Tuesday, December 15, 2009

Pure Self-Interest Promotes Energy Efficiency

NY Times -- President Obama came to a suburban Washington Home Depot store Tuesday to push a program -- helpfully called “Cash for Caulkers” -- that is aimed at helping homeowners to make their homes more energy efficient. “I am calling on Congress to provide new temporary incentives for Americans to make energy efficiency retro-fit investments in their homes and we want them to do it soon,” Mr. Obama said.

Mr. Obama wants Congress to look into consumer rebates for households that make energy efficient upgrades to their homes. He said homeowners could get back their investments in energy efficiency in two to three years.

MP: Department of Energy data (here and here) show that household consumption of energy (in 1000s of BTUs per square foot) declined by almost 33% between 1980 (65) and 2005 (43.7), and household expenditures on energy per square foot (in 2009 dollars) declined by more than 40% between 1980 ($1.39) and 2005 ($0.83, see top chart above), suggesting that American homes are becoming more and more energy efficient all the time. 

Likewise, there have been dramatic increases in energy efficiency for standard household appliances since 1980, according to data from the Association of Home Appliance Manufacturers (see bottom chart above). For a home refrigerator in 1980, its energy factor (EF, a standard measure of overall energy efficiency for appliances) was 5.59, and by 2008 the EF for refrigerators had increased almost three-fold to 15.50, for a 177.3% improvement in energy efficiency. The other standard home appliances in the chart above also had significant improvements in energy efficiency, from a 41.5% increase for the room air-conditioner, to a 91.4% increase for the dishwasher.

Bottom Line: These significant increases in energy efficiency for both our homes in general and also for the appliances that we have in our homes have happened gradually, but steadily, for many decades, and many of these improvements in energy efficiency probably took place without any government intervention, stimulus or rebate programs.  The incentive to save money ensures that there will always be an incentive to become more energy efficient out of pure self-interest, since increased energy efficiency translates directly into monetary gain. 

Listening to Obama, one might get the impression that we have become less and less energy efficient over time, and we energy gluttons now need nanny state hectoring to become energy misers.  The truth is just the opposite - we have become more and more energy efficient over time, not less, and here's another example showing that today's economy is more than twice as energy efficient as the economy in 1970, measured by "Energy consumption per real dollar of GDP (data here):

See a related article in National Review Online by Nick Schulz and Arnold Kling, who predict that:

We might see increased efforts to inflate a green bubble in the coming years as the Obama administration sees renewable energy as a way of driving down the unemployment rate. In a speech last week at the Brookings Institution touting proposals for job creation, President Obama urged Congress to “consider a new program to provide incentives for consumers who retrofit their homes to become more energy efficient, which we know creates jobs, saves money for families, and reduces the pollution that threatens our environment.”


At 12/15/2009 4:20 PM, Anonymous Lyle said...

The increases in efficiency of refrigerators did involve government intervention, the California state government. They said, oh you want to sell refrigerators here, you need to make they more efficient. Then the federal government decided to follow the lead of California. The California energy commision first proposed standards on energy efficency in 1978, 1980, 1987, and then overtaken by federal standards in 1993 and 2001. See
http://www.efficientproducts.org/reports/bchargers/bcwkshp_11-05/CEC_Policy_Overview.pdf for details. Another article at http://www.theatlantic.com/doc/200910/california-energy
tells the story that the whole effort in Ca started with the desire to stop a nuclear power plant in the 1970s and how an LBL scientist gave Jerry Brown an alternative. So the comment is literally untrue, in that there was significant government intervention in this area, unless you call outright banning as well as energy star labeling to make the costs of operating various models no government intervention.

At 12/15/2009 4:31 PM, Blogger PeakTrader said...

Canada’s top economist Jeff Rubin predicts $225 for a barrel of oil by 2012
25 June 2009

Jeff Rubin...frequently ranked as Canada's top economist...predicts that one barrel of oil will cost 225 dollars by 2012.

In 2000, Rubin correctly predicted that oil would top 50 dollars per barrel by 2005. And, in 2005 he got it right again, forecasting prices would top 100 dollars per barrel in 2007.

"It's not just about depletion [of OPEC oil fields], though depletion is playing a key role. It is also about the explosive growth of oil consumption in OPEC countries themselves. This is the reason why exports have not grown from OPEC in the last five years; they are in effect cannibalizing their own exports.

Every year we lose four million barrels a day [of production due to depletion]. Over the next five years, we are going to have to find 20 million barrels a day of new production, just so that we can [continue to] consume what we consume today.

We think that efficiency leads to conservation but history has shown that is not what happens.

The average engine today is 30 percent more efficient than the engines produced before the OPEC oil shocks [of the 1970s]. Yet, the average [North American] vehicle consumes just as much gasoline in the course of a year.

Back in the 1970s, we [North Americans] used to drive about 9,000 miles a year, now we drive 12,000. Back in the 1970s, we weren't living in the far-flung suburbs. All those gains in efficiency have led us to, ever more efficiently, consume more and more oil."

At 12/15/2009 5:06 PM, Anonymous Lyle said...

Well the issue with the auto comment is that this is how people choose to live. In the auto and the appliance case the govenment is doing what it historically did well, preterb the business case. This is what Lincoln did to the transcontinental railroad in 1862-1864, No one wanted to invest in that stupid venture during the middle of the civil war, so Lincoln steered subsidy bills thru congress to get it started, note that Lincoln also pushed government give aways of land the homestead act, as well pushing a protective tariff.

At 12/15/2009 5:14 PM, Blogger PeakTrader said...

Lyle, I stated before, there are good, bad, and roughly neutral government policies. Unfortunately, it seems, the most expensive government policies tend to be bad.

At 12/15/2009 5:25 PM, Anonymous Anonymous said...

The increases in efficiency of refrigerators did involve government intervention, the California state government.

So, the government of California arbitrarily decided to limit the construction of nuclear power plants, thereby artificially increasing the cost of energy. To offset this market interference they insisted that manufacturers design more efficient appliances to address the artificially induced energy shortage. Of course, that wasn't enough, so, as the population increased and energy demand followed, they sought power outside the state setting California up for the worst energy crisis in American history and a legacy of power shortages and "brown outs".

Your right, government intervention played a pivotal role in California.

At 12/15/2009 5:30 PM, Anonymous Benny The Man said...

I am a greenie-weenie, but even I know the price signal can work miracles. Let the price signal work.

That said, imported oil presents a security threat. Oil thug states control the supply, and it could be cut off. There might be reason to make imported oil very expensive, so that we would decrease our use of it.

Pollution is not captured in the price signal, so there is another area in which taxes to increase prices make sense.

At 12/15/2009 8:10 PM, Blogger W.E. Heasley said...

The point being made by Professor Perry is that self interest along with self direction, or what Milton Friedman referred to as The Freedom to Choose, is a major component in energy efficiency or for that matter any efficiency.

Also, Professor Perry is eluding to Obama’s Government Intervention Argument. That is, why would one argue for Government Intervention when a problem does not exist. The trend in energy efficiency (see charts) is an increasing energy efficiency at an increasing rate.

Obama’s overall argument for Cash for Caulkers regarding Cost Savings/Energy Efficiency is counter to another recent argument of Mr. Obama’s. The two counter arguments exposes some interesting Economics. Obama calls in Business Leaders for a Jobs Summit and states companies are preoccupied with cutting costs (efficiency) and should merely hire more workers rather than cutting costs (being efficient). Yet he makes the argument that Cutting Costs through energy efficiency creates jobs. So in one economic case Efficiency is bad. Yet in the other economic case Efficiency is good. Hmmm.

However, the argument for Cash for Caulkers is even more flawed. As mentioned above, self interest and self direction are major components in energy efficiency. This self interest and self direction in energy efficiency has created energy efficiency increasing at and increasing rate. In other words, consumers of energy value energy efficient products and methods. These consumers will continue to consume efficient products and methods regarding energy efficiency. Hence Cash for Caulkers merely accelerates the consumption of energy efficient products/methods from the future into the present. It has the exact same economic effect as Cash for Clunkers.

Finally, the “Cash” component for Cash for Caulkers comes from exactly where? The US Federal Government is broke. Really, really, really broke. The Political-Economy argument is that $200 Billion of TARP money is left over so lets use that money to create jobs. That is, the US Government has $200 Billion left on its Chinese Credit Card and by-goodness lets max out that Credit Card. Hence you are not only accelerating future consumption into the present, you are going to finance the acceleration.

At 12/16/2009 2:36 PM, Blogger Bloggin' Brewskie said...

"So, the government of California arbitrarily decided to limit the construction of nuclear power plants, thereby artificially increasing the cost of energy."

Speaking of nuclear power, you might want to read this: several Senate bills aimed to spur small modular nuclear reactors.

This whole insistence of avoiding nuclear energy has been silly, but if this gets the ball rolling...

At 12/16/2009 5:21 PM, Blogger juandos said...

Over at Cafe Hayek Don Boudreaux has the following posting on the same subject: The Only Trustworthy Pollster is the Market

The money line: Words are cheap. Fantasizing is free. Proclamations are abundant because proclaiming can be done at virtually no cost...


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