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Relative Effectiveness of Energy Efficiency Programs versus Market Based Climate Policies in the Chemical Industry

April 2018

Written by: Gale Boyd, Jonathan M. Lee

Working Paper Number:

CES-18-16

Abstract

This paper addresses the relative effectiveness of market vs program based climate policies. We compute the carbon price resulting in an equivalent reduction in energy from programs that eliminate the efficiency gap. A reduced-form stochastic frontier energy demand analysis of plant level electricity and fuel data, from energy-intensive chemical sectors, jointly estimates the distribution of energy efficiency and underlying price elasticities. The analysis controls for plant level price endogeneity and heterogeneity to obtain a decomposition of efficiency into persistent (PE) and time-varying (TVE) components. Total inefficiency is relatively small and price elasticities are relatively high. If all plants performed at the 90th percentile of their efficiency distribution, the reduction in energy is between 4% and 13%. A modest carbon price of between $9.48/ton and $14.01/ton CO2 would achieve reductions in energy use equivalent to all manufacturing plants making improvements to close the efficiency gap.

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econometrically, demand, economist, econometric, produce, efficiency, efficient, development, expenditure, fuel, consumption, emission, energy prices, energy, epa, energy efficiency, saving, renewable

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Annual Survey of Manufactures, Energy Information Administration, Organization for Economic Cooperation and Development, Manufacturing Energy Consumption Survey, Environmental Protection Agency, Chicago Census Research Data Center, Census of Manufacturing Firms, General Accounting Office, Economic Census, North American Industry Classification System, Special Sworn Status, State Energy Data System, Federal Statistical Research Data Center

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