Energy Efficiency as Foreign Aid?

A recent suite of energy efficiency regulations issued by the Department of Energy (DOE) have been criticized due to the DOE’s claim that consumers and businesses are behaving irrationally when purchasing appliances and other energy using devises. The Department believes it is bestowing benefits on society by “correcting” these faulty decisions. Mercatus Center scholars have written about this extensively here, here, and here.

However, even if we set aside the Department’s claims of consumer and business “irrationality,” a separate rationale for these regulations is also very problematic. The vast majority of the environmental benefits of these rules stem from reductions in CO2 emissions due to lower emissions from power plants. However, in a 2010 report, the US government estimated only 7 to 23 percent of these benefits will be captured by Americans. The rest will go to people in other countries.

Here’s a recent example. In August, the DOE proposed a rule setting energy efficiency standards for metal halide lamp fixtures. In the agency’s analysis, it estimated total benefits from CO2 emission reductions at $1,532 million. Using the more optimistic estimate of the percentage of CO2 related benefits going to the US citizens (23%), Americans should capture about $450 million in environmental benefits from the rule (once we include benefits from reductions in NOx emissions as well). At the same time, the DOE estimates the rule will cost $1,294 million, much of which will be paid by American consumers and businesses. How can the DOE, which is tasked with serving the American public, support such a policy?

One might argue America is imposing costs on the rest of the world with its carbon emissions, and therefore should pay a type of tax to internalize this external cost we impose on others. However, the rest of the world is also imposing costs on us. In fact, US emissions are actually in decline, while global emissions are on the rise.

Even if we assume it is a sensible policy for Americans to compensate other countries for our carbon emissions, is paying for more expensive products like household appliances the best way to accomplish this goal? Given that no amount of carbon dioxide emission reductions in the US will do much of anything to reduce anticipated global warming, wouldn’t the rest of the world be better off with resources to adapt to climate change, instead of (at best) the warm feeling they might get from knowing Americans are buying more expensive microwave ovens? A more efficient policy would be a cash transfer to other countries, or the US could create a fund the purpose of which would be to help other countries adapt to climate change.

Energy efficiency regulations from the DOE are already difficult enough to justify. Knowing they are really just a roundabout form of foreign aid makes these rules look even less sensible.