Incentives and Investing in Building Energy Efficiency

The Chronicle of Higher Education has a piece  announcing the “Better Buildings Initiative, an effort to improve building efficiency by 20 percent—will get $2-billion from government agencies through a  presidential memorandum, and colleges and universities, cities, private companies, and other entities will collectively contribute the other $2-billion.”

So, this appears to be a subsidy to nudge building managers to pursue energy efficiency.  If the price of electricity is expected to go up, and if managers must pay their own electricity bills, then will energy efficiency be pursued?  Why is government intervention necessary here?  Will you point to the carbon externality associated with electricity consumption? Or will you point to soft budget constraints?  Or inertia and a lack of information about the future benefits of such long term investments relative to the upfront costs?  For a subtle discussion, see Tom Tietenberg’s paper in REEP.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

9 thoughts on “Incentives and Investing in Building Energy Efficiency”

  1. So, this appears to be a subsidy to nudge building managers to pursue energy efficiency.

    Yes, the market is moving so well toward efficiency gains. By the time the threat becomes bleedingly apparent even to dolts, it will likeley be too late avoid at least 2C increases. Then the societal disruptions will begin and the market will be behind again.

  2. Tietenberg is behind a paywall.

    A lot of low-hanging fruit here (per McKinsey), and there is a Chicago problem why rational firms and rational state bureaucracies don´t pursue them. I would guess it´s more a principal-agent issue than soft budget constraints; budgets are softer in public sector organisations than private, but are they any worse at energy efficiency? Building management isn´t exactly a track to the boardroom, so the objective of managers in this area (both public and private) is, I suggest, satisficing not maximising. That means meeting perceived industry standards of OK practice, avoiding high-profile complaints and disasters, and going home at 5.
    So making a noise about the opportunities can shift perceptions about good practice and change the equilibrium.

    BTW, a nice photo of green hippies ignoring Wall Street (pace Tyler Cowen) and sticking solar panels on the roof:
    The hobbyists here are WalMart, and the roof is one of 60 of their stores in California. Leadership works.

  3. Economists really are handicapped by economics and its near-exclusive focus on allocative efficiency. Wimberley’s points would be more a part of Kahn’s intuition, if technical efficiencies and bureaucratic management were more part of an economist’s study and training.

    In the real world of slacking and genuine uncertainty, where economic behavior is mostly a matter of creating, revising, following and enforcing rules, and price is just another administrative rule, enormous effort is expended educating and motivating people to do the right thing. We don’t wonder whether we need government to keep folks from sweetening children’s toothpaste with antifreeze, or whether bankers and financiers can be trusted not to wreck the world economy.

    There’s a vast appartus of professional societies and technical consultants and industry seminars and, yes, government regulators, inhabiting every realm of an advanced economy. This is how the world works.

    It is not that cost and price and individual reasoning from self-interest do not matter. They do matter. But, they are not all that matter; they are not even the largest part of what matters.

  4. Depends what you mean by “necessary,” I suppose. From personal experience I know that finding the money for big capital expenses in a university or college budget isn’t easy, even if they have a very short payback period and even when borrowing costs are low. I’d imagine it’s very much the same in any well-run private enterprise that’s focused on the short-run bottom line. Utility costs are mostly rising incrementally and are a manageable proportion of expenses; the increases can mostly be handled through marginal re-allocations and minor revenue-enhancing changes.

    Walmart is a big exception because it owns and operates the stores itself and pinches pennies til they squeal, probably analyzes the operating expenses of its stores centrally rather than location-by-location, and it’s big enough that it don’t have to be watching its operating earnings every second in fear of what a CNBC analyst might say. And Walmart has great steaming piles of cash on hand. Not every operation can say the same.

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