Energy Efficiency The Fifth Fuel Part B Peter
Energy Efficiency: The Fifth Fuel Part B Peter Schwarz Professor of Economics, Belk College of Business and Associate, Energy Production and Infrastructure Center (EPIC) UNC Charlotte of 15 1
Outline • Introduction • Energy Efficiency and Economic Efficiency • Energy Efficiency in Production and Consumption • Energy Efficiency Gap • Rebound Effect • Government Intervention to Encourage Energy Efficiency of 15 2
Energy Efficiency Gap (1) • Energy efficiency gap • Difference between observed level of EE and theoretically optimal level • Consumers undervalue a $ of energy savings • E. g Drivers value a $ in saved fuel at $0. 76, in present value terms (Allcott and Wozny (2014)) • A “misperception problem” (Parry, Evans, and Oates (2014)) • Distinguish EE gap from EE paradox • EE Paradox (Jevons (1865)) • Increased EE leads to increased energy intensity of existing energy services as well as increased demand for additional energy services. • Partially offsets energy savings (Rebound effect- coming up shortly) • At extreme, an increase in EE actually increases energy use • Jevons Paradox • Also known as the backfire effect, an extreme case of rebound • EE Gap a potential market failure • EE Paradox (and Rebound and Backfire Effects) not a market failure of 15 3
Energy Efficiency Gap (2) • Reasons for an EE Gap • Consumers apply an above-market discount rate • Purchase and utilization of room air conditioners implies a 20% discount rate (Hausman (1979)). • Purchase of water and space heaters reflect a similar discount rate (Dubin and Mc. Fadden (1984)). • Example: • Hunt is comparing two refrigerators, a standard model and an energy efficient one. The refrigerator life is expected to be 10 years. The energy-efficient model costs $100 more, but saves $20 a year in energy costs. The market discount rate (cost of borrowing) is 10%, but he applies a 15% rate to energy-efficiency decisions. Should Hunt buy the energy-efficient model? Will Hunt buy it? of 15 4
Energy Efficiency Gap (3) • Bounded Rationality • When faced with difficult decisions, consumers use heuristics–simplified decision rules–rather than evaluating costs and benefits. • Buy EE model if payback period 5 years or less. • Spending $100 on EE refrigerator upfront to save $20/year in electricity bills breaks even in 5 years, so purchase. • EE Gap implies that consumers use shorter payback period for EE decisions than for other decisions (such as should Hunt remodel kitchen? ). of 15 5
Energy Efficiency Gap (4) • Behavioral Economics • Alternative to rational decision-making. • Psychological influences that lead to deviations from rational behavior. • “Framing” • “Nudges” • • A textbook costs $100. Cheap or expensive? It depends whether you are comparing the text to a $200 text or one that costs $20. Pay-As-You-Go plans for electric use. • Knowing you are exceeding your budget may cause you to cut back on use. Envision Charlotte • Buildings have a lobby display showing their energy use compared to other similar buildings. They may reduce their use if they see they are using more than comparable facilities, or as a marketing strategy to advertise their dedication To saving energy. of 15 6
Energy Efficiency Gap (5) • Principal/Agent Problems • Principle sets the objective • Agent carries it out (or not) • Who Pays the Energy Bill in Multi-Unit Housing? • Master- vs. sub-metering • Could the Coase Theorem resolve? Could landlords compensate renters for efficient actions? Or if there is sub-metering, would owners be able to fully capitalize any investments in energy-saving actions? There are substantial transactions costs that might prevent these agreements, starting with the adversarial relationship between landlords and tenants. Even if the two sides are willing to negotiate, the energy-efficiency gap, imperfect information, and high turnover of tenants who cannot recoup long-term investments, leave considerable uncertainty that the two sides will reach an efficient outcome. of 15 7
Energy Efficiency Gap (6) • Reasons why there may not be a gap • Why customers do not do EE audits. • They take time. • The customer has reason to discount the recommendations. • The company doing the audit profits from selling EE improvements. • EE model may differ from conventional model. • Studies have not used up-to-date econometric methods. https: //www. wsj. com/articles/energy-efficiency-programnudges-consumers-in-the-wrong-direction-1435088808 of 15 8
Rebound Effect (1) Positive/Negative from: • Substitution effect by any other name • David Friedman simply calls it the marginal effect Energy efficiency? Economic efficiency? • Or the “takeback effect” (Schwarz and Taylor 1995) • And then there is the “Khazzoum Effect” (Khazzoum 1980) • And perhaps it should be the “Jevons Effect” • And in extreme form, the backfire effect. • Examples • High mileage car driven more intensively • Well-insulated house– turn up thermostat in winter time • Or turn it down? (Dewees and Wilson follow-up to David Friedman: Cold houses in cold climates!) of 15 9
Rebound Effect (2) • Taxonomy of Rebound Effects (from Gillingham et al (2014)) • Direct rebound • • • Implicit P effect of an EE improvement • Includes substitution and income effects. • Can be inferred from price elasticity of demand Pure effect: Holding product characteristics constant Total effect: Allows for change in characteristics (e. g. small car less fun to drive, so total effect < pure effect) • Indirect rebound • Effect of re-spending saved income • On all other goods. • Macroeconomic rebound • Leakage • Less energy use in U. S. reduces global energy price • So energy use increases in other countries • Growth • Higher EE spurs productivity and innovation • And more energy use. of 15 10
Rebound Effect (3) • Magnitude of rebound effects • If small, less of a factor in predicting energy savings from EE. • Davis, et al. (2014) • “Cash for Coolers” program in Mexico • Along the lines of U. S. “Cash for Clunkers” • Trade in A/C, refrigerators for EE models. • Refrigerator replacement reduces electricity consumption by 8% • Prediction ignoring rebound was 32%. • AC replacement actually increases electricity consumption (backfire). • Expensive way to reduce CO 2 • > $500/ton. of 15 11
Government Intervention to Encourage Energy Efficiency (1) • Standards vs. Incentive-Based Approaches • Economists prefer IB approaches wherever possible • Pigou taxes • Coase cap-and-trade • Achieve goal at least cost • Standards achieve goal • But not at least cost • Unless the regulator happens to choose least-cost solution of 15 12
Government Intervention to Encourage Energy Efficiency (2) • Voluntary vs. mandatory standards • Standards • CAFÉ, ENERGY STAR, LEED • CAFÉ mandatory • ENERGY STAR, LEED voluntary • Voluntary programs have the advantage that they allow self-selection • Participants are those who can achieve goal at least cost • Rebate may go to someone who would have bought ENERGY STAR appliance anyway. • A type of free-rider problem • Cost to government (taxpayers), but no benefit • Another disadvantage is that energy-inefficient companies will not participate. • Will not produce ENERGY STAR appliance. • CAFÉ imposes equal mileage standard on all car manufacturers • Allowing car companies to trade mileage requirements will improve the economic efficiency of the program of 15 13
Government Intervention to Encourage Energy Efficiency (3) • Howarth examined U. S. EPA Energy Lights and ENERGY STAR Office Products programs • Finds both to have net benefits • Firms purchased more energy-efficient lights and products. • Limited rebound effects • Programs overcome market failures due to imperfect information, bounded rationality • But what is the counterfactual? • What would these firms have done in the absence of a program? • Free riders? • Technical assistance helped, but at a cost. • We need a better measurement of the net benefit. of 15 14
Government Intervention to Encourage Energy Efficiency (4) • Government Failures • Free riders • Special use of term • Those who get paid for taking energy-efficiency actions who would have done them anyway. • Turn in old car during Cash for Clunkers program that you were about to sell anyway. • Need counterfactual to determine real energy savings • Energy savings from free riders are illusory • And costs society money. • So economically inefficient • Picking winners • Solyndra, Clean Coal, compact cars • Try to use IB approach, so individuals, rather than government, can decide. of 15 15
- Slides: 15