The Department of Energy Thinks You’re Irrational

New regulations fail to let consumers make decisions for themselves.

energy efficient washing machine

Energy and fuel efficiency regulations aim to reduce emissions from power plants and slow increases in global temperatures. Proponents of such regulations, including the present administration, refer to these types of policies as "common sense" on a regular basis. But the recent energy efficiency rules proposed by the Department of Energy and other agencies are being justified on the basis of correcting "irrational" consumer behavior, not on the basis of benefits to the environment.

 The agencies claim that by limiting consumer choices they are improving social welfare. Many recent regulations issued by the Department of Energy are justified on this basis. These include new standards for light bulbs, air conditioners, microwave ovens, residential refrigerators and residential clothes dryers, among others.

Only a fraction of the benefits from these rules are even related to the environment. The vast majority of benefits come from eliminating options for consumers, and then counting the loss of choices as a benefit of regulating, since this supposedly brings consumer decisions closer to a theoretical model of how a "rational" individual should behave.

[See a collection of political cartoons on energy policy.]

For example, as shown by the chart below, the Department of Energy estimates that roughly 80 percent of the benefits of a recent energy efficiency rule for microwave ovens stemmed not from protecting the environment or public health, but from preventing individuals from "irrationally" opting to buy a cheaper microwave instead of a more expensive energy efficient model. In addition, most of the modest environmental benefits resulting from the rule will be captured by citizens in foreign countries, not by Americans.

Other agencies like the Department of Transportation and the Environmental Protection Agency do this as well with regulations related to fuel efficiency. Agencies even assume businesses are behaving irrationally, as if trucking companies don't take fuel efficiency into account when buying new fleets or laundromat owners don't consider electricity costs when purchasing new equipment.

[See a collection of political cartoons on the economy.]

By justifying rules on this basis, agencies are ignoring that consumers place value on other attributes of products besides energy efficiency. For example, individuals may prefer light bulbs that raise electric bills slightly but that produce a warm glow that is more pleasing than more energy efficient fluorescent bulbs. Consumers may prefer larger, safer and more spacious cars, to smaller, more fuel efficient vehicles. Or it may just be that some machines that use more energy simply work better.

It turns out that when consumers evaluate appliances they sometimes choose to forgo lower energy bills in the future to pay a lower upfront price today. Implicitly, this decision by consumers tells you something about a person's preference for present versus future value—or, in economics jargon, the consumer's discount rate. When regulators at the Department of Energy ban less energy efficient products, they are deciding that, as the experts, somehow they know better what consumers' "true" discount rate should be.

Agencies like the Department of Energy are treating citizens of this country as if they are children who need to be protected from their own impulses, when in fact regulators themselves exhibit irrational behavior at times. If we really want to do something about greenhouse gas emissions, we should focus on policies that can actually be justified on the basis of their environmental benefits. Agencies and the current administration need to be more forthright about the degree to which recent energy and fuel efficiency standards are actually related to benefiting the environment.

James Broughel is program manager of the Regulatory Studies Program at the Mercatus Center at George Mason University. 

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