November 12, 2013

Energy Conservation Program: Energy Conservation Standards for Commercial Refrigeration Equipment

Under the authority of the Energy Policy and Conservation Act of 1975 (EPCA),1the Department of Energy (DOE) is proposing new energy conservation standards for commercial refrigeration equipment.2, 3According to the DOE, these new, more stringent standards will lower energy use. This reduction in energy use will lower the costs of operating commercial refrigeration equipment and reduce the emissions of pollutants, such carbon dioxide, sulfur dioxide, and mercury, which are generated in the production of electricity. 

Unfortunately, the DOE’s use of the Capital Asset Pricing Model assumes that the risks and returns associated with refrigeration units is equal to the average risk and returns associated with all capital expenditures. The assumption that the refrigeration units are subject to the same average depreciation rate as other capital equipment results in the DOE underestimating the discount rate on refrigeration equipment and consequently overestimating the private expected benefits of this rule. This error drives the DOE’s reasoning that purchasers of refrigeration equipment are behaving irrationally when in fact, their behavior is entirely rational. Correcting this measurement error has the potential to result in a net negative welfare effect on users of refrigeration equipment, because the estimated private benefits represent anywhere from 56 to 93 percent of the total benefits provided by the proposed rule. 

It must also be noted that between 77 and 93 percent of the benefits from reductions in CO2 emissions resulting from this regulation will be captured by foreigners, not by Americans. These numbers are derived from the interagency working group report that generated the original estimate for the social cost of carbon (SCC) in 2010.4While global benefits are useful general information, they should be excluded from the calculation of net benefits from the rule because these are not benefits to American taxpayers, whom the DOE is tasked to serve, in accordance with guidance from the Office of Budget and Management (OMB).5In addition, the DOE should refrain from using the most recent estimate of the SCC until such time as the public has had a chance to comment on the technical support document that generated this new number. Evidence suggests that the interagency working group that arrived at this number left out important evidence from recent academic literature.

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