Monday, August 29, 2016

Can We Stop Mandating Energy Efficiency Already?

We only have one planet to inhabit. If we destroy the environment, then humanity is essentially screwed. It's why it is of vital importance to make sure we have a sustainable environment. Yes, it's possible to be capitalist and environmentalist, which is why it's important to distinguish between good environmental policy and policy that is simply feel-good. I wonder if we run into such a situation when discussing energy efficiency. The idea behind making items energy efficient is that they are to reduce consumption, which saves on energy costs and carbon emissions. I have no inherent objections towards greater efficiency, and I'm not against saving the environment, but I do have to ask how wary we should be of energy efficiency mandates.

Before beginning, I would like to preface that I am not going to cover energy efficiency when it comes to automobiles. I covered CAFE standards a little under a year ago, and let's just say that I'm not a fan because they increase auto prices, do little to nothing to improve energy efficiency, and actually cost lives. Now, do other forms of energy efficiency have similar effects?

The paradox behind energy efficiency is what economists refer to as the rebound effect (see here for further detail). Essentially, the energy efficiency gains are offset by behavioral or systemic changes. For instance, there have been greater efficiencies in heating and air conditioning. However, the average house has also increased by 1,000 square feet in the last forty years. A similar argument can be made for lighting (Tsao and Saunders, 2012) in that greater lighting efficiencies have resulted in greater demand for lighting products. This is in part that people find new ways to use lighting, such as illuminating office ceilings with LED virtual skies. In Melbourne, Australia, energy consumption has remained remarkably stable over 50 years, even with energy efficiencies. Why? Because homes have become larger, these areas have been heated over longer periods of time, and fewer people live in each house (Palmer, 2012). Even Arik Levinson, who is a senior environmental economist at Georgetown University who used to work in the Obama administration, found that energy efficiency regulations in California did not translate into houses using less energy than prior to to enactment of its building energy codes.

A 2015 working paper from Sofie Miller, who is a Senior Policy Analyst at George Washington University, looked at the energy efficiency mandates from 2007 to 2014. She found that most of the benefits are private, economic benefits for the consumer. The annual environmental benefits were only $3 billion, whereas the annual regulatory costs were $8 billion. What this means is that the costs cannot be justified based on environmental benefit alone. Additionally, the economic benefits for the consumer are overestimated by the Department of Energy (Miller, p. 25). The fact that the DOE even admits that many appliances already meet the new standards, and many customers opt not to buy the energy efficient versions implies that based on customer preferences and purchasing decisions, customers value the private benefits less than the DOE. Depending on the extent to which the DOE has overestimated private benefits, it is very well possible that there is not a net economic benefit with mandating energy efficiency.

This is not automatically to say that energy efficiency is inherently awful. The benefits derived from energy efficiency depend on the extent of the rebound effect for each appliance or good, and can be considered dubious. It is a matter of whether the government should be mandating it. Since the government believes that it will generate social benefits related to carbon emissions, it is going to enact these mandates across the board, which would be erroneous given how little effect it has on climate change (Gayer and Viscusi, 2012). Let's also not forget that energy efficiency disproportionately affects the poor. Higher prices due to the energy efficient products leads many to hold onto older versions for longer.

And it's not just the possibility of rebound effect of its effects on the poor that bother me. Even if rebound effect is not prevalent (Gillingham et al., 2014), the idea behind current federal energy efficiency mandates makes two erroneous assumptions, the first being that everyone consumes energy the same way, especially in terms that energy efficiency is the only thing that matters (e.g., cost, product quality, warranty, are factored into consumer decisions). If it were the only thing that matters, then energy efficiency mandates would be superfluous at best. The second issue is that under a liberalized market, the incentive to aim for energy efficiency already exists. If a company can find a way to consume less and gain a better performance as a result, it consumes less dollars and drives up profit. Greater energy efficiency predated the Department of Energy's existence or the upshot in energy efficiency regulations, and it easier for companies to innovate when needless regulations are in the way. Much like with CAFE standards for automobiles, the goal at the end of the day should be to find ways to increase energy efficiency while minimizing rebound, not impeding progress. If we are interested in reducing pollution or carbon emissions, let's find other ways to go about it instead of giving ourselves an unmerited pat on the back for passing more energy efficiency mandates.

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