Energy-Efficiency Programs ‘Nudge’ Consumers in the Wrong Direction

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

By Greg Ip of the WSJ. Excerpts:

"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."

"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 (Weatherization Assistance Program) 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.

Of course, energy efficiency subsidies can be justified by the fact that all of society benefits from reduced carbon-dioxide emissions. But the study’s authors reckon that WAP spent a whopping $329 to eliminate one metric ton of carbon emissions. That’s 10 times the $38 that the White House reckons is the all-in cost to society of a ton of carbon, meaning WAP flunks the cost-benefit test by a wide margin.

In fact, in some ways the program left others worse off. Natural-gas and electricity distribution entail high fixed costs, which are shared among all customers. When some customers consume less, others must shoulder more of those fixed costs. Incorporating all social costs and benefits dropped the program’s return to minus 9.5%."