Tag Archives: benefit-cost analysis

A shocking finding on energy efficiency cost effectiveness

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A study just released from the E2e Project finds that the investment costs in residential energy efficiency greatly exceed the realized benefits.  Earlier the same research program found that even if the energy efficiency measure packages, costing up to $5,000, were given away for free, only 6% of low income homeowners would participate. This is one of the first projects to track from start to finish a full set of energy efficiency projects. Much controversy has swirled around the accuracy of the engineering calculations used to estimate energy savings, and whether market barriers are impeding participation in what appears to be obvious cost saving actions. This study calls into question the premise of “costlessly” promoting energy efficiency actions.

The Project is run jointly by the University of California’s Energy Institute at Haas, the University of Chicago’s EPIC, and MIT.

Assessing the economic impacts of drought regulations

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M.Cubed was asked by the State Water Resources Control Board to prepare an economic assessment of the emergency regulations ordered by the Governor to reduce municipal water use by 25%. We gathered a team that included Roger Mann of RMann Economics, Tom Wegge of TCW Economics, Richard Howitt and Duncan MacEwan of ERA Economics, and prepared the report in about two weeks. The SWRCB included a summary of those findings in its regulatory digest.

The innovative aspect of our study is to steer away from a single point probabilistic estimate of the benefits of the regulations and instead to focus on the potential vulnerability and consequences of the risk of continued drought in the future.

The EO is intended to address potentially significant economic vulnerabilities – risks – rather than statistical or probabilistic expectations. If the drought and high temperatures continue in California, water saved as a result of the order will become increasingly valuable. Under these circumstances, costs estimated to be associated with the EO this year could be more than exceeded by greater adverse impacts next year if the EO had not been issued.

Australia had an extended drought that lasted 10 years before ending in 2012 that cut 1.6% off its GDP. For California that would be $35 billion in a single year which is multiples of the range of costs we estimated for the regulations. In other words, the probability of continued drought would have to be less than 4% to make this option uneconomic.

We also pointed out that while the water utilities will lose revenues this year, as mostly public agencies, they will have to make up those losses in the future. For this reason, those revenue losses should be treated as eventual economic costs.

Yet another misconstrued view of “economics” in the climate change debate

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Charles Mann wrote an interesting review of several books on climate change in The Atlantic Monthly. He portrays the debate as “Environmentalists” vs. “Economists.”  Unfortunately he describes economists as relying entirely on using central tendency expected values in standard cost-benefit analyses. And he fails to give economists full credit for creating the cap and trade system that he praises as an effective means of generating the change that is required.

The fact is that many economists are changing the debate on climate change to focus on deep uncertainty, to assess the costs of unlikely but catastrophic outcomes, to design effective technology subsidies, and to focus California’s climate change policies on global goals. All of these are important innovations that are affecting the debate over how to address the risks of potential climate change.

It’s important to recognize that we need to decide to act without full knowledge about whether climate change is driven by human activity or will it be of sufficient consequence to affect our civilization. If we live in a forest and there’s risk from a distant fire, we assess whether we need to buy insurance, clear brush around our house or evacuate. The fire may never come to pass–in fact the probability may be quite low, but we know the catastrophic consequences if it arrives. Is acting now to address climate change risk, both mitigation or adaptation, worth it? Economists have the tools to address this question–the problem is that key individuals in the media such as Charles Mann don’t seem to be aware of these, and so neither does the public or decision makers.