Monday, June 30, 2008

Not Reinventing the Wheel

As interest in consumer responses to price signals from utilities, simple assumptions about rationality should be tempered with attention to research that has been conducted over the last 30 years.

A few highlights:
1976: The importance of education that draws on the local, specific rather than the global and the abstract.
1978: Signaling devices decrease consumption by 15.7%.
1978: Token rewards produce savings (22.5%).
1980: Superior results for individuals in groups (20%) versus individuals alone (15%).
1985: Consumers underestimate efficiency savings and overestimate management and curtailment.
1999: Wide discrepancy between pro conservation attitudes and actual behavior.
2002: The value of goal setting independent of money saving – a 20% reduction.

Monday, June 23, 2008

My Meter is Running Backwards

“Ulysses and the Hedge trimmer” (see below) notwithstanding, my house has 20 solar panels on its roof as of Friday and my meter is running backwards. The company that installed it is leasing it to me for (almost) no money down at about $125 a month for a 4 KwH system. (They will increase that by 3% a year for the 15 year term of the lease – which I figure is likely a lot less than how much the price of electricity is likely to rise.) If this seems painless, it is. And that made it much easier to do than paying cash upfront for a system that would have taken 15 years to pay for itself. So how do they do it? The system cost $36,000. The upfront cost was about $25,000 with federal and State subsidies. But as a commercial lease deal, the leasee can write down the investment. And in recent legislation it can write the whole thing down in 5 years even though it has an anticipated life of 15-20 years! But you have to wonder if this is a rational way to allocate the incentives for renewable energy.

Monday, June 16, 2008

More on the Discount Rate

Stern versus Nordhaus is most importantly a disagreement about the discount rate.
But an underappreciated argument is offered by Martin Weitzman who argues that instead of viewing investment now for the future within the context of cost-benefit analysis, we should do so in terms of insurance. What we are doing is paying now to offset the chances of a worst case scenario, one that may have a low probability of occurring but would have catastrophic circumstances if it did. (See “The Stern Review on the Economics of Climate Change,” Journal of Economic Literature 45 (2207): 703-724.) But is there really a conceptual conflict here or not? First, an insurance policy is the wrong metaphor. Insurance does not prevent worst case outcomes, it distributes some measure of offsetting compensation over those who suffer such outcomes and those that do not. So insurance assumes an uneven distribution. Worst case climate would affect us all. Moreover our interest is in costs to prevent such outcomes not to offset their costs to those affected. If that is right, the issue is not a matter of cost-benefit analysis versus some alternative but rather how much weight to give to the worst case scenarios even if their probability is small.

Monday, June 9, 2008

Reality Bites

The incredibly fast demise of the Warner-Lieberman bill is cold reminder of political reality. It is not just a reminder of the sway of corporate interests but also how determinative short term interests of the electorate are as well. It is not so easy to sugar coat the bitter pill of the costs of reducing carbon output – the cost of energy can only go up – a hard sell given the recent rate of increase of the cost of oil. Even though both presidential candidates seem to support serious climate legislation, one has to wonder what the make up of the Congress will need to be for it to get pushed through.

Monday, June 2, 2008

Good news, bad news

The good news in a recent poll of consumers by Deloitte is this: 61.5% of those surveyed would accept an annual increase in rates to stop greenhouse gasses.The bad news? More than half would only support a 5% increase to do so! And another quarter would only suport a 10% increase. Another noteworthy result is that over half of those surveyed suport the development of nuclear power. But when asked if their answer would be the same if the plant were built within 20 miles, support drops by 50%.