Overriding Common Sense: An Attack on Energy Efficiency Standards

A new report published last week by the anti-regulatory Mercatus Center (an advocacy outfit associated with the Koch brothers) took aim at appliance and vehicle efficiency standards. In the report, the authors argue that standards reduce consumer choice and are not justified because the environmental benefits are small and consumer benefits are non-existent.

Nothing could be further from the truth. Efficiency standards have a long record as a common sense way to save money for consumers and provide important societal benefits at the same time. The Mercatus report, entitled Overriding Consumer Preferences with Energy Regulations, is by two economists, Ted Gayer and Kip Viscusi. It’s so full of false claims, inaccurate assumptions, and misleading statements that it’s hard to know where to start refuting them. But I thought it would be useful to rebut some of their most egregious claims.

False claim #1: “[C]urrent energy efficiency initiatives do very little to address climate change”

Taking into account all U.S. appliance standards starting with the original round signed into law by Ronald Reagan and including those updated by the Department of Energy (DOE) under two Republican and two Democratic administrations and those added by both Republican- and Democratic-controlled Congresses, U.S. standards reduced greenhouse gas emissions by about 200 million metric tons in 2010, and annual reductions will increase to about 450 million metric tons by 2025. That works out to about 3.5% of actual U.S. 2010 emissions and 8% of projected 2025 emissions. (See Figure 4 in the ACEEE report, The Efficiency Boom.) Vehicle fuel economy and greenhouse gas standards for model years 2012-2016 are projected to reduce greenhouse gas emissions by 307 million metric tons in 2030, lowering car and light truck emissions by 21%. Standards now under consideration for model years 2017-2025 would deliver similar reductions. Undoubtedly, more can and should be done to address climate change, but to suggest that standards “do very little” is absurd.

False claim #2: Efficiency standards restrict consumer choice

Refrigerators are the most regulated appliance in America, having been subject to no fewer than six rounds of improved state and federal efficiency requirements over more than 30 years. Think about it for a moment. Do you have fewer choices in refrigerators than you did 10 years ago? For those who can remember, than 30 years ago? How about for clothes washers? Or for light bulbs?

For each of these products, consumer choices have increased even as standards have eliminated energy-inefficient models from the market. Refrigerators come with a wider array of configurations (the latest rage is French doors—GE just added a second shift at its Louisville, Kentucky plant to keep up with demand), ice and water dispenser options, built-in designs, and other features than have ever existed. Clothes washer buyers have an array of energy- and water-efficient front-loading and top-loading designs covering price points from $400 and up to choose from, many with features like steam cleaning unheard of a decade ago. For light bulbs, manufacturers report that the standards spurred them to introduce a whole new generation of energy-efficient incandescent bulbs so that consumers can now choose among energy-efficient incandescent, compact fluorescent, and newly-introduced LED options. Consumers have more choice than ever.

False claim #3: Consumer savings are non-existent

The crux of the authors’ argument is that consumers and businesses maximize their own welfare in their everyday decision making, so, by definition, any government action that results in different decisions cannot make them better off. However, DOE has identified and assessed a variety of widely-recognized market and behavioral realities that explain why efficiency standards yield benefits for consumers. One such reality is that efficiency-related cost savings is only one of many features that define a product, and that optimizing across multiple attributes is complex, time-consuming, and costly for consumers. Another reality is that there are often transaction costs that get in the way of recovering investments in more efficient products, as in the case of split incentives among landlords and tenants, and for homeowners who are considering selling their property within a product’s lifetime. Energy cost savings for an individual consumer would often not justify the time and cost to gather and assess information, and when appropriate, to compensate for the transaction costs. It is by no means irrational for consumers to apply ”bounded rationality” in making decisions, a concept that explains reasonable consumer behavior in complex environments.

Oddly, Gayer also mentions that various “market failures” could result in underinvestment in energy efficiency (i.e., the “energy efficiency gap”):

…an energy efficiency gap could be due to market failures entirely consistent with a presumption of consumer rationality. For example, if renters have incomplete information about the energy efficiency of their apartment building, then a landlord might underinvest in energy efficiency because he is unable to recoup the cost in rental rates. There may be other market failures that can contribute to suboptimal consumer choices, such as lack of information about future costs of more- versus less-efficient products, or inefficiencies stemming from average cost pricing for electricity due to natural monopoly. Such market failures present economic justification for possible government regulation….” (emphasis added). (See page 4 of the Mercatus Center report.)

Gayer himself has validated DOE’s explanation for why certain market failures result in a “suboptimal” investment in energy efficiency.

In a report published earlier this year, we found that the net present value benefits of consumer benefits from all standards completed to date now tops $1.1 trillion dollars (see the executive summary of The Efficiency Boom). Those are very impressive savings, but still represent only a fraction of a percent of total consumer and business spending, so it is not at all surprising that consumers often don’t undertake efforts (which can be complex, time-consuming, and costly) to assess the economically optimum efficiency level.

Finally, we’ve probably underestimated consumer benefits from existing standards, perhaps by quite a lot. Estimates of the cost to improve efficiency are based on the best information available at the time each standard was completed or enacted, converted to present value. In practice, those estimates have tended to be higher than the actual prices seen in the market. Learning by manufacturers, scale economies, and technological innovation all drive down the costs to improve efficiency. One need look no further than the refrigerator example—a typical new fridge uses one-third as much energy as one from the 1970s and is larger and more fully featured, yet costs only one-third as much. In other words, the historical record suggests that standards have had little to no impact on the price of refrigerators.

False claim #4: Government officials act with “single mission myopia” and “perhaps the main failure of rationality is that of the regulators themselves”

The authors’ overheated rhetoric reveals their work as an attack job designed to undercut the role of government in addressing society’s problems and to demonize the individuals doing the work. An ad hominem attack against the highly competent, hardworking professionals at federal agencies should have no place in developing smart energy policy that delivers secure, economic and environmentally-sound results for our country.

In contrast with the claim, DOE has long conducted standards-setting processes that are open and transparent, and provide a great forum where consumers, utilities, manufacturers, and other interested parties are welcomed by DOE and regularly raise new data and perspectives. If anything, this transparency has increased in recent years. The fuel economy regulatory processes have been similarly transparent.

Further, there is a well-used process for review, both within the government, and, when an aggrieved party feels it necessary, through the courts. Notably, the court reviews have found neither a plague of myopia nor of poor rationality at DOE.

False claim #5: Pollution reductions are the only societal benefits of energy standards

Gayer admits that the environmental benefits to society from reduced greenhouse gas and other polluting emissions are worth considering. But he stops there and does not consider any other societal gains. However, saving electricity, oil, and natural gas provides other important benefits. For example, when a consumer purchases an efficient product, the extra cost works out to about one cent per kilowatt-hour saved for an efficient light bulb and about 4 cents per kilowatt-hour for an efficient appliance. If the efficient products were not purchased, more power would be needed from new power plants that cost on the order of 6-14 cents per kilowatt-hour (see Lazard Ltd.’s 2011 report, Levelized Cost of Energy Analysis – Version 5.0), a cost that is shared among all consumers and not just consumers who purchase inefficient products. Put more simply, we’d all be paying a lot more for electricity today if not for existing efficiency standards. Moreover, siting those power plants and the associated transmission lines can impose additional costs on those who live nearby. Producing, importing, and transporting coal, oil, and natural gas has costs and consequences beyond those reflected in the price of the commodities.

False claim #6: “The Department of Energy issued standards for metal halide lamp fixtures and walk-in coolers in 2012”

Now I’m nit-picking, but DOE has not yet issued either one of these standards, which seems like a pretty simple fact to get right. But this claim strikes a nerve because Congress required DOE to issue standards for these two product categories by January 1, 2012. DOE missed that deadline and has yet to issue even a proposed rule for either product. Both proposals appear stuck in the review process at the Office of Management and Budget: walk-in coolers have been there since last September and metal halide lamp fixtures since February.

While I’m nit-picking, Gayer also cites a 2000 poll performed for Mercatus that found that “…by a margin of 6 to 1 the public opposed regulations that would effectively eliminate top-loading washing machines (page 32).” This is not terribly interesting since the clothes washer standards Mercatus criticized didn’t ban top-loaders (the standards took effect in 2004 and about half of the clothes washers sold today are top-loaders). DOE just completed a new update to the clothes washer standards, and once again, the standards do not ban top-loaders. I suppose that won’t stop knee-jerk critics like Gayer from citing the 2000 poll.

Article by Andrew deLaski, appearing courtesy Energy Efficiency Markets.