Energy Efficiency is frequently acknowledged to be an important resource for reducing emissions of air pollutants and greenhouse gases. From federal and state regulatory approaches such as acid rain and smog reduction policies to voluntary programs such as the federal ENERGY STAR^® program, energy efficiency's pollution prevention value has been widely accepted. For example, the New York Energy $martsm efficiency programs have documented emission reductions of 950 tons of nitrogen oxides (NO_x), 1,700 tons of sulfur dioxide (SO₂), and 750,000 tons of carbon dioxide (CO₂) annually as of 2003.

Yet realizing a significant measure of efficiency's potential contribution to clean air and climate protection environmental goals has not proven easy. While states like California and New York have achieved significant emission reductions from energy efficiency policies and programs, securing adequate treatment of efficiency as a Clean Air Act compliance measure has been problematic, and gaining recognition of the market value of efficiency-driven emission reductions has been even more challenging. Because of fundamental market barriers and also design issues associated with cap-and-trade systems, efficiency's value is not inherently captured in such policies. With a number of multi-pollutant, cap-and-trade-oriented clean air and climate protection policies under development, the time is ripe to revisit energy efficiency's role in such policies, with the goal of defining the best paths to realizing efficiency's potential contribution.

Toward this end, ACEEE conducted a study designed to assess the potential contribution energy efficiency can make to attaining environmental goals through multi-pollutant, cap-and-trade policies. Beyond estimating the emission reduction potential and economic benefits efficiency can offer, we also explored in-depth the key policy framework and regulatory design issues that must be addressed if efficiency is to play a significant role in these policies. In addition, we estimated the potential value that efficiency-based emission reduction policies can offer to key private sector actors, including energy service companies (ESCOs), large industrial companies, and electric utilities. Based on our findings, we make specific recommendations for the design of cap-and-trade systems that will be necessary to realize the emission reduction benefits energy efficiency can offer.

For this study, we drew on the experience gleaned from including energy efficiency as a compliance option in existing U.S. air pollution policies such as the Title IV sulfur dioxide/acid rain program and the nitrogen oxides state implementation plan (SIP). We also drew from ongoing policy development processes such as EPA's Clean Air Interstate Rule (CAIR) and the nine-state Regional Greenhouse Gas Initiative in the Northeast.

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61 pp., 2005, $25.00, U043