Government-Imposed Energy Efficiency - a Bad Idea

WHAT has emerged as the centerpiece of the now-completed Earth Summit conference in Rio de Janeiro is a "climate stabilization" treaty - a legally binding agreement to address the global-warming theory by reducing carbon emissions. In the wake of President Bush's decision to sign this watershed agreement, a heated debate has begun on the economic impact of carbon-emissions reductions in the United States.

The most popular idea propagated by the advocates of climate-stabilization measures is that carbon-emissions reduction can afford a net economic benefit to society if implemented through government-mandated improvements in energy efficiency. This was presumably the basis for Environmental Protection Agency administrator William Reilly's claim in recent Cabinet meetings that emissions cutbacks could be effected at a low cost; this idea also encouraged the passage of a House energy bill that includes new e nergy-efficiency requirements for federal buildings.

The main source of this contention is a study by the Union of Concerned Scientists (UCS), titled "America's Energy Choices: Investing in a Strong Economy and a Clean Environment." It concludes that by requiring the "vigorous adoption of energy-efficiency measures and accelerated use of renewable energy sources," the US will save $5 trillion in energy costs over the next 40 years. With a projected "investment" requirement of $2.7 trillion, the report predicts a net accrual of $2.3 trillion to the US econ omy. In the process, carbon dioxide emissions will be reduced 70 percent, and fossil fuel use by one-third.

The "energy-efficiency" solution to climate stabilization is an appealing one, suggesting that we might have our economy and restrict it too. But the proponents of this view have failed to address several critical issues, rendering the conclusions and the viability of their plan doubtful.

If new energy-efficient technologies are a profitable investment, why are new regulations necessary? Profit-seeking corporations and individuals do not need to be forced to invest wisely; they tend to do so on their own. The report supplies an unconvincing response to this argument: "Because they lack important information, businesses and consumers often fail to take actions that are in their economic interest. Government policies can help to correct these various market imperfections."

IT is hardly reasonable to assume that government has a greater incentive to invest wisely than those whose capital is at risk. Without a personal interest in the outcome, legislators are far more likely to respond to the forces of special interest than to the vicissitudes of the marketplace.

In fact, energy efficiency in the US has improved quite steadily for decades with little direction from government. Per capita energy use fell from 305 million Btus (British thermal units) in 1970 to 271 million Btus in 1990, a decline of 11 percent.

This enormous change was brought about not only by energy-efficient technologies, but indirectly through improvements in economic efficiency. For example, the replacement of paper information storage with computer memory reduced our dependence on timber and saved energy by replacing mail communications with electronic ones. Such subtle improvements in energy efficiency might be neglected by a government-planning system that is biased in favor of more visibly efficient technologies.

Even granting the report's dubious assumptions, the accuracy of its projections is highly questionable. Economists cannot forecast economic changes accurately from year to year, let alone over four decades. The prediction of a $2.3 trillion gain in national income seems large enough to offset any uncertainties, but this figure was computed with a 3 percent discount rate. It is not very reasonable to assume that the standard rate of return on investments will be 3 percent over the next 40 years. When the figure is moved to a more realistic 7 percent, the projected economic benefit drops to only $0.6 trillion.

The UCS study is flawed because it attempts the impossible: to find a painless method to rapidly reduce carbon emissions. The activities of the marketplace are dictated by the preferences of consumers. To restrict the market is to override those preferences, and entails a cost to consumers. We must address this issue realistically; Americans cannot continue to enjoy high economic growth while curtailing the very activities that make it possible.