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4 solutions to high utility bills: fixing the split incentive problem

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In my last post, “What your drafty house has in common with overpriced ballpark beer”, I wrote about how the split incentive problem means that if you rent your home, you’re probably paying way more for energy than you would if you owned. Since then, the weather has gotten a bit nicer, but the problem of split incentives between landlords and renters remains, ready to pop up again once the AC units come on. Fortunately, many different groups and governmental agencies have come up with some interesting ways of fixing the screwed up incentives for home energy costs.

There’s of course the traditional regulatory response – called “command and control” – which involves simply mandating that certain efficiency measures be adopted by any new building or retrofit, like requiring buildings to install heating systems that meet some efficiency standard. But beyond being generally opposed by economists as inefficient, many existing buildings are out of reach of these regulations, since most cities can only impact what happens when new buildings are constructed or significant changes are made to existing buildings, leaving the majority of buildings grandfathered in. With that in mind, here are a few promising ideas:

  1. Energy Aligned Lease – Misaligned incentives mean that money is being left on the table. Energy Aligned Leases are a way of divvying up the savings so that both the tenant and landlord are more or less guaranteed to come out ahead. The idea is that the tenant and landlord agree on an engineer’s estimate of the projected energy savings, which would end up paying back the capiteverybodywinsal cost of the improvement over a period of time. The tenant then pays back 80% of that figure each year,so that the tenant is protected from uncertainty about the savings estimate and gets to start pocketing savings right away. The payback period stretched out an extra 25% so that all the capital costs are paid back. (Watch this explained in more detail in a great video by a representative of the Urban Green Council.) The landlord ends up getting what amounts to a free upgrade to their building, increasing its value. It’s a true win-win.The Energy Aligned Lease was pioneered in part by the New York City government, which created model language. The first such lease in New York was signed in the spring of 2011, with Mayor Michael Bloomberg presiding, and now the city requires that all new leases in enters into have an energy aligned clause.
  2. Energy Report Cards – This is the response favored by Lucas Davis and David Levine, the researchers mentioned in the last post. The idea is to have something similar to the yellow sticker on Energy Star appliances that compare the expected energy usage compared to competing products. Davis and Levine imagine text along the lines of:“This apartment unit has expected gas and electricity costs of $123 per month, assuming average usage. That utility bill is higher than 67 percent of apartments this size, meaning most apartments this size have lower expected energy costs.”
    energystar_sticker
    The downside is that the researchers only foresee a report card that would be able to predict energy costs associated with appliances and the home’s heating/cooling system, which have easily measurable efficiency. With quality of insulation as central as it is to home energy use, though, this would lose an important part of the picture. It wouldn’t be impossible to try to add in information about factors like insulation, but these would be much more difficult to measure and to get a baseline to compare against.
  3. Tax Incentives for Efficiency – This idea doesn’t really eliminate the split incentives problem as much as it just does an end run around it. Basically, the government is paying for the improvement through tax deductions rather than having the tenant pay for it out of energy savings like in the Energy Aligned Lease. President Obama proposed something similar in his 2011 State of the Union address with the Better Buildings Initiative.
  4. Share the Utility Costs – This last idea is certainly the simplest. Why not just cut the utility bill in two and have both the tenant and landlord pay half each month? This way both parties are getting a partial price signal to use energy more efficiently. I would imagine this option’s lack of popularity could be from logistical difficulties and resistance from energy providers at having to deal with double the number of clients. There probably also would be some inertial resistance to adoption based on the unorthodox nature of the agreement.

Written by rethoughtblog

March 25, 2013 at 2:56 pm

What your drafty house has in common with overpriced ballpark beer

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Image

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.

frattylight

More similar to your landlord than you’d think

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Written by rethoughtblog

February 28, 2013 at 8:12 am

The Post ed board strikes out on clean energy

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The Washington Post had two editorials dealing with climate change yesterday, “Nuclear haste” and “How D.C. can better deal with climate change”, that showed they don’t understand how a renewable-focused energy portfolio would work and that they are hopelessly naïve when it comes to how DC can help fight climate change.

The first offender? Nuclear baseload power

Here’s the Post’s take:

Can the world fight global warming without nuclear power? One major industrialized country — Germany — is determined to find out, and another — Japan — is debating whether to try. Both illustrate how hard it would be.

To date, nuclear is the only proven source of low-emissions “baseload” power — that is, electricity that’s always on, day or night, powering round-the-clock elevators in Tokyo or office buildings in Munich. Yet both Germany and Japan are poised to prematurely shutter their large nuclear sectors, giving up all of that guaranteed, low-carbon electricity generation in an anti-nuclear frenzy, on a bet that they can multiply their generation of renewable electricity within a decade or two.

Here’s the problem: in any economy with a proportion of renewables anywhere even close to the amount required to prevent the worst of climate change, “baseload” power is not a virtue, but a vice. In a renewable-centric energy portfolio, energy sources that take days to start up or stop and can’t adjust their output easily are simply out of place.

Renewable energy sources like wind and solar are what is known as “intermittent” power, varying in strength based on how sunny it is, windy it is, or what have you. Too much intermittent power stacked on top of too much baseload and you can have way too much energy at times with nothing to do with it — a giant waste.

Instead, what is needed is a smart grid with “dispatchable” power that can be easily ramped up or down quickly based on how productive renewables are at the moment. There is some progress toward storing large amounts of renewably-produced energy in molten sands or synthetic natural gas, but for the moment, the best source of dispatchable is regular old natural gas. (Grist’s David Roberts has a much more thorough explanation of the interplay between these three types of energy and why Germany is ditching the concept of baseload power). Obviously we’ll need to move away from all fossil fuels, but it’s a necessary step for the overhaul from baseload to renewable/dispatchable.

Now, the Post has a point in that fossil fuel use has risen in the short term in Japan, where the shutdown of nuclear plants was in response to a disaster rather than the result of a conscious long-term plan. Ideally, we’d want to phase out fossil fuel baseload plants (coal in particular) first and only eliminate nuclear once renewables held a large share of the portfolio.

Ultimately, you can get to a low-carbon economy via a nuclear-dominated energy portfolio or one with high amounts of truly clean renewable energy, such as geothermal, wind, and solar, but to my eyes, the two strategies are basically incompatible. France has already tried the first; I for one am glad another country is proceeding with the second.

Offense number two: carbon pricing nirvana

The Post’s ed board also came against D.C. council member Mary Cheh’s (D-Ward 3) proposal for cutting the District’s carbon emissions. The editorial mainly complains that the city’s climate policy is too complex. After criticizing Cheh’s attempt to remove a tax disincentive for local solar power production, the Post writes:

Ms. Cheh’s bill would also require stores to keep their doors closed while their air conditioning is switched on. Preventing such waste is obviously appealing. But the best way to lower emissions is to put a price on carbon or to set top-line goals without prescribing precisely how businesses must achieve them. This allows businesses to make their own decisions about the most efficient ways to save energy.

The fight against climate change requires government to intervene, creating incentives for cleaner energy. But in that process, it’s easy for government to get too involved in deciding how we derive and use energy. If city leaders worry that the District isn’t moving toward green energy fast enough, they should first press for a more aggressive regional carbon-pricing scheme or to modify the city’s renewables mandate.

This is a great example of the nirvana fallacy, a logical fallacy of comparing an actual option against an obviously better, but implausible alternative, discrediting the plausible option in the process.

Clearly, pricing carbon is a desperately needed step to take away the unfair advantage fossil fuels have by polluting for free. And a regional agreement would be necessary to reduce the amount of carbon leakage that happens from “regulatory arbitrage” (think going over the state line to buy cheaper gas or cigarettes).

But, umm, what magic wand is the council supposed to wave to get an “aggressive regional carbon-pricing scheme” in place? Pressure from the city’s leaders is very unlikely to push other states to do much of anything. If it weren’t, DC might have, oh I don’t know, real voting rights.

Regulations like requiring stores to keep their doors closed in the summer might not be as ideal as a carbon tax, but if we just sit around debating what the perfect policy response would look like, we’re going to end up roasting. Imperfect action now beats the hell out of Washington Post ApprovedTM solutions that either are never implemented or get put in place decades down the line after irreversible tipping points in climate change are already reached.

-kw

Written by rethoughtblog

April 25, 2012 at 1:41 am

Posted in climate, media

Out of sight, out of mind for carbon emissions?

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A new report by the Center for Investigative Reporting “How dirty is the cloud” looks at the massive, energy intensive data centers which are needed for remotely hosted (“cloud”) applications like Dropbox or Gmail. Many of those are powered with coal, the most carbon intensive of popular fuel types.

A fear I have is that as more and more computer services are remotely hosted in these data centers, people become less aware of the energy they’re using and less inclined to conserve. If you have to have a server running in your closet to power your applications, it’s pretty obvious they’re using a lot of energy. But when you access Gmail on your phone or computer, you just click a button and a magic email fairy serves up your data. Never mind that the fairy lives in a huge data center and feeds on coal.

This is just one example of a larger trend. Individuals in wealthy countries (which have the most climate pollution emissions) have had more distance put between their actions and climate pollution, as their countries have essentially outsourced their carbon-intensive industries to China and other less developed countries. As the Washington Post’s Brad Plumer writes:

A handful of countries, including Sweden, France and Belgium, have managed to become more carbon-efficient largely by using cleaner forms of power. The rest, however, seem to have largely decarbonized through the process of transforming into service economies and shifting their industrial and agricultural needs abroad.

This means that things are even gloomier than they seem and that even the modest successes that nations have had cutting climate pollution deserve a fat asterisk next to them. It seems to me that in the absence of a binding international climate agreement, that boosting clean energy sources is more effective than trying to impose limits on dirty energy as there will be carbon leakage and the “balloon effect.”

One possible improvement is carbon labeling, which has been piloted in the UK and other jurisdictions. This would at least require consumers’ ignorance to be willful. Small steps…

All in all, one more reason why a collective action problem like fighting climate change requires a collective (as in global) response.

Written by rethoughtblog

April 19, 2012 at 2:56 am

Posted in climate, media

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