“The authors (including a former Obama administration chief economist) compared the energy consumption and thermostat settings of households who signed up for the U.S. Weatherization Assistance Program (WAP) with those who didn’t. The energy consumption of program participants dropped by 10% to 20%, barely 40% of what engineering models predicted. The savings equated to $2,400, less than half the $5,000 spent on the energy efficiency investments…

…The authors put the annual return on the investment at minus 2.2% over 16 years, much worse than the historical returns on bonds or stocks.

Of course, energy efficiency subsidies can be justified by the fact that all of society benefits from reduced carbon-dioxide emissions. But the study’s authors reckon that WAP spent a whopping $329 to eliminate one metric ton of carbon emissions. That’s 10 times the $38 that the White House reckons is the all-in cost to society of a ton of carbon, meaning WAP flunks the cost-benefit test by a wide margin.

In fact, in some ways the program left others worse off. Natural-gas and electricity distribution entail high fixed costs, which are shared among all customers. When some customers consume less, others must shoulder more of those fixed costs. Incorporating all social costs and benefits dropped the program’s return to minus 9.5%.”, Greg Ip, “Energy-Efficiency Programs ‘Nudge’ Consumers in the Wrong Direction”, The Wall Street Journal

Economy

Energy-Efficiency Programs ‘Nudge’ Consumers in the Wrong Direction

Study challenges idea that consumers are irrational when they pass up federal subsidies to weatherize their homes.

By Greg Ip

Energy efficiency has long appealed to political leaders trying to combat climate change without hurting their economies. It holds out the promise of policies that both reduce fossil-fuel consumption and save consumers money.

The rationale is that consumers are shortsighted in failing to insulate their homes or buy a more efficient appliance, and should be “nudged” in that direction.

But a new study challenges that premise. The study of households who received federal subsidies to “weatherize” their homes found the efficiency investments cost far more than they save. So consumers may not be irrational when they pass up such investments: the programs simply aren’t as beneficial as their promoters think.

The paper has important implications for current efforts to reduce planet-warming emissions of carbon dioxide. Energy efficiency programs are politically popular but may be far more expensive than mechanisms that rely on price signals. These include carbon taxes (admittedly, a political non-starter) or tradable emissions allowances, one of the options available to states for meeting proposed new federal limits on greenhouse-gas emissions.

The notion that consumers hurt themselves by passing up investments that reduce their fuel and electric bills has become known as the “energy efficiency gap.” Behavioral economists, who use psychology to explain seemingly irrational behavior, think impatience, lack of information or inertia might explain the gap.

Many government programs seek to close that gap, for example by prodding utilities to equip customers with more-efficient light bulbs. The U.S. Weatherization Assistance Program, which dates to 1976, offers subsidies to low-income families to make their homes more energy-efficient with new furnaces, attic and wall insulation, and weather stripping. It got a big boost as part of the Obama administration’s economic stimulus package in 2009.

Michael Greenstone of the University of Chicago, and a former chief economist in the Obama administration’s Council of Economic Advisers, and Meredith Fowlie and Catherine Wolfram of the University of California at Berkeley used a randomized control trial to determine whether the savings for WAP predicted by engineering models were borne out in reality.

The authors focused on a sample of more than 30,000 WAP-eligible households in Michigan. Of these, a quarter were encouraged to apply for the program via home visits by field workers hired for the study, and via phone calls. Households were reluctant to sign up, though it cost them nothing.

The authors then compared the energy consumption and thermostat settings of households who signed up for the program with those who didn’t. The energy consumption of program participants dropped by 10% to 20%, barely 40% of what engineering models predicted. The savings equated to $2,400, less than half the $5,000 spent on the energy efficiency investments. The authors put the annual return on the investment at minus 2.2% over 16 years, much worse than the historical returns on bonds or stocks.

Of course, energy efficiency subsidies can be justified by the fact that all of society benefits from reduced carbon-dioxide emissions. But the study’s authors reckon that WAP spent a whopping $329 to eliminate one metric ton of carbon emissions. That’s 10 times the $38 that the White House reckons is the all-in cost to society of a ton of carbon, meaning WAP flunks the cost-benefit test by a wide margin.

In fact, in some ways the program left others worse off. Natural-gas and electricity distribution entail high fixed costs, which are shared among all customers. When some customers consume less, others must shoulder more of those fixed costs. Incorporating all social costs and benefits dropped the program’s return to minus 9.5%.

Customers shop for light bulbs in Chicago. Some government programs prod utilities to equip customers with more-efficient bulbs. Photo: Scott Olson/Getty Images

A spokesman for the Department of Energy, which runs the program, disputed the study’s findings. He said preliminary results from an upcoming study by the department and Oak Ridge National Laboratory show that the program’s savings exceed its costs. Annual energy savings, he said, come to $300 million a year.

There are numerous energy efficiency programs and not all can be compared to WAP because they have different goals. Utilities, for example, may be trying to shave “peak” demand which would otherwise require expensive, additional generating capacity.

Still, Mr. Greenstone says the paper’s implications could go well beyond WAP, because much of what economists know about similar programs is based on engineering models rather than field evidence.

That such programs are expensive “in no way removes the threat that climate change poses to our well being,” says Mr. Greenstone. But, he says, climate-change policies shouldn’t be exempt from “standard analytical tools. We need to develop a playbook of different approaches, and rank them based on cost per ton.”

For example, the cost of an allowance to emit a ton of carbon dioxide on New England’s Regional Greenhouse Gas Initiative was recently a little over $5. On California’s cap-and-trade auction, it’s a little over $12. Both easily pass the cost-benefit test. Markets aren’t perfect, as behavioral economics has shown, but they can still be powerful tools for saving the planet.

Posted on June 24, 2015, in Postings. Bookmark the permalink. Leave a comment.

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