Energy Conservation Standards for Residential Refrigerators

Analysis identifies net monetary savings to consumers as a result of lower energy costs as well as environmental benefits associated with lower electricity use. These both affect citizens' quality of life.

Benefits and costs of proposed standards are expressed in annualized values over the 30-year analysis period (2014–2043). Monetary values are the sum of (1) the annualized national economic value, expressed in 2009$, of benefits from operating products that meet the proposed standards (consisting primarily of operating cost savings from using less energy, minus increases in equipment purchase costs), and (2) the monetary value of the benefits of emission reductions, including CO2 emission reductions. A range of social costs of carbon and social costs of NOX emissions are used to monetize the environmental benefits.

Standards increase efficiency of refrigerators, and so consumers must purchase refrigerators with greater efficiency. Anlaysis recognizes that higher prices will reduce shipments, so the change in outcomes is the net change after accounting for this. The engineering analysis screens technologies for their effects on outcomes in a coherent manner. There is no clear theory explaining why government regulation can produce savings for consumers that consumers do not bother to capture themselves; there is one brief claim about economic literature on this but no theory or citations.

Exhaustive engineering calculations assess energy efficiency associated with the different standards. Many assumptions, however, were based on interviews with the affected industry or outside experts without clearly showing or describing information gathered. Data presented in the analysis show that efficiency of refrigerators has increased over time, though whether this is a result of previous standards or other market forces is not clear. Given the extensive data and literature gathered to evaluate effects of alternative policies that were not adopted, it seems odd that DOE has not analyzed the effects of past standards to gauge new standards' effectiveness.

Analysis presents low, high, and primary estimates of benefits at various discount rates. Projected energy savings are adjusted to account for the fact that actual energy savings in the field differ from what DOE tests or calculations may suggest. (Although calculation of "rebuttable payback periods" uses the test data rather than actual data.) Life-cycle cost and payback period analysis uses Monte Carlo simulations (this counts under benefits rather than costs because life-cycle cost savings are calculated as a benefit). Estimating health benefits, DOE notes that, for NOX emissions, available estimates suggest a very wide range of monetary values, ranging from $370 per ton to $3,800 per ton of NOX from stationary sources, measured in 2001$ (equivalent to a range of $447 to $4,591 per ton in 2009$). This is a very wide range from which to present estimated heath benefits. Appendices show results with alternative assumptions about economic growth. Full compliance is assumed.

NOPR claims economics literature identifies a number of reasons consumers appear to undervalue future energy savings. These include lack of information, short-term bias, computational or other difficulties in evaluating the tradeoffs, divergent incentives (renters vs. owners), imperfect foresight, and uncertainty. They are simply listed with no elaboration. No mention of market failure is found throughout the 966-page document. Other than one vague reference to a global externality problem associated with greenhouse gases, there is no discussion of social costs associated with energy production in private markets.

NOPR asserts that extensive economics literature attempts to explain why consumers appear to undervalue energy efficiency improvements. It provides no citations to any literature. There is no discussion of why suppliers lack profit incentives to make these cost savings more apparent to customers. Some admissions in the analysis undermine DOE's implicit theory of consumer irrationality. Several manufacturers expressed concern that more stringent energy standards could adversely impact utility of their products and thus displease their customers. Several manufacturers indicated that other product features currently available (e.g., ice and water dispensers, glass doors, soda can dispensers, crisper compartments, anti-sweat features, and food preservation capabilities) may have to be removed in order to both meet new standard levels and maintain product prices that would be acceptable to consumers.

The NOPR provides no evidence that any of the asserted reasons are actually true. A literature review in the appendix includes three studies that imply consumer discount rates for appliance energy savings average of 37%, but this is not carried through into any analysis of a systemic problem. (A high implicit discount rate with regard to operating costs means that, based on market behavior, consumers appear to put relatively low economic value on the operating cost savings realized from more efficient appliances.)

The "undervaluation" problem is assumed to exist based on assertions backed up by no citations to literature. DOE seeks comment on this issue, which can at least be taken as an acknowledgment of some uncertainty.

DOE considered five alternative "trial standard levels." A chapter titled "Regulatory Impact Analysis" assessed seven non-regulatory alternatives for achieving the chosen trial standard levels.

DOE identified six non-regulatory policy alternatives that feasibly could provide incentives for the same energy efficiency levels as the proposed standards for the products. These are: consumer rebates, consumer tax credits, manufacturer tax credits, voluntary energy efficiency targets, early replacement, and bulk government purchases. The five trial standard levels are variations on the same regulatory approach, but with some pretty big differences in size. This is a wider range of alternatives than federal agencies usually consider, but they are all government focused and all are alternative ways to achieve energy savings by affecting consumer purchase decisions. There is no discussion of a public information campaign, which would appear a logical alternative if indeed consumers generally lack sufficient information about cost savings that DOE claims would follow more efficient appliances. There is also no mention of raising electricity rates (e.g., by raising tax rates), which would be consistent with promoting more efficient energy consumption if indeed there is a significant social cost associated with adverse environmental effects. Higher electricity rates would create greater incentives for both consumers to demand more efficient appliances and for suppliers to invest in improved technology that results in more efficient appliances.

DOE evaluated each alternative in terms of its ability to achieve significant energy savings at a reasonable cost, and compared the effectiveness of each to the effectiveness of the proposed standard. Net consumer savings or costs, national energy savings, and emission reductions are calculated for all 5 trial standard levels. For the alternative policies, market penetration of efficient appliances and national energy savings are calculated, but other benefits are not calculated. Calculations for rebates, tax credits, and early replacement simply assume the amount of money the government spends is equal to what was done in past programs.

The baseline used to calculate energy savings is the Energy Information Administration's forecasts of energy prices and energy use, which do not assume the regulation will be adopted. Calculations adjust for projected increases in voluntary efficiency under the Energy Star program. The estimate base case is clearly identified as the "no new regulatory action" alternative. All of the above are strengths, but the analysis does not consider whether other marketplace developments might increase energy efficiency under the baseline.

Primary costs considered are increases in prices to consumers and decreased profits to manufacturers. These are calculated for all trial standard levels. Cost is not calculated for the policy alternatives, such as rebates or tax credits. Calculations for rebates, tax credits, and early replacement simply assume the amount of money the government spends is equal to what was done in past programs, but this is not calculated. Manufacturers stated that the financial burden of developing products to meet amended energy conservation standards has an opportunity cost due to limited capital and R&D dollars. Investments incurred to meet amended standards reflect foregone investments in innovation and the development of new features that consumers value and on which manufacturers earn a premium. DOE does not address existence or range of possible values of such costs or their effects on future standards of living for U.S. citizens.

Analysis predicts higher production costs, possible higher installation costs, consumers paying higher prices for appliances, and reduced revenues for electric utility firms. Analysis explicitly assumes, without substantiation, that maintenance and repair costs would not increase. It also discusses the cumulative regulatory burden affecting the manufacturers as a result of other pending rulemakings or legislation, but it does not appear to take these costs into account in the calculations.

Analysis calculates change in purchase price of refrigerators and change in operating cost due to increased energy efficiency for each trial standard level. It does assume a 37% discount rate to predict consumer purchase behavior, which is what economic research seems to show.

Net changes in relative prices of refrigerators are used, along with estimated elasticity of demand, to predict future purchases in the presence of the standards. In the economics literature, DOE found only a few relevant studies of appliance markets. No studies use time-series data of product price and shipments data after 1980. The analysis claims that the literature suggests that the demand for appliances is price-inelastic, thus suggesting that higher product prices will not significantly deter consumers from purchasing more efficient appliances. It is not clear how accurate these predictions are, because manufacturers indicated some product features will change, which changes the nature of the product. DOE also stated that a number of manufacturers expressed concern that higher retail prices could alter consumers’ decisions to repair or replace their standard-size refrigerator-freezers. Another chapter estimates employment effects. DOE stated that some manufacturers believed the higher standards could force them to move their remaining domestic production to Mexico to take advantage of cheaper labor. Indirect employment impacts that occur because of the imposition of standards may result from consumers shifting expenditures between goods (the substitution effect) and from changes in income and overall expenditure levels (the income effect).

Analysis presents low, high, and primary estimates of costs at various discount rates. In addition to using probability distributions to characterize several of the inputs to the calculation, DOE developed samples of individual households. DOE performed the life-cycle and payback period calculations for each household in the sample to account for the variability in energy consumption and/or energy price associated with a range of households. Based on the Monte Carlo simulations for each efficiency level, DOE calculated the percentage of consumers who would experience a net life-cycle benefit, a net life-cycle cost, or no impact.

A table shows benefits, costs, and net benefits of the chosen standard level. This is only done for the proposed standards, not for all trial standards, but it could easily have been done. The benefit figure is a bit unusual because it nets out cost increases to consumers when calculating consumer benefits instead of categorizing these as a cost. Net benefits are not calculated for policy alternatives.

Cost-effectiveness is not explicitly calculated. With some work, it could be calculated for each trial standard level. It could not be calculated for the policy alternatives because costs are not calculated for the policy alternatives. The analysis shows the payback period for consumers, which is one type of cost-effectiveness measure but not a measure of social cost-effectiveness.

Especially informative are calculations showing the percentage of households that will bear net costs or receive net benefits when increased appliance costs are weighed against decreased energy usage. A chapter of the analysis calculates costs for low-income and senior households and shows percentages that will bear net costs or receive net benefits, but concludes these differ little from the averages. DOE interviewed manufacturers, found only one that qualifies as a small business, and did not analyze the effects on this company separately. Consumer and industry analyses implicitly show how the burden is split between consumers and producers, but this is not really drawn out. DOE admits there may be negative effects on the actors involved in electricity supply (power plant providers, fuel suppliers, electricity generators, and electricity distributors). However, because the distribution of electricity is regulated everywhere and its institutional structure varies, DOE chose not to assess impacts on actors involved in electricity supply from reduction in electricity demand.

Some consumers gain, if we presume the 3 or 7% discount rates are the "correct" ones. It is refreshing to see a hard analysis showing the percent of consumers that will actually receive benefits. A general equilibrium model estimates that employment will increase in other sectors because other sectors of the economy are more labor-intensive than electricity production. Analysis notes that the social cost of carbon figures are global benefits, not just U.S. benefits.