Energy efficiency standards have been introduced and developed in a number of countries since the 1960s [1] and have been regarded as one of the important policy measures for energy savings or related CO2 emissions [2]. Geller et al. [3] examined several energy efficiency programs adopted in OECD countries to point out the effectiveness of standards programs in reducing energy consumption; however they had not assessed the relevant cost and cost-effectiveness. Meyers et al. [4] estimated the benefit/cost of the standards for major energy consuming appliances such as air conditioners and refrigerators in the U.S. residential sector for the period 1987-2050 to show their superiority in view of economics.
In Japan, energy efficiency standards had originally been introduced since 1980. However the former standards failed to induce sufficient improvement because they were seldom revised and were set mostly through negotiations with industries [5]. After the Kyoto Protocol was entered into and greenhouse gas reduction targets were established, a new type of mandatory standard setting program called “Top Runner Program” was established in 1999 to accelerate energy conservation efforts [6]. Under the program, standards are set based on the products of the highest energy efficiency (“Top Runner”) on the market, and they need to be met by the manufacturers on weighted average basis. Starting with nine products in 1999, it has expanded to 26 products by 2013 and so far the standards have been met for all products [7], leading to the recognition that the program in general has been “successful” [5].
But on the other hand, neither its actual energy saving effects, incurred costs, nor cost-effectiveness are well known despite their importance in the program evaluations [8]. The literature which quantitatively assessed the program or standards settings is very limited. Kainou [9] analysed the cost-effectiveness of the standards program in its initial stage, showing that the cumulative benefits of more than tens of billions of JPY through the period 1999 to 2030 would be obtained by the settings of the standards for major energy consuming appliances such as air conditioners or refrigerators and concluded that the standards program in general should be viewed as a “quite excellent policy measure”. However, a major shortcoming in their analysis procedure was that autonomous efficiency improvements of appliances in the market were disregarded. That is, they incorporated all of the improvements gained during the program into the effects of the program. Also, given a situation in which technological progress has been made and the recent standards set by the program have accordingly been revised to be more severe than those set in the initial stage, it is another challenge for us to review the cost-effectiveness based on the current situation.
The purpose of this study is to examine the cost-effectiveness of the standard settings for air conditioner as a major residential appliance or typical example by incorporating the latest statistics together with consideration of autonomous technical improvements for baseline cases.
Nordqvist [8] discussed the principles for estimation of society’s cost related to the standards program. The cost consists of the sum of the related actors’ expenditures, subtracted by the value of avoided cost for energy use. Manufacturers need to invest substantial resources to comply with the requirement, which likely led to increase of product prices and borne by consumers as final cost [8]. However through the use of appliances with higher energy efficiency, the electricity cost to be paid by consumers reduces year after year. For the confirmation of manufacturer’s compliance with the standards, which is another important aspect in the program, monitoring activities by the government should also be considered.
The costs/avoided costs of the standards set in the program were therefore supposed to consist of the following items:
Avoided cost for electricity consumption by appliances with higher energy efficiency;
Incremental production cost to meet the standards;
Monitoring cost of government for the manufacturers’ compliance.
Evaluating the impact of the standards needs estimations of energy consumptions or relevant costs for cases with/without the standards, and comparisons of those assumed cases. Also, those costs or the CO2 emission reduction effects should basically be viewed in time series after the adoption of the standards. To comprehend such dynamics and have a discussion from a long-term perspective, we evaluated them through 1999 to 2040.
The number of air conditioners of annual sales, retirement, and summation of their stocks are basic data, on which our evaluation relies. The historical sales volumes from 1965 to 2013 were collected from the industry association [10]. To calculate the number of retirement, probability distribution was assumed based on Weibull type distribution function. Its parameters were determined by fitting using least-squares method to a vast amount of cumulative survey data collected on actual lifetimes [11], where the average lifetime was estimated to be 15 years. As for the stocks in future, saturated numbers of air conditioners possessed per household, namely, 2.6 units per two-or-more-person household and 1.1 per one-person household [12], [13], were assumed. The number of total stocks was then obtained using estimated number of households for each category [14]. Annual sales from 2014 to 2040 were calculated forward from the above mentioned number of stocks.
Trend of the average energy efficiency of air conditioners sold in Japan [15]*†, [16]

Air conditioners began to spread in the 1970s, and since then, their efficiency increased based on the technological improvements such as applications of inverter controls, better fans or heat exchangers, but the progress stagnated in the mid-1990s as can be seen in Figure 1. The introduction of the standards was considered to have accelerated their improvements. Table 1 shows annual rates of improvement in energy efficiency for the periods before, during and after each phase of the standard settings. We can more clearly see the transition of the progress in energy efficiency, which strongly suggests the impact of standards.
Annual rates of improvements in energy efficiency*‡ for periods before, during and after the standards periods (starting-target year)
Rate of annual improvement | |
---|---|
Before 1st phase (assumed for 1988-1998) | 0.9% |
During 1st phase (1999-2004) | 3.4% |
After 1st/Before 2nd phase (-2005) | 0.2% |
During 2nd phase (2006-2010) | 2.6% |
After 2nd phase (2010-2013) | 0.1% |
Progress in average energy efficiency of air conditioners in the assumed cases

Estimated electricity consumption for air conditioners in the assumed cases

Based on the estimated amount of electricity savings, avoided costs of the standards were calculated by applying average electricity prices. The electricity prices in history in real terms were collected from the data record [19], and those in future were assumed to be kept at the level of 2012. Similarly, CO2 reduction effect of the standards was estimated using CO2 emission factors for electricity in history [20], and those in future were assumed to be kept at the level of 2012.
Observed relationship between the prices and cumulative sales (logarithms of the values are plotted)

where P(t) is price of appliance in real terms in year t, V(s) is sales volume of appliance in year s, D1(t) and D2(t) are dummy variables corresponding to the adoption of the 1st standard or 2nd standard, taking the value 0 or 1 (D1(t) = 0 for t <1999, and equals 1 for t ≥1999; D2(t) = 0 for t <2006, and equals 1 for t ≥2006) to indicate absence or presence of the standards, α, β0, β1,and β2 are coefficients to be estimated, and u(t) is the error term in the regression.
Using the available set of empirical data of the period 1984 to 2011, the coefficients in equation (1) were estimated and their statistical significance was confirmed. The results are shown on Table 2.
Results of parameter estimates for the incremental cost incurred by the standards
Term | Estimated coefficients | t-value |
---|---|---|
Cumulative production volume: β0 | -0.480* | -11.9 |
1st standard dummy: β1 | 0.010 | 0.25 |
2nd standard dummy: β2 | 0.213* | 6.65 |
Constant term: α | 20.56* | 28.2 |
Explanatory power: R2 [adjusted R2] | 0.969 [0.938] |
The asterisks (*) indicate statistical significance at 1% level.
We see from Table 2 that the explanatory power of the model is very high and its coefficients except for that of the 1st standard dummy were statistically significant. Using the results above, we had quantitative discussions on the incremental production costs by the adoption of the standards. As for the impact of the 1st standard on prices, although some changes might have occurred in reality, they were regarded as insignificant here in view of statistics. That does not contradict the arguments about the level of the 1st standards perceived by the industry or changes in prices of air conditioners [23]. On the other hand, the impacts of the 2nd standard on prices were found statistically significant. The incremental cost per unit was estimated by comparison of the obtained P(t) values with and without the 2nd standard in equation (1). The calculated percentage to the price of the appliance was 19%, and it corresponds to 21,051 JPY in 2010 for example. Using the assumed annual sales volumes to 2040, the future trend of additional prices were calculated in the same manner. The sum of incremental costs was then obtained from those prices and sales.
This section presents the results of our analyses for the period through 1999 to 2040. Here, the additional costs on the appliances paid annually in their average were calculated based on the average lifetime of air conditioners (15 years) with an assumed discount rate of 3%.
Figure 5 shows the estimated incremental cost/avoided cost of the standards through 1999 to 2040.
Estimated incremental cost/avoided cost through the standards (discount rate: 3%)

The estimated avoided cost increases from the start of the standards as the new products conforming to the standards spread and replace the old models with relatively low energy efficiencies. It reaches a peak at approximately 600 billion JPY in around 2020, followed by continuous decrease with the first cycles of replacement coming to their ends and the improvement rates in energy efficiency slowing down. The additional cost for appliances annually paid increases over the average lifetime from the introduction of the 2nd standard until it reaches the peak in 2021, followed by gradual decrease with the sales volume decreasing. The monitoring costs by the government are, as visualized in Figure 5, negligible quantities. The avoided cost is larger than the incremental cost all through the considered period. The cumulative net costs are obtained as shown in Figure 6. They keep decreasing from the start to reach at the cost of -10,420 or the benefit of 10,420 billion JPY in 2040.
Estimated cumulative net cost through the standards (discount rate: 3%)

Figure 7 shows the cumulative CO2 reduction effects estimated to 2040. They keep increasing from the start of the standards to reach 330 Mt CO2 in 2040 which is approximately twice of the amount of annual emission from the residential sector in Japan in 2010.
Estimated cumulative CO2 reduction effect through the standards

Using the estimated net costs and CO2 reduction effects, CO2 abatement costs of the standards in JPY per t CO2 was calculated as shown in Figure 8.
Estimated CO2 abatement cost through the standards (discount rate: 3%)

Reflected from the net cost mentioned above, the estimated CO2 abatement cost realized through the standards was negative within these periods, and it was -13,700 JPY/t CO2 in 2040. This means the standards reduces significant amounts of CO2 emission, producing net economic benefits at the same time.
The estimated economic impact by the standards is dependent on the discount rate applied in the calculation. As the assumed discount rate rises, corresponding net costs estimated increase accordingly. Figure 9 shows the result of the sensitivity analysis in terms of influence of applied discount rates on the CO2 abatement costs.
Discount rate dependence of the estimated CO2 abatement cost

It can be clearly seen that the estimated CO2 abatement cost increases when a higher discount rate is applied. Its value turns from negative into positive at 26% or higher.
In real economic activity, high discount rates (implicit discount rate) for consumers’ choice of appliances are usually observed. The discount rates are affected by not only interest rate but also by depreciation rate and opportunity costs for searching. For example, the observed discount rates for air conditioners in the U.S. were from 5% to as high as 89% [27]. Wada et al. [28] summarizes the averaged discount rate for air conditioners were about 24%. When considering those discount rates found in the previous studies, the CO2 abatement cost estimated in this study is not necessarily negative and could be positive.
This implies that examination of the cost of the standard settings requires careful consideration on the influence of the discount rate applied, and their results should also be viewed as such.
Although the estimated net cost of the standards at a discount rate of 3% was negative to reduce significant amount of CO2 emissions, the results are greatly reflected by the fact that the 1st standard setting involved little cost and their energy saving effect in contrast was relatively large. Figure 10 shows the costs only of the 2nd standard.
Estimated incremental cost/avoided cost by the 2nd standards (discount rate: 3%)

It can be seen from Figure 10 that the incremental cost of the 2nd standard was larger than the avoided costs for all through the considered period, which leads to considerable amount of net additional cost of it. On top of that, as previously mentioned and can be seen in Figure 3, the energy saving effect by the 2nd standard was relatively small. Both of these facts substantially raise the CO2 abatement cost. Figure 11 shows the estimated CO2 abatement cost of the 2nd standard. As indicated in Figure 11, it has a considerably high value through the considered period and is 26,800 JPY/t CO2 in 2040.
CO2 abatement cost of the 2nd standards (discount rate: 3%)

The Japanese government mentions that introduction of “the 3rd standard” for air conditioners needs to be considered [7]. Undoubtedly, improving energy efficiencies of appliances is important for us to save energy resources or to reduce CO2 emissions, besides, from a simple technical point of view, introducing the new standards would not be impossible on the ground that the highest energy efficiencies of air conditioners on the market have been still improving since 2010 until nowadays [16]. However they are required to carefully consider its possible impact on the economy as well as its effectiveness. Considering the cost-effectiveness of the 2nd standard shown above together with the recent situation in Japan in which technical development of components are almost reaching saturation levels, introducing “the 3rd standard” would impose a considerable burden on the economy.
This study assessed the cost-effectiveness of the Japanese energy efficiency standards for air conditioners. The CO2 reduction effect estimated through 2040 was 330 Mt CO2. When applying a discount rate of 3%, CO2 abatement cost realized through the standards was estimated to be negative value of -13,700 JPY/t CO2, suggesting its certain excellence as an energy efficiency policy measure, which supports the view shown by the previous research [9]. According to the result of the sensitivity analysis, however, the net cost turns from negative into positive at a discount rate of 26% or higher. The results also revealed that the “excellent” cost-effectiveness of the standards largely depends on that of the 1st standard, and that the estimated CO2 abatement cost of the 2nd standard was considerably high value of 26,800 JPY/t CO2 in 2040.
Policy implications obtained from those results are that considered standards could be a highly cost-effective measure if they would be introduced in stages or countries where energy efficiencies of appliances are still relatively low; meanwhile, in a situation where those efficiencies are so high as at present in Japan, adoption of the additional standards could quite possibly involve considerable amount of costs to be shouldered by the consumers, even though certain energy savings or CO2 reductions would be expected by them.The Japanese government, who is looking for the possibility of introducing “the 3rd standard” for air conditioners, is required to be careful about the possible economic burden imposed by it.
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