June 27, 2013
By Nicolas Loris
Stories covering President Obama’s climate-change speech will focus on his vow to reduce (via unilateral executive-branch action) the greenhouse-gas emissions of power plants. And that’s where the coverage should focus. After all, if ramped up successfully, his war on coal will increase energy prices and produce debilitating ripple effects throughout the economy.
But this doesn’t mean we should overlook another vow he made: the promise to ramp up energy-efficiency mandates. From kitchen-appliance standards and fuel-efficiency mandates to building and manufacturing efficiency, Mr. Obama wants the federal government to help reduce energy use, reduce CO2 emissions, and save businesses and families money. Win-win-win, right?
Not so fast. Here are four problems with government efficiency standards and subsidies for promoting energy savings.
1. Families and businesses already know how to save money. What parents haven’t told their kids, “Turn the light off when you leave the room” and “Shut the door — do you live in a barn?” Sure, this is partly a lesson in responsibility but it’s also a stern reminder that irresponsibility and forgetfulness jack up energy bills. At the pump, the faucet, or the socket, families are cognizant of their energy use and make decisions to lower those expenses.
Also, last time I checked, businesses still like to make a profit. Companies, especially energy-intensive ones, are well aware that their energy bills are a major operating expense. That’s why companies invest in innovative technologies that conserve resources. They don’t need the federal government to prod them along with efficiency mandates, let alone use other peoples’ money in the form of subsidies, as recent legislation introduced by senators Jeanne Shaheen (D., N.H.) and Rob Portman (R., Ohio) would do.
2. Efficiency mandates and subsidies disregard consumer preferences. Businesses and families make energy-saving investments when it makes sense to do so. The myopic view from the feds, however, is that efficiency upgrades always make sense if they save money. And that’s not always the case.
When the government forces efficiency choices on people, it takes away choices, or at the very least, overrides them. Car buyers want good fuel efficiency, but they may also might decide to trade off some MPGs for greater safety and more legroom. Yes, we still live in a world with both hybrids and pickup trucks, but the government’s mandates are forcing trade-offs among preferences that are better determined by consumers and producers.
Further, businesses may not want to invest in an energy-saving technology when it comes to choosing between budgeting for hiring a new employee or buying new technology. When families and firms aren’t investing in the most energy-efficient technology, it’s not that they’re acting irrationally; it’s simply that they have other preferences and budget constraints.
3. Sometimes the upfront costs outweigh the savings. Some consumers prefer paying a lower, up-front cost for a new dishwasher than a higher sticker price for a dishwasher that promises to save them money in the long run. Experience shows that consumers have every right to be skeptical that the promised savings will ever be realized.
For instance, under the latest DOE efficiency rule new dishwashers will be nearly twelve years old before their owners’ savings catch up to the higher up-front cost. With the average lifespan of a dishwasher being nine to twelve years, almost 20 percent of households will experience a net cost and almost 65 percent will never see a net benefit, according to George Washington University’s Regulatory Studies Center. Similar concerns have been raised about other energy-efficient appliances, as well as home insulation, new vehicles, and new industrial processes. And, for many of these products, Americans are paying subsidies to make or install them . . . on top of the increased point-of-sale price.
4. Estimated benefits are not about protecting the environment. A recent study from the Mercatus Center found that the overwhelming majority (87 percent) of the benefits that the government calculates will arise from efficiency mandates come from “correcting consumer irrationality.”
The actual environmental benefits Americans will enjoy as a result of reducing greenhouse-gas emissions (GHGs) total a paltry 2 percent of all projected benefits. The other environmental benefits (11 percent) would come from international reductions in GHGs and increased energy security. Regardless of what one believes about GHGs and their effect on climate, efficiency mandates and subsidies are a grossly inefficient way to reduce them. Clearly, these regulations are more about usurping individual choice than correcting a supposed market failure.
Proposals to improve energy efficiency often appear to be a great political bandwagon — and there is no shortage of politicians and bureaucrats who are eager to hope aboard. But the federal government’s attempt to improve efficiency through subsidies and mandates is costly and inefficient, producing little environmental benefit and leaving consumers far worse off than if left to their own devices.
President Obama remains smitten with regulating energy and consumer choice from the top down. But Congress would be wise to peel back these programs, not expand them.
— Nicolas Loris is the Herbert and Joyce Morgan Fellow in The Heritage Foundation’s Roe Institute for Economic Policy Studies.
First appeared in National Review Online
Herbert and Joyce Morgan Fellow
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