Energy Regulations: Protecting Irrational Consumers from Themselves

August 10, 2012

In recent years, federal agencies have issued energy-efficiency standards for everything from cars to light bulbs. These regulations are commonly billed as important efforts to reduce greenhouse gases. However, the standards have a negligible effect on emissions, say Ted Gayer, the codirector of the economic studies program and the Joseph A. Pechman Senior Fellow at the Brookings Institution, and W. Kip Viscusi, Vanderbilt University's first University Distinguished Professor.

Generally, in order for regulations to be permitted, they must pass a cost-benefit analysis in which their purported benefits are weighed against the outlays for the regulation. Even if environmental benefits are overvalued, the recent string of regulations relies upon supposed benefits to consumers and firms to make up for their enormous price tags.

  • New mileage standards contained within the corporate average fuel economy (CAFE) law obtain only 10 percent of their supposed benefits from reduced emissions.
  • The Department of Energy (DOE) estimates the global greenhouse-gas emissions benefits of clothes dryer standards at between $93 million and $1.49 billion -- this is less than half of the total claimed benefits of the regulation.
  • The same is true of DOE estimates for regulations of air conditioners: the majority of the benefits is not environmental, but is contained in economic benefits for regular consumers.

Overall, these regulations contain two overarching errors that are largely without precedent in the history of American regulatory regimes.

  • First, many of the supposed benefits to the environment are calculated on a global scale, creating a foundational mismatch between the beneficiaries of environmental protection and those who are paying for it.
  • Second, by assuming private benefits on such a large scale, these regulations essentially assume that regular consumers are irrational and that, because government knows best, there are benefits to be had in regulations that control consumer behavior.

In combating this dangerous precedent, a number of reforms should be considered:

  • Limiting consumer choice should be considered an inherent cost, not a benefit.
  • The Office of Management and Budget should require cost-benefit analyses to confine their estimates to regulations' effects in the United States -- not around the globe.
  • Finally, government agencies should bring to an end those regulations that do little to protect the environment in the first place.

Source: Ted Gayer and W. Kip Viscusi, "Energy Regulations: Protecting Irrational Consumers from Themselves," Mercatus Center, August 1, 2012.

 

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