August 14, 2016

When Energy Efficiency Rules Aren't Cool

James Broughel

Senior Research Fellow
Summary

...similarly hasty logic underlies dozens of energy efficiency regulations finalized each year. These rules are not aimed at State Department employees, but at the American people. When regulators focus only on part of the equation — hypothetical benefits — while ignoring the far more certain costs, the public receives an incomplete picture of what a policy is achieving. Consumers are the ones who ultimately pay the price.

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

At an environmentalist conference in Vienna, U.S. Secretary of State John Kerry recently compared the environmental damage done by air conditioners and refrigerators to the threat of terrorism and the Islamic State. Following the statement, a petition started on the website Change.org, requesting that the United States remove all air conditioners from State Department property.

Presumably the petition is a joke, but its underlying logic — that a sweeping action like removing air conditioners from government buildings will address an imminent environmental threat — is remarkably similar to how regulators think when they set energy efficiency regulations for home appliances, such as air conditioners.

The Department of Energy sets energy conservation standards that limit the amount of electricity that can be used by home appliances like refrigerators and air conditioners. These sweeping regulations affect nearly every American consumer. The department claims its rules address an imminent problem — environmental degradation — and argues that its conservation rules produce two main benefits: First, more energy-efficient appliances use less energy, so we all release fewer emissions into the atmosphere. Second, by using less energy, consumers may save money over time on monthly utility bills.

Sounds like a win-win situation, right? Not so fast.

We haven’t considered the costs of these regulations. Consumers care about their utility bills and the environment, but they also care about how well a product works, its appearance, whether the product comes with or without a warranty, the purchase price, and countless other things. When product attributes change as a result of regulations, these are costs to consumers. But the costs are ignored by regulators at the Energy Department. Regulators do consider some costs, like how much more appliance makers will have to pay when they are forced to comply with new rules, but the costs to consumers — whom we should care most about — are systematically overlooked.

If all the air conditioners were removed from State Department buildings, as the Change.org petition is suggesting, presumably this could result in some environmental gains — assuming employees don’t turn to alternatives, like desk fans, en masse. It may also save taxpayers some money when the government’s utility bills go down. But as anyone who endured the last few muggy months of summer would quickly point out, State Department employees would be miserable. This would be a sweeping and crazy action. Federal employees would barely be able to do their jobs without air conditioning, since Washington, D.C. is notoriously hot and humid, and the country could be even more dysfunctional as a result.

This debate, while in jest, highlights that there are both benefits and costs to any policy. Focusing solely on the benefits, like small environmental improvements or a few dollars a year saved on energy bills, while ignoring the obvious costs, like sweaty civil servants or frustrated users of appliances, presents a misleading portrayal of any policy. Few take the Change.org petition seriously. Yet energy efficiency regulations are finalized year after year based on similarly flawed logic — ignoring the obvious costs and shortsightedly focusing on benefits.

And, it turns out, there are many reasons to doubt that energy efficiency rules even deliver the few benefits regulatory agencies brag about. Consumers routinely use appliances more intensively as products become more energy efficient — a phenomenon known as the rebound effect. This behavioral change can offset much, and sometimes even all, of expected emissions reductions. Consumers also have a strong financial incentive to seek products that will reduce their monthly bills, suggesting that when consumers opt for less efficient appliances, they probably have a good reason to do so. But even assuming these benefits are real — a big assumption — that’s hardly the end of the story, because, again, it’s not just the benefits that matter, but the costs as well.

Mr. Kerry made a silly mistake when he compared air conditioners to terrorism and ISIS. The Change.org petition may have sought to poke fun at the ridiculousness of his statement. But similarly hasty logic underlies dozens of energy efficiency regulations finalized each year. These rules are not aimed at State Department employees, but at the American people. When regulators focus only on part of the equation — hypothetical benefits — while ignoring the far more certain costs, the public receives an incomplete picture of what a policy is achieving. Consumers are the ones who ultimately pay the price.