July/August 2007 Editorial: Getting the Price Right

Posted by Alan Meier on July 02, 2007
July/August 2007 Editorial: Getting the Price Right
Some people claim that most of our inefficient use of energy will disappear once we “get the price right”— that is, that the price reflects the true costs of supplying that energy.  I agree that the price is important, but even when the price is right, the system may still be broken.  Here are a few examples.

More than one-fourth of all refrigerators are purchased by people who will not pay for the refrigerator’s electricity bills.  That’s the fraction purchased by landlords, and by contractors for new homes.  These people have little or no interest in paying a premium for energy efficiency, because their tenants or the home buyers reap all the benefits. That’s about 2% of residential energy use, the efficiency of which is out of control. If it were not for minimum standards, tenants would almost certainly end up with guzzlers. And when the price of electricity rises, don’t expect landlords and contractors to suddenly buy more efficient models.

Sitting next to many of our televisions are set-top boxes. The set-top box connects the television to a cable or satellite provider. You don’t own the box—it typically comes as part of the cable or satellite contract—but you pay its electricity bill. It’s a significant bill, too. Each box consumes the equivalent of half a refrigerator, even when it’s switched off.  Do you think that Comcast or EchoStar has your energy bill in mind when it designs the box?  No; these companies are more concerned about security, preventing hacking, and minimizing service complaints.  There are no efficiency standards for set-top boxes.  That’s about 1.5% of residential electricity use that is totally out of control.

Free flow of information is the cornerstone of a functional market, yet it’s often absent in the energy market. Everybody knows that underinflated tires leads to decreased fuel economy, but few people are aware that the tires themselves vary widely in energy efficiency.  Some tires have significantly lower rolling resistance than others, and shifting from an average tire to a tire with low rolling resistance can cut fuel consumption more than 3%.  But don’t bother trying to find those tires, because manufacturers don’t list rolling resistance.  In fact, there’s no public information about rolling resistance—there’s no label, no Web site; and even Consumer Reports gives only vague clues.

Sometimes efficiency information is available, but other factors can diminish its importance.  Many European countries now require a home to receive an energy rating before it can be sold or rented. But a recent study showed that home buyers and tenants in Belgium and Denmark mostly ignored this information when selecting a home.  That’s no surprise, because, as any realtor can tell you, the only important feature is location, location, and location. 

These examples illustrate that many efficiency opportunities are likely to be ignored, and that residential energy use is unlikely to respond to higher prices alone. Some sort of intervention is necessary, to act as a substitute. For set-top boxes, why not make the service provider pay the box’s electricity bill? It’s technically feasible and accomplishes the goal of getting the service provider to consider the operating costs of their set-top boxes. But the most common intervention is a minimum-efficiency standard.  It’s an imperfect solution, but it is often better than no solution.

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