Hand-to-Mouth Myopia

July 10, 2009
Editor Chris Olson talks about effective long-term energy policy

It’s no surprise that the Obama administration’s initiatives to toughen energy standards are causing shrill outcries. Along with the prospect of higher energy prices, critics complain that government has no right to intervene in the marketplace, and that such meddling inevitably fails. But such short-term, market-driven myopia ignores much good that government policy has achieved.

A McKinsey report (Curbing Global Energy Demand Growth, 2007) notes that energy productivity gains in U.S. commercial buildings can be traced back to periods of regulatory intervention. A case in point is the oil shock of 1979, which resulted in regulation that reduced energy intensity in U.S. commercial buildings by 4 percent each year between 1979 and 1986. Another example is standards that reduced energy intensity in commercial lighting by 50 percent between 1973 and 1985. At that time, the introduction of CAFE standards led to similar improvements in auto fuel economy.

And speaking of gas prices, history has shown over and over again that absolutely nothing changes consumer behavior and reduces consumption like the unexpected shock of high prices. But these unsustainable upheavals are painfully unproductive for short-sighted consumers and auto manufacturers.

I recently asked two executives of a global building energy management firm how building energy practices in Europe compare to those in the United States. The first thing both said is that Europe has an advantage because governments there typically play a stronger role in setting energy policy and regulation.

The McKinsey report found that an astounding 73 percent of users in the U.S. commercial buildings sector will not undertake energy-efficiency investments if the payback exceeds 2 years, a common criterion of capital budgeting – and a massive impediment to efficiency.

When the invisible hand of the market encourages only a short-term, hand-to-mouth behavior among energy users, government should develop effective long-term policy. Effective is a big “if,” but hardly enough to rule out government intervention on principle alone.

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