The Limits of Incentives in Energy Policy

Bradford Plumer makes a really excellent point here about how prices and incentives and good energy policy don't always align, and still won't even if we pass cap and trade:

A renter might notice that his windows are leaky and the refrigerator is old and decrepit--and that all this waste is hell on the monthly electric bill--but he's not going to caulk the windows for a place he'll move out of in a few years. And the landlord, meanwhile, isn't paying the energy bill, so why should he buy a new fridge? No one's behaving irrationally here--it's just that the incentives don't align in favor of efficiency. And a price on emissions wouldn't necessarily fix this. That's why, in some cases, there's a rationale for well-designed regulations in addition to a carbon cap.

This pivots off an interblog discussion about whether there are lots of firms passing up profits by not adopting "pollution-abatement" policies, like the ones in the graph below.

Last year EnerNOC, an energy efficiency consulting company, located $100,000 in energy savings for Morgan Stanley's Times Square offices (they were keeping the elevator machinery rooms as cool as the corporate suite, and things like that). Morgan Stanley's profit in the first three quarters of 2009 was more than $100,000. To be specific, it was $729 million more. So you can understand why spending time on an energy efficiency policy was not a big concern for their board. But that's exactly why it's likely that there are a lot of firms like Morgan Stanley who are likely passing up abatement policies, even if they save hundreds of thousands of dollars.

It makes sense that adopting a national cap and trade policy would raise national awareness of emissions, and that awareness might trickle up to the folks who exercise control over their buildings' energy use. But Plumer's exactly right that not everybody has a financial incentive to care about how much energy they consume. For example, I live in an apartment where heat is included in the rent, so nothing's stopping me from turning the thermostat to Tropical and watching TV in my bathing suit all year. The cost of heating being factored into my rent is a bit like an employer taking health care out of our compensation. We don't see the money being spent, so we don't have the same incentive to ration our use -- of heat or health care.