One Discount Rate Fits All? The Regressive Effects of DOE's Energy Efficiency Rule

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by Sofie E. Miller, Senior Policy Analyst

May 20, 2015

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Abstract

This paper examines the Department of Energy's (DOE) reliance on low discount rates to estimate the benefits of its energy efficiency standards and uses existing literature on implicit consumer discount rates to calculate a range of benefits for DOE’s furnace fan rule. While DOE calculates large net benefits from its energy efficiency rule, using discount rates that better represent average consumer time preferences shows that this standard results in net costs. Furthermore, given the variation in consumer discount rates by income, this standard is effectively a transfer payment from low- and median-income households to high-income households.

Introduction

As a part of its Energy Conservation Program for consumer products, the Department of Energy (DOE) establishes energy efficiency standards for many appliances used daily in American households, such as microwaves, clothes dryers, and air conditioners. DOE receives statutory authority for these rulemakings through the Energy Policy and Conservation Act of 1975 (EPCA), which requires that “any new or amended standard for [covered products] must be designed to achieve the maximum improvement in energy efficiency that is technologically feasible and economically justified” (DOE 2013, 64073). Furthermore, all such standards must result in a “significant” conservation of energy (DOE 2014, 38131). These statutory instructions require a careful analysis of the costs and benefits of DOE’s energy efficiency rules.

In July 2014, DOE published a rule that, for the first time, set energy efficiency standards for furnace fans used in residential central heating, ventilation, and air conditioning systems. The rule is intended both to reduce greenhouse gas emissions and save consumers money by increasing energy efficiency. However, according to DOE’s calculations 86 percent of the benefits of this policy change are energy savings for consumers (DOE 2014, 38132-3, Tables I.3-I.4), indicating that the primary benefit of this rule is to reduce energy expenditures rather than carbon dioxide emissions.

Valuations of consumer savings—especially savings that are far into the distant future, as is the case with this rule—can vary significantly depending on the discount rate used. Discount rates “discount” the value of future streams of benefits to present values so that benefits and costs can be compared in the same timeframes. This paper examines the sensitivity of DOE’s anticipated benefits to different discount rates by drawing on DOE’s analysis and existing economics literature on time preferences, consumer purchases of energy-using durables, and implicit consumer discount rates.

First, this paper discusses the practice of discounting costs and benefits in regulatory analysis and the importance of using appropriate discount rates. Second, it examines the discount rates that the Office of Management and Budget (OMB) recommends, and compares these rates with consumer discount rates for energy appliance purchases revealed in field studies, experiments, and elicitation. Third, it compares the net present value of DOE’s furnace fan standards across a range of discount rates from the literature that represent the time preferences of low- and median-income households. Finally, this paper draws conclusions on the economic justifiability of DOE’s rule based on the results of this sensitivity analysis.

In Policy Perspectives, Volume 22

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