The Hundred Dollar Bill on the Sidewalk

David Roberts writes about energy efficiency:

When smart energy advocates claim that shifts in policy can produce large dividends, they’re inevitably dismissed as promising "something for nothing." Dig into that phrase a little and at its root you find faith: the faith that if "something" were available, rational market actors would already have acted to obtain it. The claim that government can make (or induce) investments that offer substantial returns simply doesn’t compute.

But energy efficiency refutes that view. Studies show -- at this point beyond reasonable doubt -- that there is money lying on the ground that nobody’s picking up. Lots and lots of money. This isn’t some marginal phenomenon. We’re talking about "cost-negative" investments that can in the next few decades increase the aggregate efficiency of the economy by 20, 30, 50 percent. That’s enormous. That’s a central fact of our economic life, not a peculiar marginal phenomenon. People are behaving irrationally on a massive, massive scale.

This point is largely correct, but it needs to be said just how it is correct. To begin with, an energy efficiency investment is "cost-negative" so long as you take into account the lower operating costs over some specified payback period, or even over the entire operating life of the investment. Based purely on the sticker price, though, it's rarely the case that the more energy-efficient item costs less than the less energy-efficient one. To be sure, if you go to buy, say, an air conditioner, as I did recently, you'll see attached a yellow slip of paper from the Federal Trade Commission that says what the average yearly cost of operation is, and how it compares to other items in its class. That's helpful, but it doesn't go nearly far enough to overcome the average person's tendency to think primarily of the upfront expense and leave the cost-benefit analysis for later. If we want to encourage more intelligence in our energy consumption, we need to be much more aggressive in prodding consumers into making more energy conscious decisions. (And in case you were wondering, I got a small 5,200 BTU unit; it isn't Energy Star rated, but that was only because there were no such units available in that class when I went to shop -- which, in a way, proves my point.)

At the same time, while changing individual behavior is undoubtedly important (see, e.g., Felix Salmon on Google's new PowerMeter software or my own post on the subject), inducing large-scale increases in energy efficiency will require attacking the problem at, well, a larger scale. This is the rationale behind the push for revenue decoupling for electric utilities in the US, as well as other schemes like energy efficiency portfolio standards and "white certificate" trading programs. (See this Economist article for an overview of the issues involved.) I would also add that, pace Roberts' assertions about the failures of standard economics with respect to energy efficiency, a stronger price signal would go a long way toward making our energy regime more intelligent. The oil price boom certainly convinced many that gas guzzlers are a thing of the past, even after the dramatic dropoff last fall and winter. And while electricity prices have increased significantly over the past decade, that has to be set against the much longer decade-on-decade decline:



Granted, it's also true that energy intensity, both in the US and worldwide, has been declining over the past 30 years or so; but I see no reason why an increase in coal prices, via a carbon cap, couldn't help that process along more quickly.

NB: Post title refers to the old joke about economists:

Two economists are walking down the street. One sees a hundred dollar bill lying on the sidewalk, and says so.

"Obviously not," says the other. "If there were, someone would have picked it up!"