Energy Journal*, vol. 24, no. 4. October. pp. 75-92.
**Laitner, John A. "Skip“ and Donald A. Hanson.  **2006.  “Modeling Detailed Energy-Efficiency Technologies and Technology Policies within a CGE Framework,” *Energy Journal*, Hybrid Modelling: New Answers to Old Challenges.
**Laitner, John A. "Skip" and Alan H. Sanstad.** 2004. "Learning by Doing on Both the Demand and the Supply Sides: Implications for Electric Utility Investments in a Heuristic Model." International Journal of Energy Technology and Policy, 2004, 2(1/2), pp. 142-152.
**Laitner, John A. "Skip.“** 2004. “How Far Energy Efficiency?” *Proceedings of the 2004 ACEEE Summer Study on Energy Efficiency in Buildings.* Washington, DC: American Council for an Energy Efficient Economy.
**Laitner, John A. "Skip", Donald A. Hanson, Irving Mintzer, and Amber J. Leonard.**  2005. “Adapting in Uncertain Times: A Scenario Analysis of U.S. Energy and Technology Futures.” *Energy Studies Review*, Vol. 14, No.1, 2005 pp120-135.
**Laitner, John A., Stephen J. DeCanio, Jonathan G. Koomey, and Alan H. Sanstad.** 2003. “Room for Improvement: Increasing the Value of Energy Modeling for Policy Analysis.” *Utilities Policy*, 11, pp. 87-94.
**Martin, Nathan, et al. 2000.** "Emerging Energy-Efficient Industrial Technologies," Washington, DC: American Council for an Energy Efficient Economy, 2000.
**Sachs, Harvey et al.** 2004. “Emerging Energy-Saving Technologies and Practices for the Buildings                 Sector,” Washington, DC: American Council for an Energy Efficient Economy, 2004.
**Shipley, Anna Monis and R. Neal Elliott.  **2006**.  **“Ripe for the Picking: Have We Exhausted                                  the Low-Hanging Fruit in the Industrial Sector?”  Washington, DC: American Council for an                               Energy-Efficient Economy, April.

## The difficulty lies not with the new ideas, but in escaping the old ones

***John Maynard Keynes***

## Contact Information

**John A. “Skip” Laitner**
- Director of Economic Analysis
**American Council for an Energy-Efficient Economy (ACEEE)**
- 4372 Shooting Star Drive
- Island Lake, IL 60042
- (847) 865-5106
- jslaitner@aceee.org
- For more information and updates visit:
- http://www.aceee.org