Economics, Energy and the Environment

Do energy efficiency regulations benefit consumers?

Photo Credit: sun dazed (Flickr) (CC BY-SA 2.0)

Photo Credit: sun dazed (Flickr) (CC BY-SA 2.0)

Several fallacies pervade thinking about energy efficiency measures. The first fallacy is the assumption that increasing energy efficiency somehow leads to using less energy. That never made a lot of sense: people generally want more power and more mobility rather than less, and if one genuinely decreases the cost of power or mobility, one would expect more consumption, rather than less. I’ve blogged about the issue of the Jevons Paradox before, where people respond to genuine increases in efficiency not by consuming less, but by consuming more. The guys at the Breakthrough Institute have done great work on this issue, with a comprehensive review of the literature on the Jevons Paradox showing that the risk of rebound or even backlash is considerably higher than proponents of efficiency measures have historically credited.

Another fallacy that supports energy-efficiency regulation is the idea that consumers are essentially irrational: That they discount future savings on energy when they make their purchases, and that they must be made to save money on energy by having their choices made for them by government.

The Mercatus Center at George Mason University recently released a long but interesting report by (my former colleague) Ted Gayer and W. Kip Viscusi looking at this latter fallacy. They do not find signs of consumer irrationality in energy efficiency:

Taken as a whole, the engineering and empirical literature on the energy-efficiency gap does not provide strong, credible evidence of persistent consumer irrationality, and the literature on behavioral economics with respect to energy efficiency is still limited and unable to consistently demonstrate the magnitude of the contribution of behavioral deviations from rationality.

And without the ability to claim that government regulations are remedying consumer irrationality and saving people money, the cost of energy-efficiency regulations outweighs their benefit considerably. Gayer and Viscusi look at energy-efficiency regulations relating to cars, trucks, appliances, and even the dreaded incandescent light bulb, and find:

The impetus for the new wave of energy efficiency regulations has little to do with externalities. Instead, the regulations are based on an assumption that government choices better reflect the preferences of consumers and firms than the choices consumers and firms would make themselves. In the absence of these claimed private benefits of the regulation, the costs to society dwarf the estimated benefits.

Gayer and Viscusi do find some irrationality in the situation however:

Perhaps the main failure of rationality is that of the regulators themselves. Agency officials who have been given a specific substantive mission have a tendency to focus on these concerns to the exclusion of all others. Thus, fuel efficiency and energy efficiency matter, but nothing else does. If other attributes matter, it is assumed they either are irrelevant or will be included at no additional cost in the post-regulation products. In effect, government officials act as if they are guided by a single mission myopia that leads to the exclusion of all concerns other than their agency’s mandate.

Irrational regulators. Who could have conceived of such a thing.

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