There is no gain saying the fact that climate change is the most salient environmental problem confronting us today. Scientists agree that the increased emissions of greenhouse gases by humans is a key contributor to the climate change problem. Therefore, a significant amount of research has now gone into discovering the pros and cons of alternate ways of reducing the emissions of greenhouse gases. In this regard, several observers have noted that by increasing energy efficiency, we can effectively lessen the emissions of carbon dioxide, the most significant greenhouse gas.
The U.S. Environmental Protection Agency and Department of Energy instituted the Energy Star program in 1992. This voluntary labeling program was designed to promote the use of energy-efficient products and thereby reduce greenhouse gases. Utility companies across the United States have frequently used this program to encourage the purchase of energy-efficient appliances such as clothes washers, dishwashers and refrigerators, by offering cash rebates to consumers.
Are these utility rebates a good idea? Interesting new research by Souvik Datta and Sumeet Gulati sheds valuable light on this basic question.
These researchers study the question from the standpoint of both consumers and the utility companies. With regard to consumers, they ask whether the existence of the rebate has promoted energy efficiency by increasing the purchases of clothes washers, dishwashers and refrigerators. The surprising answer is that although the rebates have increased the market share of Energy Star clothes washers, these same rebates have had no statistical impact on the sales of either dishwashers or refrigerators.
One explanation for this non-uniform impact is that in the data studied, the rebate for clothes washers was higher that the corresponding rebates for dishwashers and refrigerators. As a result, the “marginal” consumer could not be persuaded to give up his non- Energy Star appliance for an Energy Star appliance. Simply put, as far as the promotion of energy efficiency from the consumption standpoint is concerned, the effect of utility rebates is mixed.
What about the utility companies? These companies are interested in practicing “demand-side-management.” As such, the rationale for rebates is to reduce the emissions of carbon dioxide and the demand for electricity. Datta and Gulati calculate the costs of both a metric ton of carbon emissions saved and a megawatt hour of electricity saved with rebates. Using a plausible rebate redemption rate, they show that for the clothes washer rebate program, the cost of a metric ton of carbon emissions saved is $140. Now, reliable estimates of the social cost of carbon range from a low of $17 per ton to a high of $350 per ton. Hence, comparing the $140 figure with these two numbers, the rebate program is clearly a bad idea for the lower number but a very good idea for the higher number.
With regard to electricity use, utilities would like to reduce peak demand and, since the cost of building and operating power plants is prohibitive, they would also prefer not to build unnecessary plants. This is why these companies seek to reduce the demand for electricity by offering rebates. Once again assuming a reasonable rebate redemption rate, Datta and Gulati show that the cost of a megawatt hour of electricity saved with the clothes washer rebate program is $28. In contrast, the average on-peak spot price of electricity is $60. Comparing these numbers, it is clear that instead of having additional power plants, utilities are better off offering rebates to customers seeking to buy an appliance such as a clothes washer.
In sum, from the standpoint of both consumers and the utility companies, rebates are sometimes a good idea. In this matter as in so much else in life, the devil truly is in the details.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.
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