Monday, May 07, 2007

I was thinking about energy conservation.

As a policy matter it is simple. A tax on energy consumption will cause people to conserve. The effect won't be as quick or as large as in a simple economic model in which people are completely informed and rational, but it can be large enough if the tax is high enough. Such a tax, by itself, would be regressive. However, if the revenues are rebated equally to everyone, the policy will equalize. So what is the problem ? In particular what is the problem in the USA (other developed countries have much higher energy prices and much lower consumption compared to GNP).

I think the problem is that such a tax and transfer policy would take from areas over represented in the Senate and give to under represented areas. Energy consumption is higher in low population density regions than in high density regions. Low density states have a lock on the Senate. People without driving licences are less likely to register to vote etc etc etc.

I think that a solution to this political problem is to make the rebate depend on receipts within the state or, better, county. This maintains the good incentive effect and the good (but possibly politically unpopular) income redistribution effect and prevents the exurban to urban transfer which makes such a policy politically impossible.

This brilliant post by Michael O'Hare explains a much more important reason why energy policy must be region specific. Inefficient technology for lighting (or anything else) produces heat. If a residence is being heated with a thermostat, efficient lighting saves less than it seems to. If a residence is being air conditioned it saves more (not nothing or double as heat pumps and air conditioners are quite efficient). Thus optimal policy depends on the weather. Of course I know this when I leave this computer on all night in the winter but not in the summer, but I managed not to think of it before reading O'Hare.

I did think of it when reading posts on painting streets white by Matthew Yglesias. Excellent policy in LA, Houston and Miami, less so in Buffalo.

3 comments:

Anonymous said...

What a terrific post, and do I ever need to learn to think more clearly.

anne

Anonymous said...

This raises an important point for me at least about how little we are able to do reasonably complete cost-benefit analysis on issues from environmental protection to war and possibly even to the effects of trade.

anne

Anonymous said...

Robert Waldmann may well know, but I remember a MacArthur Grant being given a couple of years ago to an economist who was working on cost-benefit analysis on environmental issues. I cannot recall the name.

Joseph Stiglitz has been attempting a cost-benefit analysis of the war in and occupation of Iraq. But, though I find the analysis compelling many pay no attention to it.

anne