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Testimony of David M. Gardiner


April 14, 1999

I want to thank Chairman Calvert and Members of the Subcommittee for inviting me here today to give EPA's perspective on the FY 2000 Budget for the President's Climate Change Technology Initiative (CCTI). EPA plays a key role in CCTI through several different programs that already have produced concrete environmental and economic benefits and improved the lives of many Americans. The President's budget proposals will allow us to multiply those benefits in the future, saving the American people billions of dollars per year in unnecessary energy costs, and avoiding millions of tons of air pollutants and greenhouse gases.

The driving force behind CCTI is the serious and growing threat posed by global warming. The basic scientific facts are virtually beyond dispute. Man-made emissions of carbon dioxide and other greenhouse gases undoubtedly are changing the composition of the earth's atmosphere. Since pre-industrial times, carbon dioxide concentrations are up about 30 percent, methane concentrations have doubled, and nitrous oxide is up about 15 percent.

Since these gases help trap the sun's radiation, over the past century the average temperature on earth has increased between a half and one degree Fahrenheit. Sea levels have risen 4 - 10 inches over the past century. The frequency of extreme rainfall events has increased throughout much of the United States.

Our view of the future is less certain, of course, but the possible -- and indeed likely -- consequences of steadily increasing greenhouse gas emissions, with attendant rises in average temperatures and sea levels worldwide, would be widespread and very serious. The best available science suggests that over the next century a worsening greenhouse effect could impose high costs on natural habitat, certain species of wildlife, coastlands, estuaries, drinking water aquifers, and human health.

The benefits of CCTI are not limited to global warming. Our experience to date shows that EPA's voluntary, common-sense efforts in this area also help bolster the economy, protect public health from a variety of pollutants, improve productivity, and strengthen national security as they reduce our demand for imported energy. In my opinion, they are among the best investments made in our country today through the federal budget, returning $70 to the American people for every dollar spent.

The CCTI represents a balanced three-part approach to achieve these benefits:

.  R&D, to develop promising technologies, demonstrate their capabilities, and lower their costs;

.  Targeted tax credits, to support the initial stages of accelerated deployment of innovative technologies;

.  Voluntary programs, to accelerate market penetration in subsequent years.

EPA's climate change efforts are almost exclusively voluntary government-industry partnerships. They are designed to overcome marketplace barriers that block other cost-effective investments in energy-efficient and environmentally-clean technologies. These market barriers include the lack of accurate, reliable consumer information on the environmental and economic benefits of different products, low incentives for private-sector research and development, and a lack of corporate data on energy use and pollutant emissions. EPA's technology deployment programs minimize or remove these barriers in the marketplace so that businesses, households, governments, and industries can develop and deploy clean technologies much faster than they would in a business-as-usual environment.

Let me emphasize some important aspects of EPA's programs. First, they are completely voluntary; each of our 7,000 partners in private businesses, non-profit organizations, and state and local governments has chosen to participate. Second, our programs impose no regulatory costs on the private sector; on the contrary, they help our partners save money, thus making them more profitable and competitive. Third, our programs provide no financial subsidies; rather, they elicit the involvement of our partners simply because they make economic and environmental sense.

Furthermore, our programs foster earlier market penetration of cost-effective, environmentally-protective technologies. By doing so, they increase the likelihood that these technologies will be adopted by non-participating companies, universities, hospitals, and state and local governments as well. Indeed, some of the technologies our programs have leveraged -- e.g., energy-efficient computers -- are now the standard norm around the world, even in some developing countries. The broadest possible use of these technologies generates an additional economic benefit for the United States, because in many cases the technologies are developed and sold by American companies. In addition, because these technologies usually reduce emissions of many air pollutants besides greenhouse gases, they help us achieve a number of our long-term health goals.

Perhaps the most important quality of these programs is that their benefits are immediate. When an investment is made today in energy-efficient technology, energy use drops immediately. Money is saved immediately. Air pollutants, including greenhouse gases, are reduced immediately. All those savings resulting from new technology deployment continue to accrue for decades to come, resulting in enormous aggregate benefits.

If, on the other hand, we invest today in inefficient and out-of-date technologies, we will miss out on a huge opportunity to change our environmental and economic future for the better. Just as one example, 60 percent of U.S. greenhouse gas emissions in the year 2010 will be generated by manufacturing plants, equipment, and products that will be purchased between now and then. In other words, if we are concerned about air quality in 2010 and beyond, if we are concerned about the effects of global warming in the year 2010 and beyond, we can address those concerns today in the decisions we make to purchase new capital stock.

EPA's CCTI programs already funded by Congress are helping American businesses, communities, and consumers make better investment and purchasing decisions, and those decisions are already boosting profits, improving worker productivity, and cleaning up the air. Let me give you just a few examples.

.  Schools nationwide that have joined EPA's ENERGY STAR Buildings and Green Lights programs have increased the quality of their classroom lighting while achieving large reductions in their energy bills. Since 1995, EPA's programs have helped schools and universities save more than $200 million, enough money to buy 4 million books or hire 4,000 new teachers.

.  Home builders have built more than 5,000 new ENERGY STAR Homes that use 30 percent less energy than conventional structures, saving each homeowner $400 per year on energy costs.

.  Hundreds of businesses, large and small, are protecting the environment while saving money through their participation in CCTI programs. For example, in the Wisconsin headquarters building of West Bend Mutual Insurance, efficient building design is credited with saving about $125,000 per year on utility bills while improving employee productivity by about $260,000 per year.

.  Climate Wise Partner Anheuser-Busch has developed a "bio-energy" recovery system that turns solid waste into a renewable source of energy that provides 15 percent of the brewery's fuel supply. By 2000, eight facilities are expected to save more than $40 million a year by using that technology.

.  Climate Wise Partner Allergan of Irvine, California has installed energy-efficient technologies including improved lighting, motion detectors, high-efficiency motors, variable-speed drives, and upgraded cooling systems. Allergan reduced annual carbon dioxide emissions by almost seven million pounds in 1997, and by 2000 the company projects annual CO2 reductions of almost 20 million pounds. The associated cost savings are estimated at $300,000 in 1997 and $1.8 million in 2000.

.  RMC Lonestar, a Portland cement company in Davenport, California is improving its air compressor system, installing variable speed motors, and modernizing its raw mill delivery system, among other improvements. By next year, these energy-efficient upgrades will save the company about a million dollars while reducing carbon dioxide emissions by 3.3 million pounds per year.

.  Jockey International of Kenosha, Wisconsin has pledged to reduce its energy use 10 percent below 1995 levels by the year 2000 by installing modular hot water boilers, central chillers, and energy-efficient lighting. By next year, the company expects to save $20,000 a year in energy costs while reducing annual CO2 emissions by 600,000 pounds.

Taken in the aggregate, EPA-sponsored technology deployment programs have helped American businesses and communities generate huge energy savings while making sizable reductions in a number of different pollutants. EPA's year 2000 goals for these programs, which serve all major sectors of the American economy, are to:

.  Reduce greenhouse gases by 58 million metric tons of carbon equivalent (213 million metric tons of carbon dioxide equivalent), about as much as is emitted by 15 percent of our motor vehicle fleet.

.  Reduce other forms of air pollution such as nitrogen oxides (NOx), particulate matter, and mercury through better energy efficiency, and reduce water pollution through better fertilizer management. NOx emissions alone will be reduced by more than 152,000 tons in 2000.

.  Reduce U.S. energy consumption by more than 59 billion kilowatt hours.

.  Provide up to $8 billion in energy savings to U.S. consumers and businesses that use energy efficient products for the year.

Clearly, EPA's CCTI programs have been successful in the past. Through the hard work and innovative thinking of our corporate and community partners, we have consistently surpassed our annual programmatic goals for greenhouse gas emission reductions. We have demonstrated beyond any doubt that these voluntary partnership programs are win-win situations for the American economy and the quality of our environment. We estimate that every federal dollar spent on these programs drives 20 dollars of private investment, which in turn saves more than 70 dollars in energy costs while reducing carbon dioxide emissions by more than two tons.

These programs are working. But we think they can do even more, which is why the Administration is requesting a $107 million increase over this year's funding for EPA's CCTI programs. We want to target other cost-effective, environment-protecting opportunities. If the proven results of current programs continue into the future, our goals for the year 2010 are:

.  A reduction of 354 million metric tons carbon equivalent (1.3 billion metric tons carbon dioxide), in addition to 850,000 tons of NOx reductions; and

.  $35 billion in energy savings for American families and businesses.

What's more, we expect overall program effectiveness to improve as EPA's programs mature and more energy-efficient technologies become available. As Jay Hakes notes in his testimony this morning, the early market penetration of energy-efficient technologies, the kind of early penetration accelerated by EPA's and DOE's CCTI programs, may reduce future costs [and I quote] "through learning, establishing the infrastructure, and increasing familiarity with new technologies."

I mention Mr. Hakes' testimony because there are two areas of his analysis with which I disagree. First, while he recognizes some of the positive aspects of the EPA and DOE programs, his analysis focuses on only one portion of the President's CCTI -- the tax incentives -- and thus misses the bigger picture. Tax incentives do not operate independently within the President's climate change initiative. They are simply one of the tools used in combination with several others to speed up the introduction and market penetration of new, energy-efficient technologies. All of these tools work more effectively together than when looked at in isolation. Second, the EIA analysis appears to mischaracterize certain key technologies and their economic and environmental benefits. Let me give you two examples, one in the transportation sector and one in the industrial sector.

In the transportation sector, the CCTI's R&D and tax proposals go hand in hand. The Partnership for a New Generation of Vehicles (PNGV) is an exemplary R&D effort aimed at enhancing our global leadership in automotive technology. PNGV is on schedule -- within five years it will generate production prototypes of mid-sized family cars that will be up to three times more fuel efficient than today's counterparts, while maintaining the cost, safety, performance, and utility that consumers demand.

Federal government support of this kind of R&D effort is critical. In its fourth regular report on the PNGV program, the National Research Council said, "The government should significantly expand its support for the development of long-term PNGV technologies that have the potential to improve fuel economy, lower emissions, and be commercially viable." Mindful of this recommendation, the President proposed an increase of $24 million over this year's funding level for PNGV R&D within the FY 2000 Budget for the Climate Change Technology Initiative. This request is only made more urgent by increasing international competitive pressures in this area of high-mileage vehicle technology and increasing concerns about our trade deficit.

For our economy and our environment to reap the benefits of high fuel efficiency technologies, we must get those technologies out of the laboratory and onto the highway. Our domestic manufacturers have repeatedly stated that the issue is not whether they can build advanced technology vehicles, but rather whether there is a "business case" for marketing them.

That is where the President's new tax credit in the FY 2000 Budget for fuel efficient vehicles comes in. As General Motors Chairman John Smith, Jr. said last year, "We believe a tax credit for consumers can be an effective way to stimulate development and promote acceptance of new technologies."

The new CCTI tax credit would provide incentives to the purchasers of high-mileage vehicles in the early years, when customer experience and acceptance is building, and will help accelerate the move to production volume at which car makers can reap the economies of mass production. The President's proposals include a step-ladder of incentives -- from $1000 to $4000 -- depending on the improved mileage of the new vehicles.

This tax credit can help make the business case during the initial period when critical decisions must be made. The credit will help offset the incremental cost of new technology at low production volumes, bridging the gap to consumer volumes that justify larger capacity investment by the manufacturers. The stimulant, market-transforming effect of the vehicle tax credit goes well beyond the four-year scope of the proposal and the consumers who directly benefit. In our view, the EIA analysis substantially underestimates these benefits.

Let me turn to my second example within the industrial sector, Combined Heat and Power (CHP) systems. DOE has set a goal of effectively doubling CHP capacity in the United States by 2010. If successful, this implies an increased capacity of nearly 50 gigawatts of CHP systems with benefits ranging from lower emissions of both carbon and nitrogen oxides to important energy bill savings for industrial consumers. We think this is an important goal that is achievable with a mix of policies supported by the Administration.

The EIA analysis fails to capture both the economic potential and the impact of the overall mix of CHP policy proposals supported by the Administration, looking only at the tax credit proposal. The tax credits, however, will go hand in hand with reforms to be announced later this week in the Administration's electricity restructuring proposals that will remove statutory and regulatory barriers to the advancement of CHP technology. The EIA analysis also does not include the full array of CHP technologies, especially the district energy systems; does not reflect the enormous contribution from the private sector developers of this technology who are the ones that will most benefit from the tax credits; and uses problematic cost assumptions for CHP systems. Our analysis indicates that such costs may be too high by a factor of two or more. This is supported by independent analysis as well as by industry-based data.

The EIA report overlooks many other considerations in evaluating the CCTI. First, the EIA analysis is based only on energy-related carbon emissions. The potential reductions from the other gases must also be considered in evaluating the Administration's overall climate plan.

Second, EIA does not include any calculations of ancillary benefits such as lower NOx or SO2 emissions, enhanced productivity benefits, strengthened international security, or improved energy security. Yet all of these benefits are well-documented.

Finally, the EIA analysis includes impacts only within the U.S. economy. It does not estimate the international effects of either CCTI or the other various policies advocated by the Administration. In fact, the CCTI would encourage the development of technologies that potentially could be exported to the rest of the world. In addition, any energy savings could translate into improved international competitiveness for many U.S. businesses.

Our proposed tax credits are part of a well-balanced total package that includes research and development, tax credits, and voluntary technology deployment programs. This package will be very effective at speeding up change in capital investment decisions.

And that is what the CCTI is all about: speeding up change. Given enough time, energy-efficient technologies would gradually penetrate the market without federal incentives; market barriers would fall as the benefits of this kind of capital investment became more widely appreciated. But the Clinton Administration wants to speed up the process because the stakes are high. Earlier and faster market penetration is well worth the investment now, not only because we make significant reductions in CO2 emissions, but because of other economic, environmental, and national security benefits.

In other words, the speed at which we move into the future will affect the quality of the future. Today we have an opportunity to speed up the flow of capital investments in technologies that will improve our future quality of life in several important ways. We cannot ignore this opportunity. EPA is prepared to work in partnership with all sectors of the economy, with other federal agencies such as the Department of Energy, and with state and local governments to help deploy tomorrow's technologies today.

Our CCTI programs deserve to be expanded because they work very well. We'd like to carry our past success into the 21st century, and with the support of this Subcommittee and the rest of the Congress, we will.

This concludes my prepared statement. I would be happy to answer any questions that you may have.


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