Cost of Energy-Efficient Appliances Outweighs Energy Savings
March 26, 2004
The Department of Energy is recommending new energy standards which will make new appliances less affordable for lower-income families, according to a study by the Cato Institute. The new standards, based on a Department of Energy study, claim to reduce carbon monoxide emissions by 8 to 9 percent by 2020 and provide a benefit/cost ratio of 2.75/1 from 1987 to 2050.
However, the new standards, which are purported to save consumers $150 billion through the year 2050, are based on flawed estimates and will actually cost consumers about $46 billion.
- From 1974 to 1990, the energy use per refrigerator declined, and could not have been attributed to energy standards, which were not enacted until 1990. The decline is more likely due to increasing energy prices.
- The "discount rate" that is used to determine energy efficiency -- that is, how much a household is willing to pay for an investment that reduces future energy costs by $20 each year -- varies, based on the availability of alternative investments.
- Lower-income households would require a higher rate of return on their appliance investment since they would be less likely to invest in alternatives such as stocks; therefore, their investment cost must be extremely low -- that is, a 20 percent discount rate must cost only $100.
However, more energy mandates increase the cost of appliances, making them less attractive investments to lower-income consumers, whereas wealthy consumers would be largely unaffected. Moreover, less expensive models that lower-income consumers would prefer to purchase would be removed from the market, providing them fewer affordable choices, according to the study.
Source: Ronald J. Sutherland, "The High Cost of Federal Energy Efficiency Standards for Residential Appliances," Policy Analysis 504, Cato Institute, December 23, 2003.
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