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Measuring Energy Efficiency: Accounting for the Hidden Costs of Product Failure

DOE sets energy efficiency standards for a wide variety of consumer appliances to achieve a “significant conservation of energy.” Advocates for these standards claim that households have realized substantial cost savings with the existing standards. There is a substantial literature—although no consensus—on the effects of energy efficiency regulation, however. While an increasing emphasis has been placed on the potential reduction in greenhouse gas emissions, the relative benefits of these emissions reductions are generally small. Instead, the basis for energy efficiency regulation rests on the claim of an “energy paradox”—that the private benefits of energy efficiency measures substantially exceed the marginal costs, and that households and firms fail to adopt them because of market or behavioral imperfections. As further support for an energy paradox effect, ex ante engineering analyses by regulatory agencies typically estimate substantial net private benefits for energy efficiency rules. In the case of the 2001 energy efficiency standards for clothes washers and the 1997 standards for refrigerators, DOE estimated between $16.97 billion and $26.5 billion in cumulative net benefits through 2030. However, both rules resulted in unanticipated burdens for consumers in the form of diminished product reliability, increased repair costs, and decreased product lifetime. To date, existing retrospective analyses have considered consumers’ energy savings without considering these substantial added burdens, which captures only half of the picture.