The conventional wisdom is, and has been for years, that we benefit from energy efficiency policies because they save money and are good for the environment. The Obama administration believes this, and it has dramatically expanded taxpayer-funded efforts to upgrade furnaces, windows, insulation and wiring in the homes of low-income Americans.
For example, the budget for the Weatherization Assistance Program (WAP) increased from $450 million annually in 2009 to almost $5 billion for the 2011 and 2012 programs under the federal stimulus plan. Owner-occupied households with income of up to 200 percent of the poverty level qualified for the upgrades.
However, the long-standing presumption of a “win-win” (lower energy costs, less environmental damage from CO2) from these kinds of programs is questionable. Comprehensive new research by economists at the University of Chicago and the University of California Berkeley found “energy efficiency investments may not deliver all that they promise.”
The economists conducted research on a sample of 30,000 Michigan households and found that the cost of WAP was about twice the savings. The upgrades cost an average of $5,150 (all taxpayer dollars) per household. They did reduce monthly energy consumption by 10 to 20 percent, but “the upfront investment costs are about twice the realized energy saving.”
The researchers also found the calculated benefit from lower CO2 emissions through WAP is vastly overestimated. The U.S. Government’s projection of the social cost of carbon is roughly $38 a ton, but the cost of reducing greenhouse gas emissions through WAP in the Michigan experiment was nearly ten times more expensive at $330 a ton.
“Energy efficiency programs are generally viewed as cost-effective,” said Meredith Fowlie, associate professor of resource economics at UC Berkeley and a member of the study team. “Our data-driven analysis that measures the actual returns on energy efficiency investments shows how these projections can be quite flawed. In actuality, the energy efficiency investments we evaluated delivered significantly lower savings than the models predict.”
None of this should suggest that energy efficiency has no merit, far from it. The Wall Street Journal reported last year, “A recent report by McKinsey & Co. says that up to 20 percent of U.S. residential energy use can be cut by a few changes in consumer behavior, from slight changes in thermostat adjustments to shorter showers.”
The key, however, is doing the things that pass the cost-benefit test.
Michael Greenstone, the Milton Friedman professor of economics and the director of the Energy Policy Institute at the University of Chicago, was a team leader of the study. Greenstone says not all energy efficiency investments are created equal. “It is critical that we field test energy efficiency programs to determine which investments offer the greater potential.”
Until then, this research shows we should not automatically assume that any program, service or product identified as “energy efficient” or “good for the environment” is also good for the pocketbook.