The Agenda

Doug Allen Makes the Case for Efficiency Standards

Doug Allen suggests that Virginia Postrel is wrong on efficiency standards. First, he quotes a recent Postrel column:

 

What matters, from a public policy perspective, isn’t any given choice but the total amount of electricity I use (which is itself only a proxy for the total emissions caused by generating that electricity). If they’re really interested in environmental quality, policy makers shouldn’t care how households get to that total. They should just raise the price of electricity, through taxes or higher rates, to discourage using it.

Instead, the law raises the price of light bulbs, but not the price of using them. In fact, its supporters loudly proclaim that the new bulbs will cost less to use. If true, the savings could encourage people to keep the lights on longer.

But then he argues that raising the price of electricity isn’t the most appropriate strategy:

 

The cost of electricity in a given TOU period will always be determined not only by my use, but by the use of other customers during that same period. This remains true as you get into continually smaller TOU periods, and even if you introduce tiers into the different TOU periods (as PG&E’s TOU rate does). You can get closer and closer to marginal pricing, but at no point will your energy rates be unaffected by the consumption choices of others unless you allow consumers to individually contract for generation, transmission, and distribution service. Realistically, is anyone going to argue for that?

I think it’s fairly easy to argue for that. In New York city, electricity prices are considerably higher than the national average and this has appeared to have a significant impact on consumption. Granted, it’s not entirely fair, but gas prices also reflect the consumption choices of others and this hasn’t deterred calls for higher gas taxes. 

As the free-rider problem can never really be eliminated from electricity pricing schemes, I believe that this provides a basis for arguing for public policy interventions in the form of efficiency standards. And let’s be clear: these efficiency standards are not typically set capriciously. In California, there is an extensive public review process for the efficiency programs that the utilities put together. Programs are evaluated using the Total Resource Cost (TRC) test in order to “focus on programs that serve as resource alternatives to supply-side options”.

I’m open to discussion about the metrics by which these programs are evaluated, including discussion of the appropriate discount rate to use when valuing programs, the value of avoided energy, whether the tests should include avoided external costs like a proxy price for CO2 emissions, etc. But I disagree with the idea that there is no place for the government in this discussion because some people don’t like the way CFLs look (especially when the options for CFLs have expanded so dramatically as to make it difficult to tell the difference between light from an incandescent bulb and a CFL**). When your electricity use impacts the price of my electricity (i.e. property rights are not clearly defined), there is a role for an independent arbitrator to fix an inefficient allocation of resources.

It’s an interesting argument. I don’t buy it, but perhaps you will. Doug continues:

One thing that interests me about this idea that “properly pricing electricity is the only solution to this problem” is that it is, in a sense, just a different argument for government intervention in the electricity market. Because properly pricing electricity is beyond the capabilities of the meters that many people currently have installed in their homes, which just track total use and not when the power was used. Instead, getting to a point where it would even be possible move dramatically towards a more accurate price of electricity (though as I’ve discussed above, I don’t think it’s possible to move all the way there) would require the installation of smart meters for all customers which would likely take . . . a government mandate. I’ve yet to find any articles by the people calling for changes in the price of electricity that advocate this.

I think he misunderstood Postrel’s column: she was not suggest that “properly pricing electricity is the only solution to this problem.” Rather, she was suggesting that raising electricity prices would represent a more effective approach to addressing the problem addressed by advocates of the efficiency standards in question. It’s not clear to me that she was advocating the raising of electricity prices. Rather, I read the column as agnostic on whether the underlying “problem” merits a policy intervention. Given that, I’m confident that Postrel understands that raising electricity prices may well require using public regulatory authority. The claim is that this would nevertheless be a sounder, more appropriate intervention than imposing efficiency standards, at least in this instance. 

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