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Government Rebates – The Uneasy Case For Subsidizing Energy Efficiency

• January 27, 2010 • 3:10 PM

Rebates for energy-efficient appliances don’t stand up to the economic analysis that, until now, no one bothered to do.

Most people would agree that rebates for more energy-efficient cars and appliances are a good thing: They give consumers incentives to buy more environmentally friendly products. Cash for Clunkers gave people a several-thousand-dollar reason to buy more fuel-efficient cars, got gas-guzzlers off the road and, some say, jump-started the auto industry. But University of Delaware professors Burton A. Abrams and George R. Parsons found that the Cash for Clunkers program cost American taxpayers a bundle — and the environmental returns on their investment don’t make up for the millions lost.

Abrams and Parsons argue that Cash for Clunkers, which they estimate yielded net societal losses averaging more than $1,000 per clunker traded in, “illustrates the problematic consequences of making economic and environmental policy without first making a best effort to weigh the costs and benefits,” an error that they believe is being repeated, albeit on a much smaller scale, with a $300-million rebate program for energy-efficient appliances. The program, which will be state-run, entitles consumers purchasing Energy Star-certified appliances to rebates of $50 to $200 per unit.

Their findings, published in the current issue of The Milken Review, suggest that the program will do little to convince consumers to buy an energy-efficient dishwasher or washer/dryer who weren’t planning to get one already.

In fact, they say, it may actually increase energy usage. Because the policy doesn’t require people to destroy their old appliances in order to qualify for rebates on new ones, many Energy Star refrigerator purchasers may simply move their old fridges to the basement for extra storage, which would actually increase energy consumption by 425 kilowatt hours per year per household.

Department of Energy Secretary Stephen Chu stated in a press release about the program, “Appliances consume a huge amount of our electricity, so there’s enormous potential to both save energy and save families money every month. These rebates will help families make the transition to more efficient appliances, making purchases that will directly stimulate the economy and create jobs.” In his first State of the Union address, President Obama even gave a shout-out to the concept: “We should put more Americans to work building clean energy facilities – and give rebates to Americans who make their homes more energy-efficient, which supports clean energy jobs.”

But the economists aren’t convinced. Although they don’t include employment effects in their study, they see the argument for subsidies as economic stimulants during a recession as difficult to defend. While subsidies may increase the supply and demand of some products, they contend, subsidies also affect prices and the economy as a whole.

They focused their appliance-rebate research on refrigerators, the modern versions of which use considerably less energy than earlier-generation models.

By analyzing three different groups of buyers — those who had planned to buy Energy Star units with or without a rebate, those who accelerated their purchase of an Energy Star refrigerator because of the rebate and those who bought an Energy Star refrigerator (and not an alternative) because of the rebate — Abrams and Parsons found that for each $100 in subsidies, $6 disappears.

“In essence, the taxpayers — really, future taxpayers because increases in federal spending are financed through borrowing — are putting $100 into the pot on behalf of society as a whole. Society gets back $9 in environmental benefits. People who buy refrigerators, on average, get $85 in value from the cash transfer. The other $6 is lost to everyone,” they explain.

They estimate that it would take a reduction of the subsidy to only $30 per appliance for taxpayers to break even.

Although there are many reasons for this, chief among them is that the rebate program doesn’t inspire people who don’t need new appliances to buy them and doesn’t require people to get rid of the “clunkers” they already have. Another problem is the relatively small environmental benefit of each energy-efficient unit.

As the researchers conclude, “Subsidies in the name of virtue — reducing pollution, putting the unemployed back to work — are easy to sell in times of economic crisis. And maybe — just maybe — they can be justified in the name of creating jobs or off-setting market distortions. But the very fact that Washington never bothered with that analysis before committing funds to the [Cash for Clunkers] and Energy Star initiatives suggests how problematic they are.”

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Elisabeth Best
Former Miller-McCune Fellow Elisabeth Best is currently pursuing a Masters of Pacific International Affairs at the University of California, San Diego School of International Relations and Pacific Studies, where she is the editor in chief of the Journal of International Policy Solutions. She graduated from UC Santa Barbara in June 2009 with a BA in global studies and a minor in professional editing. As an undergraduate, she wrote for The GW Hatchet and Coastlines magazine and hosted “The Backseat” on WRGW.

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