DOE's Proposed Efficiency Standards for Commercial Heating and Cooling Equipment

December 01, 2014

Sofie E. Miller

Download this Public Interest Comment (PDF)


Introduction

The Department of Energy's proposed rule amends the existing energy efficiency standards for commercial unitary air conditioners (CUAC) and commercial unitary heat pumps (CUHP), which are used for space conditioning of commercial and industrial buildings. According to DOE, "This equipment is designed to heat and cool commercial buildings and is typically located on the building's rooftop. This category of equipment has a rated capacity between 64,000 Btu/h and 760,000 Btu/h." This rule sets maximum allowable energy usage standards for 12 different product classes of CUAC and CUHP. DOE expects that the proposed standards will go into effect in 2019.

The standards will increase appliance prices for commercial customers such as grocery stores, restaurants, universities, and hospitals. For the differing equipment classes, DOE estimates the life-cycle cost savings resulting from the standards will range from $3,469 to $16,477, with median payback periods of up to 6.6 years. DOE expects the installed cost of regulated equipment to increase by between $2,167 and $5,043 per unit due to the standards. As a result, DOE expects the standards to save 11.7 quads of energy over 30 years. In total, DOE expects the standards to result in $5.262 billion in annualized benefits and $507 million in annualized costs through the year 2048. According to DOE, these standards are intended to improve the Nation's energy security, strengthen the economy, and reduce the environmental impacts or costs of energy production.

As DOE explains in its proposed rule, two types of market failure could potentially be addressed by setting energy efficiency standards for CUAC and CUHP: externalities related to greenhouse gas emissions and asymmetric information (and related misaligned incentives) regarding high-efficiency commercial appliances. However, neither of the potential market failures cited by DOE is solved by its proposed energy efficiency standards, leaving the proposal economically unjustifiable.

DOE estimates global externality benefits of the proposed standard at $1.774 billion, compared to costs to US citizens of $507 million. However, DOE expects only 10% of these annualized externality benefits of carbon reductions to accrue to Americans. Thus, the annualized costs to American citizens outweigh the social benefits of the standard by almost 3 to 1, calling into question whether this proposal is economically justified, as required by law.

Additionally, DOE does not explain why sophisticated, profit-motivated purchasers of CUAC and CUHP would suffer from either informational deficits or cognitive biases that would cause them to purchase products with high lifetime costs without demanding higher-price, higher-efficiency products. This asymmetric information, if it exists, could be remedied by improved labeling or other types of consumer education campaigns rather than banning products from the marketplace. DOE's approach, in addition to ignoring any potential underlying information asymmetry issues, is contrary to President Obama's instruction to agencies in Executive Order 13563:

Where relevant, feasible, and consistent with regulatory objectives, and to the extent permitted by law, each agency shall identify and consider regulatory approaches that reduce burdens and maintain flexibility and freedom of choice for the public. These approaches include warnings, appropriate default rules, and disclosure requirements as well as provision of information to the public in a form that is clear and intelligible.

DOE's proposal does not maintain flexibility and freedom of choice for purchasers of CUAC and CUHP equipment, and the resulting benefits do not justify the costs as required both by statute and by Executive Order.