In particular, the renewable industry is looking to the military as one possible alternative source of government support. As discussed in greater detail in a recent Pew study entitled “From Barracks to the Battlefield: Clean Energy Innovation and America’s Armed Forces,” interest in renewables in the U.S. military has been growing in recent years for a mix of practical, policy, and administrative reasons:

1. DOD is a the single largest energy consumer in the U.S.: The direct operations of the Department of Defense (DOD) comprise 1% of primary energy consumption in the United States, making it the single largest energy consumer in the nation, spending nearly $11 billion annually on energy. Roughly 3/4 of this is associated with the consumption of liquid fuels for vehicle and equipment operation, primarily jet fuel. DOD also operates more than 500 military bases with 2.2 billion square feet of buildings and facilities (about 2/3 of the government’s total building space, and roughly 2.5% of all commercial building space).
2. DOD is mandated to use more renewables and reduce emissions, providing a large deployment opportunity: DOD is subject to stringent requirements in statute and through executive orders to reduce its energy consumptions and increase its use of renewable energy. DOD must:
   • reduce its facility energy intensity by 3% annually, and its fleet’s petroleum consumption by 2% annually from a 2005 baseline.
   • procure or produce 25% of its energy consumption from renewable sources starting in 2025
   • reduce its greenhouse gas emissions from sources controlled by DOD by 34% from a 2008 baseline by 2020.
3. DOD has the authority to enter into long-term contracts for on-site renewable generation:Unlike the rest of the Federal government, the DOD has special authorities that allow it to enter into long-term contracts for electricity generated on-site by private entities.
4. DOD can influence renewable energy use more broadly through its supply chain: Indirect energy consumptions associated with DoD’s annual procurement of $400 billion in goods and services comprise an additional nearly 3% of U.S. GDP, and likely a similar additional fraction of primary energy consumption (we are not aware of a study that has quantified this). Thus, DOD is the single largest consumer of goods and services and could exert market power on its suppliers’ renewable energy use.
5. DOD is increasingly investing in clean energy innovation: DOD has increased its investment in R&D on clean energy technologies from roughy $300 million in 2006 to nearly $1.2 billion in 2010 – about a quarter as much as the Department of Energy’s annual budget for clean energy technology programs. Further, DOD has developed substantial internal capacity to assist with demonstration, commercialization, and scale-up of new technologies, including using its bases as pilot test beds for the operation of new technologies. In this vein, DOD has signed an agreement with DOE to cooperate on clean energy R&D as well as demonstration.
6. DOD’s innovation culture and commercialization infrastructure could be a great asset for driving clean energy deployment: As the single largest source of R&D funding in the U.S., the Defense department has developed unmatched capabilities for developing and commercializing innovative products needed to address its mission requirements. These capabilities could play an important role in helping innovative renewable technologies overcome the commercialization “valley of death.”

While the military’s growing interest in renewable energy presents a substantial opportunity for advancing the development and deployment of renewable energy, reliance on this pillar also poses significant barriers and issues for industry development.

1. DOD energy requirements are not likely to be well aligned with civilian energy requirements: DOD’s energy consumption is primarily (75%) from transportation fuels, while they make up roughly a third of U.S. energy use more generally. Thus, there will be an emphasis on specialized biofuels applications, which are of general interest, but not necessarily the area of greatest potential impact on national emissions or energy consumption. Further, R&D to adapt renewable technologies to the battlefield may not have substantial commercial applications, but are critically important for defense operational needs and will be prioritized.
2. Dual-use clean tech R&D may face security barriers to commercialization: There may be barriers to full, international commercialization of new technologies developed for defense needs arising from security concerns associated with the spread of technologies which may be used by adverseries.
3. DOD procurement rules and requirements may be a challenge to an industry with little experience with the Pentagon: Matching renewable technologies to the needs and requirements of specific military applications, and navigating the military bureaucracy may be challenging, particularly for companies with the relatively small-scale of many renewable companies.

More generally, as policy-makers think about the possibility of supporting renewable energy through defense spending, careful consideration of the potential consequences of this shift as it relates to the efficiency of spending to achieve renewable deployment is needed. Nevertheless, this is a significant opportunity which we at CPI hope to examine more closely in the coming year.

Beyond the usual questions about the effectiveness of voluntary agreements or targets, two important questions emerge about the targets themselves:

• How difficult would a 45% reduction be to achieve for APEC as a whole?  How much additional action would be required?
• How would the burden be shared, or how difficult would it be for each country to achieve a 45% reduction individually?

The first question is easier to answer than the second.  If history is any guide, the answer appears to be that even if these targets were mandatory, they might not require any new action.   In annual terms, a 45% reduction over 25 years would equate to an average decrease of 2.4%.  However, since the base year is 2005 and energy intensity declined slightly between 2005 and 2010, the actual target is somewhat lower at 2.26%.  Using International Energy Agency (IEA) data, we find that from 1990-2009 energy intensity fell an average of 0.88% per year in APEC countries in USD dollar terms, using contemporaneous exchange rates.  Thus, the commitment would seemingly equate to a 1.4% improvement over the path of the last 19 years.  Great, we seem to have agreement for real improvement.

The problem with this analysis is that a major reason why energy intensity (in USD terms) has not increased more rapidly since 1990 has been artificial exchange rate policies.  If a country keeps its currency artificially weak, then its economic growth and total economic output will be lower in dollar terms, resulting in higher energy intensities (and a slower decline in energy intensity) as energy intensity is merely energy use divided by economic output.   A target expressed in dollar terms at prevailing exchange rates could be easily met by allowing the dollar to devalue against other currencies, without the need for any specific energy intensity improving measures.

Economists use Purchasing Power Parity (PPP) to adjust for the vagaries of volatile exchange rates and to approximate a long term equilibrium exchange rate.  If you use PPP rather than exchange rate adjusted GDP you get a very different story on energy intensity.

 

	Average Yearly Improvement in Energy Intensity
	1971-2009	1990-2009	Target 2009-2035	Target versus BAU
IEA – Mtoe/GDP	N/A	0.88%	2.26%	1.38%
IEA – Mtoe/GDP (PPP)	N/A	2.12%	1.90%	-0.22%
Without Russia
IEA – Mtoe/GDP	0.99%	0.41%	2.29%	1.88%
IEA – Mtoe/GDP (PPP)	1.85%	1.85%	1.92%	0.07%

Source: IEA, CPI Calculations

The IEA numbers in the table below show that on a PPP based GDP figure, energy Intensity for APEC countries fell on average 2.12% since 1990 and a similar amount since 1971 (taking Russia out of the equation due to data problems pre-1990).  Furthermore, as PPP adjusted energy intensity fell much faster than the required pace between 2005 and 2009, the overall target falls to 1.9% per year from 2010.  In other words, the target is actually less than the trajectory that we have been following for the last 20 years.   Charting the data makes the case even more clear, the new commitment just maintains the current trend.

 

While the target may just be a reflection of Business as Usual for APEC as a whole, could it be that the impact of the target might be felt very differently by different countries?  That is, if each country were held to a 45% reduction on its own (as China has committed to) rather than as a collective, could some countries find it more difficult?  The answer is that it is hard to tell, but here again, we can start from historical data.   The table below shows the same historical changes in energy intensity for the larger of the APEC countries.  Interestingly, three countries – the US, Russia, and China – saw reductions in energy intensity from 1990 to 2009 that were close to, or greater than, the required targets.

 

	Average Yearly Improvement in Energy Intensity
	1971-2009	1990-2009	Target 2009-2035	Target versus BAU
US	2.00%	1.84%	1.94%	0.10%
Canada	1.28%	1.28%	1.90%	0.62%
Mexico	-0.41%	0.61%	2.24%	1.63%
Australia	0.58%	1.03%	2.25%	1.23%
Japan	1.14%	0.47%	1.99%	1.52%
Korea	0.16%	0.40%	2.13%	1.73%
Russia		1.76%	1.76%	0.00%
Indonesia	1.10%	0.90%	1.86%	0.96%
Thailand	0.35%	-0.62%	2.17%	2.79%
China	4.02%	4.76%	1.72%	-3.04%

These three countries are the largest and most powerful of APEC and also had the economies that were the most carbon intensive for their size.  Although each – and in particular China – could rightfully argue that  as a result of their recent performance the gap has narrowed and that further improvements in energy intensity will be more difficult, they remain relatively energy intensive (along with Canada and Australia) and could find reaching the targets easier.

We will be looking at cost impacts of the codes in more depth in the near future.  However, we can do some simple calculations based on our energy savings results to serve as a starting point.  In our study we found that, on average, a new household built in a state that has adopted a code at least as stringent as the 1992 Model Energy Code consumes 9.1% less final energy than a household built in a state without that has not adopted such a code.  So, as a first approximation, we can assume that these households face 9.1% lower energy costs.  The average U.S. household spent $2269 on energy in 2008, the most recent year for which measured data are available.  9.1% of $2269 is about $206; let’s take $200 as a nice round number.  So, we estimate that the studied codes saved the typical code-built household $200 in 2008.  We can eventually make this value more precise by considering different fuels separately and by paying attention to where in the country the code houses are being built, but it’s good enough to start with.

No one will argue with getting $200 in savings each year, but what are the costs of making buildings more efficient? Unfortunately, we are not aware of a definitive source for these costs.  (If you are, do let us know!  We’ll need to find or develop one eventually.)  A couple of quick Google hits imply that the rough range may be something like $1000 to $3000 for an average household in today’s dollars, but we’re reluctant to put much weight on this.  Also, understanding the cost increase to builders is only part of the story.  If we’re evaluating things from the buyer’s perspective, we need to know how costs and savings are passed through to the buyer.  If we assume that housing supply is perfectly competitive, then the capital costs are passed through 100%; however, this assumption may not be appropriate.

What we can do is think about how much of an increase in home purchase price the energy savings from the codes justify, thus sidestepping the question of who reaps the costs or benefits.  To avoid speculating about future energy use trends and energy prices, let’s just assume that the studied codes generate a $200 annual savings in perpetuity.  If we specify a discount rate, we can find the present value of this stream of savings: an amount of money today that we consider equally attractive to the perpetuity.  The tricky part, of course, is the discount rate.  If we look to consumer choices for energy efficient devices, we might choose a very high discount rate of, say, 30%.  Discounted at 30%, an annual savings of $200 is worth only $667 today.  However, there is plenty of reason to suppose that these choices are not simply expressions of the consumer’s time preferences, but are due in part to market failures such as imperfect information or to behavioral anomalies in decision-making.  After all, a consumer that requires a simple payback on an investment may still choose to invest money in stocks and bonds instead of buying a more efficient refrigerator, even if the latter option provides a better return.  So, perhaps we should use a discount rate equal to the rate of return available on the capital market.  There is no one correct value here, and the return obviously depends on the riskiness of the investment, but 7% is a commonly chosen value and is the real rate of return of the S&P 500 since 1950.  Discounted at 7%, our savings are worth $2857 today.  Or, since decisions about energy efficiency in buildings have implications for society (they affect the need for energy infrastructure, which is funded by public dollars, as well as health and climate impacts from energy generation), we might choose a lower rate rate more in keeping with the literature on social discount rates.  At a 4% discount rate, our savings are worth $5000.  At the 1.4% discount rate used by the Stern Review, our savings would be worth $14,286.

Clearly, as is so often the case, the choice of discount rate is consequential.  As a more concrete way to look at the issue, let’s consider my colleague Andrew’s suggestion.  We have a pretty robust market for financing housing purchases: the mortgage market.  (Insert requisite joke about robustness of U.S. mortgage markets here.)  So a natural discount rate to use for this problem is the mortgage rate (plus property tax).  In other words, we’re asking how much receiving $200 each year ($17 per month) will allow you to increase your loan.  These days, mortgage rates hover around 4%.  We’ll add on 1% in property taxes.  We assume a 30 year fixed rate mortgage with a 20% down payment.  Using these values, we can calculate that $200 annually in energy savings would allow us to qualify for a house that is worth an extra $3843.  Of course, this requires an additional outlay of 20% of that number for a down payment; if we prefer a value net of this down payment, we get $3074.  Granted, mortgage rates are currently at historic lows.  If we rewind the clock ten years and use a 7% mortgage rate (plus the same 1% property tax rate), we get a $2814 increase in allowable home price, or $2252 net of the increased down payment.

Where does this leave us?  Well, there’s no one way to answer the question of whether codes save money; it depends on the way we discount.  And we don’t know exactly what the increased cost of building to code is, nor who bears the added construction costs and reaps the energy savings.  Our preferred way of discounting (referencing the mortgage market) suggests that codes are probably more than paying their costs. As a simple way to think about it, the average 1992-2008 state energy code allows you to finance a home worth several thousand more dollars through the savings it provides; if the cost of building to code is less than this, the home buyer is winning.

More on this coming soon.  If you have thoughts or questions, please leave a comment!

On the surface, the switch to gas can bring some immediate advantages over other options for nations aiming to decarbonise their energy spectrum: gas generates around half the carbon when burned for power generation; it is a more efficient fuel for transport and, it is cheaper than oil. In addition, shale gas could effectively eradicate the dependency of many countries to importing energy: a particularly poignant point when European gas production has been in steep decline for many years (is expected to drop some 30% by 2035) when European demand for gas has been increasing substantially.

Dig a little deeper, however, and it may begin to sound too good to be true. The extraction process, known as hydraulic fracking (or fracking), uses heavily pressurised liquids to break geological hydrocarbon formations which in turn make previously unconventional sources of gas (and in some circumstances oil as well), conventional. The overall production of shale gas is widely believed to contribute to uncontrolled releases in methane (a greenhouse gas 21 times the global-warming potential of carbon dioxide); it can contaminate ground and surface fresh-water sources with harmful chemicals, and worryingly, can even cause localised earthquakes.  A study by Cornell University estimates that when compared with coal, the emissions footprint from shale gas may be some 20% worse in the short-term, and potentially double the GHG impact on the 20-year horizon.

The EU report goes on to explain that while European developments have been relatively small in comparison to other countries (US and China for instance), major regulatory gaps concerning shale gas extraction and production mean shale gas is currently provided ‘privileges’, and thus could expose Europe to unreasonable environmental and human health risks if these gaps are exploited.

With uncertainty surrounding nuclear energy, prolonged future oil price rises and the wonder of potential energy independence, many governments are already looking for alternatives to fill the energy gap for the next decade. It may yet come with a slightly gaseous flavour but, for the moment, the jury is still out. In any case let’s hope that decisions are based on balanced facts and not merely on potentials, which clearly are as staggering in scale as the potential risks.

New regulations issued by the California Air Resources Board last year forced large container ships to shift to low-sulfur fuel within 24 miles of the coast and also asked for shipping companies to voluntarily reduce their speed, an action which reduces emissions by burning less fuel. The National Oceanic and Atmospheric Administration (a division of the U.S. Department of Commerce and provider of the National Weather Service) led a consortium of academics and regulators in measuring pollutants before and after the regulation and voluntary action went into effect, an effort that seems so sensible (wouldn’t everyone want to know whether the new rules work?) but for the fact that it is rarely done.

Perhaps the best news here is that these researchers not only found that sulfur dioxide and particulate matters decreased as expected - by 91% and 90%, respectively – but also found that black carbon (a pollutant not originally targeted by the regulation or the voluntary measure) fell by 41%.

This is effectiveness research at its finest, as one of the scientists involved describes (my emphasis):

“This study gives us a sense of what to expect in the future, for the people of California, the nation, and even the globe,” said Daniel Lack, chemist with NOAA’s Earth System Research Laboratory and the Cooperative Institute for Research in Environmental Sciences. “This really is where science gets fun – a study with first-rate institutions, equipment and people, probing the effects of policy. It’s important to know that the imposed regulations have the expected impacts. The regulators want to know, the shipping companies want to know, and so do the people.”

I couldn’t agree more.