January 17, 2008
FEDERAL ENERGY BILL, CONNECTICUT, AND PEAK OIL
By: Kevin E. McCarthy, Principal Analyst
You asked for a summary of the recently passed federal Energy Independence and Security Act of 2007 (HR 6) and a discussion of how it affects Connecticut and how it relates to the possibility of global supply of conventional petroleum peaking in the relatively near future while consumption continues to grow.
HR 6 specifies a national standard of 35 miles per gallon by model year 2020 for cars and other light-duty vehicles, which will increase fuel economy standards by 40%. The act also requires the Department of Transportation (DOT) to establish, for the first time, fuel economy standards for medium and heavy-duty trucks.
The act requires fuel producers to use at least 36 billion gallons of biofuel in 2022. This is nearly a fivefold increase over current levels. Particularly in the later years of this period, the act requires that the bulk of fuel come from sources other than corn-based ethanol (the principal biofuel on the market today). The act authorizes several new programs to encourage the development of biofuels.
The act establishes new efficiency standards for light bulbs, residential boilers and water heaters, and several other appliances. It expands the funding authorization for the residential weatherization assistance program and authorizes funding for new energy efficiency programs. The act contains a wide range of other provisions, including research and development programs for a variety of renewable resources, renewable energy and energy efficiency provisions related to federal buildings and fleets, studies and reporting requirements, and educational programs.
The act's impact on Connecticut will depend on many factors. These include how vehicle manufacturers and fuel producers comply with the act's requirements, technological and market developments, and the extent to which the federal government funds the programs the act authorizes. It appears likely that the act will increase the purchase price of vehicles and affected appliances but decrease their operating costs, leading to net benefits. The act's effect, if any, on biofuels use in the state is unclear, in part because it is unclear to what extent it will lead to greater biofuels use in the state.
The act's vehicle fuel efficiency and biofuels provisions could reduce U.S. consumption of petroleum by as much as 4 million gallons per day by 2020, when the Department of Energy (DOE) projects that global consumption will be approximately 103 million gallons per day. The impact of such a reduction of consumption on petroleum prices and availability will depend on global supply of conventional and unconventional petroleum, among other things.
ENERGY INDEPENDENCE AND SECURITY ACT OF 2007 (HR 6)
Vehicle Efficiency Standards
The act requires DOT's National Highway Traffic Safety Administration to increase the average fleet fuel economy standards for light duty vehicles to 35 miles per gallon by model year 2020. On a fleet-wide basis, this is 40% above the current standards of 27.5 miles per gallon for cars and 22.2 miles per gallon for light trucks and SUVs. For model years 2021 through 2030, the act requires the average fuel economy by each fleet manufactured for sale in the United States to be the maximum feasible average fuel economy for that model year.
The act requires DOT to issue “attribute-based standards” under which each manufacturer would have an efficiency standard based on the mix of vehicles it manufactures. Manufacturers with a “heavy” mix, i.e., primarily larger vehicles, will have to meet a lower standard, and those with a “lighter” mix will have to meet a higher standard. The act also requires DOT to establish a credit program to allow any manufacturer whose vehicles in one category exceed any of the average fuel economy standards to obtain credits and to apply the credits within the manufacturer's fleet to those vehicles in another category that do not meet the standards. It allows DOT to establish a credit trading program to allow manufacturers whose vehicles exceed the average fuel economy standards to earn credits that they can sell to manufacturers whose vehicles fail to achieve the prescribed standards, so long as the total oil savings associated with the standards are preserved.
Under the current efficiency standards, vehicle manufacturers receive credits towards the standards for vehicles they produce that can run on alternative fuels. The act extends these credits to model year 2019. To the extent that these “flexible fuel” vehicles operate on gasoline (which is usually the case) this provision will offset the tighter efficiency standards to a limited extent.
Vehicle manufacturers expect to meet the standards through greater use of diesel engines and hybrids, reducing vehicle weight through materials substitution, and greater use of technologies such ascontinuously variable transmissions and variable valve timing. Another likely response will be the use of automatic start-stop technology currently used in hybrids. Shutting down the engine during stops and running accessories off a battery instead of the engine can increase mileage by 10 to 30%.
The Energy Policy Act of 2005 established a renewable fuel standard mandate of at least 7.5 billion gallons of renewable fuel to be blended into motor vehicle fuel sold in the U.S. by 2012. HR 6 expands on this mandate to require the Environmental Protection Agency (EPA) to revise its regulations to ensure that transportation fuel sold in the U. S. contain, on an annual average basis, specified amounts of renewable fuel, advanced biofuel, cellulosic biofuel, and biomass-based diesel.
Under the act, renewable fuel includes fuel produced from crops (e.g., ethanol from corn starch), among other things. Renewable fuel produced from new facilities that begin construction after the act's effective date must achieve at least a 20% reduction in lifecycle greenhouse gas emissions compared to lifecycle greenhouse gas emissions for conventional gasoline production.
Advanced biofuel means renewable fuel, other than ethanol derived from corn starch, that has lifecycle greenhouse gas emissions that are at least 50% less than the amount produced by conventional gasoline, calculated on a lifecycle basis. Cellulosic biofuel is renewable fuel derived from cellulose, hemicellulose, or lignin (these are components of wood and grasses) that is derived from renewable biomass and that have lifecycle greenhouse gas emissions that are at least 60% less than the amount produced by conventional gasoline or diesel, calculated on a lifecycle basis. Biomass-based biofuel is biodiesel that has lifecycle greenhouse gas emissions that are at least 50% less than the amount produced by conventional diesel, calculated on a lifecycle basis. Biodiesel that does not meet this criterion is considered advanced biofuel.
The act requires the amount of renewable fuel sold on the market to increase from 4 billion gallons in 2006 to 36.0 billion gallons in 2022. It requires that 0.6 billon gallons of the amount sold in 2009 be advanced renewable fuel, with this figure rising to 21.0 billion gallons in 2022. It requires that 0.1 billon gallons of cellulosic renewable fuel be sold in 2010, rising to 16 billion gallons in 2022. Finally, the act requires that 0.5 billion gallons of biomass-based biodiesel be sold in 2009, rising to 1.0 billion gallons in 2012.
The act authorizes $500 million in federal fiscal years (FFYs) 08 to 15 to provide grants to encourage the development of advanced biofuels that achieve at least an 80% reduction in lifecycle greenhouse gas emissions. It authorizes a program for research, development, demonstration, and commercial application of biofuel production technologies in states with low rates of ethanol production. The grants would go to universities in these states, or consortia of universities, state agencies, and other entities. The act authorizes $25 million each year from FFY 08 to 10 for this program.
Appliance Energy Efficiency
The act requires light bulbs to use about 25-30% less energy than today's incandescent bulbs by 2012-2014 and at least 60% less energy by 2020. The initial targets can be met by compact fluorescent lamps (CFLs) and light-emitting diodes (LEDs), which are already on the market and advanced incandescent lamps, which the major lamp manufacturers are introducing to the market. CFLs and LEDs will also meet the 2020 targets.
The act establishes efficiency standards for walk-in (commercial) freezers and coolers that are similar to standards that Connecticut has already adopted. It makes existing federal energy efficiency standards more stringent for the following products: residential boilers, dehumidifiers, clothes washers, and dishwashers (for the latter two products, the act also establishes water efficiency standards). It increases the stringency of the standard for electric motors and extends coverage to more motors. The act requires that, starting in 2012, gas- and oil-fired boilers and water heaters have an annual fuel use efficiency ranging from 80% to 84%, depending on technology. The act allows the DOE to set efficiency standards for heating and cooling products that vary by region and amends procedures for establishing new or amending existing standards.
Other provisions require the DOE to adopt regulations to set revised efficiency standards for refrigerators, external power supplies, and battery chargers by 2011; clothes washers and walk-in coolers and freezers by 2012; dishwashers by 2015; and metal halide lamp fixtures and general service lamps by 2017 and again by 2022. DOE must issue a furnace electricity use standard by 2014.
The act establishes public-private partnerships to design and demonstrate energy efficient processes and technologies, including industrial feedstock recovery and feedstock diversification. Additionally, the program could help the industrial energy users adopt renewable resources for their heat and power requirements.
Finally, the act re-authorizes the weatherization assistance program, increasing the authorization from $700 to $750 million in FFY 08. It establishes increasing authorizations in the four subsequent years, rising to $1.4 billion in FFY 12. It allows DOE to make these funds available to local weatherization agencies to expand the program to include materials, benefits, and renewable and domestic energy technologies not covered by the program, if the state weatherization agency certifies that the applicant has the capacity to carry out the proposed activities and that the state will oversee the funded projects.
The act requires DOE to establish an energy efficiency block grant program for municipalities with populations over 35,000 and states. The purpose of the program is help grantees implement strategies to (1) reduce fossil fuel emissions created as a result of activities within their jurisdictions in a way that is environmentally sustainable and, to the maximum extent practicable, maximizes benefits for local and regional communities; (2) reduce the total energy use; and (3) improve energy efficiency in the transportation, building, and other sectors. The act authorizes $20 million for the program in FFYs 08 and 09, $25 million in FFYs 10 and 11, and $30 million in FFY 12. Of the amounts actually appropriated, 68% must go to municipalities and 28% to states, with state appropriations based on population and other factors (the rest goes to Indian tribes and administration).
The act requires DOT to establish a competitive program to provide grants on a cost-shared basis to state and local governments, among other entities, to carry out projects to encourage the use of plug-in electric vehicles or other emerging electric vehicle technologies. It authorizes $90 million for each of FFYs 2008 through 2012, with at least one-third of the total amount appropriated made available each fiscal year for grants to local governments.
IMPACT ON CONNECTICUT
Vehicle Efficiency Standards
The act's vehicle efficiency standards will tend to increase the purchase price of vehicles while reducing their operating costs. The Consumer Federation of America estimated that the 35 mile per gallon standard would increase the purchase price of a typical car, if financed by a five-year loan, by $1,909. (Some vehicle manufacturers have asserted that the cost of compliance could be substantially higher.) However, the car's operating cost would be $2,487 less over this period and $3,480 less over a ten-year period, based on gasoline at $3 per gallon in both cases. Other factors being equal, this trade-off would result in Connecticut receiving higher sales taxes from vehicle sales, but lower gasoline taxes (petroleum products and excise taxes). The latter would be partially offset to the extent that lower operating costs lead people to drive more each year.
The Union of Concerned Scientists projects that the fuel efficiency provisions will provide a net benefit of $22 billion nationally in 2020 and $72 billion in 2030, based on gasoline costing $2.55 per gallon. Since the Connecticut economy is slightly more than 1% of the size of the national economy, this would suggest that the net benefit to Connecticut consumers under this analysis would exceed $220 million in 2020 and $720 million in 2030. To the extent that lower expenditures for gasoline mean that more money is circulating in the Connecticut economy rather than exported to other countries, the standards will increase economic activity in the state.
The vehicle efficiency provisions in the act could improve air quality in the state, although a 40% increase in the standard would not necessarily lead to a comparable reduction in air pollutants, according to Department of Environmental Protection (DEP) staff.
Appliance Efficiency Standards
The appliance efficiency standards would have similar effects, although on a smaller scale. The American Council for Energy Efficient Economy (ACEEE) estimates that the standards will produce a net benefit of $7.7 billion in 2030 (measured in 2005 dollars) nationally. The light bulb standards will have the largest impact. Further information on the estimated effects of these provisions is available at www.aceee.org/energy/national/07nrgleg.htm. The act's appliance efficiency standards, once they go into effect, will preempt state standards. The act has standards for four products that are currently covered by Connecticut standards. The state and federal standards are generally similar, according to staff at the Appliance Standards Awareness Project. However, the new federal standards for metal halide lamps (commonly used in commercial buildings) are more stringent than the current state standards.
It is unclear how the act's biofuel provisions will affect Connecticut. This is because the state, in effect, already requires gasoline to contain 10% ethanol and conventional vehicles are currently not warranteed to use fuel with a higher ethanol content. The act's provisions may encourage dealers to install pumps that can deliver gasoline that contains 85% ethanol (E-85), to the extent that vehicle manufacturers make more vehicles that can use this fuel. While widely available in the Midwest, there are very few E-85 fueling stations in the Northeast. Substantially expanding ethanol use in this state would require substantial investments in infrastructure, since ethanol cannot be shipped in gasoline pipelines. (The act requires DOE to study the feasibility of building ethanol-only pipelines.) Ford, General Motors, and Chrysler have committed to double, by 2010, the number of vehicles they produce that can use E-85, but this commitment is contingent on the development of the needed infrastructure.
The impact of the requirements for specific types of biofuels is uncertain because advanced and cellulosic biofuels are not currently available on the market. It is unclear as to (1) whether production of these types of fuels can meet the targets set by the act and (2) how much these fuels will cost. Currently, extensive research is being conducted on cellulosic and advanced biofuels, but their current costs are substantially higher than ethanol, which in turn is more expensive than gasoline in Connecticut.
The environmental impacts of the biofuels provisions are unclear. A 2006 DEP study found that substituting ethanol for gasoline can reduce emissions of carbon monoxide, carbon dioxide and other greenhouse gases, benzene (an air toxic), and some hydrocarbons produced by combustion. However, the improved combustion that yields those reductions may lead to increased nitrogen oxides emissions and permeation (fuel system leakage) emissions may increase volatile organic compounds (a precursor to ozone). The study notes that it is based an analyses conducted in California, and that differences in fuel formulation and vehicle fleets limit the transferability of the California data. The DEP study, available at www.ct.gov/dep/lib/dep/air/fuels/etohstudy.pdf, looked at the current blend of 10% ethanol and 90% gasoline. A 2007 DEP study, available at www.ct.gov/dep/lib/dep/air/fuels/alternativefuelsreport_publicact07-4section35.pdf, found that permeation emissions for E-85 are less than from the 10% blend.
A number of analysts believe that the biofuels requirements of the Energy Policy Act of 2005 have contributed to the recent rise in food prices. It is unclear whether, and to what extent, the act's provisions would exacerbate this trend.
The act may increase demand for the state incentives for biodiesel established by PA 07-4, June Special Session. Among other things, this act requires the Department of Economic and Community Development to establish a program to provide grants to qualified Connecticut biodiesel producers and distributors.
The passage of the act may indirectly affect the state's ability to address global climate change. Shortly after President Bush signed HR 6, EPA denied California's request for a waiver of federal air pollution standards. California had sought the waiver in order to implement its “clean car” standards as part of its climate change initiatives. Connecticut and 16 other states have adopted or are adopting these standards. In denying the waiver, EPA administrator Stephen Johnson said that the vehicle efficiency standards and biofuels provisions of HR 6 would be sufficient to curb greenhouse gases from cars. California officials have announced that they will appeal the decision. Unless and until the decision is reversed, California, Connecticut, and the other states will not be able to implement the standards.
HR 6 AND PEAK OIL
A number of analysts believe that (1) global production of conventional petroleum will peak in the relatively near future, perhaps in a decade or less; (2) production of conventional petroleum will decline substantially after this peak occurs; (3) global petroleum consumption will continue to grow rapidly before and after the peak; (4) while production from non-conventional sources will grow it will not be sufficient to meet the shortfall in conventional production; and (5) the combination of these events will lead to dramatic increases in the prices of petroleum products and supply disruptions. This view is commonly referred to as the “peak oil” theory. The theory focuses on global supply and demand because the petroleum market is global; U.S. conventional petroleum peaked in the 1970s.
In 2006, worldwide consumption was 84.7 million barrels per day, of which 20.1 million barrels per day was used in the U.S. The DOE Energy Information Administration's 2007 International Energy Outlook projects that worldwide consumption will rise to 103 million gallons per day by 2020 and to 118 million gallons per day by 2030.
The American Council for an Energy Efficient Economy (ACEEE) estimates that the act's vehicle efficiency standards will reduce petroleum consumption by 1.1 million barrels per day by 2020 and by as much as 2.5 million barrels per day by 2030, assuming there are no additional changes in the efficiency standard. In addition, there may be additional savings attributable to standards for medium and heavy duty trucks that the act requires DOE to establish.
As noted above, the act calls for the production of 30 billion gallons of biofuels annually (1.9 million barrels per day) by 2020 and 36 billion gallons annually (2.3 million barrels per day) by 2022. In addition, the production of biofuels tends to use less petroleum than the production of petroleum products, leading to additional reductions in total petroleum consumption. The combined effects of the vehicle fuel efficiency and biofuels provisions could reduce global demand for petroleum by approximately 4%. The impact of this reduction in demand on petroleum product prices and availability in the U.S. would depend on global supply of conventional and unconventional petroleum, refinery capacity, environmental regulations, and other factors.
ACEEE estimates that the appliance efficiency standards will reduce the nation's total energy use by 1.6% by 2030. Most of the reduction will take the form of electricity. ACEEE estimates that the standards will reduce peak electric use by 33,000 megawatts by 2030 (this is approximately the amount of generating capacity currently in place in New England). However, it is unlikely that the standards will have a significant impact on oil consumption, since oil is not widely used as a generating fuel outside of the northeast.