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Energy-Efficiency Programmes Are Another Green Flop

Greg Ip, The Wall Street Journal

Study challenges idea that consumers are irrational when they pass up federal subsidies to weatherize their homes.

Energy efficiency has long appealed to political leaders trying to combat climate change without hurting their economies. It holds out the promise of policies that both reduce fossil-fuel consumption and save consumers money.

The rationale is that consumers are shortsighted in failing to insulate their homes or buy a more efficient appliance, and should be “nudged” in that direction.

But a new study challenges that premise. The study of households who received federal subsidies to “weatherize” their homes found the efficiency investments cost far more than they save. So consumers may not be irrational when they pass up such investments: the programs simply aren’t as beneficial as their promoters think.

The paper has important implications for current efforts to reduce planet-warming emissions of carbon dioxide. Energy efficiency programs are politically popular but may be far more expensive than mechanisms that rely on price signals. These include carbon taxes (admittedly, a political non-starter) or tradable emissions allowances, one of the options available to states for meeting proposed new federal limits on greenhouse-gas emissions.

The notion that consumers hurt themselves by passing up investments that reduce their fuel and electric bills has become known as the “energy efficiency gap.” Behavioral economists, who use psychology to explain seemingly irrational behavior, think impatience, lack of information or inertia might explain the gap.

Many government programs seek to close that gap, for example by prodding utilities to equip customers with more-efficient light bulbs. The U.S. Weatherization Assistance Program, which dates to 1976, offers subsidies to low-income families to make their homes more energy-efficient with new furnaces, attic and wall insulation, and weather stripping. It got a big boost as part of the Obama administration’s economic stimulus package in 2009.

Michael Greenstone of the University of Chicago, and a former chief economist in the Obama administration’s Council of Economic Advisers, and Meredith Fowlie and Catherine Wolfram of the University of California at Berkeley used a randomized control trial to determine whether the savings for WAP predicted by engineering models were borne out in reality.

The authors focused on a sample of more than 30,000 WAP-eligible households in Michigan. Of these, a quarter were encouraged to apply for the program via home visits by field workers hired for the study, and via phone calls. Households were reluctant to sign up, though it cost them nothing.

The authors then compared the energy consumption and thermostat settings of households who signed up for the program with those who didn’t. The energy consumption of program participants dropped by 10% to 20%, barely 40% of what engineering models predicted. The savings equated to $2,400, less than half the $5,000 spent on the energy efficiency investments. The authors put the annual return on the investment at minus 2.2% over 16 years, much worse than the historical returns on bonds or stocks.

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