Government Regulated Energy Efficiency and the Light Bulb

Lighting manufacturers are pushing back against widespread rumors that the federal government is banning incandescent light bulbs. Rush Limbaugh and some Republicans in Congress are calling for the repeal of a 2008 law signed by President Bush that sets tougher standards for light bulbs beginning in 2012. They claim consumers would be forced to use less popular fluorescent bulbs. But bulb manufacturers say that claim is false.

This was the lead from a recent NPR report (9 December 2010). The story went on to interview Mr. Randy Moorhead (Vice President, Philips Electronics): “There has been no ban on the incandescent light bulb. The incandescent light bulb actually lives. It's just going to be 30 percent more efficient.”

George Will is just one example of a commentator who didn’t bother to check the facts; in an editorial he wrote about the “provision of the Energy Independence and Security Act of 2007” and a couple who: “replaced their incandescent bulbs with the compact fluorescents that Congress says must soon be ubiquitous.” What government is actually regulating for light bulbs --- and similarly over the past several decades for products such as cars and appliances --- is greater efficiency of the product; it is not regulating how specifically the product is to be designed.

Is there much doubt that without such regulations, there would often be little to drive investment in efficiency improvements?

Refrigerators are a classic example of the difference efficiency regulation can make. Starting in the late 1970’s, California, and later the US as a whole, began regulating progressively higher levels of energy efficiency for refrigerators. The effect was dramatic; in the decades before the regulations took affect, as the interior volume of refrigerators increased, the amount of energy used per refrigerator increased, as the basic technology did not change. In the decades since energy efficiency regulations were put in place, the energy used per refrigerator has dropped dramatically.

The figure below from a 2004 paper by Reuben Deumling (University of California, Berkeley):
Thinking Outside the Refrigerator: Shutting Down Power Plants with NAECA? plots this result for the time period 1947-1996. Up through the mid 1970’s, as the size (in terms of interior volume) of refrigerators increased, the amount of energy used by each refrigerator increased roughly proportionally. After the mid 1970’s, even though the interior volume continued to increase (albeit more slowly), the energy used per refrigerator dropped significantly as manufactures tracked to the new regulations, and by the early 1990’s a 20 cubic foot refrigerator was using less than an 8 cubic foot refrigerator had 45 year earlier.

Interesting to note also is the shaped of the graph as the regulations for progressively tighter energy efficiency were put in place. Big improvements can be seen to have been made as the 1978 and then 1980 standards became current, then the improvement slowed, until the 1987 standard approached, then again slower improvement until the 1990 standard, and a big improvement to meet the 1993 standard. Then, with no new, lower standard until 2001, energy used per refrigerator flattened. With no imminent tighter efficiency regulation in sight, there was no further improvement in the energy efficiency of refrigerators (interior volume remained roughly constant over this time). This is logical behavior from refrigerator manufacturers: which one of them individually is going to sign up to do the design work to improve inefficiency, design work that will cost them money and so require them to charge more for their refrigerators than their competitors? Only if all manufacturers are required to meet these government regulated targets, can any one of them afford to do the work (i.e., spend the money) to do so.

A similar behavior can be seen in the automotive industry, relative to fuel economy standards. The figure below, is from Fuel Efficiency and the Economy by Roger H. Bezdek and Robert M. Wendling.

The light blue line shows the federal targets for corporate average fuel economy (CAFE), while the light brown circles show the average fuel economy for cars, by model year, tracking just above the target, and flattening out as soon as the target stops increasing. Similar behavior, for similar reasons, as in the appliance industry: manufacturers invest in design work to meet new targets but have little or no incentive to spend money on further improvements, if there is no change in the regulated targets the entire industry is required to meet. (A report from the Union of Concerned Scientists by Richard Byrne provides an interesting summary of the history of the development of the CAFE standards.)

Thus, in these industries, the government has regulated increase inefficiency, not the development of specific technologies, and the effected industries have responded by designing improvements to their products to meet the regulations. And, based on the evidence in several industries, and the simple logic of competitive behavior, it is clear that industries will not pursue these developments if there is no incentive to do so.

I will close out this post with short answers to several questions that can be asked at this point about government regulation of energy efficiency…

1. Is such regulation in keeping with a capitalist, competitive system?

Yes. The key point is exactly the miss-representation mentioned above in the case of the Energy Independence and Security Act of 2007 for light bulbs: incandescent bulbs were still allowed under this act, but they needed to be re-designed to meet a new, stricter energy efficiency target. The government created a common target, for all manufacturers of light bulbs, of whatever kind, and so the industry as a whole had a level playing field on which to work.

This is in keeping with the political economic theory of even economists who champion small government, such as Friedrich Hayek, who in The Road to Serfdom wrote that the key point is that everyone has a common set of ground rules (what he called the Rule of Law) within which they operate, and which does not give preference to certain individuals or groups of people in a society. Two examples from his text:

To prohibit the use of certain poisonous substances or to require special
precautions in their use, to limit working hours or to require certain sanitary
arrangements, is fully compatible with the preservation of competition.

The successful use of competition as the principle of social organization
precludes certain types of coercive interference with economic life, but it
admits of others which sometimes may very considerably assist its work and even
requires certain kinds of government action. … Any attempt to control prices or
quantities of particular commodities deprives competition of its power … [but]
this is not necessarily true, however, of measures merely restricting the
allowed methods of production, so long as these restriction affect all potential
producers equally…. Though all such controls of the methods of production impose
extra costs … they may be well worth while.

2. Are there economic benefits to government regulations on energy efficiency?

Yes. And maybe. There are two ways to look at government regulation on energy efficiency.

The first is the clearest to state: as the government tightens regulations on energy efficiency it increases the engineering work that needs to be done on otherwise established products. Without the need for further design improvements, light bulbs, refrigerators and cars (and all other products) are simply commodities that require little or no new design engineering, which means little or no investment in such engineering, and so less of the kind of higher paying jobs that are critical for an advanced country to maintain. Manufacturers of commodity products look simply for the lowest cost manufacturing site, which is typically overseas.

Increased energy efficiency regulations, however, require design innovations, and so design groups to develop these innovations. Although this kind of design work can increasingly be moved to other countries as engineering capability improves world-wide, the US still has a strong base of research and development from which to lead this work. Many if not most large US companies have moved their manufacturing overseas, but continue to maintain a significant portion of their design and engineering work at home. Government regulation drives the employment of exactly the kind of high-tech jobs a country is interested in having. (Of course, it does not make sense to ‘regulate energy efficiency to create jobs’, but if there are other benefits to such regulation, this additional benefit cannot be ignored in the discussion.)

The second benefit is more difficult to analyze, and can only really be done on a product by product basis. Typically, increased energy efficiency regulations drive increased price into the product --- if only because the design work just mentioned must be paid for, though the product and product manufacturing process can also become more costly. This increased price to the consumer, however, is balanced by a savings to the consumer in energy usage costs. The arguments become difficult to prove out, one way or the other, because of variability of energy costs, consumer behavior in using a given product, and the fact that it can be difficult to isolate the cost of the product directly associated with the new energy efficiency regulation. (For example, in a car engine, the same new, more advanced part that allows increased fuel efficiency can provide increase performance, which makes the car more marketable to the car buyer.)

I have read several articles that analyze this trade-off, and will add the links as I go back and dig them out.

3. Why not let consumers drive the move to more energy efficient products, as opposed to the government?

Like that of the economic benefits of energy efficiency regulation, this is a complex question that does not offer an easy answer. I would argue that there are strong reasons for improving energy efficiency that are societal in nature, and so require society as a whole, through its government, to address; they cannot be effectively addressed by the behavior of individual consumers. I will outline the reasons I believe are most critical, and provide some links to what others have said on these topics --- and maybe make them the topic(s) of future posts.

• There are important geo-political reasons to reduce our use of oil. Much of our oil comes from dictatorships that we need to support simply because we rely so heavily on them to meet our energy needs. Thomas Friedman is probably the most recognized commentator on this topic, in the New York Times, and his books, such as Hot, Flat, and Crowded 2.0: Why We Need a Green Revolution - And How it Can Renew America. Greater energy efficiency can reduce our use of oil, and save us significant amounts of money in terms of military expenditures to support and protect these regimes, and the political capital we lose by having to do so.
  
• Global warming and pollution concerns, make improved energy efficiency critical to our future. Global warming and several types of pollution are in large part due to our need to generate a significant amount of energy from carbon sources (coal, oil, gas). Energy efficiency has been stated to be the most cost effective way to reduce our use of energy, and so our use of carbon as a fuel (as opposed to the development and implementation of alternative energy sources).
  
•  The economic position of the United States in the world market. Even if you don’t believe in global warming, and the need to reduce our use of carbon fuels to protect against it, many people in countries around the world do, and are subsidizing the movement of their industries in the direction of what are typically called, ‘green technologies’. This is perhaps more an argument for how the US can avoid being left behind in these new markets, than about energy efficiency regulation, per se, but it is none the less a part of the larger picture of energy policy. The recent documentary film Carbon Nation focuses on the economic argument for reducing the use of carbon fuels, and, again, Thomas Friedman makes this point passionately in his articles and books.
  
• Entrenched industries maintain the status quo, at times at a detriment to the consumer and the country as a whole. Most established industries, most of the time, will prefer not to have to invest in new technology development; and, these industries will have a significant level of control over the political and economic debate in the country. The article referred to earlier, on the history of automotive fuel economy standards, recounts how the US automotive industry fought these new standards, even as companies in other countries embraced them, and went on to out compete the US industry for several decades.