Potential Is Not Necessarily Practical

Productivity gains generally correspond to improvements in innovation and technology; efficiency on the other hand is related to producing a given level of output with less input. A quick scan of the summary material for the Alliance Commission on National Energy Efficiency Policy reveals the group doesn’t appear to make a clear distinction between efficiency and productivity, and in places it seems to use them interchangeably. For the purpose of this topic, those terms will be used in the more traditional way.

Over the past 40 years, the federal government has sponsored a large number of programs aimed at increasing efficiency by altering market forces either with mandates or subsidies. While proponents of government programs point to significant efficiency gains—reducing energy intensity by 50 percent – too little attention has been paid to the price of achieving them or to the true cost of achieving them.

Cars get more miles per gallon, household appliances and HVAC systems have higher efficiency ratings, etc. – but those products also cost more. In the case of cars, Corporate Average Fuel Economy (CAFE) standards killed the station wagon, led to about 2,000 highway deaths per year, and caused many trucks to be converted to SUVs to get around those standards. Some loopholes have been closed but the new standards come with sticker price shock, which means that older cars will stay on the road longer and consumers may be forced by price to choose their second best choice.

So, when the Commission lays out its blue print to “to double energy productivity over the next 20 years” and “get more bang for our energy buck,” it would do the public a favor by following up to identify the externalities involved, to be clear on the role of price, and to identify how rent seeking companies will likely game the system. That may seem cynical, but that has been the history of past government initiatives. Trust but verify is a reasonable way to view this initiative.

When Germany and Japan are held up as examples of being “at the forefront of energy productivity gains,” there is reason for great skepticism. Japan has had more than a ‘lost decade” of economic growth, and Germany’s rush to embrace “alternative energies” has driven up electricity costs, created an incentive for businesses to go elsewhere, and been a drag on economic growth and employment.

An analysis of Germany’s renewables experience by the European Institute for Climate and Energy warned of “impending doom for the German economy caused by the lemming like charge to the Green mirage of affordable renewable energy.” The report went on, “ after tens of billions of euros spent on renewable energy systems and higher prices for consumers, not a single coal or gas-fired power plant has been taken offline. To the contrary, old inefficient German plants have been brought back into service in an effort to stabilize the grid.”

The Energy 2030 plan is intended to “provide policy solutions through investments, modernization, and education and include(s) an in depth analysis that shows how these gains in energy productivity can increase U.S. GDP up to 2 percent, create annual savings of $327 billion, and produce household savings of $1,039.” It is fair, therefore, to ask what actual market failures have lead to the need to tell entrepreneurs why they have not been smart enough to make investments and modernize to increase productivity and profitability. If barriers are the result of poor information systems, regulatory impediments, or poor tax policy, then the barriers should be the focus of recommendations to remove them to increase efficiency and productivity.

Most business people and economists have concluded that strong economic growth is associated with corporate tax reform, increased business confidence in fiscal policy, and stable and predictable rules of the road. The uncertainty that has existed over the past five years and costly programs and regulations have held back economic growth and held up unemployment. Robust economic growth will come from changing those conditions, not another commission.

The energy efficiency field has been dominated by top down engineering analysesthat propose solutions that often have turned out to be impractical and uneconomic. When they are not adopted, the result has not been to drill down to understand why; it is to claim market failure. The Energy Star Program has been a success because it dealt with information failures and incentives for companies to develop information to improve their own efficiency and productivity. On the other hand, programs like banning incandescent light bulbs and solar panel incentives have created boundless opportunities for rent seekers and examples of the “Baptist-bootlegger” theory of public choice. A classic example was documented in a Wall Street Journal Opinion piece by T.J. Rodgers on December 8, 2011—Subsidizing Wall Street to Buy Chinese Solar Panels.

This article appeared on The National Journal’s Energy Experts weblog athttp://energy.nationaljournal.com/2013/02/how-will-energy-productivity-j.php#2294936

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