In the past decade, federal agencies have greatly increased the number of regulations establishing energy efficiency standards for household and commercial appliances. In 2014 alone, federal regulations setting energy efficiency standards accounted for an estimated $154 billion in total regulatory benefits.

Because these regulations target common household appliances, they affect nearly all Americans. For example, the U.S. Department of Energy (DOE) recently finalized energy efficiency regulations for dishwashers, microwaves, clothes washers, furnaces, and air conditioners—appliances that most households rely on for everyday tasks. Each of these rules increases the price of appliances in return for reducing long-term energy usage and energy bills.

Because of the scope of these rules, it is important to examine the rationale that regulators use to justify them. Prima facie, it seems that consumers wouldn’t need government protection from their own purchase choices. As a result, federal regulators have increasingly cited behavioral economics and “consumer irrationality” to justify standards that limit the amount of electricity and water that appliances can use. Because they claim such large regulatory benefits—and because they affect all households—these rules and their justifications merit a closer look.

Whose benefits? / Between 2007 and 2014, energy efficiency standards promulgated by the DOE accounted for an estimated $26.6 billion in annual benefits. My recent working paper, published by the George Washington University Regulatory Studies Center, attempts to get to the bottom of the question: whose benefits are these, anyway?

Tallying the benefits of all energy efficiency rules finalized in these years finds that the DOE relies on two types of regulatory benefits to justify its regulations: private benefits to consumers from reduced energy expenditures, and the international benefit of reducing carbon dioxide emissions.

Of the $26.6 billion in annual benefits that the DOE expects from its rules, some $23.4 billion (88 percent) are private benefits, and the remaining $3.2 billion are public benefits to the environment from reduced emissions. The reported benefits of these rules greatly outweigh the estimated costs: based on the DOE’s analysis, consumers gain $18.8 billion annually on net from efficiency standards. Given that the rules are ostensibly motivated by environmental goals, the reliance on private benefits—rather than public benefits—may come as a surprise.

Without the $23.4 billion in private benefits, the costs of these standards outweigh the public benefits by $4.6 billion annually. That suggests the rules are not “made necessary by compelling public need” as directed by Executive Order 12866, issued by President Bill Clinton. Instead, the DOE justifies them with estimated private cost savings that, in most cases, consumers and businesses could achieve without government intervention.

The pervasiveness of these private benefits suggests that none of the rules could be justified based on their environmental benefits alone. But what could be the goal of these rules, if not to better the environment?

Vanishing benefits / These analyses are highly sensitive to the scope and prevalence of private benefits—and, to a lesser extent, international benefits—that the DOE chooses to include. The private benefits, in turn, are driven by the DOE’s assumptions about future energy prices, appliance characteristics, and discount rates. A different set of assumptions that relies on consumers’ revealed preferences indicates that the rules result in large net costs for consumers and businesses.

Standard economic analysis of regulations relies on the concept of consumer sovereignty and traditionally treats market participants as if they are rational actors. This allows regulators to measure potential consumer and producer surplus and infer the social value of regulatory policies. However, the private benefits the DOE relies on are a departure from the norms that have traditionally governed cost-benefit analysis.

In many cases, consumers already had the option to purchase more efficient appliances prior to regulation, indicating that a lack of energy-efficient appliances available in the market is not the impetus for these standards. Because more efficient appliances typically have higher prices than their less efficient competitors, some consumers choose not to purchase the more expensive goods. Regulators draw on the behavioral economics literature to argue that those consumers fail to purchase high-efficiency appliances because of inadequate information-processing capability. The DOE’s reasoning is that consumers pass up these products because they’re not capable of weighing the higher upfront price against the long-term energy savings.

This line of reasoning overlooks the possibility that consumers may have legitimate preferences for less-efficient appliances based on household characteristics or other observable product qualities (such as size, durability, reliability, or noise level). Also, the assumptions underpinning the DOE’s analyses may not be accurate; for instance, some consumers may have high discount rates, making future energy savings less important than immediate purchase savings. By regulating away the option for consumers to purchase less-efficient appliances, the DOE claims to be improving consumers’ choice structure by removing choices. These rules aren’t technology-forcing, they’re consumer-forcing.

Instead of taking consumers’ actual purchases as indications of legitimate preferences, the DOE argues that they reveal behavioral biases that could be resolved through regulation. However, the fact that consumers choose not to purchase efficient appliances indicates only that they do not value these attributes as much as the DOE does. As a result, these rules impose huge net costs on consumers, rather than benefits.

Looking forward / The pace of energy efficiency rules has accelerated over the past five years, and that pace now appears to be increasing further. The fall 2015 Unified Agenda, which forecasts agency regulatory activity for the following year, lists 18 proposed rules and 18 final rules establishing energy efficiency standards for appliances. If the past decade is any indication, the DOE will continue to rely—heavily—on highly questionable private benefits estimates to justify reducing consumer choice. Whether those benefits will materialize for consumers remains to be seen.

Readings

  • “America’s New Fuel Economy Cartel,” by Bruce Yandle. Regulation, Vol. 32, No. 3 (Fall 2009).
  • “Do Consumers Value Fuel Economy?” by Molly Espey. Regulation, Vol. 28, No. 4 (Winter 2005–2006).
  • “Regressive Furnace Fans,” by Sofie E. Miller. Regulation, Vol. 37, No. 1 (Spring 2014).
  • “The Limits of Irrationality as a Rationale for Regulation,” by Brian F. Mannix and Susan E. Dudley. Journal of Policy Analysis and Management, Vol. 34, Issue 3 (Summer 2015).
  • “Whose Benefits Are They, Anyway? Examining the Benefits of Energy Efficiency Rules 2007–2014,” by Sofie E. Miller. George Washington University Regulatory Studies Center, 2015.