June 1, 2015

DOE's Proposed Energy Efficiency Standards Are Anything but Rational

Sherzod Abdukadirov

Former Research Fellow
Summary

The DOE should stop misusing behavioral economics to justify more stringent energy efficiency standards. These regulations are based on a flawed assumption that failure to save a trivial amount over more than a decade is proof of consumers' irrationality. Restricting consumer choice should count as costs, not benefits to consumers.

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With recently proposed energy efficiency standards for clothes dryers and residential furnaces, the Department of Energy continues a cycle of regulations that seek to reduce our energy consumption. At the heart of the DOE's case for regulation is the assumption that consumers are too myopic to choose more efficient appliances voluntarily and that the higher upfront costs deter consumers from realizing the substantial savings from lower future energy bills. The agency claims that the regulations are necessary to counter consumer myopia. Yet while there are cases when consumers are myopic, the DOE's energy efficiency standards push the argument to absurd levels. They also raise questions as to how far the government can intrude into consumers' purchasing decisions.

The logic behind energy efficiency standards is straightforward. Numerous studies in behavioral economics have demonstrated that in some cases consumers are myopic – they put too much value on present costs and undervalue future benefits. This is the same bias that pushes consumers to procrastinate and to put off going to the gym or to fail yet another diet. While consumers realize the long-term value of healthier lifestyle, the immediate costs of exercising or foregoing a tasty snack overshadow the future benefits. The DOE assumes that the same myopic decision-making prevents consumers from choosing the most energy-efficient appliances on the market.

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