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California's Green Gaffe

Some green-energy policies disregard the value of energy use, risking market distortion and consumer backlash.

Fortnightly Magazine - November 2007

services whose production causes pollution. A proper analysis will include these factors.

Acknowledging the economic well-being of consumers also has broader policy implications. For instance, California energy agencies assert that per-capita electricity use in the state has not increased in decades, unlike it has elsewhere. 7 However, evaluating California’s experience requires understanding why usage has not increased. Efficiency savings are good, but suppressed consumption due to high retail prices is likely to reflect economic harm. Similarly, commercial or industrial cutbacks might reflect better technology, or a loss of output and jobs in energy-intensive businesses. The general point is that a single-minded focus on minimizing the use of one input (in this case energy) seldom leads to the greatest economic welfare for society.

There is also a more fundamental issue. Economists treat energy as a normal good that benefits consumers and society. Adverse side-effects also can be captured in an analysis that still presumes a gain when a consumer gets what he wants. But a California-style analysis starts with an opposite presumption, that energy use is a bad thing that should be minimized for its own sake.

Indeed, this might represent the greatest challenge for lawmakers in California and other states who are struggling to develop effective green-energy policies. It is one thing to become more efficient; it is another to deny consumers their preferred choices in the name of usage reductions that may ultimately harm society. 8

To address this challenge, regulators and utilities can try to persuade consumers that going without some usage is not such a burden, or is tied to a greater purpose that justifies a minor annoyance. Perceptions matter, too, as the new light bulb that is “ugly” today may be seen as fashionable tomorrow. If such persuasion changes buying choices in the marketplace, then the economics of consumer and producer surplus will follow and bring the cost-benefit balance along with them.

But it also may be possible to erode public support for green-energy efforts, even in an environmentally conscious state like California, by focusing too much on mandates that frustrate consumer demands instead of allowing them to be fulfilled more efficiently. Recognizing real consumer value will help policy-makers steer toward the latter, and away from the former.

Getting the analysis right is not just good economics. It may help avoid a political reaction that threatens all green initiatives—beneficial or not.

 

Endnotes

1. For example: Boardman, Anthony E. Greenberg, David H. Vining, Aidan R. and David L. Weimer: Chapter 4, Cost-Benefit Analysis: Concepts and Practice, Pearson Prentice Hall, 3rd. ed., 2006.

2. E.g., United States Office of Management and Budget, “Circular No. A-94 (revised),” Oct. 29, 1992.

3. California Standard Practice Manual: Economic Analysis of Demand-Side Programs and Projects, California Energy Commission and California Public Utilities Commission, October 2001.

4. See CPUC Decision 06-01-024, mimeo p. 19.

5. California Assembly Bill 1X , enacted Feb. 1, 2001.

6. The CPUC’s 2006-08 “evaluation, measurement and verification” budget is $162 million. CPUC Decision 05-11-011. A database of California studies is at www.calmac.org.

7. For example, “Energy Efficiency: