The Illusion of Energy Efficiency

As we enter the summer of our energy discontent, battle lines are forming. Republicans argue that we’re short of energy and need more. Democrats argue that we should use what we have more efficiently. Well, who’s going to argue against efficiency? Nobody. Who’s going to argue against government promotion of energy efficiency? We will.

The main reason that energy is being used “inefficiently” is that government subsidizes its use. In California for instance, skyrocketing natural gas prices have increased electricity costs from 3 cents per kilowatt hour to 25-50 cents per kilowatt hour during peak demand periods. Because Californians are only paying a fraction of that, even after the recent rate hikes, they’re naturally using more electricity than they would had the government not stepped in with price controls.

Ironically, the environmentalists—the lobby crying loudest for increased conservation— are also among the most militant supporters of the price caps. They think they can get around the damage being done by the price caps by setting up countervailing subsidies. The favored method is to subsidize consumer purchases of energy efficient air conditioners, refrigerators and the like.

The problem is that the demand for the most energy intensive services, such as home cooling, is responsive to price. Look at what happened last year during the gasoline price spike. For the first time in a non-recession year, gasoline consumption went down in absolute terms. The widespread belief that consumers do not adjust their behavior in the teeth of increased energy costs is a politically convenient myth.

Now read this carefully: Energy efficient appliances reduce the costs of operation. This might not be a big deal when it comes to, say, the television set (we won’t watch more TV just because it costs a little less to turn on the set). But for appliances like air conditioners that make all the difference during peak demand periods, energy efficiency reduces the marginal cost of energy services and thus increases—not decreases—energy consumption. This is a well-known phenomenon called the “rebound effect.”

The same goes for automobile fuel efficiency. Environmentalists argue that increasing the miles per gallon of the cars we drive would save more energy than increased drilling could produce. But the data show that fuel consumption goes up whenever automobile fuel efficiency goes up. Nearly all the gains in fuel efficiency disappear once we account for the demonstrable increases in driving that such investments produce.

It’s not as if we haven’t tried such programs before. Utilities nationwide have spent about $20 billion since the mid-1980s to subsidize ratepayer investments in energy efficiency. Yet the data reveal that utilities heavily invested in such technologies experienced no reduction in electricity demand compared with utilities that largely avoided such subsidies.

There are several reasons beyond the “rebound effect” for this. First, most consumers who take advantage of these programs are free riders: They would have bought energy-efficient devices with or without handouts. Second, the high initial cost of many of these technologies (like the fabled $40 light bulb) means that those investments can take years to pay off even after the subsidy. Other investments are more attractive by comparison. Third, many of these “wonder-techs” are poor performers, trading off other consumer conveniences to eke out a little more efficiency at the margin. Having been burned before, people are leery of pitching thousands of dollars worth of appliances with years of life left in them to embrace unknown technologies that often have their own problems and only save money after years of operation—if ever.

What about the claim that, “If only everyone in America would keep their tires properly inflated, we would save googols of oil,” or, “If everyone were to carpool or take mass transit, we would save more energy than contained in the Arctic National Wildlife Refuge.” Maybe. But absent a million- member energy police, it’s not going to happen.

The truth is that people will conserve energy when they think the inconveniences of doing so are outweighed by the money saved. Reducing the marginal cost of energy consumption is the wrong approach. Government programs that put their faith in subsidized energy conservation were what helped give us the California mess. Only by letting prices do their job can energy conservation be achieved. Everything else is political smoke and mirrors.

Jerry Taylor is director of natural resource studies and Peter VanDoren is editor of Regulation.