Freakonomics Radio - 195. How Efficient Is Energy Efficiency?

Episode Date: February 5, 2015

It's a centerpiece of U.S. climate policy and a sacred cow among environmentalists. Does it work?

Today, we'll be hearing from an environmental economist. Now, that very title may strike you as a bit oxymoronic. Economists are interested in what is the right level of pollution. The main issue at hand today is legislation passed in California back in the 1970s that required new houses to be much more energy efficient. The California Energy Commission projected at the time that homes built after the standards were enacted would use 80% less energy. So did new homes in California really use 80% less energy?

Do you think I'd be asking this question if the answer were yes? Along the way, we'll hear what an environmental economist can get away with saying, even when he's advising the President of the United States. Well, I don't like that idea. If you think I'm speaking out of turn, fire me. I have a better job back home. And finally, we try to solve some of the environmental puzzles that you, our podcast listeners, like to send in. My favorite quote from all of this came from Betty Friedan,

who said she would rather help the environment by not using disposable coffee mugs and pouring the scalding hot coffee directly into her hands than use cloth diapers. From WNYC, this is Freakonomics Radio, the podcast that explores the hidden side of everything. Here's your host, Stephen Dupner. We are having a conversation today with Arik Levinson. I'm an economics professor at Georgetown University.

Okay. And Arik, when I look at the papers you've written about pollution and energy use and development rights, I'm inclined to call you, to label you an environmental economist. Are you okay with that or is that not quite you? I think that's right. I started as a public finance economist. Public finance is the role of government in the economy. not quite you. I think that's right. I started as a public finance economist. Public finance is the role of government in the economy. And the last 10 years or so, I've specialized in environmental issues. Now, someone who doesn't know better might think of environmental economics as sort of an oxymoron because a lot of people think that economists are inherently pro-business

at any cost and that business is inherently anti-environment. So respond to that possible misperception. So I think it is a misperception. Economists are pro-market, not necessarily pro-business. And a lot of things that businesses do in pursuit of profits are anti-market. Think of a monopolist. A monopolist suppresses competition. And so we have regulations to prevent that. A polluter pollutes and that causes distortion in the market and adverse outcomes. And we have regulations to prevent that. So being pro-environment is not necessarily being anti-market. Does being an environmental economist

make you an environmentalist necessarily? No, actually. And I think for many years, for decades and decades, environmentalists didn't like the environmental economics ideas coming out of the economics profession. The classic example is cap and trade,

which has been around among economists for a long time. And environmentalists don't like the idea of giving polluters the property rights to trade among themselves. The counterproposal then is don't pollute, period, which hasn't worked out so well. Here's an example from my undergraduate environmental economics class. Economists are interested in what is the right level of pollution. Zero pollution would be very expensive and hard to obtain, and we have to shut down the economy. Letting people pollute as much as they want is also clearly bad. So somewhere in the middle, the costs that society

incurs from the pollution that happens is about equivalent to the benefits from generating that pollution. And that's the sweet spot that economists are looking for. And environmentalists, real hardcore environmentalists, don't like the idea that there's some right amount of pollution that's not zero. Yeah, I mean, honestly, the minute you said at the beginning of that explanation, the right amount of pollution, I can kind of feel the neck tingling for some listeners who say, instinctively, I think, and through purely well-meaning, the right amount is zero. But as you point out, and this is what economists do, is point out that everything in life in the history of civilization is a tradeoff, really. And you need to try to get to the point at which the tradeoff helps the most people possible. Yeah?

Sure. When I drive my car, I have accident risk. I face accident risk. You know, if the right amount of accident risk is zero, I should just never drive. But that's clearly not right. I'll incur a little bit of accident risk in order to drive the places I want to drive, and I want to talk to you about today is titled, How Much Energy Do Building Energy Codes Really Save? Evidence from California. Okay, so before we get to the evidence from California, walk us through the background on this paper. First of all, why is this something you decided to look at? I got interested in this because I'm an environmental economist, and I went to work for the Obama administration for a year. One of my jobs was helping the White

House evaluate the environmental policies coming out of Department of Transportation, Department of Energy, and the Environmental Protection Agency. And I quickly realized that most of the policies that I was seeing involved energy efficiency, mandated energy efficiency for light bulbs and refrigerators and air conditioners and cars and trucks and so on. And front and center in many of the cost-benefit analyses for those policies was claims about the efficacy of regulations that California passed in the 1970s. That those regulations for energy efficiency for the buildings and the appliances in California had saved California a lot of energy and consequent pollution. And so I was suspicious of that claim because to me it looked like a correlation rather than a causation. All right, let's unpack that a bit. What was

the correlation that may or may not be a causation? In 1974, California passed the Warren-Alquist Act, which established the California Energy Commission and gave it the authority to, quote, prescribe by regulation lighting, insulation, climate control systems, and other building design and construction standards, which increase the efficient use of energy. As Arik Levinson tells us, these were the nation's first such standards. And in the ensuing decades, he says, per capita residential electricity consumption in California grew more slowly than in other states. So one might naturally assume this was because of those energy efficiency standards. You have to admit, it's a very attractive notion, especially the idea of how much money you'd save as a homeowner.

That was a big part of the sell. That continues to be a big part of the sell with all of these policies. The California Energy Commission projected at the time that homes built after the standards were enacted, so homes built in the 1980s relative to homes built in the 1970s, would use 80% less energy. So they would only be using a fifth as much energy as the pre-building code homes. So were the energy efficiency standards in fact responsible for these homes using something like 80% less energy? That's what Levinson wanted to find out. Talk about how you measure this. It seems to me in every way the opposite of simple. Can you explain why it's hard and what you do about it? So you're right that it's the opposite of simple. And I think policy so far has been somewhat glib about the ease with which we can measure it. So, for example, the new clean power plan that's proposed by the Environmental Protection Agency gets about half of its future carbon reductions from things like energy efficiency

and reductions in consumer energy consumption. But it's silent about how we would go about measuring those savings. And the savings are really hard, really difficult to measure. We can't take the engineer's estimates as gospel because there's mounting evidence that engineering forecasts of how much will be saved as a consequence of energy efficiency mandates are way overstated. All right, let me warn you here. This is going to get a bit more complicated before it gets less complicated. It may just be that the engineering estimates don't account for consumer behavior. If you make my air conditioner more energy efficient,

then it's cheaper for me to air condition my home than I might. I can't compare people who live in efficient homes and people who live in inefficient homes because those people have chosen. Or if environmentalists choose to live in energy efficient homes because they like preserving the environment, that'll exaggerate the difference. And so I can't just compare side-by-side the homes where one's energy-efficient and one's not. And I also can't compare jurisdictions. So you've got all these problems that are selection problems and behavioral responses and endogeneity.

Talk to us for a moment in language that even I can understand then about what you do with this set of problems. If you want to measure apples to apples as best as you can to determine whether the energy codes actually saved energy. So the first thing I did was I filed an open records request with the state of California. Again, it's a bit complicated. So I took three approaches. I took three strategies. First, I tried to control statistically for all of those characteristics of homes that affect its energy consumption. The temperature outside, where it's located, how many people live in the house, their education levels, and so on.

Okay, that's the first approach. Second, I compare electricity consumption by new and old homes when they face a surprisingly hot month of weather. Again, not so simple. So I look at the average monthly temperature in the zip code in which the house is located. I compare it to the average temperature in that month in that zip code. And if it's higher than usual, houses use more electricity for air conditioning. And finally... The third strategy I use is I compare electricity consumption by new homes and old homes in California to that same difference, electricity consumption in new homes and old homes, in other states that didn't pass California's strict energy efficiency standards back in the 1970s. All right. So, Ark, you put these three approaches,

three strategies into place to try to figure out what actually happened. So, can you read the last sentence for us of the abstract of this paper then? Yes, but I have to put on my glasses. Hold on. Take your time. Last sentence of my abstract. All three approaches yield the same answer. There is no evidence, no evidence that homes constructed since Californians used less electricity. I mean, that is mind blowing. When I read it, my mind was blown in part, I guess, because you start the

paper with a couple of quotes from one, the California Energy Commission in 1979, saying that new building codes will reduce the energy quote quote, used in typical buildings by at least 80 percent. Then another quote from Tom Friedman writing in 2014 in The New York Times saying new houses in California now use one fourth of the energy they used 25 years ago. So, first of all, are you calling Tom Friedman a liar? Is he wrong? Well, if you look at that Tom Friedman op-ed, or it's an editorial, he's referring to information from a guy named Hal Harvey, who runs an energy innovation institute in California. And I called up Hal Harvey and asked how they figured out this calculation. And that calculation is simply an aggregation of all the engineering estimates that were done before the policies were enacted. So it's not an ex post analysis, even though it looks like one in print. So it's kind of like a promise that I'm going to win the

Super Bowl before the Super Bowl is played. Right. And then afterwards, you claim credit for having won the Super Bowl no matter what happened. We also got in touch with Hal Harvey, who's the CEO of a clean energy firm called Energy Innovation. Levinson had asked the firm to review a draft of the paper we're talking about today. As you may have figured by now, a firm like Energy Innovation wasn't so enthusiastic about Levinson's conclusion, and they critiqued his methodology as well. Here's a statement that Harvey sent us. Quote, California building codes are the most advanced in the world.

They've saved consumers tens of billions of dollars in reduced energy waste and ushered in terrific products, super efficient windows, new HVAC systems, advanced lighting, and more. Furthermore, as Hal Harvey wrote to us, Levinson's analysis unfortunately fails at the basic task to measure heating energy in buildings, which is astonishing since that is the main purpose of building codes. His paper does not distinguish between different uses of electricity, uses a poor surrogate for climate conditions, and comes up with results that don't support in any way his headlines. Now, Harvey's firm, as he wrote to us, laid out a careful set of recommendations for Dr. Levinson to upgrade his analysis. And Levinson, in our interview, noted that he is looking over Harvey's recommendations.

His paper is a working paper. That's why he sent it out to review, including to people like Harvey, who inevitably may dislike its conclusions. That said, Arik Levinson has confidence in his conclusions. As he wrote to us in response to Hal Harvey's response, I don't dispute that California's building codes may have ushered in terrific new products and made heating, cooling, and lighting less expensive for homeowners. That's not what my paper is about. My paper and others like it

provide mounting evidence that these types of regulations don't reduce energy consumption or pollution nearly as much as promised, if energy efficiency regulations don't really save energy, should we banish them entirely? No. And why is energy efficiency such a big piece of U.S. energy policy anyway? This administration is merely following the will of Congress. And since this president is facing a Congress that doesn't seem to be willing to take legislative action on climate change, this is one of the biggest Radio. Here's your host, Stephen Dubner. All right. So if you are an environmental economist like Arik Levinson of Georgetown,

and you do this painstaking analysis of energy efficiency regulations and find that they don't save anywhere near the energy they promise, does this mean you think that such regulations are bad policy? No. And in fact, I'm happy that there are energy efficiency regulations for new buildings. Just like I'm happy there are fire codes and electric wiring codes

and plumbing codes for new buildings because as a homeowner, when I go buy a house, I can't see all those things. I'm not informed enough to know whether my builder has cut corners or skimped on safety or energy efficiency details. I can't look behind the walls and see the insulation. And so those regulations have a solid economic purpose and a solid purpose in real estate markets, but they don't necessarily

save energy. Eric, I can't imagine a whole lot of people that this study would make happy, except maybe for the energy companies themselves who are selling electricity. So talk to me about response that you've gotten, whether from industry, from government, from colleagues and so on. So energy efficiency is kind of a sacred cow among environmentalists. And I think that there's a, just like there's environmentalist worry that there's a head-in-the-sand denialism among climate change deniers who say, I don't care what the scientific evidence says, it's cold where I am,

so they really can't be climate change. There's a parallel sort of a head-in-the-sand denialism among environmentalists that say, I don't care what the evidence is about energy efficiency. Intuitively, it makes sense that it would work. The engineers have said it's going to save 80%. How can it not? And so let's impose these policies. We're going to have people save money. They're going to reduce pollution and everybody will be better off. And there is And my paper is not alone. There is mounting evidence that these policies don't deliver on their promises.

And so to ignore that evidence is to suggest we're enacting a bunch of policies, patting ourselves on the back for achieving our climate goals while the Earth continues to warm and carbon emissions continue to increase. Talk to me for a minute about, let's assume that your findings are correct and true, that the new regulations did not lessen energy consumption in homes in California. Talk to me about the various channels by which that is true. In other words, is it that with a more energy efficient home and or appliance that I just use a lot more? Is it that people

are building bigger homes generally and that's part of the issue? Is it that we have more appliances than we used to, et cetera? So talk about the different ways in which energy consumption hasn't fallen despite the regulations. Sure. I mean, the first thing I'll do is be humble and say that it may be that my findings are not true. This is a very difficult question. And all I've done is poke the data in a variety of different ways and haven't been able to find it. And so I think one of the important takeaways from this is that this is a really difficult question and we shouldn't be glib about how hard it is. Okay. But you asked, suppose my findings are true. If my findings are true and energy efficiency mandates don't

reduce electricity consumption by homes in California, there are a couple of reasons why that might be the case. The problem with energy efficiency for cars or for homes, for air conditioners, is that energy efficiency makes doing the activities that cause the problems in the first place cheaper. So if we put a tax on gasoline or a tax on electricity that made emitting carbon more costly, people might respond in a couple of ways. They might drive less. They might invest in more energy-efficient vehicles. Engineers might innovate to develop more energy-efficient technologies. And that would be energy efficiency responding to what is the true price of driving and what is the true price of using air conditioning. But if you try to short-circuit that mechanism and mandate the energy efficiency directly

without the rise in price, then all you've done is make it less expensive for people to drive and make it less expensive for people to use their air conditioners. And it makes sense that people will do more of both. So let's say for the average concerned and informed or misinformed citizen listening to you, you know, you could probably understand how they might just throw up their hands and say, what am I supposed to do? You know, I try to be a good citizen. I try to be one of many good citizens trying to pick the low-hanging fruit, trying to waste less, pollute less. I learn about negative externalities. I try to produce fewer of them if possible. But your message is, I don't want to say hopeless, but it's a little bit of a downer. Look, carbon emissions are a global problem, and there's 7 billion people on the planet.

What can you, Stephen Dubner, do to reduce climate change? I think nothing, except advocate for public policies that make sense. I believe that climate change is a very simple economic problem, and it's a very difficult political problem. The simple economic solution is let's raise the cost of doing things that emit carbon. This is something that conservative economists agree with, liberal economists agree with, Democrat economists agree with, Republican economists agree with. It's not rocket science. It's difficult politically.

It's not difficult in terms of economic policy. Aaron Powell On this point, Levinson knows where of he speaks at least a little bit. In 2010 and 2011, he worked for the Council of Economic Advisers under President Obama as a senior economist for environmental issues. David Morgan The Council of Economic Advisors was set up in the Truman administration as the president's sort of in-house think tank, meant to be sort of non-political, academic, economic advice for the president. And I think it's a terrific, good government institution. All of the staff, like me, typically come from leaves of absence from universities. So our college

professors who take time off to go work for the government. And the three appointed members are also college professors who take time off, leaves of absence of two years or so to go work for the government. And because they're on leave from universities, they can say things inside the White House behind closed doors that are politically unpopular. They're not part of the career track of government officials. If I have to say something that's politically popular but academically or economically questionable, a CEA chairman will have to balance that against his or her career in academic economics and can say to the president or the president's people, we can't say that. It's not quite true. And so I think that the fact that everyone comes from academia and there's this rotating staff has pros and cons. It means that we're not steeped in the

institutional details of every policy, but it also means that we're not steeped in the institutional details of every policy, but it also means that we have license to relitigate issues that have come and gone, and it means that we have license to say, well, I don't like that idea. If you think I'm speaking out of turn, fire me. I have a better job back home. One of the ideas that Levinson didn't like so much, or at least found suspect, was the administration's heavy reliance on energy efficiency, perhaps at the expense of energy policies an economist might find much more effective, like the carbon tax. I think it's safe to say that energy efficiency mandates have become the centerpiece of U.S. climate policy. If you ask an Obama administration official about what

this administration has done for the environment or for global climate change, the answer will come in form of the long list of energy efficiency regulations that the DOT, EPA, and Department of Energy have passed. And that's for a very good reason, which is that back in 2007, President Bush signed into law an act of Congress that gave the Department of Transportation, Energy, and Environmental Protection Agency the authority to regulate energy efficiency of appliances and cars and trucks. In fact, it required them to do that. And so all the Obama administration doing— That was the Energy and Security Act you're talking about? Energy Independence and Security Act of 2007, EISA. This administration is merely following the will of Congress. And since this president is facing a Congress that doesn't seem to be willing to take legislative action on climate change, this is one of the biggest and only policy levers that this president has. So executive agencies can regulate energy efficiency without going to Congress for new laws.

So you're saying energy efficiency becomes a centerpiece because the other pieces are just off the table legislatively, yes? Politically. I think that's right in the case of the president and this administration. But it's been true for a long time, and it's true at the state level, and it's true when Congress has acted. For example, in 2009, when the House of Representatives did pass an economy-wide federal cap-and-trade plan that never got passed by the Senate, but it passed the House of Representatives in 2009, that devoted a lot of its energy to energy efficiency mandates. This is fascinating, to me at least. As Arik Levinson tells us, we've become obsessed with energy efficiency, dependent on energy efficiency, primarily because it's the only energy policy

that's really been advanced, even though it's not very effective. And it's not very effective for a simple behavioral reason, what economists call the rebound effect, which means that as it becomes cheaper and easier to use something, I probably use more of it. So if I build a house with solar panels and I drive a Prius, I'm gaining all this energy efficiency. I can also afford to run my hot tub all the time, maybe have a couple extra refrigerators in the garage, a deep freezer. You know how I know that so, so many people are obsessed with energy efficiency? It's because of the emails that you send us with questions that I can't answer, but hopefully, Eric Levinson can. So I asked him to answer one of the most common emails we get.

So here's the question. If your goal is overall energy conservation, what's better? To use a coffee mug that gets washed after each use, or at least after several uses, or the throwaway coffee cup. So we've been trained to think that anything disposable is an environmental sin. But it seems as if it's pretty efficient to throw things away if you do it right these days, whereas if you wash that mug repeatedly, you're paying for the energy to heat the water, maybe heat the dishwasher, to manufacture the soap, to say nothing of all the water you use in washing. Then you have to dispose of the soap afterwards. So, Arik, what will it be, at least for you, throwaway cup or a coffee mug?

I don't know the answer to that question. But I will say that one of the, there's environmental economists and environmentalists. And one of the things that environmentalists have focused on, I think, to the detriment of the environment, is landfill space. So using space in landfills is not an environmental problem. We have plenty of space in the United States. There's a political problem associated with where we locate those landfills. But solid waste going into landfills doesn't impose much of an environmental problem. And so if that's part of the cost of using a disposable coffee cup, that's not a big cost to me. So I would want to compare the pollution associated with generating the disposable cup

versus the pollution associated with washing the clean one. And that seems doable. I just haven't done it. If you get around to that, can I give you another one to solve that we also get asked, which is paper towels versus electric hand dryers in restrooms? People are really puzzled by that one. When I had babies, I did the research. I looked at the research into disposable diapers. Yeah, exactly. And my favorite quote from that, it will tie all these together. So I went to the library and I looked up papers

on disposable diapers versus cloth diapers. And the problem is a lot of the papers are written and paid for by Procter & Gamble, which is in the disposable diaper industry. So I don't know what to make of all of it. But my favorite quote from all of this came from Betty Friedan, who said she would rather help the environment by not

using disposable coffee mugs and pouring the scalding hot coffee directly into her hands than use cloth diapers. Uh-huh. And is that the advice that you and your family followed then? We did not pour scalding hot coffee into our hands. Okay. Hey, podcast listeners. On the next episode of Freakonomics Radio,

how about a Hippocratic oath for the people in charge of fighting terrorism? Many people might think that we couldn't make the problem worse. Oh, yes, we can make it much worse very quickly, as we saw with Iraq. The White House plans to host a summit next week on violent extremism. We talk about some ideas you might not hear at the White House. That's next time on Freakonomics Radio. In the meantime, we need your help for an upcoming episode about something called temptation bundling. That's the idea from the University of Pennsylvania professor Catherine Milkman of tying together two activities, one that you should do but may not want to, like going to the gym or visiting a cranky relative, and the one activity

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Most important, tell us your temptation bundle. Maybe, for instance, you only let yourself listen to Freakonomics Radio podcast while you're filling out your tax return or washing your fleet of polo ponies. I don't know. Whatever your bundle, send it along to radio at Freakonomics.com. We will pick through the best, weirdest examples and make them part of our show. If you're too shy to record your voice, which I hope you're not, you can give us a shout on Twitter or on our Facebook page or on Freakonomics.com. Thanks. and Chris Bannon, with help from Christopher Wirth, Anna Hyatt, Daniel DeZula, David Herman, and Merit Jacob. If you want more Freakonomics Radio, you can subscribe to our podcast on iTunes or go to Freakonomics.com, where you'll find lots of radio, a blog, the books, and more. Thank you.