The Simplest Incentive to Stimulate Energy Savings

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Home energy retrofit programs (I’m talking about programs this month), indeed most energy-efficiency programs, try to entice people to do things differently to reduce their energy use. Congress puts in a tax credit for furnaces or new homes that meet certain efficiency standard. They set the CAFE standard for cars. Utilities, under pressure from their PUCs, set up free audit programs, or water heater wrapping programs, or air-conditioner tune up programs.

We spend a lot of money on activities that don’t directly deliver on the stated goal of reducing energy use. We often work against buying decisions people would otherwise make, but only in narrow circumstances.In doing so, we then create administrative nightmares and Byzantine and often conflicting sets of regulations, rules, and incentives in an attempt to herd people in the right direction. This is messy, expensive, and inefficient. And taking this path, we limit creativity to prescribed paths, sort of pre-defined creativity.

If what we’re really trying to see is more energy-efficiency behavior, there is an easier and much more, er, efficient, way to do it. All we have to do is raise the price of energy. This would naturally push the desire to reduce energy costs, and energy use, throughout all decisions, big and small.

Call it a tax if you want. But you don’t have to make it about big government. You can give every dime of it back to everyone in the country as an “efficiency dividend”, tax refund, or whatever you want to call it. And over time people could decide whether they wanted to keep spending all their money, including their annual dividend, on energy, or whether they preferred to spend it on college education for their kids, vacation, or beer.

Speaking of time, there’s no need to jolt the markets, businesses or consumers, overnight. This could be phased in over a decade. Using gasoline as an example, we could telegraph the plan to raise gasoline taxes by 50 cents per year each year other the next decade, giving people time to plan, react, and adapt. (And remember, they get that average tax amount back at the end of the year, whether they chose to reduce their energy use or not.)

Simpler. Clearer. More effective. And more efficient.

And unfortunately, given our current political climate, very unlikely to happen. (But political climates change, too!)

Addendum: The Economist makes an argument that the time to do this is now. David Goldstein of NRDC argues that price has little impact on energy use. (Goldstein is wrong in this analysis. Using historical pricing trends to declare zero elasticity doesn’t take into account growing demand, market awareness of volatility so that responding to price spikes doesn’t happen on short time horizons, time lag required for such investments to pencil out, the increasing cost-competitiveness of alternative, and more. One of his big caveats is misplaced, too–carbon fee don’t have to exist in a policy vacuum.  But it’s worth considering his arguments.)

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About the Author:

Mike Rogers is the President of OmStout Consulting. A nationally recognized expert in residential energy-efficiency, he works with contractors and programs to scale sustainable market approaches to improving homes. More on Google+

Comments

  1. Russ Rudy  October 15, 2013

    Mike,
    I may be rehashing old concepts, but it seems to me that the incentive to change energy behaviors by raising prices for the consumer tends to approach the issue from the wrong side of the value equation. For very low income consumers who tend to live in the least efficient house (whether owned or rented), the option of making dollar investments in energy efficiency improvements is probably non-existent. Moreover, political bias has limited the ability of low income weatherization programs to adequately meet the efficiency needs of this population. The reality for the very low-income is level-payment plans and a seasonal cycle of shut-offs and reconnects.

    A greater potential for success with efficiency programs might be realized if the utilities became the focus of incentives. For example, some sort of system which calculates the total number of service points (houses), a utility carries and pays a fixed dollar amount per unit to the utility, might provide an incentive the utility to invest in improving the efficiency of ALL houses, but especially those that use more energy, thus reducing the utilities cost for providing service and increasing utility profit from each service unit. This same methodology might motivate the utility to invest in distributed generation and co-generation systems which have been demonstrated to be more efficient and environmentally friendly than large centralized production, even for small scale users.

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    • Mike Rogers  October 15, 2013

      Hi Russ (how the heck are you–it’s been a while!),

      I’ll be at the front of the line when we queue up to urge support for low-income families. But we cannot deliver the efficiency needed by looking at low-income alone. Raising the cost of energy, and then rebating the full amount of the surcharge (uniformly by person, not be usage!!) to a large extent offsets the regressive nature of the energy tax. On average, low-income folks would be no worse off, although because of the reasons you state, probably not better off, either. We’d still need need to find ways to help them, such as through the Weatherization Assistance Program. I’ll note that not all energy savings require a dollar investment. Some are purely behavioral, so even some low-income folks would be able to retain their some or all of their dividend whether for efficiency investments or the kids’ education.

      The rest of us would have a built-in incentive to use less energy, the less we used, the better off we’d be, whether through efficiency or behavioral approaches. And on average again, even people who did nothing would be no worse off than they are now. They’d simply have to use their entire dividend to pay for energy, rather than a trip to the Grand Canyon.

      The scheme you’re suggesting might work–although it’s harder to say because it sounds complicated. Continuously complicated. It would require a large of bureaucratic rules. For example, how would the utility safeguard against people leaving their windows open all winter, their lights on all night, and other behavioral drivers of energy use. The can of worms and the resulting complication increase costs and decrease effectiveness.

      Complicated hasn’t been working too well for us. Make it simple.

      reply
  2. Aaron Linfante  September 10, 2013

    Health, Safety, Comfort, Durability and Efficiency. As natural as the order seems, programs seem to promote the latter. Perhaps because it’s quantifiable, but as measurable as efficiency is, so is health and saftey and even comfort to a certain extent. You’re right to suggest a refocusing as incentives only produce a want for more incentives.

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    • Mike Rogers  September 10, 2013

      True, Aaron. With one caveat. We can measure energy savings, but most programs don’t even do that very well! (Or if they do, they do a good job hiding the results from us.) That subject comes later in this series!

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