Congress told energy efficiency regulations don't address environmental problems

April 9, 2013
An economist tells the Subcommittee on Energy and Power of the House Energy and Commerce Committee that market-oriented approaches to control pollution are much more cost-effective than government regulations such as energy efficiency mandates on vehicles and appliances

Politicians frequently claim energy-efficiency regulations reduce pollution, but the government’s own estimates confirm that the environmental benefits are negligible and are often outweighed by the societal costs they impose.

So says Ted Gayer, co-director of economic studies at the Brooking Institution, a liberal think tank. Speaking before the Subcommittee on Energy and Power of the House Energy and Commerce Committee, Gayer claimed regulators have deviated from well-established principles of cost-benefit analysis to justify expensive energy efficiency regulations by asserting that consumers and companies are making “irrational purchase choices.” To make the math work, regulators claim consumers benefit from government mandates that restrict choice.

Gayer says the one-size-fits-all philosophy of energy efficiency mandates ignore the substantial diversity of preferences, financial resources, and personal situations that consumers and firms must align to make their decisions. Interestingly, Gayer also says that energy efficiency mandates do not promote conservation. They lower the cost of using an appliance, reversing some of the energy savings.

For example, he says, an energy efficiency standard for air conditioners increases the incentive to run the air conditioners longer. Moreoever, energy efficiency standards apply only to new products, which can create incentives for consumers and firms to retain older (and thus less energy-efficient) products.

All in all, Gayer says government regulators behave as though they are better at judging how consumers should spend money on appliances and vehicles than are consumers themselves. And many regulations cost more than they save, Gayer says. "(Researcher) Kip Viscusi and I examined a number of recent government regulations that mandate energy efficiency standards for vehicles and appliances," says Gayer. "Despite the fact that these regulations are frequently touted as pollution-reducing initiatives, the agencies’ own estimates confirm that the environmental benefits are negligible and are often dwarfed by the societal costs they impose. In order to justify these expensive regulations, the agencies assert that consumers and firms are making irrational purchase choices and that they therefore benefit if product choices are restricted to those that meet the agencies’ mandated standards."

Dismissing consumer preferences as irrational is a significant departure from traditional economic thinking, says Gayer. "By claiming regulatory benefits from the correction of so-called 'consumer irrationality,' agencies are shifting regulatory priorities from the important goal of reducing the harm individuals impose on others (through pollution) towards the nebulous and unsupported goal of reducing harm individuals cause to themselves by purchasing purportedly uneconomic products," said Gayer. "This shift from environmental protection to consumer protection results in a host of costly regulations that are far less effective than a government policy that simply sets a price for pollution. It also establishes a dangerous precedent: If agencies can justify regulations on the unsubstantiated premise that consumers and firms (but not regulators) are irrational, then they can justify the expansive use of regulatory powers to control and constrain virtually all choices consumers and firms make."

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