Energy Efficiency, Fuel Switching, and Environmental Emissions: The Case of High Efficiency Furnaces

Abstract

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 (SOx and NOx). 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 SOx and NOx emissions of one million households switching from conventional heating to the newer high-efficiency gas heaters.' 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.