Forecasting the optimal cost of energy conservation by sectors to the year 2000

This paper suggests that government policies to induce or mandate energy conservation across sectors should be based on cost-effective measures. Section 2 outlines the concept of cost-effectiveness by sector according to the marginal cost MC of conservation and the aggregation of the MC curves in a horizontally added aggregate marginal cost curve AMC or the supply curve for conservation. It also outlines a methodology of estimating MC (in constant prices) by regressing total cost of conservation on total energy conserved. Empirical estimation of the MC in the residential sector is attempted in Section 3 by developing data for annualized cost of conservation capital stocks and the related energy savings. The regression of total residential energy conservation costs on total conservation provided the MC at $0.84 per million Btu (MM Btu) to the year 2000. Section 4 used time-series data for the commercial sector and obtained the MC at $0.17/MM Btu for 1980–2000. The MC of conservation in the industrial sector is estimated in Section 5 at $0.78/MM Btu for 1985–2000. In section 6, we estimate the MC in the transportation sector at $2.42/MM Btu for 1980–2000. The last section summarizes the approach and conclusions and recommends that the cost-effectiveness approach dictates that the order of priority for inducing or mandating conservation should be from the commercial to the industrial, to the residential and followed by the transportation sector for the next 20 years.