Climate, politics, campaign finance, media criticism

What your drafty house has in common with overpriced ballpark beer

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As I’m sitting paying my highest heating bill of the winter, next to the drafty window half-heartedly sealed with a layer of plastic, it’s easy to grouse about my landlord not springing for basic energy efficiency measures (Saran wrap on the windows — really?) that could cut our energy use dramatically. It turns out, though, that it’s not just my landlord.

A few months ago, Brad Plumer at the Washington Post and Matthew Wald at the New York Times both had posts looking at the problem of poor energy efficiency in rental units. Based on research by Lucas Davis at the Haas School of Business at UC Berkley, they show that like you might expect, homeowners are way more likely to make energy-saving investments that pay off in the long run. You really are paying way too much for energy at your rental apartment.

The problem isn’t that your landlord has it out for you. It’s called the “split incentive problem” (or the “landlord-tenant problem,” your choice), where who pays for energy is separate from the energy user. But that’s a really wonky term, so let’s put it in terms that are easier to relate to: alcohol.

You see, the typical rental house where the tenant pays for energy is sort of like buying beer at the ballpark. You end up paying way too much for low quality beer, so you try to make the drink last as long as possible, but what you end up with is a warm quarter cup of Bud Light by the fifth inning. Not a great experience. Similarly, you can turn your thermostat down to 66 degrees, but you’re still going to be paying way too much for energy when your house leaks like a sieve, has an outdated heating system, and a refrigerator from 1986.

On the other hand, when the landlord includes energy costs in the lease (common in commercial properties), you have a situation much closer to that producer of great decisions, the open bar. After you’ve paid your entrance fee — or gone in for free if you’ve really lucked out — every extra drink has a marginal cost of zero. With those terms even the most responsible drinker is likely to go back for just one more drink. Since they bear all the costs, in this scenario, your landlord is likely to act like frat houses do, those paragons of getting masses of people drunk cheaply, and serve you the energy efficiency equivalent of Natty Light or Keystone. The only difference here is that cheap is good.


More similar to your landlord than you’d think

Professor Davis and Professor David Levine have a post showing that rental units are about two to three times less likely to have energy efficient Energy Star appliances, with 17% having Energy Star washing machines despite research showing that it’s a good investment for 83% of households. Here they discuss the problem in slightly more serious terms than I did above:

“The story is considerably different for renters. In most rental units tenants pay their own electricity bills, so landlords don’t have much incentive to invest in energy-efficient appliances.  Landlords would only benefit from buying more costly energy-efficient appliances if enough tenants were willing to pay slightly higher rents in exchange for the lower utility bills.  Unfortunately, tenants typically have no way to learn the energy efficiency of each appliance in each potential apartment and translate that efficiency into projected utility bills. Thus, tenants are rarely willing to pay higher rent for more energy-efficient apartments.”


While this research looks at Energy Star appliances as an easy metric of energy efficiency, Davis writes that the split incentive problem for heating and other basic energy efficiency is probably even worse. As Slate’s Will Oremus puts it, “Tweaks that seem small — insulation, plugging air leaks, heat-recovery ventilation, fluorescent lighting — loom big” in efficiency. These most important steps for reducing energy use are actually the hardest to sell to prospective tenants, as compared to a shiny Energy Star washing machine.

Unfortunately, the split incentive problem has far worse consequences than a hangover the next morning. Few people need impressed upon them the severity of human suffering in store if climate disruption continues unabated, and buildings are a huge source of the emissions causing climate change. In New York City, 75% of measurable CO2e emissions are derived from the built environment, and the average U.S. city sees 40% of its greenhouse gas emissions coming from buildings. Energy efficiency is always cited as a “low hanging fruit” solution, but split incentives stand in the way.

The good news is that fixing the split incentive problem is a positive sum game and several novel policy solutions have come out in the past few years. With a proper response to the split incentive problem, the savings from energy efficiency can be spread both to renters in lower monthly costs (desperately needed when rents in DC look like this), and landlords can pocket some of the difference as well. I’ll look at a few of these solutions in the next post.



Written by rethoughtblog

February 28, 2013 at 8:12 am

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