The Mercatus Center released a paper (PDF) this month co-authored by Ted Gayer (an economist at the Brooking Institution) and W. Kip Viscusi (an economics professor at Vanderbilt), titled “Overriding Consumer Preferences with Energy Regulations” which questions the economic justification for various government schemes implemented to force energy efficiency improvements in consumer household products, automobiles, lightbulbs, etc. The abstract is below:

This paper examines the economic justification for recent U.S. energy regulations proposed or enacted by the U.S. Department of Energy, the U.S. Department of Transportation, and the U.S. Environmental Protection Agency. The case studies include mileage requirements for motor vehicles and energy-efficiency standards for clothes dryers, room air conditioners, and light bulbs. The main findings are that the standards have a negligible effect on greenhouse gases and the preponderance of the estimated benefits stems from private benefits to consumers, based on the regulators’ presumption of consumer irrationality.

The paper walks through the basic economic understanding of consumer rationality, and explains why behavioral critiques of consumer rationality fail to undermine the general conclusion that consumers are overwhelmingly rational and tend to act in their own best interest, and that “in most contexts consumers are better equipped than analysts or policymakers to make market decisions that affect themselves.”

The authors state that benefit cost analysis (BCA) conducted by government agencies in support of these policies (fuel standards, consumer appliance efficiency, etc.) make unwarranted assumptions, including the assumption that the energy efficiency of the product should trump other considerations, such as the up front cost:

As our discussion in this paper indicates, government agencies do not properly assess the benefits from energy-efficiency standards. They assume consumers and, in some cases, firms are incapable of making rational decisions and that regulatory policy should be governed by the myopic objective of energy efficiency to the exclusion of other product attributes. Energy efficiency standards provide a valuable case study of how agencies can be blinded by parochial interests to assume not only that their mandate trumps all other concerns but also that economic actors outside of the agency are completely incapable of making sound decisions. The assumption that the world outside the agency is irrational is a direct consequence of the agencies’ view that energy efficiency is always the paramount product attribute and that choices made onany other basis must be fundamentally flawed.

This paper is important because there exists a general scorn from left leaning policy groups towards anyone who dares question the wisdom of energy efficiency programs, including the recently introduced CAFE standards which will require that automobiles meet previously unheard of fuel mileage standards by 2025. Libertarians and market oriented folks are dismissed as right-wing cranks by those who are more supportive of government intervention into the economy, and yet there remains a strong and sound argument against narrowly tailored regulations designed to nudge consumers towards making different choices.

Today the Senate Energy and Natural Resources Committee marked up and approved S. 398, a bill that establishes new efficiency standards for a variety of consumer products: air conditioners, refrigerators, freezers, washers, dryers, outdoor drinking water dispensers, dishwashers, and a number of other appliances. You can certainly trust Congress to micromanage the optimal amount of energy used by hundred’s of complex small appliances across different industries.

This bill saw national media coverage earlier this year when Senator Rand Paul ranted about efficiency standards that have effected toilets and will soon effect light bulbs. It’s infuriating that energy bureaucrats can claim that they are in favor of allowing consumers to choose whichever bulb they want, when they are setting bulb efficiency standards that will ban the traditional incandescent bulb. At least be honest about your desire to restrict the choices of consumer and our freedoms.

Politico covered today’s hearing and Paul was unsurprisingly one of the few dissenters. This time Senator Paul offered an amendment that would make the energy efficiency standards voluntary, which failed 16-6 in committee. Here is a short video from Paul’s office covering the hearing.

Consumers should be wary when business gets together and supports these types of standards, though the environmentalists often use this as evidence that only ‘crazies’ oppose such bipartisan, “sensible” legislation. These regulations will increase the cost of these appliances (and the profitability of them), create new competition-crushing barriers to entry, and often bring unexpected consequences (and here). Recall that a number of oil and energy companies supported the Waxman-Markey bill after it went through the Congressional pork factory.

Proponents will also make grandiose claims about the amount of energy/jobs/money/small children saved from this legislation. These studies almost never consider the efficiency gains that companies might pursue on their own, assuming that the products will remain stagnant in water or energy usage for the rest of time, despite historical evidence (and common sense) to the contrary.

And who really believes that bureaucrats at the Department of Energy can calculate the appropriate amount of energy efficiency? After all, it’s not like Americans would prefer a refrigerator which adds $100 to their electric bill per year rather than $50, if everything else is equal. There is a natural incentive for companies to produce efficient products while also considering consumer demand.

Here is a previous post from last year on efficiency measures. Here is a CEI press release on today’s decision. Here is a 2003 Cato Institute study on appliance efficiency standards from prior decades. Here is Representative Markey making the hilariously inaccurate claim that the GOP was responsible for ruining America’s domestic auto industry because of their opposition to fuel efficiency standards.