In a pathbreaking analysis of US energy policy, NEPI worked with Resources for the Future (“RFF”), an independent research institution based in Washington, D.C. NEPI and RFF managed a team of national experts across the country to produce a broad, ranked list of policy options to inform national leaders working to develop a comprehensive national energy policy.
Released in November, 2010, “Toward a New National Energy Policy: Assessing the Options” assesses the societal costs, and the barrels of oil and tons of carbon dioxide emissions reduced, for an array of policy options (both individually and in combinations), and ranks these options using a rigorous, consistent methodology. The results provide policymakers with a wealth of valuable information to consider in establishing a coordinated national energy policy.
While numerous, valuable research studies on alternative fuels, new technologies, and future energy scenarios have been conducted, the RFF/NEPI project goes beyond what others have done to present a focused, consistent ranking and analysis across specific policy options. Several important features of the study distinguish it from other assessments of U.S. climate and energy options.
- This research focuses explicitly on policy design and evaluation. It is essential to look beyond engineering estimates or availability of particular fuels and technologies, and consider the specific government policy instruments that will drive changes in private markets. Without an understanding of how these policies work, decisionmakers have no clear guidance on how to move forward.
- This report uses a consistent economic modeling approach, which is the backbone of the study. This model, (NEMS–RFF), is a version of the U.S. Department of Energy/Energy Information Administration’s National Energy Modeling System (NEMS). By using the same model with the same underlying assumptions, we can score different policies based on “apples-to-apples” comparisons. We based our scores on two effectiveness metrics—reduction in barrels of oil consumed and reduction in tons of CO2 emitted—as well as the cost of each policy.
- The study is wide-ranging, taking into account a broad menu of policies. Unlike some other studies, we also examine an array of crosscutting policies that combine multiple individual policies. We examined 35 policy scenarios, including four crosscutting policy options, against a reference case. We believe this report covers many of the relevant energy policy options currently facing policymakers.
- A hallmark of this report is its examination of economic or “welfare” costs, based on fundamental microeconomic principles in which cost is the value of the resources that society gives up (directly and indirectly) to achieve a given reduction in oil use and/or CO2 emissions. With both cost and effectiveness measures in hand, we then compare the cost-effectiveness of various policies, meaning the average cost per barrel of oil reduced and the average cost per ton of CO2 emissions reduced. This helps us to identify those policies that can produce the biggest “bang for the buck,” or perhaps more accurately, the lowest buck for the bang.
- For relevant policies, we consider three cases as possible explanations for the “energy paradox,” the observation that consumers appear reluctant to make investments in energy efficiency unless they see a pay-off well before the lifetime of the investment. Many advocates of energy efficiency standards believe that market failures can entirely explain the energy paradox—our complete market failure case—and they argue for using a very low discount rate in valuing the energy savings. On the other hand, some economists are skeptical of this argument and believe that markets work fine—our no market failure case; they advocate using a much higher discount rate that is consistent with observed behavior. We discuss costs for both of these bounding cases, as well as a compromise, a partial market failure case.