United States General Accounting Office

GAO Report to Congressional Requesters

September 1998 CLIMATE CHANGE

Information on

Limitations and

Assumptions of DOE’s

Five-Lab Study

GAO/RCED-98-239

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-280459 

September 8, 1998

The Honorable Larry Craig

The Honorable Chuck Hagel

The Honorable Jesse Helms

The Honorable Frank Murkowski

United States Senate

Human activities, primarily those related to energy production and use,

are increasing the concentrations of carbon dioxide and other “greenhouse

gases” in the atmosphere. These heat-trapping gases are believed to

contribute to global warming, which could lead to future climatic changes.

To address the potential consequences of climate change, the United

States and other countries have entered into international negotiations and

agreements. In October 1997, the administration proposed stabilizing U.S.

emissions of greenhouse gases at 1990 levels by no later than 2012. The

most recent agreement, known as the Kyoto Protocol, was negotiated in

December 1997 in Kyoto, Japan, and calls for even greater reductions in

U.S. greenhouse gases.1

 Of the six greenhouse gases covered by the Kyoto

Protocol, carbon dioxide is of significant concern for the United States,

constituting more than 80 percent of U.S. greenhouse gas emissions in

1996.

Prior to the Kyoto conference, a September 1997 Department of Energy

(DOE) study2

 by five DOE national laboratories quantified the potential for

energy-efficient and low-carbon3

 technologies to reduce U.S. carbon

emissions4

 to 1990 levels by 2010. Among other things, the study (also

known as the five-lab study) concluded that an aggressive national

commitment to energy-efficient and low-carbon technologies—coupled

with an increase in the price of carbon-based fuels of $50 per metric ton5

1

The Kyoto Protocol to the United Nations Framework Convention on Climate Change would require

the United States to reduce its anthropogenic, or man-made, carbon dioxide equivalent emissions

during the period from 2008 to 2012 to 7 percent below 1990 levels; however, this protocol has not yet

been ratified by the U.S. Senate.

2

Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy Technologies by 2010 and Beyond

Interlaboratory Working Group on Energy-Efficient and Low-Carbon Technologies (Sept. 22, 1997).

3

Low-carbon technologies can reduce carbon emissions by employing a less carbon-intensive fuel,

such as switching from coal to natural gas.

4

In the laboratories’ study, carbon dioxide is measured in units of carbon, defined as the weight of the

carbon content of the carbon dioxide molecule (carbon constitutes 12/44 of the molecule).

5

A metric ton is 1,000 kilograms, or about 2,200 pounds.

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—could reduce carbon emissions to the levels they were in 1990, with

energy savings estimated to roughly equal or exceed costs. In view of the

study’s potential influence on U.S. climate change policy, as requested, we

are providing you with information on (1) how the study’s scope and

methodology may limit its usefulness, (2) key assumptions that may have

influenced the study’s results, and (3) the study’s role in the formulation of

the October 1997 climate change proposal and the Kyoto Conference’s

emission-reduction goals for the United States.

Results in Brief The five-lab study is an important step in evaluating the role that

energy-efficient and low-carbon technologies can play in the nation’s

efforts to reduce global warming gases. However, the study’s usefulness is

limited because it does not discuss the specific policies needed to achieve

its estimate of 394 million metric tons of carbon reductions by 2010 and

does not fully consider the costs to the nation’s economy of reaching this

goal. For example, a policy involving tax credits as an incentive for

consumers to make energy-efficient purchases could have different

economic and budgetary impacts from a policy requiring manufacturers to

meet minimum energy-efficiency levels for products. According to DOE

laboratory officials, specifying the types of policies needed to achieve such

significant reductions by 2010 was not one of the study’s objectives.

Furthermore, the study assumes a fee of $50 per ton for carbon emissions,

which would increase the cost of energy; however, the study does not

evaluate the broader impacts that this cost may have on the economy. DOE

laboratory officials acknowledge that the study does not examine the

broader economic impacts of such a carbon fee on the U.S. economy but

said that, in their opinion, these broader economic impacts would be

minor.

The study’s finding that the widespread adoption of energy-efficient

technologies can be achieved with low to no net cost to the nation is

heavily dependent on the assumptions made for four sectors of the U.S.

economy—buildings, industry, transportation, and electricity production.

Among the groups that we interviewed, we found a disparity of views on

key assumptions that may have influenced the study’s results. Several of

the groups6

 questioned some of these assumptions as being too optimistic,

such as those about the payback period, rate of adoption of new

technologies, or timing of technological breakthroughs. For example, the

study assumes that industry will change the length of time expected for a

capital investment to recover its costs—known as the payback

6

Of the 52 groups that we contacted to obtain views on the energy-efficient and low-carbon

technologies in the study, 31 provided their views on the study. App. I provides the details of our scope

and methodology, including our selection of these groups. App. II lists the groups.

Page 2 GAO/RCED-98-239 Climate Change
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period—from about 3 years to nearly 7 years. However, most of the

representatives of the seven industries that used about 80 percent of the

manufacturing energy consumed in the United States in 1994 indicated this

assumption may be too optimistic given their current capital constraints,

market conditions, and existing manufacturing processes. On the other

hand, some groups believed that certain assumptions in the study appear

reasonable. For example, the Legislative Director of the International

District Energy Association said that the study is not only reasonable, but

may underestimate the potential carbon savings that industry might realize

by 2010 from new technologies, such as cogeneration power systems that

use waste heat to supplement an industry’s energy needs.

The study has been cited as one of many documents considered in

formulating the administration’s October 1997 climate change proposal.

Additionally, according to the Department’s Assistant Secretary for Energy

Efficiency and Renewable Energy, the study was one of the documents

considered in formulating the emission-reduction goals for the United

States at the December 1997 Kyoto Conference.

Background The study by five DOE national laboratories7

 was prepared in response to a

growing recognition that any national effort to reduce the growth of

greenhouse gas emissions must consider ways of increasing energy

productivity. According to DOE laboratory officials, project discussions

began in the summer of 1996, a peer review committee was formed in

November 1996, and official authorization and a budget of $500,000 were

provided in December 1996 to “analyze the impact of energy efficiency

technology on energy demand growth in the United States.” Requested by

DOE’s Office of Energy Efficiency and Renewable Energy, the five-lab study

had a central goal of quantifying the potential for energy-efficient and

low-carbon technologies to reduce carbon emissions in the United States

by 2010 for four sectors of the U.S. economy—buildings, industry,

transportation, and electricity production. The building sector includes

residential and commercial buildings, where energy is used for heating and

cooling, lighting, refrigeration, cooking, heating water, and operating

electrical appliances. The industrial sector includes all manufacturing, as

well as agriculture, mining, and construction activities. The transportation

sector includes passenger cars and light-duty trucks, freight trucks,

railroads, aircraft, and marine vessels. The electricity-producing sector

7

Argonne National Laboratory, Lawrence Berkeley National Laboratory, National Renewable Energy

Laboratory, Oak Ridge National Laboratory, and Pacific Northwest National Laboratory.

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includes electric power produced from coal, oil, natural gas, nuclear

energy, hydroelectric systems, wind, solar energy, and biomass.

Initially, the study’s focus was on energy efficiency from technology and

the carbon savings that may accrue from such technologies. Subsequently,

DOE laboratory officials said that the study’s objectives were expanded

about March 1997 to include not only the potential for carbon savings from

energy efficiency, but also carbon savings from switching fuel supply

options for electric power generation, such as from coal to natural gas.

Because it was recognized that few low-carbon technologies would be

implemented by the electricity sector without some type of external

incentive or regulation, the officials told us that the study’s objectives

were also expanded to include an assessment of the impact of increasing

the price of carbon-based fuels by $25 and $50 per ton.8

 The officials noted

that it is not unusual for a study to evolve over time and that the expansion

of the study’s objectives was in large part due to early comments from

peer reviewers.

In calculating the carbon savings that could be achieved for each of the

four sectors of the U.S. economy, the study uses three different,

increasingly more aggressive, scenarios: (1) an efficiency scenario that

assumes the United States takes an active role in public and private efforts

to promote energy efficiency through enhanced research and development

and market transformation activities; (2) a high-efficiency/low-carbon

scenario that assumes a more aggressive national commitment to energy

efficiency coupled with a $25 per ton carbon fee; and (3) a

high-efficiency/low-carbon scenario that, in addition to the aggressive

national commitment to energy efficiency, assumes a $50 per ton carbon

fee. As shown in table 1, the study’s estimate of carbon savings for the

most aggressive scenario is more than 200 percent greater than its

estimate for the first scenario.

8

According to the study, a $50 per ton increase in the price of carbon-based fuels would increase the

price of a gallon of gasoline by 12.5 cents, increase the price of electricity produced from natural gas

(at 53-percent efficiency) by 0.5 cents per kilowatt-hour, and increase the price of electricity produced

from coal (at 34-percent efficiency) by 1.3 cents per kilowatt-hour.

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Table 1: Potential Carbon Savings by

2010 Under the Five-Lab Study’s Three

Scenarios

Metric tons in millions

Economic

sector

First

scenario

Second

scenario

Third

scenario

Percent

increasea

Buildings 25 44 62 148

Industry 28 54 93 232

Transportation 73 88 103 41

Electricity

production b 48 136 b

Total 126 234 394 213

aCompares savings under the third scenario with those under the first scenario.

bUnlike the second and third scenarios, the first scenario assumes no carbon savings from fuel

switching among utilities to reduce carbon in the production of electricity, such as converting

from coal-fired to natural gas-fired power plants.

It is important to note that, at numerous points, the five-lab study qualifies

its 2010 estimates by noting, among other things, that the calculations

generally represent an “optimistic but feasible potential” for carbon

savings. In some cases, particularly transportation, major breakthroughs in

technologies would be needed to achieve these savings.9 DOE laboratory

officials noted that, with the exception of the transportation sector, they

believe the majority of the study’s 394 million metric tons of emissions

reductions come from technologies that exist now or are near the end of

their development phase. For example, the officials said that the 62 million

metric tons of carbon emissions reductions estimated for the building

sector can be achieved solely from technologies that exist today.

Additionally, the officials emphasized that the study was not a projection

of what would happen by 2010 but of what could happen if the nation

embarked on a path to reduce carbon emissions that included aggressive

federal policies and programs, strengthened state programs, and very

active private sector involvement, beginning in 2000 and being

progressively phased in by 2010.

Limitations of the

Study

The five-lab study is an important step in evaluating the role that

energy-efficient and low-carbon technologies can play in the nation’s

efforts to reduce global warming gases, according to several groups that

we contacted; however, the study’s scope and methodology may limit its

9

By 2010, scenarios 1 and 2 would achieve only about 32 and 60 percent, respectively, of the

394 million metric tons achieved by the study’s most aggressive scenario; unless otherwise specified,

assumptions relate to the scenario described as an aggressive national commitment to energy-efficient

and low-carbon technologies coupled with a $50 per ton carbon fee.

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usefulness. For example, the study does not identify the type of policies

that would be needed to get consumers and businesses to reduce carbon

emissions by 394 million metric tons by 2010, and it does not indicate how

these policies would be implemented. Additionally, the study does not

address the broader economic effects on the nation’s economy, such as

how the $50 per ton carbon fee may affect energy prices, energy

consumption; and, eventually, economic activity and employment levels in

the rest of the economy.

Unspecified Policies The study bases its results on a package of unspecified policies that could

bring about substantial increases in public and private research and

development, acceleration of the adoption and use of energy-efficient

technologies, advancement of the timing of postulated technological

breakthroughs, and changes in the historical patterns of consumer and

industry behavior. However, the study provides few suggestions as to what

these policies would be, how they would be designed and implemented, or

how they could be paid for. For example, a policy involving tax credits as

an incentive for consumers to make energy-efficient purchases could have

different economic and budgetary impacts from a policy involving

regulations and standards, such as requiring manufacturers to meet

minimum energy-efficiency levels for appliances. In its August 1997 peer

review comments to DOE, the Treasury Department wrote that the five-lab

study does not

“shed much light on what government can or should do to enhance the role technology will

play in mitigating the growth of carbon emissions. In particular, the contribution of the

report is to document energy savings and emissions reductions that would accrue if U.S.

consumers and businesses move closer to the current (and, in some cases, reasonably

anticipated) technology frontier. Despite its efforts to justify these moves as

’cost-effective,’ the report does not address the policies that would be needed to actually

get consumers and businesses to adopt the technologies described in the report, nor does it

present a rigorous assessment of the societal costs that would accrue if they did.”

In its August 1997 peer review comments to DOE, the Council of Economic

Advisors was also critical of the study’s failure to present the specific

policies that would stimulate the adoption of these technologies. Similarly,

according to an October 1997 study,10 the kinds of policies implemented to

achieve any particular target for reducing greenhouse gas emissions “will

have a significant impact on the costs.” While acknowledging that the

10The Economics of Climate Change, S. DeCanio, Department of Economics, University of California at

Santa Barbara (Oct. 1997).

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types of policies chosen can have an impact, officials of DOE’s Office of

Energy Efficiency and Renewable Energy noted that, in their view, the

main point of the October 1997 study is that there are many policies that

could be implemented and have a low, if any, net cost.

DOE laboratory officials agreed that the study does not discuss the policies

needed to achieve carbon savings by 2010 but explained that this was not a

study objective or task from DOE. However, the officials also noted that

there is fairly recent historic precedent for the types of behavior by

consumers and industry modeled under the study’s most aggressive

scenario. For example, the officials said the growth in the demand for

energy assumed under this scenario (0.13 percent annually through

2010) is more conservative than the actual growth in demand from 1973

through 1986 when the nation’s economy grew by about 35 percent while

primary energy demand remained unchanged. Additionally, the American

Council for an Energy-Efficient Economy (ACEEE) indicated that the

study’s message is clearer because its focus on technology is

unencumbered by policy discussions.

Other Economic Effects The study does not address the various broader economic effects on the

nation’s economy. The study employed a methodology that, in essence,

involved adding together the estimated net cost or savings to the economy

for the adoption and use of each individual energy-efficient,

carbon-reducing technology, with the savings based on the direct cost of

adopting these technologies compared to the study’s estimated energy

savings over the life of these technologies.11 However, this methodology

focuses on one aspect of the economy—energy—and does not consider

the broader impacts on other non-energy related aspects of the U.S.

economy. Without considering the interrelationships between the changes

that the five-lab study proposes—such as imposing a $50 per ton carbon

fee—and other sectors of the economy, the full effects of these changes

are not known. For example, the study does not include any analysis of the

impacts of a $50 per ton carbon fee on energy consumption or economic

activities elsewhere in the U.S. economy, including the impacts of these

fees on energy prices and energy demand, as well as potential employment

impacts. Several of the groups we contacted, such as the Global Climate

Coalition and the International Project for Sustainable Energy Paths,

believe the lack of an economic “feedback effect” in the study’s

methodology limits the usefulness of the study’s results.

11Direct cost includes the incremental cost of investment in the technologies as well as an allowance

for the overall cost of a package of programs and policies required to achieve the carbon emissions

reductions.

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DOE laboratory officials recognized that the study does not address these

broader economic feedback effects. In their opinion, these impacts would

be minor because only one sector—electricity generation—relies primarily

on the increased price of carbon as an economic stimulus to achieve

significant carbon reductions. The officials noted that the study assumes

that the estimated carbon reductions for two sectors—buildings and

industry—rely primarily on more aggressive policies, and for another

sector—transportation—the estimated carbon reductions rely on

technological breakthroughs. Regarding increased prices for electricity

generation, the officials envisioned that the overall net impact of the most

aggressive scenario on the nation’s economy would be small.12

Additionally, the officials acknowledged that the study does not provide a

quantitative analysis to support their view that the broader effects would

be minor. Officials of DOE’s Office of Energy Efficiency and Renewable

Energy agreed that the full costs to the nation’s economy are not

considered in the study but emphasized that neither are the full range of

benefits from energy-efficient technologies, such as the lower cost of state

compliance with Clean Air Act regulations or the decreases in the costs for

oil imports.

Disparities in Views

About Key

Assumptions

The study’s calculations of carbon savings depend, in large measure, on

the assumptions made about a host of factors in four sectors of the U.S.

economy, including assumptions about consumers’ purchasing behavior,

loan rates, appliance standards, industrial capital constraints, the

commercialization of near-term technologies, technological

breakthroughs, future costs, and future benefits. Comments from

interested and affected parties13 about the reasonableness of selected

assumptions illustrated disparities in their views on some key

assumptions, including those on discount rates, capital recovery factors,

the rate of adoption of new technologies, the timing of technological

breakthroughs, and the impact of changing the electricity-generating

sector by 2010.

Discount Rates The choice of a discount rate is a key assumption because it can affect

whether an investment is viewed as cost-beneficial or not. In the five-lab

study, the discount rate is used to value the stream of future benefits, such

as estimated energy savings, accruing throughout the lifetime of an

12According to these officials, the impact of the most aggressive scenario would be less than

0.2 percent for the nation’s approximately $10 trillion gross domestic product by 2010.

13See footnote 6.

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investment. Once these accumulated benefits have been calculated, they

are used to determine the cost-effectiveness of a technology (energy

savings less added investment cost). The study assumes that only

cost-effective technologies will be adopted to achieve the level of carbon

reductions estimated for each scenario. Assuming a higher discount rate

will, among other things, cause fewer technologies to be viewed as

cost-beneficial, whereas a lower discount rate means that more long-term

investments with higher initial costs will be viewed as cost-beneficial. The

study evaluates costs and benefits from two perspectives. The first, or

more optimistic, case uses real discount rates14 of 7 percent for buildings,

10 percent for transportation, and 12.5 percent for industry. The second

case uses higher discount rates—15 percent for buildings and 20 percent

for transportation and industry, thus reducing the value of energy savings.

According to DOE laboratory officials, the technologies included in the

study are cost-effective even with the higher discount rates, and these

rates are higher than those recommended by the Office of Management

and Budget (OMB) for evaluating the costs and benefits of public policies.

The study’s assumed discount rates for the transportation sector were not

a significant issue among the groups we contacted; however, some groups

were skeptical of the assumption of a 7-percent real discount rate for the

building sector. For example, the Association of Home Appliance

Manufacturers told us that the consumer discount rate for most

replacement appliances, such as refrigerators, clothes washers, clothes

dryers, and dishwashers, ranges from 12 to 15 percent. Similarly, officials

from the Energy Information Administration (EIA)15 noted that consumers

often charge such items on credit cards where the discount rate would

range from about 12 to 16 percent, or more. Representatives of the Global

Climate Coalition, National Association of Home Builders, and others also

found the study’s assumption of a 7 percent discount rate for the building

sector too optimistic. Some noted, however, that the 7 percent would be

reasonable for appliances included in new home purchases. EIA officials

and others also noted that some replacement appliances—such as hot

water heaters—are often purchased without regard to energy efficiency or

cost-effectiveness. The officials explained that, although water heaters are

a significant energy item in most homes, when water heaters fail,

consumers rarely calculate a life cycle cost analysis, choosing instead to

take what the plumber or local appliance store has most readily available.

14Real discount rates have been adjusted for inflation.

15EIA is an independent statistical and analytical agency that is required to prepare an annual report

containing trends and projections in energy consumption and supply.

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Representatives of other groups considered the 7-percent rate for the

building sector reasonable and pointed out that rebates and low-interest

financing, such as past utility-administered energy-efficiency programs,

could lower the effective discount rate on building sector purchases to

7 percent. DOE laboratory officials explained that the 7-percent rate for the

building sector would be consistent with a scenario in which the nation

embarked on a path to reduce carbon emissions that included aggressive

federal policies and programs. Additionally, the officials noted that the

higher discount rates that some groups were more comfortable with are

still within the range of discount rates that the study’s most aggressive

scenario concludes are still cost-effective.

Capital Recovery Factors

for the Industrial Sector

A key assumption for the industrial sector involves the length of time

expected for a capital investment to recover its costs—known as the

payback period. The study assumes that, for investment planning

purposes, industry can be persuaded to change the length of time

expected for a capital investment to recover its costs for energy-efficiency

investments from about 3 years to nearly 7 years.16 Under this scenario,

the study assumes industry would install new energy-efficient technologies

on twice as many operations as they would normally.

Most of the representatives of seven industries that used about 80 percent

of the manufacturing energy consumed in the United States in 1994

indicated that the capital recovery factor assumed for the industrial sector

may not realistically consider the capital constraints, market conditions,

and existing manufacturing processes these industries operate under

today. For example, in a November 1997 letter to the Secretary of Energy,

the Chemical Manufacturers Association noted that the study’s assumption

that the industry could double the rate of capital stock turnover is

“impossible or at a minimum, highly improbable.” Representatives of the

American Petroleum Institute explained that, in a business investment,

(1) there is nothing special about energy-efficiency investments; (2) such

investments have to compete directly with other investments for limited

capital assets; and (3) the longer the payback period, the greater the risk

and the uncertainty associated with an investment. Most of the

representatives of the seven industries indicated that they would not be

able to accept more than a 4-year payback; several said 3 years or less

would remain their industry’s normal payback period. Generally, the

16According to the study, the historical capital recovery factor (or payback period) for

energy-efficiency investments by industry is about 33 percent (a 3-year payback); the study assumes

that industry will change its capital recovery factor for energy-efficiency investments to 15 percent

(nearly a 7-year payback).

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representatives said that a 7-year payback is not realistic because of the

higher risks and uncertainties associated with longer investments, the

competing demands within their firms for investment capital, and their

increasingly global competition.

On the other hand, the Director of ACEEE believed that industry could

achieve this goal with little difficulty, and pointed out that this is

consistent with the Council’s 1997 report,17 which noted that industry

often does not fully account for all the savings (both energy and

nonenergy) in its financial analyses of such projects. DOE laboratory

officials also believed that, given an aggressive package of federal policies

promoting low-carbon technologies, along with federal research and

development funds, industries would begin to look at such investments

more favorably. They noted that for some larger investments—known as

strategic investments—industry has been willing in the past to look at

payback over a longer period of time. This is consistent, they noted, with a

1986 study18 which found that the capital budgeting practices of 12 large

manufacturers varied based on the size of the project, with large projects

having capital recovery rates ranging from 15 to 25 percent (paybacks

ranging from about 7 to 4 years, respectively), and small- and

medium-sized projects having capital recovery rates ranging from 35 to

60 percent (paybacks ranging from about 3 to less than 2 years,

respectively).19 Many energy-efficiency projects in the industrial sector

would be viewed as large projects.

Technology Adoption Rate

for the Building Sector

One of the study’s key assumptions involves the choice of “penetration

rates,” or the rates of adoption and use of energy-efficient technologies

within a certain time frame. For the building sector, the study assumes a

65-percent penetration rate for its most aggressive scenario. This means

that 65 percent of the energy savings achievable from maximum

cost-effective energy-efficiency improvements are realized in residential

and commercial buildings constructed or renovated from 2000 to 2010 and

in the equipment subject to replacement during this time period.

17Energy Innovations: A Prosperous Path to a Clean Environment, Alliance to Save Energy, ACEEE,

Natural Resources Defense Council, Tellus Institute, and Union of Concerned Scientists (June 1997).

18Capital Budgeting Practices of Twelve Large Manufacturers, M. Ross (Winter 1986).

19According to DOE, under the most aggressive scenario, investments in energy-efficient technologies

would be on the lower end of the range (15 percent for large projects and 35 percent for small- and

medium-sized projects).

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Among the groups we contacted, we found a disparity of views on the

reasonableness of the assumed 65-percent penetration rate. Several were

skeptical of this level of penetration and questioned its reasonableness for

some categories of new and retrofitted structures—such as low-cost, or

entry-level, housing and rental properties. For example, the National

Association of Home Builders told us that the entry-level housing market

is extremely cost-sensitive and questioned whether builders of these

structures would install the higher initial cost but more energy-efficient

technologies described in the five-lab study. They were also skeptical that

such homes would be equipped with higher initial cost, but more

energy-efficient appliances. Similarly, the Air-Conditioning and

Refrigeration Institute noted that the study’s assumption of a 65-percent

penetration rate is unrealistic, noting that generally “the people making the

purchasing decision of air conditioning equipment are usually not the ones

who will be paying the energy bills, so first cost becomes more important

than operating cost.”

Conversely, officials from the Alliance to Save Energy and ACEEE said that,

in their view, the study’s assumptions for the building sector are probably

conservative. The officials said that, in the building sector, such things as

aggressive national codes and standards over the home building industry

and significantly higher energy-efficiency standards for appliance

manufacturers could achieve the level of carbon emissions reductions

estimated in the study. DOE laboratory officials noted that the 65-percent

penetration rate was based on retrospective studies and their judgment of

the percentage of cost-effective technologies that can reasonably be

adopted over time with strong policy incentives. Additionally, the officials

said that the 65-percent penetration rate for the building sector is

conservative in their opinion because their analysis of this sector does not

rely on any technological breakthroughs.

Timing of Technological

Breakthroughs for the

Industrial and

Transportation Sectors

Some industry groups we talked with questioned the study’s assumptions

about the feasibility of some technologies being available by the 2010 time

frame, noting that, in a few cases, the study’s description of these

technologies as “incremental” is incorrect because they still require

fundamental breakthroughs. For example, according to officials of The

Aluminum Association, the study’s assumption that the aluminum industry

will be able to use inert anode20 technology to cost effectively smelt

aluminum by 2010 is overly optimistic, with a more realistic time frame for

20According to the February 1998 Inert Anode Roadmap, there are a number of barriers to the use of

this technology, with some of the most critical barriers being the durability and longevity of the anode

material, which fails to maintain the thermal and chemical properties needed.

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implementing this breakthrough technology being 2020. To be

cost-effective, the officials explained, anodes must last for 8 to 10 years,

but anode life in ongoing experiments has ranged from a matter of hours

to several weeks.

Similarly, some groups were skeptical that the breakthrough technologies

envisioned for the transportation sector will be forthcoming soon enough

to substantially reduce carbon emissions by 2010. According to

representatives of the American Automobile Manufacturers Association

(AAMA), the technology relied on for much of the carbon savings

envisioned for light-duty vehicles is not expected to be available as quickly

as the study assumes, and even if the technologies are demonstrated as

viable, the benefits will probably not be realized until after 2010. For

example, a substantial amount of the assumed reduction in light-duty

vehicles’ carbon emissions is expected to come from lean-burn engines

that improve fuel economy but produce excessive amounts of nitrogen

oxide, a Clean Air Act-regulated pollutant and an ozone precursor.

According to AAMA officials, these engines still require significant

technological development before they can be used in the U.S. market.

They said that U.S. automotive manufacturers have been working on this

type of engine for over 20 years, and—while it is technically feasible—it is

still a question of technological cost-effectiveness today. They also pointed

out that the median expected lifetimes of passenger cars and light-duty

trucks—now about 14 and 16 years, respectively—are increasing, making

it more difficult to achieve part of the carbon reductions estimated for the

transportation sector by 2010. Officials of DOE’s Office of Energy Efficiency

and Renewable Energy noted that longer vehicle lifetimes will slow the

pace of technological change but emphasized that the study scenarios

consider these extended lifetimes.

The AAMA representatives and others pointed out that the study

acknowledges that transportation sector reductions are not likely to

materialize without a major change in U.S. policy to foster transportation

modes that are more energy-efficient, as well as an intensification of

research efforts. With respect to transportation sector technologies, the

study cautions that

“because the outcomes postulated in the high-efficiency/low-carbon scenario require

technological breakthroughs, they require a certain degree of luck to be achieved by 2010.

There are no credible methods to accurately gauge the probability of such breakthroughs;

we believe they stand a decent chance of occurring with an intensification of research

Page 13 GAO/RCED-98-239 Climate Change
B-280459 

efforts, but we stop short of claiming that they are a likely outcome of such an

intensification.”

DOE laboratory officials acknowledged that, in some areas such as the

transportation sector, technological breakthroughs will be needed but

noted that it is plausible that additional funding for research and

development activities could accelerate such breakthroughs. Additionally,

officials of DOE’s Office of Energy Efficiency and Renewable Energy noted

that the study’s most aggressive scenario does not anticipate that fuel cell

vehicles will enter the market until 2007, yet, according to DOE, a number

of manufacturers, including Daimler Benz, have announced that they plan

to have such vehicles on the road before 2007. Also, according to DOE,

Toyota has announced that it plans to introduce a hybrid vehicle in the

U.S. market in 2000, several years ahead of the entry year assumed in the

study’s most aggressive scenario. Furthermore, officials from the

American Forest and Paper Association said the assumptions about some

breakthrough technologies for their industry, such as impulse drying,

multiport cylinder drying, and on-machine sensors, are reasonable.

Changes in the Electricity

Sector

Some groups believed the study’s assumptions about changes that would

occur in the electricity sector may be too optimistic. For example, the

study’s cost-benefit analysis assumes that a large segment of the

electricity-generating sector can change from coal to natural gas without

causing the price of natural gas to increase. However, officials from EIA,

the American Petroleum Institute, and the Edison Electric Institute said

that it is optimistic to assume that significant switching from coal to

natural gas can occur without resulting in an increase in gas prices. DOE

laboratory officials explained that this could happen due partly to the

study’s assumed reduction in overall energy demand for the building

sector, after this sector adopts more energy-efficient technologies, such as

highly efficient windows, doors, and appliances.21 One group questioned

whether the assumed carbon savings would occur. A June 1998 American

Petroleum Institute report22 asserts that a $50 increase in the price of

carbon-based fuels would not cause coal plants to convert to natural gas,

and that—in order to achieve such conversions—the five-lab study further

assumes that coal plants incur an additional environmental compliance

cost of $1,400 per ton for nitrogen oxides and $100 per ton for sulfur

21By 2010, the study assumes that the building sector’s energy demand decreases by about 5 percent, or

about 2 quads, from 1997 levels, for the most aggressive scenario.

22A Critique of the “Five Lab” Study, R. Sutherland, American Petroleum Institute (June 23, 1998).

Page 14 GAO/RCED-98-239 Climate Change
B-280459 

dioxides.23 DOE laboratory officials disagreed with this report and

emphasized that the five-lab study’s analysis of opportunities to convert

coal plants to natural gas was based on a detailed plant-by-plant

assessment of conversion costs.

Study’s Role in

Formulating Policy

In October 1997, the administration announced key elements of its

proposal to reduce the emissions of greenhouse gases to the levels they

were in 1990 by no later than 2012, with additional reductions below the

1990 levels in the ensuing 5-year period. Among other things, this proposal

provided the framework for the level of greenhouse gas emissions

reductions that the United States would commit to achieve in the next

international negotiation to be held in December 1997 in Kyoto, Japan.

Unlike the 1992 international climate change agreement that had called for

voluntary reductions, the Kyoto conference was to establish binding

commitments for reductions in greenhouse gases.

In the administration’s October 1997 proposal, the five-lab study was cited

as illustrating how greater use of many existing technologies could reduce

carbon emissions. Also, the OMB Associate Director of Natural Resources,

Energy and Science, told us that the administration relied on several key

studies, including the five-lab study, in determining which activities should

be a part of the administration’s climate change initiatives. According to

the five-lab study, the estimated amount of carbon that the United States

would need to reduce in order to meet 1990 levels by 2010 is 390 million

metric tons per year. The study found that, for its most aggressive

scenario, the United States could reduce its emissions by 394 million

metric tons by 2010 with a low to no net cost to the economy. According

to the Principal Deputy Assistant Secretary for Energy Efficiency and

Renewable Energy, the five-lab study increased in its importance as

support for the administration’s climate change proposal when, in

June 1997, a major study24 dealing with the economic effects of global

climate change policies could not be finalized.

In its December 1997 Kyoto Protocol negotiations, the United States

agreed—subject to Senate ratification—to reduce the emissions of six

23DOE officials pointed out that the study also analyzes the impact of lower costs of $700 per ton for

nitrogen oxides and no additional costs for sulfur dioxides. Using EIA’s forecasted 2010 prices for coal

and natural gas, however, shows that the incremental carbon reductions are less than one-third of the

amount removed when the higher costs are assumed.

24Draft report, Economic Effects of Global Climate Change Policies: Results of the Interagency

Analytical Team (June 1997).

Page 15 GAO/RCED-98-239 Climate Change
B-280459 

greenhouse gases25 to 7 percent below 1990 levels.26 However, one

greenhouse gas—carbon dioxide—is by far the largest contributor to total

U.S. greenhouse gas emissions, constituting more than 80 percent of total

U.S. emissions in 1990 and projected to represent more than 80 percent in

2010. With its technological focus on the ability of the nation to

significantly reduce carbon emissions, the five-lab study was also one of

the key documents cited as support for the December 1997 Kyoto

Protocol’s emission-reduction commitments for the United States,

according to DOE’s Assistant Secretary for Energy Efficiency and

Renewable Energy.

Agency Comments We provided a draft of this report to the Department of Energy (DOE) for

review and comment. The agency generally agreed with the overall

message of the report, noting that it showed reasonable balance and was

consistent with information DOE had received following publication of the

five-lab study. DOE suggested several changes to clarify information in the

report. For example, the agency suggested that we note in the section on

other economic effects that, while the five-lab study did not consider the

full range of costs to the nation, it also did not consider the full range of

benefits of employing these energy-efficient and low carbon technologies,

such as a lower cost of compliance with Clean Air Act regulations. We

made this change and incorporated DOE’s other comments where

appropriate.

The agency expressed concern with the section on the study’s limitations.

While noting that the agency did not disagree with the two principal

limitations presented in our report, DOE suggested that we state in that

section that these limitations do not invalidate the conclusions of the

five-lab study, most notably the study’s essential conclusion that “a

vigorous national commitment to develop and deploy energy efficient and

low-carbon technologies has the potential to restrain the growth of U.S.

energy consumption and carbon emissions . . . and can produce energy

savings that are roughly equal to or exceed costs.” We did not make this

change, however, because the types of policies that might be needed to

actually get consumers and businesses to adopt the technologies

described in the report are not specified, and some have expressed

concerns about the costs of these policies. For example, the Treasury

25Carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur

hexaflouride.

26According to the Chair of the Council of Economic Advisors, after accounting for changes in the

definition of the baseline for three of the six gases from 1990 to 1995 and the way that carbon sinks are

figured, the actual reduction is no more than 2 to 3 percent more than the administration originally

proposed as a negotiating position.

Page 16 GAO/RCED-98-239 Climate Change
B-280459 

Department questioned the study’s conclusion that carbon emissions can

be reduced in ways that reduce energy costs more than they increase other

societal costs, noting that in its view the study “substantially understates

the costs of government policies to promote technology.” Additionally, as

noted in the section on key assumptions, the study’s finding that a

widespread adoption of energy-efficient technologies can be achieved with

a low to no net cost to the nation is heavily dependent on the assumptions

made, and we found a disparity of views on some of the key assumptions

that may have influenced the study’s results.

DOE also suggested that we include in our report that, since publication of

the five-lab study, the administration has provided many of the elements of

the policy roadmap in its announcement of a Climate Change Technology

Initiative, which is a combination of higher budgets for technology

research and tax incentives to accelerate the use of energy-efficient and

low-carbon technologies. We did not include this in our report, however,

since this initiative was outside the scope of our review. Also, in our

April 1998 report Department of Energy: Proposed Budget in Support of

the President’s Climate Change Technology Initiative (GAO/RCED-98-147, Apr.

10, 1998), we raised several questions regarding DOE’s proposed budget

that the Congress may want DOE to address before the agency implements

this initiative. Additionally, uncertainties regarding the lack of specific

performance goals associated with this initiative were discussed in our

June 1998 testimony Global Warming: Administration’s Proposal in

Support of the Kyoto Protocol (GAO/T-RCED-98-219, June 4, 1998).

DOE also questioned the relevancy of including comments from

organizations that criticized some assumptions of the five-lab study as

optimistic when compared to current conditions. We believe the

viewpoints of these organizations are relevant and appropriately reflect

their opinions of the reasonableness of certain key assumptions used in

the study, taking into consideration current conditions and historical

trends. Appendix III contains the full text of the agency’s written

comments and our responses.

We conducted our review from December 1997 through August 1998 in

accordance with generally accepted government auditing standards. A

detailed discussion of our scope and methodology is provided in

appendix I.

Page 17 GAO/RCED-98-239 Climate Change
B-280459 

As arranged with your offices, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 15 days after its

date. At that time, we will send copies of the report to the Secretary of

Energy and other interested parties. We will also make copies available to

others upon request.

Please call me at (202) 512-6111 if you or your staff have any questions.

Major contributors to this report are listed in appendix IV.

Peter F. Guerrero

Director, Environmental

 Protection Issues

Page 18 GAO/RCED-98-239 Climate Change
Page 19 GAO/RCED-98-239 Climate Change
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

22

Appendix II 

List of Nonfederal

Groups Commenting

on the Five-Lab Study

24

Appendix III 

Comments From the

Department of Energy

25

Appendix IV 

Major Contributors to

This Report

31

Table Table 1: Potential Carbon Savings by 2010 Under the Five-Lab

Study’s Three Scenarios

5

Abbreviations

AAMA American Automobile Manufacturers Association

ACEEE American Council for an Energy-Efficient Economy

API American Petroleum Institute

DOE Department of Energy

EIA Energy Information Administration

GAO General Accounting Office

OMB Office of Management and Budget

Page 20 GAO/RCED-98-239 Climate Change
Page 21 GAO/RCED-98-239 Climate Change
Appendix I 

Objectives, Scope, and Methodology

In view of the Department of Energy’s (DOE) five-lab study’s potential

influence on U.S. climate change policy,1

 Senators Larry Craig, Chuck

Hagel, Jesse Helms, and Frank Murkowski asked us to provide information

on (1) how the study’s scope and methodology may limit its usefulness,

(2) key assumptions that may have influenced the study’s results, and

(3) the study’s role in the formulation of the October 1997 climate change

proposal and the Kyoto Conference’s emission-reduction goals for the

United States.

To obtain information on the study’s limitations and assumptions, we

obtained and reviewed the final study, drafts of the study, and intramural

and extramural peer reviewers’ comments on drafts of the study. We also

reviewed DOE’s Energy Information Administration’s (EIA) 1997 Annual

Energy Outlook, which served as the principal basis for the estimated 2010

carbon emission levels under the five-lab study’s business-as-usual case,2

and we discussed various assumptions in the study with EIA officials

associated with the development of the 1997 Annual Energy Outlook, as

well as EIA’s more recent 1998 Annual Energy Outlook. Additionally, we

interviewed officials and obtained documents from Oak Ridge National

Laboratory and Lawrence Berkeley National Laboratory, the two key

laboratories in developing the study. We also contacted 52 organizations

that we selected as being interested and affected parties, many with

energy-efficiency expertise or able to offer informed opinions about the

study’s assumptions and limitations based on a particular field of

expertise. In selecting these representatives, we contacted potentially

interested and affected parties that were identified as being

knowledgeable of the study, as well as energy-efficiency, industry, and

environmental experts and other groups we identified from Internet

searches, discussions with energy-efficiency experts, and our previous

experiences. We selected organizations that represent different aspects of

the four sectors of the U.S. economy discussed in the study—buildings,

industry, transportation, and electricity production—as well as

environmental groups. Not all of the representatives we contacted had

read the study or wanted to express their views on it. Others had read and

analyzed only those parts of the study that related to their sector, and they

limited their comments accordingly. Of the 52 groups contacted, 31

commented on one or more aspects of the study. A list of the groups

1

Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy Technologies by 2010 and Beyond

(Sept. 22, 1997).

2

The study bases its savings estimates on the amount of carbon that would be emitted in 2010 if the

nation continued on its current energy consumption and production path. This approach is generally

known as the business-as-usual scenario.

Page 22 GAO/RCED-98-239 Climate Change
Appendix I 

Objectives, Scope, and Methodology

commenting appears in appendix II. Additionally, while we discussed

some aspects of the assumptions associated with the

engineering-economic modeling approach used in some parts of the study,

we did not attempt to verify the adequacy of these models or the

alterations made to them for analyzing various study scenarios, such as the

alterations of EIA’s National Energy Modeling System model.

To describe the extent to which the final report’s results were reflected in

the October 1997 climate change proposal and the December 1997 Kyoto

Conference’s greenhouse gases emission-reduction goals for the United

States, we relied on interviews, memorandums, press, and other briefings

by the administration that cited the study as partial support for these

proposals, the proposal and conference documents themselves, and

testimony before the U.S. Senate. We conducted our review from

December 1997 through August 1998 in accordance with generally

accepted government auditing standards.

Page 23 GAO/RCED-98-239 Climate Change
Appendix II 

List of Nonfederal Groups Commenting on

the Five-Lab Study

Air-Conditioning and Refrigeration Institute

Alliance to Save Energy

American Automobile Manufacturers Association

American Council for Capital Formation

American Council for an Energy-Efficient Economy

American Forest and Paper Association

American Foundrymen’s Society

American Iron and Steel Institute

American Metalcasters Consortium

American Petroleum Institute

Association of Home Appliance Manufacturers

Chemical Manufacturers Association

Consumer Energy Council of America/Research Foundation

Edison Electric Institute

Environmental and Energy Study Institute

Global Climate Coalition

International District Energy Association

International Project for Sustainable Energy Paths

National Association of Home Builders

National Association of Manufacturers

National Hydropower Association

National Mining Association

Natural Gas Supply Association

Natural Resources Defense Council

Nuclear Energy Institute

Primary Glass Manufacturers Council

Reason Public Policy Institute

Renewable Fuels Association

Resources For the Future

Steel Founders Society of America

The Aluminum Association

Page 24 GAO/RCED-98-239 Climate Change
Appendix III 

Comments From the Department of Energy

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Now on pp. 2 and 3.

Page 25 GAO/RCED-98-239 Climate Change
Appendix III 

Comments From the Department of Energy

Now on p. 13.

Now on p. 6.

See comment 1.

Now on p. 9.

See comment 1.

Page 26 GAO/RCED-98-239 Climate Change
Appendix III 

Comments From the Department of Energy

Now on p. 8.

See comment 1.

Now on p. 11.

See comment 4.

Now on p. 12.

See comment 5.

Now on p. 11.

See comment 6.

Now on p. 13.

See comment 7.

Now on p. 14.

See comment 8.

Now on p. 14.

See comment 9.

Page 27 GAO/RCED-98-239 Climate Change
Appendix III 

Comments From the Department of Energy

Now on p. 15.

See comment 10.

Now on pp. 14 and 15.

See comment 11.

Page 28 GAO/RCED-98-239 Climate Change
Appendix III 

Comments From the Department of Energy

The following are GAO’s comments on the Department of Energy’s letter

dated July 27, 1998.

GAO Comments 1. We agreed with this comment and have revised the report accordingly.

2. See comment 1.

3. See comment 1.

4. The statement suggested by DOE has not been included because this

section of our report only addresses the building sector and because the

adoption rate of new technologies for the transportation sector was

questioned by officials of the American Automobile Manufacturers

Association.

5. This sentence was clarified to note that, because the entry-level housing

market is so cost-sensitive, the National Association of Homebuilders

questioned whether builders of entry level housing would install the

higher-initial-cost but more energy-efficient technologies described in the

study.

6. The study in question does not use the term “strategic investments” to

describe the capital budgeting practices of firms, as suggested by DOE. The

study does indicate that the capital budgeting practices of firms varied

based on the size of the project, with large projects having capital recovery

rates ranging from 15 to 25 percent, medium-sized projects, from 25 to

40 percent, and small projects, from 35 to 60 percent. We have added a

clarifying note that DOE’s interpretation of the study in question is that,

under the most aggressive scenario, investments in energy-efficient

technologies would be on the lower end of the range (according to DOE,

about 15 percent for large projects and 35 percent for small- and

medium-sized projects).

7. DOE’s views have been added to this section of the report.

8. Due to a typographical error in the draft sent to DOE, the words

“resulting in” were omitted, which distorted the meaning of the sentence.

We have revised the report accordingly.

9. The information suggested by DOE has been added to this section of the

report.

Page 29 GAO/RCED-98-239 Climate Change
Appendix III 

Comments From the Department of Energy

10. Although our draft report already noted that DOE laboratory officials

disagreed with the American Petroleum Institute report, we added DOE’s

suggested language about the analyses supporting the five-lab study’s

assessment of conversion costs.

11. We agreed with this comment and have added a clarifying note to this

section of our report.

Page 30 GAO/RCED-98-239 Climate Change
Appendix IV 

Major Contributors to This Report

Resources,

Community, and

Economic

Development Division

William F. McGee, Assistant Director

Mehrzad Nadji, Assistant Director, Economic Analysis Group

James R. Beusse, Evaluator-in-Charge

Philip L. Bartholomew, Evaluator

Hamilton C. Greene, Jr., Evaluator

(160422) Page 31 GAO/RCED-98-239 Climate Change
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