The Failure of Government Energy Conservation

December 30, 1997 • Commentary

Diplomats from around the world are now meeting in Kyoto, Japan, to develop plans to reduce global warming. They are likely to repeat the conclusions of a recent U.S. Department of Energy study, which argued that the United States could reduce emissions of greenhouse gases if consumers adopted off‐​the‐​shelf technologies such as more energy‐​efficient vehicles, lighting, appliances and building materials. But those devices cost money, and many government officials worry that consumers won’t buy them.

What should government do about the apparent failure of consumers to use energy efficiently? If elected officials proposed policies to ban the purchase of toiletries at 7‐​Eleven stores or gasoline at expensive service stations, most of us would think that those officials had lost their minds. But when the subject is energy use rather than razor blades, many thoughtful people believe that the government should use both carrots and sticks (subsidies and mandates) to encourage more cost‐​effective energy‐​consumption behavior.

Americans’ apparent resistance to energy‐​efficient appliances and technologies is evidence that the market is not working, according to many environmentalists. They argue that consumers need government to help them make better decisions. Moreover, environmentalists say that government should encourage consumers to reduce energy consumption to reduce the emission of greenhouse gases. Such interventions, we are told, will not only help the environment but will prove economically beneficial as well.

Why don’t consumers make what appear to be no‐​brainer energy‐​saving investments? Perhaps they are smarter than we give them credit for. In the late 1970s and early 1980s many prominent energy analysts argued that oil prices, adjusted for inflation, would double by the year 2000. Given those projections, many electric utilities adopted costly nuclear‐​power and renewable‐​energy generation technologies to reduce fossil‐​fuel use. The actual price of oil in 1997 is only about half of the inflation‐​adjusted 1979 price and about equal to the real price of oil in the late 1950s and early 1960s. The nuclear and renewable‐​energy investments are now seen as expensive turkeys, and the same esteemed energy analysts tell us that we need to bail out the utilities that invested in those costly mistakes.

The general point is that energy‐​conservation investments have large payoffs only if energy prices rise; they lose money if energy prices fall, as they have since 1985. Consumers recognize that and demand very large returns on energy‐​conservation investments before they make them. Consumers also are reluctant to invest in energy‐​saving technologies because such investments are much less liquid than alternatives. Extra wall insulation is more difficult to resell than investments in stocks or bonds.

Another possible explanation of consumer reluctance to make energy‐​saving investments is the difference in performance, in some cases, between traditional and energy‐​saving technologies. Many people do not like the light given off by fluorescent fixtures and don’t use them even though they use less electricity. Those who bought energy‐​saving diesel cars in the 1970s spent more time in the shop than they did on the road.

A more subtle explanation of consumer reluctance is the normal process by which any new technology diffuses through the population. Economists who study cost‐​saving technologies have concluded that even in those cases in which the cost savings are very certain, the rate at which a population adopts cost‐​saving investments follows a bell‐​shaped curve. Some consumers adopt a technology initially, the mass middle follows, but others change their behavior very slowly.

But what about the hard cases? What should government do if people do not adopt cheap, energy‐​saving technologies that have no obvious performance flaws relative to traditional alternatives many years after introduction? Well … nothing.

Markets are valuable because they convey information through price signals, let individuals make decisions based on those price signals, and then require them to live with the consequences. If people spend more money than they need to, that’s OK because they suffer the consequences. We would not give the time of day to proposals to require people to purchase razors at K‐​Mart because they are cheaper or to attend college because the return on a college education far exceeds that on other investments. We should treat proposals to require or subsidize energy‐​conservation investments with similar skepticism.

If global warming is a problem (and it isn’t), then create carbon dioxide emission rights and let individuals decide how to respond. We shouldn’t micromanage market behavior as an indirect method of limiting those emissions. We micromanaged behavior during the energy crises of the 1970s, and that gave us the multi‐​billion‐​dollar synfuels boondoggle, a disastrously wrongheaded ban on natural‐​gas‐​fired electricity, and nuclear‐​power and renewable‐​energy contracts that make utility rates so high today. Haven’t we learned our lesson?

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