“DOE’s energy efficiency regulations generally have the effect of increasing the cost of products and reducing competition and innovation.”
“In most other cases, it would be better for DOE to scrap its rules and allow private market actors to develop standards and information tools in their place.”
Julian Morris of the Reason Foundation recently submitted COMMENTS OF REASON FOUNDATION ON THE REGULATORY BURDEN REDUCTION in a Request for Information (RFI) by the U.S. Department of Energy (Document Number 2017-10866, Docket ID DOE_FRDOC_0001-3375, 82 FR 24582, 5/30/2017.)
Excerpts from his comments follow. (For the full comments, including footnote sources, see here.)
This comment seeks to address questions raised by the Department of Energy in its Request for Information regarding “existing regulations, paperwork requirements and other regulatory obligations that can be modified or repealed, consistent with law, to achieve meaningful burden reduction while continuing to achieve the Department’s statutory obligations.”
Advance Energy Efficiency and Conservation
Most improvements in energy efficiency and conservation have occurred as a result of competition between producers of goods and services. Such competition motivates producers to use resources more efficiently, in order to reduce costs and thereby offer consumers products at a lower price. In addition, competition drives producers to supply products that themselves use resources efficiently in order to meet consumer needs and wants.
The history of development of modern lighting offers a good illustration of the importance of competition. The incandescent bulb was developed in a competitive race between various entrepreneurs, including Thomas Edison. Subsequently incremental improvements, including the development of the tungsten filament, were also driven by competition between multiple producers. Like the incandescent bulb, the fluorescent bulb was developed over many years by competing entrepreneur-scientists.
The same is true for the LED lights, a technology that has been around for decades but only recently became a viable source of ambient lighting—and where competition continues to drive rapid innovation, leading to improvements in effectiveness, efficiency and cost. As a result of these improvements, over the past 150 years the efficiency of light sources has increased nearly 1,000 fold.
Computers offer another example of the power of competition. Early computers were vast, heavy, expensive and slow. The ENIAC, for example, occupied about 1800 square feet, weighed 30 tons, consumed 160 kilowatts of energy, cost $600,000 (in 1997 dollars), and was capable of processing only about 300 instructions per second. Today it is possible to purchase a fully functioning computer (the Raspberry Pi Zero W) that processes about 870 million instructions per second, consumes less than 1 watt of power, has built-in wifi, can fit in the palm of one’s hand, and costs only $10.
These examples highlight the importance of competition as the driving force behind innovations leading to energy efficiency improvements. While mandates may have contributed in some cases to improvements in energy efficiency, in most cases they have not been a major driving force. Moreover, to the extent that mandates have resulted in efficiency improvements, they have likely in most cases come at the cost of a reduction in other innovations, with adverse effects for society.
All companies subject to an efficiency mandate are effectively forced to divert resources toward compliance with the mandate and away from other investments that might have resulted in innovations of various kinds (including efficiency improvements). Since innovation is both cumulative and combinatory, mandates that reduce the diversity of innovation almost inevitably result in a reduction in overall levels of beneficial innovation.
Claims that mandatory improvements in the efficiency of products are necessary are often predicated on the assumption that consumers do not appropriately value efficiency when making product purchases. (In the context of energy use, this is often referred to as the “energy paradox.”) But this is belied by the evidence, which shows that consumers do rationally factor in the expected savings from more efficient products when making purchasing decisions.
For example, a recent study found a one-to-one correspondence between expected net savings resulting from fuel economy differences between otherwise similar automobile models and the price differential between those automobiles.
Unfortunately, mandatory efficiency improvements have the effect of driving up the cost of new products for many consumers. As a result, some consumers who might have purchased a new product had it been less expensive may delay their purchase of a product whose price has been driven up by the efficiency mandate, or, worse, not make a purchase at all.
Take air conditioners, for example. In locations where air conditioning is used for many days of the year, consumers are likely to be willing to pay for more-efficient units. But in places where air conditioners are used only rarely, consumers are less likely to be willing to pay more for more efficient units because the net cost, taking into account the cost of electricity and the amount the unit will be used, does not justify such a purchase.
Since air conditioning dramatically reduces mortality on very hot days, it is important that the price of air conditioning units not be driven up unnecessarily. The DOE has partially taken this into consideration by issuing differential energy efficiency requirements for air conditioning units sold in different locations.
However, a better approach would be simply to remove such requirements altogether and allow consumers to make decisions concerning the desired efficiency of their air conditioners based on their expected use of the product. In areas where air conditioners are used rarely, consumers could then purchase less expensive, less efficient units, enabling them more cost-effectively to manage heat and humidity when necessary. Such a change would likely save lives.
Efficiency standards can have other perverse effects. Take the mandated reductions in water flow for shower heads. To comply with federal rules, new shower heads typically incorporate regulators to limit the flow of water to 2.5 gallons/minute. Many consumers prefer more powerful showers and remove these regulators.
It is likely that some consumers who remove the regulators entirely might, if given the option, choose to regulate water flow at a rate that still enables them to take a satisfying shower—but that option has largely been precluded by the mandated rules. As a result, consumers face a binary choice: leave the mandated regulator in, or remove it (and regulate water flow using a variable valve, if installed).
Energy efficiency mandates have also had perverse effects. The gradual phase-out of incandescent bulbs led initially to greater use of compact fluorescent (CF) bulbs, which have different light and performance characteristics than incandescent bulbs. The light emitted by CF bulbs is typically cooler, which creates a less relaxing atmosphere.
In addition, although CF bulbs often are rated with a longer life than incandescent bulbs, frequently turning a CF on and off tends to shorten its life considerably. As a result, for applications where a bulb is used frequently but for short durations, CFs can turn out to be a much less cost-effective solution for consumers.
Meanwhile, some consumers responded to the adverse effects of cycling by leaving CFs on continuously, thereby likely at least in part mitigating the energy saving benefits. By mandating the phase out of incandescent bulbs, the DOE likely imposed unnecessary costs on consumers.
As the lightbulb example shows, a narrow focus on “energy efficiency” can result in perverse outcomes. In practice, consumers are interested in many different product characteristics and are typically willing to make trade-offs between the energy consumption of a product and its other characteristics.
In the case of automobiles, for example, it is often lamented that “fuel economy” did not improve significantly during the course of the 20th Century prior to the introduction of Corporate Average Fuel Economy standards in 1978. But this ignores that engine efficiency did increase dramatically prior to 1978.
The reason “fuel economy” (i.e. miles per gallon) did not increase much is that the power, size and weight of vehicles rose, as manufacturers added features that made them faster, more luxurious and safer. The same happened between 1981 and 2003: although CAFE standards for passenger cars rose from 22 mpg to 27.5 mpg over that period, average fuel economy of passenger vehicles and light trucks rose only slightly, from 20.5 to 20.8 mpg, but average power nearly doubled, from 102 to 197 horsepower, average weight rose by nearly 25%, from 3,201 lbs to 3,974 lbs, and average time to accelerate from 0 to 60 mpg fell by nearly 30%.
Rather than mandate efficiency improvements, a better approach would be to focus on the development of ways to communicate the net cost of products for consumers with different usage habits. (This website offers an example of such an approach for air conditioners: https://kobiecomplete.com/cool-tips/seer-savings-calculator/)….
DOE’s energy efficiency regulations generally have the effect of increasing the cost of products and reducing competition and innovation. (One reason for this is that companies frequently patent new, more efficient technologies and then lobby for standards which only their technology can meet. This reduces competition. It also reduces the incentive to make incremental improvements to old technologies. And it makes it difficult for new companies, whose products might initially not comply with the new standards, to enter the market.)
As noted above, more recent regulations and those that affect products with a larger market size will likely have more significant effects than older regulations and those that affect products with only a small market.
So, as a first step it would make sense to take an inventory of existing energy efficiency regulations, identify those that have been most recently developed and updated, and either scrap them or revert to earlier, less onerous regulations. This will result in lower costs for consumers and enable greater competition in the market, leading to more incremental innovation. Over time, it is likely that this approach will result in a wider array of products of differing degrees of energy efficiency, including some that are more efficient than those that would otherwise have been introduced onto the market.
Some voluntary energy performance standards and information services provided by the DOE may be useful—for example, the Superior Energy Performance standard and ISO 50001 standard, for which DOE has developed a toolbox, as well as the Energy Performance Indicator tool.
To the extent that these standards and tools are useful for companies, it would likely make sense to privatize them, since private companies generally have stronger incentives to identify the kinds of information and analysis consumers (including companies) want, ensure that the information is reliable, and identify the most effective ways to represent that information. (Existing private actors that currently provide such services include the IEEE and Underwriters Laboratories.)
In addition, there may be information tools aimed at consumers that are potentially valuable. Again, it would make sense to privatize these services.
(Currently, many private companies already provide similar services. Most such information providers offer a range of tools enabling consumers to evaluate product performance on more than one metric. A good example is www.rtings.com, which enables consumers to compare multiple products on a range of metrics, often including but by no means limited to energy efficiency.)
To the extent that the DOE currently attempts to provide such information, it either duplicates or crowds out private provision.
In most other cases, it would be better for DOE to scrap its rules and allow private market actors to develop standards and information tools in their place.
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Julian Morris is Vice President of Research, Reason Foundation, a non-profit think tank advancing free minds and free markets.
Morris graduated from the University of Edinburgh with a Masters in economics. Graduate studies at University College London, Cambridge University and the University of Westminster resulted in two further masters’ degrees and a Graduate Diploma in Law (equivalent to the academic component of a JD).
The author of dozens of scholarly articles on issues ranging from the morality of free trade to the regulation of the Internet, Morris’s academic research has focused primarily on the relationship between institutions, economic development and environmental protection. He has also edited several books and co-edits, with Indur Goklany, the Electronic Journal of Sustainable Development (www.ejsd.org).
Morris is also a visiting professor in the Department of International Studies at the University of Buckingham (UK). Before joining Reason, he was executive director of International Policy Network (www.policynetwork.net), a London-based think tank which he co-founded. Before that, he ran the environment and technology programme at the Institute of Economic Affairs, also in London.