Energy Policy:

Brookings economist Gayer says government rationale on efficiency is flawed

Is the government's economic justification for efficiency regulations flawed? During today's OnPoint, Ted Gayer, co-director of the economic studies program and a senior fellow at the Brookings Institution, discusses a new paper examining the costs and benefits of efficiency regulations proposed or enacted by the departments of Energy and Transportation and U.S. EPA. He explains why he believes restricting consumers' choices does not produce benefits.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Ted Gayer, co-director of the economic studies program and a senior fellow at Brookings Institution. Ted, thank you so much for coming show.

Ted Gayer: My pleasure, thank you for having me here.

Monica Trauzzi: Ted, you've just released a paper examining the economic justification for resume efficiency regulations that we've seen coming out of DOE, DOT, EPA. What is the current government rationale regarding efficiency and why do you believe it's flawed?

Ted Gayer: Well, let me first start by saying what I think the rationale should be, the traditional approach to environmental regulations is we look at what the effect is on the environment and so if you're going to regulate them, what you're trying to do is look at if we're going to in some sense restrict market activity, we want to do so in order to reduce pollution. And that is ultimately the goal. And we weigh the benefits of reducing pollution against the costs associated with restricting trade and market commerce. I think it's a very noble goal. I think that's the goal that we should have for environmental regulations. Where I think they're getting it wrong is if you look at the actual regulations, if you look at the analysis actually done by the agencies. There's very little pollution reduction getting done by most of these regulations and certainly not enough to justify the cost that the agencies themselves say are associated with them. So, what you find agencies doing is instead they're looking for alternative rationales and the rationales that they've arrived at, which I have some problems with and I think takes us in the wrong direction, is essentially saying, okay, look, there's not a lot of pollution reduction going on here. But by restricting the products that consumers and firms can buy, restricting it to energy-efficient products, we're actually helping those consumers and firms. In some sense, they're protecting us from ourselves. They're saying that people are making poor consumption choices and by essentially forcing them to make better consumption choices, we're helping them. And to me this shifts environmental regulation away from where it should be, which is protecting the environment, and shifts it more towards consumer protection. Which I think in the end distorts the policies that we have and really, if you look at the regulations, they're really not well justified that we need that kind of consumer protection anyway.

Monica Trauzzi: But isn't there sort of a learning curve that's happening here as these regulations come into play to get to that point where there are real environmental benefits?

Ted Gayer: Well, no, if you look at their analysis, there's very, very little environmental benefits associated with them. So, the question is are people out there making bad decisions and should that be the focus of EPA, DOT and DOE? And what I think it does is it moves us away from what I would think would be more useful environmental policies that actually get at the environmental pollutant. I would also note that if people are making mistakes, if they're somehow making irrational consumer decisions, that the more appropriate response, which is actually in OMB guidelines, is to help inform consumers. To say, look, okay, maybe we can label this product a little bit better so that you know if you use this dishwasher, you know, once a day, this is what your bill is going to be every month. If you drive in the city this amount, this is how much you can expect to spend on gasoline. That is kind of a more nuanced, appropriate response, as opposed to kind of mandating something uniformly on a bunch of consumers, some of whom might actually prefer to have one product that is now not available to them, which is essentially going to impose a cost on them.

Monica Trauzzi: So, if there was more consumer education would you then say that these regulations are more justified?

Ted Gayer: I would say if there's more consumer regulation, that you wouldn't need these regulations. There's actually a good case in point because if you look at the CAFE rule and EPA's analysis of the fuel economy rule, they go through great pains of just essentially trying to justify it saying, look, people make mistakes. They have bad information and by essentially forcing the market to make more fuel-efficient cars, we're helping them. But just last year they promulgated a rule that was a labeling rule. The whole idea of the rule was basically saying people need better information. So either A) that rules and work or B) it did work, in which case why are you claiming that people have informational problems and thus need more of a kind of forceful mandate? In fact, in the analysis of the CAFE rule, they don't even refer back to their labeling rule, somehow ignoring it, which I think is a mistake. So, you know, again this is not anti-regulation. Regulation should be looking at when people engage in market transaction, what are the spillover costs to the environment and how do we reduce it? Not focus on how do we protect us from ourselves when there's very little justification that we need it. And then you wind up with a host of regulations that are not really doing much for the environment anyway and I think kind of pushes the debate in the wrong direction.

Monica Trauzzi: So you think then the more justified approach would be a price on emissions, a cap on carbon or perhaps a carbon tax?

Ted Gayer: Sure, yeah, I think, you know, if you're looking at consumer protection, first I think we need to -- the agencies need to identify that they exist and what the magnitude are, before you kind of willy-nilly regulate. But even if you, once you do that, the kind of suite of regulations I would be looking for there are much more nuanced, so these informational approaches, which again are in OMB guidelines that should be happening. So that's your consumer protection. On the environmental protection front, yes, we need to put a price on the pollution, not these mandates. The mandates have some kind of perverse effects. If you raise the fuel economy of an automobile, people tend to drive more, so that runs counter to pollution reduction. So a lot of these regulations aren't well-equipped at getting a problem; whereas, if you put a price, like a carbon tax as you say, which is my preferred policy, that actually gets at the problem. The problem is somebody is engaging in a market activity, somebody is driving their vehicle, someone is using their dishwasher. It is much to their own benefit, but in doing so they're imposing costs on the rest of us and we need to price those costs to affect their behavior.

Monica Trauzzi: But we've gone down this road before and we figured out that these approaches are not necessarily politically feasible right now. So, aren't these efficiency measures the next best thing?

Ted Gayer: Well, so I think you're right. I think politically what I'm advocating for, as we've seen, is very difficult. What I think what you wind up having happen here, which is very frequent in DC, is you have the old adage something must be done. This is something; therefore, let's do it. And I'm looking at this and saying the therefore isn't exactly right. I don't know that this is actually getting what we want. And then I would take it a step further. These regulations rely on cost-benefit analyses. There are guidelines set up by OMB. There is an office within OMB which is supposed to rigorously assess the work that's being done by these agencies to make sure that they are up to the academic credentials of cost-benefit analysis. They are not supposed to look at it and say, well, I understand why you're doing this, because politically, you know, you have to justify it. It's as if CB, I view it as similar to CBO. When Congress proposes a legislation that CBO evaluates, they're not supposed to take into account, well, politically, this is the best he can do. They are supposed to say here is our best assessment, impartially, of costs and benefits. And I think that's what OMB should be doing and the agencies should be doing when they present these analyses. Just one example there, the agencies on some of these don't have a choice. Some of these are in the statute. But nonetheless, when they analyze it, when they do what they are deeming are credible cost-benefit analysis, they should do an honest analysis of the cost-benefits. Subject to the statute they may not have a choice, but they are doing a service by saying, yes, this is what we have to do, but here are the benefits and costs as we actually see it. And I see that not happening enough.

Monica Trauzzi: All right, interesting perspective. Thank you for coming on the show.

Ted Gayer: Thanks for having me, I appreciate it.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.

[End of Audio]

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