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spot
light
No. 415 – October 13, 2011
E
nErgy
E
fficiEncy
, E
conomic
E
fficiEncy
,
and
T
hE
P
rETEnsE
of
K
nowlEdgE
k :• nergy efciency, as defned by those who embraceit as a policy guide, is ocused strictly on saving energy even i it means sac-rifcing overall economic efciency.• nergy efciency programs ocus on the relationship between one inputinto the production process, energy, relative to the output generated by thatprocess.• his simplistic view maes no consideration or the strong possibility thatother inputs — labor, plastic, steel, glass, etc. — might actually increase.• conomic efciency, on the other hand, relates total costs to the value o the output that those costs generate.• We may observe people maing decisions that we consider to be inefcient,but the proper conclusion to draw is that we, not they, are misperceivingtheir costs and benefts.• or an increase in energy efciency to translate into an increase in eco-nomic efciency, it would have to result in an overall decrease in the aver-age cost o production or, i you are a consumer, the cost o consumption.he people implementing the energy efciency plan would have to be bettero rom their own perspectives.• Mandates and special incentive programs would not have to be put inplace to promote energy efciency, unless we assume that the governmentis in a better position to judge the best interest o individuals or businessesthan the individuals or businesses themselves.• When experts and policy advocates push energy taxes, incentives, andmandates to promote energy efciency, they do what Nobel Prize-winningeconomist riedrich Haye warned against: crat policy through a “pretenseo nowledge.” hey pretend to have inormation about other people’s pre-erences and alternative uses o resource that they could not possibly obtain.• Ultimately, energy efciency programs are necessarily an exercise in pa-ternalism and behavior modifcation.
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ver the past decade a new buzzword has come to be infused into the public policy debate. “Energy efciency”is now a major part of any new initiative in the areas of energy policy, transportation policy, environmentalpolicy, land use policy, building code and zoning policy, and even tax policy. It seems that no matter what gov-ernments at any level do, from building buildings to formulating and implementing legislation, “energy efciency” hasto be a consideration.The problem is that the term, as dened by those who embrace it as a policy guide, is focused strictly on savingenergy even if it means sacricing overall economic efciency. Indeed, the standard denitions (see below) display analmost obsessive concern for the energy input into production and consumption processes while showing no regard atall for the very real possibility that saving energy would also require the wasteful use of other resources.
he Meaning o nergy fciency
Below are three denitions of energy efciency. Each of these is from federal and state government documents.These denitions are typical of how the term is used by government agencies and trade associations, as well as how, asnoted in language from North Carolina’s SB3, which mandates “energy efciency,” it is codied in legislation.
‘Energy efciency measure’ means an equipment, physical, or program change … that results inless energy used to perorm the same unction.
— NC Senate Bill 3, passed in 2007
1
Reducing energy or demand requirements without reducing the end-use benefts.
— The Low-Income Home Energy Assistance Program
2
…products or systems using less energy to do the same or better job than conventional productsor systems…
— U.S. Environmental Protection Agency
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When examined carefully, none of those denitions have anything to do with actual economic efciency. They focuson the relationship between one input into the production process, energy, relative to the output generated by thatprocess.The denitions essentially express a ratio putting the amount of energy used — i.e., BTUs — in the numerator andthe benets received from a given amount of energy in the denominator. Policies that are said to promote energy ef-ciency, such as those that set energy efciency standards for appliances, homes, or commercial buildings, or mandatethe kind of light bulbs we can use, ultimately have as their goal to reduce that ratio.This simplistic view makes no consideration of the strong possibility that other inputs — labor, plastic, steel, cop-per, glass, etc. — might actually increase in the process. In fact, since energy efciency is single-mindedly focused onthe energy, any tradeoffs for other inputs are left out of the equation. For that reason the above denitions have noth-ing to do with overall economic efciency. In fact implementation of policies that promote energy efciency so denedcould easily lead to overall reductions in economic efciency if the quantity or, more appropriately, the value of otherresources used more than compensates for the value of energy saved.
conomic fciency
The typical denition of energy efciency does not express an economic relationship but a technical relationship;i.e., quantity of energy (BTUs) in comparison to some measure of actual services provided (illumination, warmth in thewinter, coolness in the summer, cleanliness of clothes, etc.). Economic efciency, on the other hand, relates total costs
3
to the value of the output that those costs generate.From an economics perspective, the term costs here does not simply refer to monetary outlays, but any sacricethat the business or consumer must make to obtain a given benet — that would include sacrices in time or conve-nience, which are subjective and valued differently by different people. For this reason, economists generally arguethat outside observers (such as energy efciency experts, politicians, and bureaucrats) cannot decide what is an ef-ciency-enhancing decision for others.We may observe people making decisions that we consider inefcient, but the proper conclusion to draw is thatwe, not they, are misperceiving their costs and benets. Indeed to do otherwise is to take the path of paternalism andsocial engineering.
How Does conomic fciency Dier rom nergy fciency?
Energy efciency and economic efciency are unrelated. In order for an increase in energy efciency, as denedabove, to translate into an actual increase in economic efciency, it would have to result in an overall decrease in theaverage cost of production or, if you are a consumer (using a home appliance, paying for electricity, etc.), the cost of con-sumption. In other words, the people implementing the energy efciencyplan would have to be better off from their own perspectives. As already alluded to, if using less energy, or more accurately, spend-ing less money on energy, meant that the person had to invest in otherequipment whose cost more than offset the savings, then even though en-ergy efciency might be enhanced, economic efciency would be reduced.If the opposite were the case, mandates and special incentives programswould not have to be put in place to promote energy efciency, unless weare to assume that the government is in a better position to judge thebest interest of individuals or businesses than the individuals or busi-nesses themselves.To square this circle — in other words, to justify energy efciencyprograms on the grounds of economic efciency — proponents are in-deed advancing the idea that the experts know better than the individual. As William H. Golove and Joseph H. Eto,researchers from Lawrence Berkley National Laboratories, put it: there is an “efciency gap” between people’s percep-tions of costs and benets and reality. As the authors describe it:Proponents of government intervention believe that substantial market barriers prevent so-cially desirable levels of investment in energy efciency. … This belief justies continued gov-ernment intervention in energy service markets to correct or overcome the distortions inherentin market-based resource allocations. … [T]here is a substantial “efciency gap” between a con-sumer’s actual investments in energy efciency and those that appear to be in the consumer’sown interest.
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This conclusion, which Golove and Eto subscribe to, is the conclusion that governs the energy efciency movementgenerally, including those programs launched in North Carolina under the banner of its mandated energy-efciency/ renewable-portfolio standard (SB3) and other subsidy and mandate programs funded by state and local governments. As stated more succinctly in a document published by the federal Environmental Protection Agency meant to supportimplementation of its energy efciency programs, “energy efciency remains critically
underutilized
in the nation’senergy portfolio.”
5
(Emphasis added.)
We may observe peoplemaking decisions that weconsider inefcient, butthe proper conclusion todraw is that we, not they,are misperceiving theircosts and benets.
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Spotlight 415: Energy Efficiency, Economic Efficiency and The Pretense of Knowledge
Key facts:
• Energy efficiency, as defined by those who embrace it as a policy guide, is focused strictly on saving energy even if it means sacrificing overall economic efficiency.
• Energy efficiency programs focus on… (More)
• Energy efficiency, as defined by those who embrace it as a policy guide, is focused strictly on saving energy even if it means sacrificing overall economic efficiency.
• Energy efficiency programs focus on… (More)
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