|July 7, 2009|
|Should Uncle Sam Turn Down Our Lights? |
Should the federal government force Americans to use less energy?
Congress is considering legislation that would require residential and commercial buildings to be 50 percent more energy-efficient within the next five to six years. Those account for about 40 percent of U.S. energy consumption, the most of any sector. Building standards have traditionally been the purview of local governments, but a new coalition of business, electric industry, and consumer and environmental groups is pushing for national action.
Meanwhile, President Obama recently announced a federal lighting standard aimed at cutting the amount of electricity used by certain industrial light bulbs. He also dedicated $346 million in stimulus funds to boost energy efficiency in new and existing homes and commercial buildings.
Should Washington mandate tougher energy standards for appliances, equipment and buildings? Or can industry and consumers take sufficient energy efficiency actions on their own?
Should Uncle Sam turn down our lights? This isn’t the right question. The goal behind efficiency legislation is to reduce the amount of energy used to provide a given service—not to reduce the quality or quantity of that service. Uncle Sam’s bulb isn’t so dim as to force Americans to use less light; rather, legislation being considered in Congress would stimulate the development and deployment of new technologies that provide the same level of service—be it lighting, heating, cooling, dishwashing, etc.—but use far less energy to do it.
Why should government do this? If energy efficiency is a desirable trait, won’t the market simply produce more efficient goods and services on its own? Market forces, primarily concern over high and volatile energy prices, have driven impressive gains in energy efficiency over the last several decades. But we know there are still significant energy efficiency opportunities that remain untapped. For example, a 2007 analysis conducted by McKinsey & Co. estimated that technically achievable energy efficiency improvements could offset approximately 85 percent of the projected growth in electricity demand out to 2030.
While many of these efficiency improvements are technically cost-effective, a variety of “market failures” impede their implementation. The fact that tenants are typically responsible for paying electric bills, whereas landlords are usually responsible for capital investments that improve energy efficiency, leads to split incentives that can obstruct efforts to reduce energy use. Informational barriers are also a complicating factor. Managers responsible for purchasing computer equipment and other appliances often have little knowledge about the benefits of energy efficiency. As a result, they base purchasing decisions on upfront costs and fail to consider longer-term savings that may result from buying a more energy efficient piece of equipment.
Of course, the key driver today behind new energy efficiency requirements is concern about climate change. Through the American Clean Energy & Security (ACES) Act of 2009, Congress is debating legislation that includes a greenhouse gas cap-and-trade system that would ultimately reduce emissions 83 percent below 2005 levels by 2050. The bill will put a price on carbon, thereby counteracting the central market failure associated with climate change: the social costs of greenhouse gas emissions are not priced into the costs of energy production.
Putting a price on carbon is essential but it is not a silver bullet and it does not obviate the need for additional policies that promote energy efficiency, because it does not address the kinds of market failures mentioned above (nor is it designed to). Detailed modeling of ACES conducted by the EPA indicates that the price signal generated by cap and trade will indeed encourage consumers to use less energy, through conservation and switching to cheaper, less energy-intensive products. However, when the price signal is combined with the energy efficiency measures included in the bill, both emissions and the overall macroeconomic cost of the program are lower. The efficiency policies included in the ACES Act are therefore critical as they drive relatively low-cost measures that reduce electricity demand, making it easier and cheaper for society to meet emissions reduction targets.
Federal, state, and local governments all have a role to play in setting and enforcing efficiency requirements. The ACES Act recognizes this: under the legislation, for example, states can adopt a national building code developed by the Department of Energy, or draft their own code, provided it achieves at least the same level of savings. As a result, the legislation strikes a good balance by setting a strong national floor but giving states the freedom to innovate and be more aggressive if they so choose.