Energy Efficiency Regulations Set Dangerous Precedent

Government-imposed energy efficiency standards are an unnecessary burden on consumers.

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A 2008 Toyota Prius is guided through traffic along Broadway in north Denver on Tuesday, June 24, 2008. Toyota Motor Corp. could overtake General Motors Corp. in monthly sales for the first time in June, but the victory could be a hollow one as the weak economy continues to pummel the auto industry and even Toyota struggles to meet U.S. consumers' sudden and insatiable demand for hybrid cars.

Ted Gayer is the co-director of the Economic Studies program at the Brookings Institution. W. Kip Viscusi is a university distinguished professor of law, economics, and management at Vanderbilt University.

A recent wave of government regulations has mandated energy efficiency standards for products ranging from passenger cars and commercial vehicles, to clothes dryers, air conditioners, and light bulbs. Federal regulators tout these new rules as "greenhouse gas initiatives" with the purported aim of reducing environmental pollutants—especially those that contribute to climate change.

But as the regulatory agencies' own estimates confirm, the environmental benefits of these regulations are negligible, and are often dwarfed by the societal costs they impose.

In our recently released Mercatus Center study, we examined a sample of energy efficiency regulations proposed or enacted by the Department of Energy, the Department of Transportation, and the Environmental Protection Agency to assess the validity of their benefit claims.

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In order to justify these expensive regulations in economic terms, the regulatory agencies asserted that consumers and firms are incapable of making responsible purchase choices on their own—even from the standpoint of their own welfare, and apart from any broader concerns such as pollution. Thus, the agencies claimed (without supporting evidence), consumers and firms would benefit if product choices were restricted to those that meet the agencies' mandated standards.

From the standpoint of the regulatory agencies, any product purchase that is not the most energy efficient is irrational and harmful to the consumer. Under this standard, a mother of four who buys a car that has advanced safety features and flexible seating options, but is not the most energy efficient, has made an "irrational" choice. Thus, the buyer would have benefited by having the government restrict her options to only the most energy efficient model.

These one-size-fits-all energy efficiency mandates ignore the substantial diversity of preferences, financial resources, and personal situations that consumers and firms must align in order to make purchase decisions. Dismissing consumer preferences out of hand is also a significant departure from well-established tenants for conducting cost-benefit analyses set forth in economics literature and by the administration's Office of Management and Budget.

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By claiming regulatory benefits from the correction of so-called "consumer irrationality," agencies are shifting regulatory priorities from the important goal of mitigating the harm individuals impose on others (through pollution) towards the nebulous and unsupported goal of mitigating harm individuals cause to themselves by purchasing purportedly uneconomic products. The result is a host of costly regulations that have minimal effect on improving the environment.

More important, this establishes a dangerous precedent: If regulatory agencies can justify regulations on the unsubstantiated premise that consumers and firms (but not regulators) are irrational, they can justify the expansive use of regulatory powers to control and constrain virtually all choices consumers and firms make. If anything, the irrationality revealed by these regulations is on the part of regulators who characterize an ill-conceived reduction in choice as a benefit for consumers and firms.

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