Tag Archives: climate change

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.

“Regulatory Certainty” as a Justification for Regulating

A key principle of good policy making is that regulatory agencies should define the problem they are seeking to solve before finalizing a regulation. Thus, it is odd that in the economic analysis for a recent proposed rule related to greenhouse gas emissions from new power plants, the Environmental Protection Agency (EPA) cites “regulatory certainty” as a justification for regulating. It seems almost any regulation could be justified on these grounds.

The obvious justification for regulating carbon dioxide emissions would be to limit harmful effects of climate change. However, as the EPA’s own analysis states:

the EPA anticipates that the proposed Electric Generating Unit New Source Greenhouse Gas Standards will result in negligible CO2 emission changes, energy impacts, quantified benefits, costs, and economic impacts by 2022.

The reason the rule will result in no benefits or costs, according to the EPA, is because the agency anticipates:

even in the absence of this rule, existing and anticipated economic conditions will lead electricity generators to choose new generation technologies that meet the proposed standard without the need for additional controls.

So why issue a new regulation? If the EPA’s baseline assessment is correct (i.e. it is making an accurate prediction about what the world would look like in absence of the regulation), then the regulation provides no benefits since it causes no deviations from that baseline. If the EPA’s baseline turns out to be wrong, a “wait and see” approach likely makes more sense. This approach may be more sensible, especially given all the inherent uncertainties surrounding predicting future energy prices and all of the unintended consequences that often result from regulating.

Instead, the EPA cites “regulatory certainty” as a justification for regulating, presumably because businesses will now be able to anticipate what emission standards will be going forward, and they can now invest with confidence. But announcing there will be no new regulation for a period of time also provides certainty. Of course, any policy can always change, whether the agency decides to issue a regulation or not. That’s why having clearly-stated goals and clearly-understood factors that guide regulatory decisions is so important.

Additionally, there are still costs to regulating, even if the EPA has decided not to count these costs in its analysis. Just doing an economic analysis is a cost. So is using agency employees’ time to enforce a new regulation. News outlets suggest “industry-backed lawsuits are inevitable” in response to this regulation. This too is a cost. If costs exceed benefits, the rule is difficult to justify.

One might argue that because of the 2007 Supreme Court ruling finding that CO2 is covered under the Clean Air Act, and the EPA’s subsequent endangerment finding related to greenhouse gases, there is some basis for the argument that uncertainty is holding back investment in new power plants. However, if this is true then this policy uncertainty should be accounted for in the agency’s baseline. If the proposed regulation alleviates some of this uncertainty, and leads to additional power plant construction and energy creation, that change is a benefit of the regulation and should be identified in the agency’s analysis.

The EPA also states it “intends this rule to send a clear signal about the current and future status of carbon capture and storage technology” because the agency wants to create the “incentive for supporting research, development, and investment into technology to capture and store CO2.”

However, by identifying the EPA’s preferred method of reducing CO2 emissions from new power plants, the agency may discourage businesses from investing in other promising new technologies. Additionally, by setting different standards for new and existing power plants, the EPA is clearly favoring one set of companies at the expense of another. This is a form of cronyism.

The EPA needs to get back to policymaking 101. That means identifying a problem before regulating, and tailoring regulations to address the specific problem at hand.

Politics makes us dumb

A new paper by Dan Kahan, Ellen Peters, Erica Cantrell Dawson and Paul Slovic offers an ingenious test of an interesting hypothesis. The authors set out to test two questions: a) Are people’s abilities to interpret data impaired when the data concerns a politically polarizing issue? And b) Are more numerate people more or less susceptible to this problem?

Chris Mooney offers an excellent description of the study here. His entire post is worth reading but here is the gist:

At the outset, 1,111 study participants were asked about their political views and also asked a series of questions designed to gauge their “numeracy,” that is, their mathematical reasoning ability. Participants were then asked to solve a fairly difficult problem that involved interpreting the results of a (fake) scientific study. But here was the trick: While the fake study data that they were supposed to assess remained the same, sometimes the study was described as measuring the effectiveness of a “new cream for treating skin rashes.” But in other cases, the study was described as involving the effectiveness of “a law banning private citizens from carrying concealed handguns in public.”

The result? Survey respondents performed wildly differently on what was in essence the same basic problem, simply depending upon whether they had been told that it involved guns or whether they had been told that it involved a new skin cream. What’s more, it turns out that highly numerate liberals and conservatives were even more – not less — susceptible to letting politics skew their reasoning than were those with less mathematical ability.

Over at Salon, Marty Kaplan offers his interpretation of the results:

I hate what this implies – not only about gun control, but also about other contentious issues, like climate change.  I’m not completely ready to give up on the idea that disputes over facts can be resolved by evidence, but you have to admit that things aren’t looking so good for a reason.  I keep hoping that one more photo of an iceberg the size of Manhattan calving off of Greenland, one more stretch of record-breaking heat and drought and fires, one more graph of how atmospheric carbon dioxide has risen in the past century, will do the trick.  But what these studies of how our minds work suggest is that the political judgments we’ve already made are impervious to facts that contradict us.

Maybe climate change denial isn’t the right term; it implies a psychological disorder.  Denial is business-as-usual for our brains.  More and better facts don’t turn low-information voters into well-equipped citizens.  It just makes them more committed to their misperceptions.  In the entire history of the universe, no Fox News viewers ever changed their minds because some new data upended their thinking.  When there’s a conflict between partisan beliefs and plain evidence, it’s the beliefs that win.  The power of emotion over reason isn’t a bug in our human operating systems, it’s a feature.

I suspect that if Mr. Kaplan followed his train of thinking a little bit further he’d come to really hate what this implies. Mr. Kaplan’s biggest concern seems to be that the study shows just how hard it is to convince stupid Republicans that climate change is real. The deeper and more important conclusion to draw, however, is that the study shows just how hard it is for humans to solve problems through collective political action.

Myth of the rational voterTo understand why, it’s helpful to turn to another Caplan—Bryan Caplan of George Mason’s economics department. In The Myth of the Rational Voter that Caplan offers a convincing and fascinating explanation for why otherwise rational people might make less than reasonable decisions when they step into a voting booth or answer a political opinion survey. Building on insights from previous public choice thinkers such as Anthony Downs and Geoffrey Brennan and Loren Lomasky, Caplan makes the case that people are systematically disposed to cling to irrational beliefs when—as is the case in voting–they pay almost no price for these beliefs.

Contrast this the way people behave in a marketplace where they (tend) to pay for irrational beliefs. For example, as Brennan and Lomasky put it (p. 48), “The bigot who refuses to serve blacks in his shop foregoes the profit he might have made from their custom; the anti-Semite who will not work with Jews is constrained in his choice of jobs and may well have to knock back one she would otherwise have accepted.” In contrast, “To express such antipathy at the ballot box involves neither threat of retaliation nor any significant personal cost.”

This helps explain why baby-faced candidates often lose to mature-looking (but not necessarily acting!) candidates, or why voters consistently favor trade protectionism in spite of centuries of scientific data demonstrating its inefficiency.

Given that humans are less likely to exhibit such irrationality in their private affairs, this entire body or research constitutes a powerful case for limiting the number of human activities that are organized by the political process, and maximizing the number of activities organized through private, voluntary interaction.

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Update: Somehow, I missed Bryan’s excellent take on the study (and what the Enlightenment was really about) here.

 

Do Energy Efficiency Regulations Create Jobs?

Earlier this year, the Department of Energy (DOE) finalized a regulation setting energy efficiency standards for microwave ovens. At the time, Heather Zichal, the Deputy Assistant to the President for Energy and Climate Change, had this to say about the regulation:

…in his State of the Union Address this year, the President set a bold new goal: to cut in half the energy wasted in our homes and businesses over the next 20 years. Part of how we will achieve that goal is by making appliances more energy efficient. Not only will that help Americans keep more money in their pockets, it will also curb pollution and spark innovation that creates jobs and ultimately brings better products to the marketplace. That’s why we are proud to announce today that the Department of Energy has finalized new energy efficiency standards for microwaves… (emphasis added)

I’ve written elsewhere about why Americans should be skeptical of the environmental benefits from this regulation, as well as other energy efficiency regulations emanating from the Department of Energy. Putting that aside for a moment, I’d like to focus on the last part of Ms. Zichal’s comment, that energy efficiency regulations will create jobs.

As an example, let’s look at the microwave oven regulation that Ms. Zichal cites in her blog post. According to the Department of Energy’s own employment analysis, the employment effects of this regulation are negligible. Since American consumers import roughly 99% of microwaves purchased, the DOE expects that effects on domestic production jobs will be virtually zero.

In addition, DOE models indirect employment effects on other industries as a result of changes in consumer behavior and investment decisions resulting from the regulation. While these numbers are highly uncertain given the inherent difficulty in predicting these things, the DOE estimated the rule will probably eliminate jobs in the short term, estimating between 551 jobs destroyed and 17 jobs created by 2016. In the long run, employment effects may be positive, with the regulation potentially creating between 153 and 697 jobs by 2020. However, the DOE notes there are limitations inherent in its model when calculating these effects, especially when trying to predict jobs created years in the future. For example, the DOE states:

Because [the agency’s model] does not incorporate price changes, the employment impacts predicted by [the model] would over-estimate the magnitude of actual job impacts over the long run for this rule.

The DOE goes on:

…in long-run equilibrium there is no net effect on total employment since wages adjust to bring the labor market into equilibrium. Nonetheless, even to the extent that markets are slow to adjust, DOE anticipates that net labor market impacts will be negligible over time due to the small magnitude of the short-term effects.

Creating jobs should never be the primary reason for justifying a regulation.  In most cases, jobs created by regulations are compliance jobs, which constitute a cost of regulating, not a benefit. More importantly, these types of predictions about jobs created and destroyed ignore the true employment costs of regulation that occur when individuals lose their jobs because of a rule. These costs include things like lost earnings, loss of health insurance, stress, additional health effects, etc. Despite this, by the DOE’s own estimates job creation does not appear to be a solid justification for this particular energy efficiency standard.