DOE to Americans: Want Heat? Pay More.

Working through the auspices of the Regulatory Studies Program of the Mercatus Center, I have recently published a public comment on the Department of Energy’s proposed energy efficiency standards for residential furnace fans. Truly interested readers can follow the link and read the (brief) comment in its entirety, but in the present post I want to highlight some of the gaping holes in the government’s cost/benefit analysis to (attempt to) justify the regulation. The two takeaway messages are: (1) The government ignored its own procedural guidelines when calculating the alleged benefits from reduced carbon dioxide emissions. (2) The government admits it will make furnaces more expensive for many consumers—for a total incremental cost of either $3.1 billion or $5.8 billion, depending on the discount rate used—but is forcing that outcome anyway because those consumers can’t be trusted to make rational decisions when considering energy efficiency.

First let’s deal with the alleged benefits of reduced carbon dioxide emissions. Because the proposed rule would make furnace fans more energy efficient, DOE claims that the rule will, over time, lead to less energy use and hence lower emissions. To put a dollar value on the social benefits of that reduction in emissions, DOE uses the so-called “social cost of carbon,” which was estimated by the Obama Administration’s Interagency Working Group. The DOE claimed that the benefits from the emission reductions would be some $11.5 billion in present-value terms.

In my testimony to the Senate, I walked through the numerous problems with the Working Group’s analysis. For one thing, their estimate of the “social cost of carbon” fails to follow the guidelines on calculating economic impacts put out by the White House Office of Management and Budget (OMB). Specifically, OMB (the office in the White House that oversees the creation of new regulations) requires that regulatory cost/benefit analyses be performed using both a 3 percent and a 7 percent discount rate, and that the values be calculated from a domestic (not a global) perspective.

This puts the DOE and other federal agencies in an impossible situation. They are required to conduct cost/benefit analyses using a 7 percent discount rate, but they haven’t been provided with an appropriate estimate of the social cost of carbon using such a rate. We thus have the hilarious situation in which federal agencies have to report figures at “7 percent” but then explain in a footnote explaining that they’re actually using a different number. I already blogged about this in reference to a previous federal analysis, but the same pattern holds true with regard to DOE’s proposed rule for furnace fans.

Overall, the DOE’s analysis claims either $23.2 billion or $43.8 billion in total benefits from the proposed rule (depending on the discount rate used), contrasted with either $$3.1 billion or $5.8 billion in incremental furnace costs to consumers. Of those total benefits, $11.5 billion are attributed to reduced carbon dioxide emissions. Adjusting for just the two issues I’ve described above (the more accurate discount rate and domestic versus global calculations) would reduce the benefits from emission reductions to a mere $547 million, an enormous change.

Yet things get worse. At least half (depending on the discount rate used) of the alleged benefits from the DOE’s proposed rule on furnace fans comes not from reduced emissions, but from alleged cost savings to consumers. In other words, the DOE is arguing that imposing minimum energy efficiency standards on residential furnace fans will make Americans richer, because the higher initial price of the units will eventually “pay for itself” by lower energy bills.

Note that this isn’t even a “negative externality” argument such as they use with carbon emissions. No, here the DOE is engaging in pure paternalism, saying that American consumers are too shortsighted to recognize the benefits of lower energy bills. There are several academic papers explaining what’s wrong with this line of attack (which I reference in the formal comment linked above). In a nutshell, there are various reasons that consumers might quite “rationally” buy cheaper furnaces, even knowing that in the long run they will have higher energy bills. For just one example: Consumers might not be able to buy furnaces at a 3 percent finance rate, which the DOE analysis assumes (in one set of calculations).

For those wishing to see just how strained the federal government’s arguments are for imposing new regulations on American businesses and consumers, I encourage you to skim my public comment. It’s not fun reading, but it is instructive.

IER Senior Economist Robert P. Murphy authored this post.