Improving Energy Codes.

• Author: Jacobsen, Grant D.
• Position: Report - Statistical data

1. INTRODUCTION

   Increased concerns about climate change have recently sparked renewed interest among policymakers for more aggressive energy efficiency policies. Much attention has been paid to policies related to buildings, which are responsible for 41% of U.S. energy consumption (US EIA, 2012b). In particular, policymakers have increasingly employed building energy codes to regulate the energy efficiency of buildings. Federal policymakers have provided incentives for state adoption of energy codes and have included provisions for a national energy code in major legislative proposals. As of 2013, 43 states have mandatory, statewide energy codes for residential and commercial buildings and most of these energy codes have seen recent increases in stringency (U.S. DOE, 2013).

   The focus on building energy codes (henceforth, "energy codes") is perhaps warranted, given their potential for energy savings. According to policy projections made by the Energy Information Administration (EIA), a nation-wide increase in the stringency of energy codes, in combination with updated efficiency standards for appliances and other equipment, would lead to a 3.6 quadrillion BTU decrease in the amount of energy used by buildings (U.S. EIA, 2012a). (1) This figure exceeds the projections for policy-related energy savings from other sectors. For example, the announced increases in CAFE Standards, in combination with other transportation related policies, are projected to lead to a 3.2 quadrillion BTU savings by 2035.

   Energy codes are unlikely to be the least-cost approach to addressing energy-related externalities because they focus on a single sector, do not provide marginal incentives for improvements in efficiency beyond the compliance threshold, and do not provide direct incentives for reduced consumption. Despite these potential sources of inefficiency, energy codes have been shown to be effective at reducing energy consumption (Jacobsen and Kotchen, 2013; Aroonruengsawat, Auffhammer, and Sanstad, 2012; Costa and Kahn, 2011) and appear likely to remain a central component of U.S. energy policy (Auffhammer and Sanstad, 2011). Given the continued use of energy codes, focus should shift toward improving energy code design.

   This paper argues that energy codes would be improved if they were structured to provide relatively stronger incentives for conservation of energy types that are associated with greater social damages, and that such incentives could be implemented by modifying the way in which codes determine compliance. In particular, I present a model that shows that energy codes would be improved if compliance was determined by the projected social damages associated with a building's design under normal usage patterns, as opposed to the projected private energy expenditures, as is current practice. (2) Buildings consume multiple types of energy (electricity, natural gas, and fuel oil) and structuring codes such that compliance was determined by social damages would provide relatively stronger incentives for conservation of energy types associated with greater social harm. Additionally, damage-based codes would allow codes to be responsive to regional differences in the sources used for electricity generation (e.g. coal, hydropower) because region-specific electricity damage rates could be employed based on the regional generation mix.

   After presenting the model, I use state-level data on energy consumption, emissions rates, and energy prices, to evaluate how the outcomes under damage-based codes that were motivated primarily by concerns about climate change would differ from current practice within the residential sector of the United States. I find evidence that damage-based codes would lead to substantial welfare gains and would place greater emphasis on conservation of electricity, relative to natural gas, in most states. The relatively greater emphasis on conservation of electricity is especially prominent in the Central Plains where electricity is typically generated through coal-fired plants.

   In addition to relating to the literature on energy codes (Jacobsen and Kotchen, 2013; Aroonruengsawat, Auffhammer, and Sanstad, 2012; Costa and Kahn, 2011), this paper relates to a recent literature that has evaluated how the optimal design and effectiveness of various energy policies depends on the regional electricity generation mix. Graff Zivin et al. (2012) find that the influence of electric vehicles on emissions levels depends on the regional electric generation mix and that, under certain scenarios, increasing the share of electric vehicles could lead to an increase in emissions levels. Holland and Mansur (2008) find that the environmental consequences of shifting to real-time electricity pricing depends on a region's electricity generation mix, leading to reduced emissions in certain regions, and increased emissions in others. Other studies have examined subsidies for renewable generation and have found that variation exists across regions in the net emissions reductions achieved through increasing wind power, and that the variation is driven by differences in the existing electricity generation mix (Cullen, 2013; Kaffine, 2013; Novan, 2012). I contribute to this literature by showing that the impacts of energy codes are influenced by the regional electricity generation mix. This insight is arguably of at least equal policy relevance as the insights provided by previous studies due to the greater importance of energy codes in current U.S. energy policy relative to electric cars or renewable electricity (U.S. EIA, 2012a).

   This paper also relates to the literature on "differentiated" policies for air pollution (Fowlie and Muller, 2013, Muller and Mendelsohn, 2009, Mendelsohn, 1986). Differentiated policies achieve welfare gains by placing greater weight on reducing emissions from sources, such as power or industrial plants, that operate in areas where emissions are associated with greater social damages. The present study contributes to the literature by providing the new insight that similar intuition can be applied to energy codes and that energy codes can be improved by providing differential incentives for conservation across energy types based on social damages.

   This paper proceeds as follows. Section 2 presents background information on energy and energy codes. Section 3 provides a model of energy codes under alternative ways of determining compliance. Section 4 evaluates how marginal social damages per dollar of expenditure varies across energy types in different U.S. states. Section 5 discusses policy implications and concludes the paper.

2. BACKGROUND ON ENERGY AND ENERGY CODES

   Buildings consume energy in the form of electricity, natural gas, and petroleum (most often in the form of fuel oil) and these energies make up 69, 23, and 6 percent of total primary energy consumption in the residential sector, respectively (U.S. DOE, 2012). (3) Natural gas and fuel oil are primarily used for space heating or water heating, and electricity is used for a variety of end-uses.

   Electricity is typically generated through coal-fired plants, gas-fired plants, oil-fired plants, hydropower, nuclear power, or other renewables sources (e.g., wind, solar). The manner in which electricity is generated varies substantially across regions. For example, the Midwest relies on coal-fired plants, whereas over half of the West Coast's generation comes from either gas-fired plants or hydropower (eGrid, 2010). Generation of electricity is associated with negative externalities, which occur primarily through the production of carbon emissions and other pollutants, and the extent to which externalities occur varies across sources of generation. Coal-fired power is typically associated with the greatest social damages, renewable power is associated with the lowest social damages, and other sources fall toward the middle of the scale (Greenstone and Looney, 2011; National Research Council, 2010).

   Policymakers regulate energy due to the negative externalities associated with its production and consumption, and the primary policies that regulate the energy consumption of buildings are energy codes. While energy codes are state-level policies, there is a strong degree of homogeneity across state energy codes. Most states adopt a version of the International Energy Conservation Code (IECC) for residential buildings and a version of the American Society of Heating, Refrigerating and Air Conditioning (ASHRAE) for commercial buildings (ACEEE, 2013). This homogeneity is driven, in part, by federal action. The Energy Conservation and Production Act, as amended in 1992, requires states to certify to the Department of Energy (DOE) that they have compared their energy codes to the IECC whenever the IECC is revised. More recently, the American Reinvestment and Recovery Act of 2009 requires that states commit to adopting an energy code that meets or exceeds the 2009 IECC and achieve 90% compliance of the code by 2017 as a condition of receiving part of $3.2 billion in State Energy Program grants. Federal policymakers have also considered implementing a national energy code standard, and any national standard would likely be based on the IECC code as well. (4)

   While there are several ways to comply with the IECC, the compliance paths can generally be split into two groups: prescriptive and performance-based. The prescriptive compliance path requires that each individual component or system of a building's design meet a certain efficiency standard, as specified by the code. For example, the insulation used in a wood-framed wall must exceed a certain R-value and the windows must exceed a certain U-factor. In contrast, the performance-based compliance path determines compliance by the overall level of expected energy expenditures associated with a building's design. (5) In particular, the expected annual energy expenditures of a proposed building must...