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

I. 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.

II. The Pulse Combustion Furnace

The pulse combustion furnace, introduced in 1982, was the first residential furnace to achieve over 90 percent efficiency. Its success proved the economic viability of the market for very-high efficiency gas furnaces, particularly in colder regions of the United States. Table I shows the characteristics of the pulse combustion furnace and four conventional heating systems--a conventional gas furnace, a fuel oil fired furnace, an electric heat pump, and electric resistance heating--under the assumption of an 87 million Btu per year heating demand. As seen in Table I, the pulse technology offers annualized savings of 75, 30, 59, and 856 dollars relative to the conventional gas, fuel oil, heat pump, and electric resistance heating.

Table I also demonstrates the reductions in emissions from using pulse technology. The pulse technology is not just more efficient than conventional gas heat, it is intrinsically cleaner. Estimated [NO.sub.x] emissions per million Btu of fuel consumed are 0.045 pounds or pulse technology versus 0.092 pounds for conventional gas heat. Thus, while switching to pulse technology reduces fuel use by approximately 17 percent, [SO.sub.x] and [NO.sub.x] emissions fall 29 and 59 percent respectively. When compared to fuel-oil-fired furnaces, the pulse technology provides even larger environmental gains, producing only about 0.6 percent of the [SO.sub.x] and 23 percent of the [NO.sub.x] that fuel-oil-fired furnaces do. Electric heat pump and resistance systems are "clean" systems in that they produce no direct emissions. However, owners of electric systems produce a large amount of indirect emissions through their purchases of electricity. The magnitude of these indirect effects will be evident below. [Tabular Data I Omitted]

Table II presents the major direct sectoral effects of the switch to pulse technology for each of the four scenarios. The net fuel savings represent a recurring savings, while the increase in purchase price is a one time event. To the extent that the cost reductions are spent on goods and services (including keeping thermostats set higher), additional indirect environmental impacts develop. In order to assure that the gains in environmental quality are at least as large as shown in subsequent tables, we assume that consumers spend the full annualized cost reduction.[2] [Tabular Data II Omitted]

III. Method

The full effects of the switch to pulse combustion furnaces depend on how households respond to their increase in purchasing power. For simplicity, we assume that consumers allocate the increase in purchasing power in proportion to current spending.(3) While this assumption would be quite unrealistic for large changes in purchasing power, it is not unreasonable for the small change that we are examining. Annual net savings for the scenarios range from 63 to 90 million dollars, or about 0.003 percent of consumer spending. In addition, because the changes we examine are small relative to the size of the economy, no large scale macroeconomic effects, such as changes in GNP, inflation, or the balance of trade are expected. Nonetheless, we expect significant impacts on individual sectors, particularly those mentioned in Table II.

We use a standard input-output approach to track the effects of the changes in consumer spending on sectoral outputs and emissions.(4) The equations which describe the model are:

NSOX = DSOX(I - A) [sup.-1] CCON; and

NNOX = DNOX(I - A) [sup.-1] CCON where:

NSOX, NNOX are net changes in [SO.sub.x] and [NO.sub.x] emissions;

DSOX, DNOX are now vectors containing the direct [SO.sub.x] and [NO.sub.x] emissions per dollar of

output for 1985 for the 78 sectors;

CCON is a column vector containing the change in the 1985 consumption vector for the 78

sectors; and

(I - A) [sup.-1] is a 1985 "total" matrix.

Two possible intermediate results are the change in output caused by the change in consumer spending, CCON times the total requirements matrix, and the total emissions (direct and indirect) per dollar of final output produced, DNOX or DSOX times the total requirements matrix. The first is examined below, while the second is available from the authors upon request.

The 1985 input-output tables and output data were provided by the INFORUM project of the University of Maryland. The DSOX and DSOX vectors were derived from the 1985 NAPAP Emissions Inventory [8], prepared for the National Acid Precipitation Assessment Program. The NAPAP Inventory estimates combustion emissions of [SO.sub.x] and [NO.sub.x] by fuel for the electric utility, industrial, and commercial sectors. We allocate the NAPAP estimates of [SO.sub.x] and [NO.sub.x] emissions across the 78 sectors(5) and divide by sector output to produce emissions coefficients.

IV. Results

Tables III and IV present summaries of the changes in tons of [SO.sub.x] and [NO.sub.x] emitted for the four scenarios. The Change in Direct Emissions indicates the change in emissions by household furnaces. The indirect effects consist of fuel use effects and consumption change effects. The fuel use effects are the changes in emissions caused by the changes in fuel used given in Table II, exclusive of changes in purchasing power. In essence, the fuel use effects are derived by assuming that consumers save the entire cost reduction. All purchasing power effects, including some increase in purchases of natural gas for heating, are included in the consumption effect. the consumption effect is always positive, as increased production requires additional emissions. [Tabular Data III and IV Omitted]

The Base Case scenario, which reflects the actual pattern of heating system replacements, combines both increased efficiency with some fuel switching. Direct emissions fall by 227 tons of [SO.sub.x] and 3131 tons of [NO.sub.x]. Natural gas use falls even though more homes are heating with natural gas because the increase in efficiency outweighs the increase in demand. The reduced demand for natural gas, electricity, and fuel oil lead to upstream reductions in emissions of 3017 tons of [SO.sub.x] and 1421 tons of [NO.sub.x]. Changes in consumption, as a result of increased purchasing power, lead to increases of 519 tons of [SO.sub.x] and 257 tons of [NO.sub.x] emitted. The consumption-related increases are easily outweighed by the other decreases, yielding large annual reductions in both [SO.sub.x] and [NO.sub.x].

The V presents more detail about the effects of switching to pulse for the Base Case (actual replacement) scenario. The first column reports the change in output (in million of 1985 dollars) given the change in consumer spending. The change in employment column is included to provide some context for the output changes because changes in output, particularly intermediate output, are difficult to interpret. The final two columns show the change in [SO.sub.x] and [NO.sub.x] emissions by sector given the changes in output. Much of the increased spending by consumers is for services, which have relatively low abatement costs. It is clear from Table V that the reduced emissions which result from the change in fuel use outweigh the increased emissions caused by the change it consumer spending. [Tabular Data V Omitted]

Perhaps the most interesting of the other three scenarios is the 100% Gas scenario, where there is only an efficiency gain and no fuel switching. While conventional gas systems account for 92.4 percent of the Actual Replacement scenario, the small amounts of other fuels have the rather dramatic effects shown in Table III. For the Conventional Gas scenario, direct emissions of [NO.sub.x] are cut by 3,195 tons, while [SO.sub.x] emissions are reduced by just 10 tons because natural gas contains little sulphur. The upstream effects of reduced natural gas demand are also small, reductions of 187 and 234 tons for [SO.sub.x] and [NO.sub.x]. The consumption effects are small and positive, but large enough to make the sign on the Total Recurring Effect for [SO.sub.x] positive. Thus, an increase in efficiency leads to an increase in [SO.sub.x] emissions of 193 tons per year. In spite of this result, the switch to pulse technology is worthwhile for a number of reasons. First, the reduction in [NO.sub.x] emissions is nearly 17 times larger than the increase in [SO.sub.x], a tradeoff that many would make. Second, consumers benefit from the switch, as they have a net annual savings. Third, the efficiency gain would slow the depletion of natural gas reserves.

The Fuel Oil and Heat Pump scenarios demonstrate the size of the environmental gains from switching to cleaner fuels and technologies. For the Fuel Oil scenario, the large reductions in direct emissions and emissions associated with producing fuel oil outweigh the increases in emissions caused by increased use of natural gas and increased consumer purchases. The Heat Pump scenario demonstrates the huge amount of pollution associated with production of electricity. Thus, while heat pumps are "clean" in the sense of having no direct emissions, they are by far the "dirtiest" heating technology when considering total emissions. The emissions associated with generating the electricity for heat pumps are greater than the sum of the emissions for the other three scenarios.(6)

V. Concluding Thoughts

This study has examined both the direct and indirect impacts of consumers switching to pulse combustion heating systems on emissions of [SO.sub.x] and [NO.sub.x]. As expected, we find that direct emissions are always reduced when efficiency gains are made. In addition, we find large effects on indirect emissions, although the direction is somewhat ambiguous. Reduced fuel demand leads to reduced production and emissions by fuel supplying sectors, reductions which are large when consumers are switching from fuel oil or heat pump technologies. On the other hand, emissions are increased as a result of consumers demanding more products given their increase in purchasing power. As demonstrated in Tables III and IV, the net effect on emissions is highly dependent on type of system being replaced, although emissions are reduced in all cases except for [SO.sub.x] emissions in the Conventional Gas scenario.

From the regulator's point of view, the gains made through increased efficiency are "bonuses" in the sense of achieving emissions reductions without having to change regulations or regulatory expenditures. In addition to the direct reductions, the regulators and policy makers benefit from the indirect reductions associated with reduced fuel demand, particularly in the Fuel Oil and Heat Pump scenarios. The large potential reductions in emissions from increased efficiency, again suggests a relationship between energy and environment policy issues.

The major limitation of our study is the lack of well defined data on specific fuel uses. Lacking more detailed data, our estimates are, in essence, national averages and are not power source or location specific. In addition, our estimates are sensitive to the procedures used to allocate emissions across sectors. If, for example, the sulfur content of coal varies across consuming sectors, then our allocation of emissions in proportion to coal consumption misallocates [SO.sub.x] emissions among sectors. A final limitations of our study is the lack of consideration for the location of increased and decreased emissions. Because we examine only emissions levels and not location. we cannot comment on environmental quality as perceived by residents of various areas. (1)The first of the new furnaces to achieve 90% efficiency was the Pulse Combustion furnace developed by the Gas Research Institute, the American Gas Association Labs, and Lennox Industries, Inc. and introduced in 1982. (2)It might be more reasonable to expect consumers to use the fuel savings towards paying the higher capital costs which would reduce the indirect effects to just the upstream effects of the change in fuel used. In this case, the gains in environmental quality would be larger than reported below. (3)An attempt was made to use income elasticities to predict the change in consumption behavior. However, the percentage changes were so small that the results were nearly indistinguishable from the simple linear assumption. (4)Leontieff [4] first suggested the use of input-output to track environmental emissions. Leontieff and Ford [5] provide an estimate of 1976 emissions per dollar of output for a 90 sector input-output table. (5)Emissions which were not specifically assigned to an industry, were allocated across other industries in proportion to fuel (coal, oil, and natural gas) use. The detailed calculations and data files are available, upon request, from the authors. (6)The numbers for electric utilities are national averages and may be higher or lower depending on the source of the electricity. Where pulse technology replaces heat pumps powered by hydro or nuclear generated electricity, indirect emissions would rise. When replacing high-sulphur coal generated electricity, the gains from pulse would be even larger than those listed in Table III.


[1]Barbera, Anthony J. and Virginia D. McConnell, "The Impact of Environmental Regulations on Industrial Productivity Direct and Indirect Effects." Journal of Environmental Economics and Management, January 1990, 50-65. [2]Conrad, Klaus and Catherine J. Morrison, "The Impact of Pollution Abatement Investment on Productivity Change: An Empirical Comparison of the U.S., Germany, and Canada." Southern Economic Journal, January 1989, 684-97. [3]Dubin, Jeffrey A., Allen K. Miedema, and Ram V. Chandran, "Price Effects of Energy-efficient Technologies: A Study of Residential Demand for Heating and Cooling." Rand Journal of Economics, Autumn 1986, 310-25. [4]Leontieff, Wassily, "Environmental Repercussions and the Economic Structure: An Input-Output Approach." Review of Economics and Statistics, August 1970, 262-71. [5]Leontieff, Wassily, and Daniel Ford. "Air Pollution and the Economic Structure: Empirical Results of Input-Output Computations," in Input-Output Techniques, edited by A. Brody and A. P. Carter. Amsterdam: North-Holland Publishing Company, 1972. [6]Pasurka, Carl, "The Short-Run Impact of Environmental Protection Costs on U.S. Product Prices." Journal of Environmental Economics and Management, December 1984, 380-90. [7]Robison, H. David, "Industrial Pollution Abatement: The Impact on Balance of Trade." The Canadian Economic Journal, February 1988, 187-99. [8]Saeger, M. et al., The 1985 NAPAP Emissions Inventory (Version 2): Development of the Annual Data and Modeler's Tapes, Final Report of Allied Technologies Corporation to the U.S. Environment Protection Agency, EPA Report No. EPA-600/7-89-012a, November 1989. [9]Walter, Ingo, "The Pollution Content of American Trade." Western Economic Journal, 1973, 61-70.
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Author:Robison, H. David
Publication:Southern Economic Journal
Date:Apr 1, 1992
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