Life cycle costing,government policies and the diffusion of energy-conserving technology

Energy conservation has become a major goal of State and Federal policy. Governments are called on to play an active role in identifying promising energy-conserving technologies, and in encouraging their timely and widespread adoption.For their role to be effective, governments must have available—and be willing to use—some economic tools that permit estimation of the costs and benefits of their actions. Costs may consist of funds spent on research, development and public education, of tax revenues foregone, of administrative expenses, or of outright subsidies to producers or consumers. Benefits arise mainly through the earlier adoption of energy-conserving technologies with their attendant economic savings.In evaluating these savings, governments may assign “shadow prices” different from observed market prices to certain energy forms, to reflect more correctly their perceived value to society. They may also want to use discount rates different from those of private businesses or individuals in their benefit-cost calculus, to better take into account the claims of future generations on earth's remaining resources.The main purpose of this paper is to show what special economic tools are required in this evaluation, to develop some of them, and to demonstrate their application. Specifically, the aim is to explain and illustrate the usefulness to public policy makers of the techniques of life cycle costing and of market acceptance estimation.In order to highlight the basic principles without getting embroiled in excessive algebraic details, certain simplifications are introduced (and clearly stated) in the course of the paper. Although the tools are general, the development is made concrete by focussing the discussion on consumer durables that use and/or deliver energy in the performance of their service, and that are ready for application without further research and development effort.