It's Not A Market Failure When People Avoid a Crappy Investment

Environmentalists often claim that people systematically under-invest in energy conservation, something they call a market failure.   This is why Obama and the Left put in a much heralded provision in the stimulus package that used Federal money to subsidize home energy conservation (new windows and insulation and such).

A new study in the NBER looks at the results.  This is the abstract:

Conventional wisdom suggests that energy efficiency (EE) policies are beneficial because they induce investments that pay for themselves and lead to emissions reductions. However, this belief is primarily based on projections from engineering models. This paper reports on the results of an experimental evaluation of the nation’s largest residential EE program conducted on a sample of more than 30,000 households. The findings suggest that the upfront investment costs are about twice the actual energy savings. Further, the model-projected savings are roughly 2.5 times the actual savings. While this might be attributed to the “rebound” effect – when demand for energy end uses increases as a result of greater efficiency – the paper fails to find evidence of significantly higher indoor temperatures at weatherized homes. Even when accounting for the broader societal benefits of energy efficiency investments, the costs still substantially outweigh the benefits; the average rate of return is approximately -9.5% annually.

The only failure here is the government diverting capital from productive uses into money-losing ventures like this one.

  • Mike

    It seems like a strange statement that the upfront cost is twice the energy savings. Surely the energy savings depend on the period of time considered, and it would make more sense to calculate the savings in terms of the payoff time (the amount of time it takes for the savings to pay for the investment).

  • Matthew Slyfield

    It depends on the nature of the what the up front costs are covering. For example, if the money is being spent on more efficient HVAC systems or kitchen appliances, these things have a limited lifespan and up front costs could be compared to energy savings over the expected service life.

  • sch

    If you read between the lines on the projects in a number of cities you will realize the programs were political bonanzas for favored groups. A lot of 'training' was required and managers were needed. The scope for padding the expenses and salaries was large. Typically a few
    million $ were provided and under 100 houses were 'upgraded', ie insulation, fixing air leaks and holes etc. These programs did not
    cover HVAC or window/door replacements. As a side comment NBER papers are not available to individuals, only governmental or academic entities.

  • ano333

    True, but according to the other commenter (sch) who seems to have read the paper, the programs did not cover either of those things.

  • Onlooker from Troy

    I think the fundamental problem these people have is their economic ignorance (I know, shocker, right?). Specifically in this case it's their lack of understanding that money represents resources and not just arbitrary stuff that govt makes at will (gee, I wonder why they think that).

    And so they don't see it as using resources now vs. the saving of resources later and therefore that you have to make that trade-off calculation. They just think that govt can make all the money we need at no real cost, we'll save resources in the future and therefore it's a can't-lose proposition. Oh, and that it's just "the right thing to do" and such other meaningless rhetoric.

  • Matthew Slyfield

    I doubt sch read the actual paper.
    1. I followed the link, you have to pay to read the paper

    2. sch talks about projects in a number of cities, whereas the paper is about one specific program namely "the nation’s largest residential EE"

  • MJ

    Someone needs to let this woman know right away. The study's participants just need a "nudge" in the right direction.

  • MJ

    The types of improvements financed by the programs have a finite economic life. At some point in the future they will have fully depreciated and need to replaced. Hence, it makes sense to compare the costs and benefits over its lifetime.

  • marque2

    My utility company insulated my attic to R30 for free!

  • Rich R

    We recently replaced the old single pane windows in our house (last item on the remodel list - DONE!) with dual pane windows. We didn't do it for energy efficiency, we did it for noise reduction. The very slight monetary gain from energy reduction was far outweighed in our minds by the value of not hearing the neighborhood kids carousing on Saturday mornings...

  • epobirs

    We got new windows last year. It was a huge improvement in several ways but if it has made a difference in energy consumption it requires close scrutiny to tell. Our location is such that we use the heat and air conditioning during a very small portion of the year. We sometime go through a mild winter without using the heat at all.

    The company that did the window work was very up front about it. Their take was that if you tracked very closely you could probably detect an improvement but nowhere near what it would take to cover a significant portion of the investment. It would possibly improve the selling price of the property but we're only likely to move if we become suddenly wealthy, in which case we wouldn't care if the property sold for perhaps a couple thousand more than otherwise.