Energy Efficiency: Now Free to Consumers

The government is really bad at guessing how much extra we'll pay to make appliances energy efficient. That's awesome!
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The government is really bad at guessing how much extra we'll pay to make appliances energy efficient. That's awesome!


Mandated product improvements for the public good, say seat belts or better mileage for cars, often get shot down, or at least shot at, because of their presumed cost. Apart from the Libertarian impulse, these are usually delaying actions thrown up by industries reluctant to spring for things that won’t give them a competitive advantage but will eat into their profit (or foist higher prices onto consumers).

So it’s a little bit of good news to know that improved energy efficiency in appliances, mandated nationally in the United States at least since 1987, is coming in cheaper than predicted—as it always has. That’s the verdict of a new report from two interested observers, the American Council for an Energy-Efficient Economy and the Appliance Standards Awareness Project. Since the White House is pushing for even greater efficiency as part of President Obama’s Climate Action Plan, the findings should make at least part of that plan easier to swallow for those who hate to be ordered to eat their vegetables.

Last summer Brookings Institution economist Ted Gayer and Vanderbilt law professor W. Kip Viscusi blasted the federal government (PDF) for “overriding consumer preferences” with efficiency mandates that assume people are irrational:

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.

The White House puts a different shine on this particular plate of broccoli, even as it heaps on some peas:

In President Obama’s first term, the Department of Energy established new minimum efficiency standards for dishwashers, refrigerators, and many other products. Through 2030, these standards will cut consumers’ electricity bills by hundreds of billions of dollars and save enough electricity to power more than 85 million homes for two years. To build on this success, the Administration is setting a new goal: Efficiency standards for appliances and federal buildings set in the first and second terms combined will reduce carbon pollution by at least 3 billion metric tons cumulatively by 2030 – equivalent to nearly one-half of the carbon pollution from the entire U.S. energy sector for one year – while continuing to cut families’ energy bills.

Oddly enough, efficiency standards for white goods—quite unlike vehicle mileage standards—had traditionally been accepted as pretty benign. Perhaps that’s because they always come in cheaper than expected....

The source of the original estimates on the high side was the U.S. Department of Energy, which is tasked by law with figuring out how much extra the new rules will cost during the rule-making process. Between 2000 and 2010, the period covered by this report, in every case the manufacturers’ selling prices came in under the estimate, “generally substantially so.” (The manufacturers’ selling price is not the same as the retail price.) Moreover, this is the same pattern observed in prior years in studies by the Lawrence Berkley National Lab and the efficiency council.

Looking at products ranging from refrigerators and electric water heaters to commercial air conditioners and lighting ballasts, on average a manufacturer’s price dropped $12 on the new item instead of rising the DOE-predicted $148. (Using the median, as opposed to the average, took away any savings but still produced a price rise of only nine percent of the predicted amount.)

Before mandating zero energy use in hopes that the resulting products will be free, there are some non-standards-related reasons likely at play. For example, appliance prices have been falling steadily for almost half a century. The report authors note that their remit didn’t include looking at different kinds of efficiencies—say in manufacturing or outsourced labor costs—but they speculate that innovation likely arises as products and production lines are redesigned, and manufacturers find ways to shave costs in what are generally pretty staid items.

The report recommends that the Department of Energy analyze what went awry in its past analyses and learn from experience for future or delayed standards, or perhaps provide a range of possible costs. But what would be their incentive? It wasn’t by design, but the current plan—of surprising customers with good price news, even as they do right by the environment—seems to be working just fine.