Whose Benefits Are They, Anyway? Examining the Benefits of Energy Efficiency Rules 2007 - 2014

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by Sofie E. Miller, Senior Policy Analyst
September 02, 2015

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Abstract

The Energy Policy and Conservation Act authorizes the Department of Energy (DOE) to establish energy efficiency standards for consumer appliances that are both technologically feasible and economically justified, while also resulting in a “significant conservation of energy.” To justify its regulations, DOE relies almost entirely on two specific types of regulatory benefits: the cost savings consumers are estimated to enjoy over the life of a more energy efficient appliance, and international benefits associated with reducing the impacts of climate change. To explore these benefits, this paper first examines the composition of benefits from energy efficiency regulations as reported by the Department of Energy over the past 10 years. It then examines arguments for and against inclusion of these benefits in regulatory impact analysis, including whether attributing large private benefits to energy efficiency rules is consistent with standard economic assumptions of consumer sovereignty, and the appropriateness of including international benefits in domestic rulemakings.

Introduction

In the past decade, government agencies have greatly increased the number of regulations establishing energy efficiency standards for household and commercial appliances. For example, in 2014, federal regulations setting energy efficiency standards accounted for $7.65 billion in annualized regulatory benefits.[1]

Because these regulations target common household appliances, they affect nearly all households. The Department of Energy (DOE) has recently finalized energy conservation standards for residential dishwashers,[2] microwaves,[3] clothes washers,[4] furnaces, and air conditioners,[5] appliances that most households rely on for everyday tasks. Each of these regulations increases the price of appliances in return for reducing long-term energy usage and energy bills.

Due to the scope of these rules, it is important to examine the rationale that regulators use to justify them. In the past decade especially, federal regulators have cited behavioral economics and “consumer irrationality” to justify standards that limit the amount of electricity and water that appliances can use. Because they comprise such a large proportion of overall regulatory benefits—and because they affect all households—these rules, and their justification, merit a closer look.

First, this paper examines the statutory authority underpinning DOE energy efficiency standards, and the market failures that these rules purportedly address. Second, it assesses the composition of the benefits that DOE claims result from its rules finalized between 2007 and 2014, and explains the ramifications of including private benefits and benefits to citizens of other countries in a traditional benefit-cost analysis. Third, it concludes with recommendations to policymakers who promote energy efficiency standards and analysts who seek to understand the role of consumer choice in constructing policies to reduce energy use.

Statutory Authority

The Energy Policy and Conservation Act of 1975 (EPCA) authorizes DOE to establish energy conservation standards for consumer appliances that are both technologically feasible and economically justified, while also resulting in a “significant conservation of energy.”[6] EPCA requires DOE to establish energy and water efficiency standards for twenty different categories of covered consumer products, including refrigerators, freezers, furnaces, dishwashers, clothes dryers, televisions, faucets, and lamps.[7]

In addition to this wide range of explicitly covered appliances, EPCA also gives DOE the authority to establish energy conservation standards for “[a]ny other type of consumer product which the Secretary classifies as a covered product under subsection (b).”[8] This subsection of the Act allows the Secretary broad discretion in classifying consumer products as a “covered product” if he or she determines that:

(A) classifying products of such type as covered products is necessary or appropriate to carry out the purposes of this Act, and

(B) average annual per-household energy use by products of such type is likely to exceed 100 kilowatt-hours (or its Btu equivalent) per year.[9]

Since energy use is a function of water use in many appliances (e.g., clothes or dish washers), the statute gives the Department authority to regulate energy and water usage of a wide swath of products used every day in nearly every American household.

The EPCA also delegates authority to DOE to establish energy conservation standards for twelve classes of commercial appliances, including commercial ice machines, air conditioners, heating equipment, walk-in coolers and freezers, and commercial clothes washers.[10] Beyond these explicitly covered products, DOE also has authority to regulate “[a]ny other type of industrial equipment which the Secretary classifies as covered equipment under section 341(b).”

The number of energy efficiency standards promulgated by the federal government has increased rapidly since passage of the Energy Independence and Security Act of 2007 (EISA), which amended the EPCA to increase Corporate Average Fuel Economy (CAFE) standards and efficiency standards for energy-using durables. Figure 1 below shows the number of significant energy efficiency rules finalized by DOE from 1987 – 2014.

Figure 1 displays counts of energy efficiency rules finalized by the Department of Energy each year between 1987 and 2014. This figure measures only significant rules reviewed by the Office of Information and Regulatory Affairs.
Source: Mannix & Dudley, “The Limits of Irrationality as the Rationale for Regulation.” Journal of Policy Analysis and Management, Summer 2015.
 
The semiannual Unified Agenda, published by the Office of Management and Budget (OMB), lists ongoing and upcoming regulations planned by agencies for the year ahead. The Spring 2015 Unified Agenda listed four energy efficiency standards from DOE in the prerule stage, twenty-one standards in the proposed rule stage, and ten in the final rule stage,[11] indicating that federal regulators do not plan to slow the promulgation of energy efficiency rules any time soon.

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[1]  Author calculation based on annualized benefit numbers reported in DOE final rules. Numbers are reported in 2010$. See Appendix B for detailed benefit information on final rules, and see Appendix C for annual benefit information on included rules.

[2]  77 FR 31917

[3]  78 FR 36315

[4]  77 FR 32307

[5]  76 FR 37407

[7]  Energy Policy and Conservation Act, as amended, §322 (http://legcounsel.house.gov/Comps/EPCA.pdf)

[8]  Energy Policy and Conservation Act, as amended, §322(a) (http://legcounsel.house.gov/Comps/EPCA.pdf)

[9] Energy Policy and Conservation Act, as amended, §322(b) (http://legcounsel.house.gov/Comps/EPCA.pdf)

[10] Energy Policy and Conservation Act, as amended, §340 (http://legcounsel.house.gov/Comps/EPCA.pdf)

[11] These counts do not include test procedures for energy efficiency which, while integral to the promulgation of energy efficiency rules, do not in themselves establish energy conservation standards.