Ross McKitrick Professor of Economics University of Guelph and Adjunct Scholar Cato Institute Presentation to the Heartland Institute America First Energy Conference Houston Texas November 9 ID: 652925
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Benefits from Repealing Uneconomic Energy Efficiency Regulations
Ross McKitrickProfessor of Economics, University of Guelphand Adjunct Scholar, Cato InstitutePresentation to the Heartland Institute America First Energy Conference,Houston, TexasNovember 9, 2017
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Summary
EPA and DOE used Cost-Benefit Analysis (CBA) to justify new regulationsTheir methods mistakenly treated a large category of costs as if they were benefitsFixing this error would justify the repeal of hundreds of billions of $ worth of regulations
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Example
Wine A: $10/bottleWine B: $50/bottleTotal sales of wine B: 1,000 bottles per year
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Example
US Department of Wine Regulation 2017-1aWine B costs $40 more per bottle than wine A, but our engineers can’t taste the difference.
Therefore wine B is hereby banned.
This will save consumers $40,000 annually!
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Example
Problem: they misinterpret what the $40 representsIt’s not money being wasted by irrational consumersIt measures what some consumers are Willing to Pay for what they perceive to be a higher quality productIt’s a measure of the benefit to the consumer of the better wine, not a cost
of making the “wrong” selectionIt’s called Consumer Surplus
By treating it as a
cost
the bureaucrats are saying they are smarter than you and know your tastes better than you
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How this plays out
Electricity use:CFL bulb: $5 / yearIncandescent bulb: $10 / year1 billion incandescent bulbs in userossmckitrick.com
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How this plays out
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US Department of Lightbulbs Regulation 2017-1b
Incandescent light costs $5 more year than CFLs, but they both give the same amount of light.
Therefore incandescent bulbs are hereby banned.
This will save consumers $5 billion annually! Slide8
The big mistake
They don’t give the same quality of lightThe $5 is a measure of what people are willing to pay to get the better quality of lightIn other words it measures the benefits of the availability of the product, not the cost of irrational consumers making a “mistake”The ban imposes a cost: Lost Consumer Surplus
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Another mistake
The $5 energy savings is almost certainly over-estimatedLots of research shows government experts overstate the benefits of energy efficiency programsrossmckitrick.com9Slide10
Example 1: CAFE Rule (2011)
CBA from EPA (cars & light trucks)Costs (billions) Benefits (billions)Technology $140.0 Environmental Improvements $54.4Accidents etc. $52.0 Energy Security $24.2
TOTAL COSTS
$192.0
TOTAL BENEFITS
$78.6
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Example 1: CAFE Rule (2011)
CBA from EPA (cars & light trucks)Costs (billions) Benefits (billions)Technology $140.0 Environmental Improvements $54.4Accidents etc. $52.0 Energy Security $24.2
TOTAL COSTS
$192.0
TOTAL BENEFITS
$613.6
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Consumer Benefits $534.4Slide12
Example 1: CAFE Rule (2011)
CBA from EPA (cars & light trucks)Costs (billions) Benefits (billions)Technology $140.0 Environmental Improvements $54.4Accidents etc. $52.0 Energy Security $24.2
TOTAL COSTS
$192.0
TOTAL BENEFITS
$613.6
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Lost Consumer Surplus $534.4
TOTAL COSTS
$726.4
TOTAL BENEFITS
$78.6Slide13
Gayer and Viscusi (2013)
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Example 2
CAFE Standards for heavy duty trucksEPA: Costs = $9.6 Benefits = $58.9Corrected:Costs = $60.1 Benefits = $8.4rossmckitrick.com
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Example 2
CAFE Standards for heavy duty trucksEPA: Costs = $9.6 Benefits = $58.9Corrected:Costs = $60.1 Benefits = $8.4rossmckitrick.com
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Example 3
Furnace Fan regulations (3% case)DOE:Costs = $5.8 Benefits = $43.8Corrected:Costs = $37.8 Benefits = $11.8rossmckitrick.com
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Example 3
Furnace Fan regulations (3% case)DOE:Costs = $5.8 Benefits = $43.8Corrected:Costs = $37.8 Benefits = $11.8rossmckitrick.com
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Further issues …
I haven’t touched on other problems:Overestimated effectiveness of energy efficiency policies and rulesOverstated benefits of environmental improvementsUse of below-guideline discount rate in SCCUse of SCC based on too-high climate sensitivityIncluding world benefits in SCCAll these issues need to be addressed as well
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Summary
The Big One:EPA, DOE, NHTSA etc. treat lost Consumer Surplus as a “benefit”Reclassifying it properly—as a cost—would overturn countless CBA results that likely underpin over a $Trillion worth of regulationsrossmckitrick.com19