Energy efficiency, fuel switching, and environmental emissions: the case of high efficiency furnaces.

• Author: Klein, Yehuda L.

1. Introduction

   From the environmental policy maker's point of view, the increase in energy prices in the 1970s and early 1980s had the positive effect of reducing pollution emissions by encouraging energy conservation. In particular, increases in energy efficiency in industrial and residential furnaces reduced emissions of sulphur and nitrogen oxides ([SO.sub.x] and [NO.sub.x]). Thus, environmental regulators were able to identify improvements in environmental quality, or mitigation of environmental degradation, achieved without changes in regulatory policy or increased expenditures for enforcement. The existence of market-driven improvements in environmental quality is particularly important given the well-documented negative impacts of environmental regulations on the cost of production [9; 6], on balance of trade [7], and productivity growth [1; 2].

   This paper uses an input-output modeling approach to examine the net (direct and indirect) impact on [SQ.sub.x] and [NO.sub.x] emissions of one million households switching from conventional heating to the newer high-efficiency gas heaters.[1] As a result of the switch, environmental quality is affected in three ways: 1) Direct emissions by households are reduced as a result of increased efficiency and the resultant reduction in fuel use; 2) The reduction in household use of fuels produces corresponding reductions in energy extraction, processing, and transportation activities; and 3) Other emissions change in response to changes in consumer spending patterns. A 78 sector input-output model is used to track the effects of changes in fuel use and purchasing power on sectoral outputs and emissions, effects which are missed in a simpler partial-equilibrium approach. A comparison of the direct, fuel change, and purchasing power effects provides insight into their relative magnitude and importance.

   An improvement in energy efficiency, such as that provided by the residential pulse combustion furnace, can be expected to reduce both costs to the consumer and emissions into the environment. The intuition behind this perception is clear: the energy savings exceed the increase in capital costs, and emissions are reduced because less fuel is burned. However, this analysis captures only the direct effects; two indirect effects offset, in part, the projected decrease in emissions. First, the marginal cost of heating a home is a decreasing function of energy efficiency. As a result, consumers increase purchases (i.e. increase the temperature setting) when when the price of heat falls [3], which reduces the magnitude of energy savings and increases the level of emissions. Second, consumers are likely to spend some, or all, of the annualized energy savings. if spent on goods and services whose production requires high emission levels, it is possible that total emissions will rise rather than fall as a result of the technology change.

   As demonstrated below, the net effects are heavily dependent on the assumption about the type of heating systems being replaced. Given the sensitivity of the results to this assumption, we examine the following four possible scenarios. First we assume pulse systems replace the actual mixture of conventional gas, fuel-oil fired, heat pump, and electric resistance systems estimated by the Gas Research Institute. More specifically, we assume that 92.4 per cent of pulse furnaces replace conventional gas heat, 5.91 replace fuel-oil fired furnaces, 0.14 replace electric heat pumps, and 1.52 replace electric resistance heat systems. In each of the other three scenarios, included for comparison purposes, we assume that all pulse combustion furnaces replace heating systems of a single type: conventional natural gas, fuel oil, or heat pump technologies, respectively.

2. The Pulse Combustion Furnace

   The pulse combustion furnace, introduced in 1982, was the first residential furnace to achieve over...