Energy efficiency and emissions intensity standards

We investigate the role of energy efficiency in rate-based emissions intensity standards, a particularly policy relevant consideration given the Environmental Protection Agency’s Clean Power Plan allows crediting of electricity savings as a means of complying with state-specific emissions standards. We show that for perfectly inelastic energy services demand, crediting efficiency measures can recover the first-best allocation. This approach extends the output subsidy in a traditional intensity standard to energy efficiency, thereby eliminating the distortion that favors energy generation over energy efficiency. However, when demand for energy services exhibits some elasticity, crediting energy efficiency can no longer recover first-best. While crediting energy efficiency removes the relative distortion between energy generation and energy efficiency, it distorts the absolute level of both generation and efficiency via an energy services subsidy. Simulations calibrated to the electricity sector in Texas examine these issues numerically and explore the implications of alternative energy efficiency crediting schemes. ∗We thank participants at the 3rd Annual Front Range Energy Camp and 2015 AERE Summer Conference for comments. Ed Balistreri, Jared Carbone, Jonathan Hughes, Derek Lemoine, and Andrew Yates provided useful comments. †Department of Agricultural and Resource Economics, North Carolina State University; [email protected] ‡Department of Economics, University of Colorado Boulder; [email protected] §National Renewable Energy Lab; [email protected]