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Do you know more about energy efficiency than a regulator?

The rationale for enacting any government regulation is to fix a problem the market has failed to rectify on its own. If there is no market failure, there is no reason for a regulation, at least in theory.

But nobody seems to have explained this theory to regulators at the Dept. of Energy or Environmental Protection Agency. Recent work by academics at George Mason University show that many energy efficiency regulations don’t correct market problems. Their provisions only make sense if one assumes that government regulators know more about what you want than you do.

That is really the only conclusion that can be drawn from work by economists Ted Gayer and W. Kip Viscusi. Looking at energy efficiency regulations for clothes dryers, room air conditioners, high-intensity lighting, and several other devices, they concluded that benefits claimed from these laws only arose if consumers weren’t making good choices on their own. Otherwise, the costs of the regulations dwarfed any benefits.

The problem with regulators, the two economists noted, is an “assumption that the world outside the agency is irrational,” and that “energy efficiency is always the paramount product attribute and that choices made on any other basis must be fundamentally flawed.”

There are, in fact, studies showing people don’t put enough weight on what it costs to operate appliances. But the data that show this are quite old, harking back to the 1970s when there wasn’t much information available about energy costs, the economists point out.

More recent engineering studies that purport to show consumers neglect energy efficiency are flawed, researchers say, because they make numerous assumptions about factors that are difficult to predict accurately such as duration and frequency of use and capital costs. They also neglect a wide range of factors that can legitimately out-weigh energy costs. For example, researchers found that manufacturing plants reject about half of recommended energy efficiency projects because the studies that recommended them didn’t account for physical costs, risks, opportunity costs, lack of staff, or the risk of problems with equipment.

There are similar problems with new energy efficiency standards for clothes dryers. A few years ago, regulations effectively eliminated top-loading washing machines. One poll found the public opposed such measures by a factor of six to one, even allowing for lower operating costs and greater energy efficiency. One reason for the opposition: Most consumers wash fewer loads per week than the DOE analysis assumed when justifying the new regulations. For consumers who washed less than what DOE figured, savings were far less than what DOE estimated. All in all, conclude the two economists, engineering studies divorced from consumer usage and preferences can produce policies with far fewer benefits than predicted.

Interestingly, a lot of the problems energy efficiency regulations aim to rectify add up to consumer education about energy use. If that’s the main problem, why not simply enact labeling laws for energy use and leave it at that? Energy Star already encompasses such labeling measures. If an energy saving apparatus offers substantial energy savings, shouldn’t labeling be enough to convince people to buy it?

Not for regulators who think they know better than consumers or business owners.

-- Leland Teschler, Editor

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