As the United States tries to reduce emissions and become more energy independent, energy efficiency will likely play a major part in achieving these goals. But should the government be incentivizing consumers to lead more efficient lifestyles? During today's OnPoint, Thomas Tanton, a fellow in environmental studies at the Pacific Research Institute discusses his new white paper, written for the Competitive Enterprise Institute, discussing California's demand-side management program (DSM). The paper, "California's Energy Policy: A cautionary tale for the nation," takes aim at the DSM and explains why it should not be implemented nationally. Tanton says the DSM has not yielded energy usage reductions on its own and he explains why he believes other states would not be successful in reducing their energy usage in this way.
Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Thomas Tanton of the Competitive Enterprise Institute. Tom is the author of the new white paper "California's Energy Policy: A Cautionary Tale for the Nation." Tom, thanks for coming on the show.
Thomas Tanton: Thank you for having me this morning, Monica.
Monica Trauzzi: Tom, you've written this new white paper that sort of takes aim at California's demand-side management programs, which were created to cut electricity demand. Essentially, you're saying that the DSM can't be replicated on a national scale. Talk about why you set out to write this paper at this point and what some of your main concerns are with the California DSM.
Thomas Tanton: Well, the main reason for writing the white paper was a lot of talk last year during congressional session was, well, if we just did what California does we wouldn't have to build new power plants, we wouldn't have to do anything, and we can reduce our greenhouse gas emissions and yadda, yadda, yadda. Well, the fact of the matter, California is unique. It has several features that had allowed it to constrain electricity demand growth, not because of demand-side management programs, but because of the weather, because our economic structure has changed, we don't make anything in California anymore, other than movies, it's primarily a service oriented economy. And other features of California make it such that it's not the policies that should be replicated and the other factors cannot be replicated in other states. Demand-side management programs really haven't contributed that much to the slowing demand growth.
Monica Trauzzi: So, is this an environmental or economic argument that you're making?
Thomas Tanton: It's both. It's both. A lot of the economic structure in California, I mean you've heard about our high real estate prices and whatnot, what that's done it is made more people live in smaller spaces. There's a higher person per household in California than anywhere else in the country. So, in the residential sector, there's automatically built-in a slowing of demand growth because you're heating less space per individual, the per capita heating. The economic structure has changed. We don't make airplanes anymore, things of that sort. And coupled with that are very stringent environmental regulations that are driving businesses out of California.
Monica Trauzzi: All right, Californian officials would say that this particular program has led to the success of their emissions reductions and lower use of energy. So, why do you feel that those numbers are being exaggerated? Why does that not square?
Thomas Tanton: Well, you know, if all you have is a hammer then everything looks like a nail. Of course, they think their programs are successful because that's what they've got. That's their tool. But when the electricity crisis occurred in California in 2000 and we finally got out of it, the government asked me, "How do I take credit for getting us out of the energy crisis?" I said, "Mr. Davis, there's only two reasons we got out of the energy crisis. One was the weather got milder and our economy tanked. I'm not sure you want to take credit for either one of those." It's not the policies really that are reducing demand growth. Our demand for electricity has increased over 60 percent in the last 20 years and a lot of that comes from coal-fired power plants in other states. We don't build a whole lot of power plants in California. Those that we do build are primarily natural gas. So that shift to natural gas is also a large reason for the reduction in emissions.
Monica Trauzzi: All right, but we're also seen population growth. And isn't it a smart idea to sort of preemptively strike and try to have this like wide scale energy efficiency regulation in order to manage that growth?
Thomas Tanton: Well, you want to manage growth. And the question becomes, do you manage it through regulations and heavy-handed standards and rebates and subsidies or do you let the market respond? California has high electricity prices and high energy prices for everything. The natural inclination of the typical consumer is be more efficient on their own, given their own unique circumstances and their own unique value system and their own unique ability to pay for different measures. So, you can either get it by regulation, which is sort of a sledgehammer affect, or you can allow the free market to do it. And it's been shown over and over again that the price effects are much more effective and reduce consumption much more than the programs, the DSM programs themselves.
Monica Trauzzi: But without regulation you're putting a big burden on the consumer to actually take the initiative to become more energy efficient. If there's some sort of regulation, if there are subsidies in place to help them get to that point, won't they be more inclined then to become more energy efficient?
Thomas Tanton: Well, they would be more inclined, but I don't think it's fair to say that they would be more inclined than they would be otherwise. The subsidies, fact, what happens with energy efficiency is as each individual end use becomes more efficient, that frees up dollars for something else. Now, those something else often require a new demand. So with energy efficiency programs energy efficiency doesn't necessarily lead to less energy consumption.
Monica Trauzzi: Con Edison in New York is now taking steps to implement a DSM type program. Are they wrong here? How do you see things playing out in New York?
Thomas Tanton: I'm not familiar too much with their individual program. DSM programs can take many different avenues, some are public education, and it's surely helps the consumer in making the right choice to have the right information. Cross subsidies or mandating people use compact fluorescent lights, outlawing incandescent lights, and things of that sort, the heavy-handed approach, usually doesn't work very well and it leads to unintended consequences.
Monica Trauzzi: But what you hear from consumers a lot is I'd like to be more energy efficient, but either (a) I don't know how to do it or (b) it's too expensive. Either they've heard that it's too expensive or they've gone to the store themselves and seen that, for example, energy-efficient light bulbs are more expensive.
Thomas Tanton: Sure.
Monica Trauzzi: So, a subsidy would help them get to that point, would it not?
Thomas Tanton: Well, it helps them in making that choice. The education is good. Smarter consumers make smarter choices. The subsidies, however, I don't think are. I mean they're sold as something to make a choice economically attractive. Well, it's not economically attractive, it's financially attractive, and most consumers don't understand the difference between financially attractive and economically attractive. All it does is a wealth transfer from whoever is funding the subsidy to whoever is receiving the subsidy. That distorts the choice. If it's too expensive, if it's not economically attractive to begin with, giving it a subsidy doesn't make it economically attractive. What it does is it reduces our productivity overall and ends up, ultimately, shipping jobs overseas because we are less economically productive.
Monica Trauzzi: So, what's more important here, meeting our rising demand or reducing emissions? Can we do both?
Thomas Tanton: I think we can do both. Certainly, I think you'll see a renaissance in the nuclear industry. Noted environmentalists are starting to push for nuclear capacity. It has issues as well. We can continue to build more reliable, more safe, more cheap and more clean energy sources. What I hate to see is things holding back construction of new technologies, which are ultimately cleaner than 1960s vintage power plants. We need to renew the fleet at the same time that we grow the fleet.
Monica Trauzzi: Well, for example, carbon capture and sequestration technology has not yet been fully developed. It's not implementable at this point and that's going to play a major factor in our future use of coal and future efficiency of coal-fired power plants.
Thomas Tanton: That's correct.
Monica Trauzzi: So, how do we manage that if we had this rising demand, we want to continue to use coal, but the technology still doesn't exist?
Thomas Tanton: Well, keep in mind that a new, state-of-the-art, power plant without carbon capture and sequestration is much more efficient, makes more kilowatts hours for every Btu that it burns, than an old power plant. So, we can bridge to the day when CCS is available, widespread, which is going to take decades probably, but we can bridge by building cleaner, more efficient, albeit not perfect, whatever that might mean, power plants in the meantime, so that we can continue having electricity that is just so crucial to our lifestyle and reduce emissions at the same time. Keep in mind that the United States' carbon intensity has continued downward for the last 15, 16 years, so we're getting better all the time. And as long as we're always getting better then that's pretty nice. We can't hope to ever actually be perfect, but we can always try to get better and we've been getting better.
Monica Trauzzi: I'll end here on this question. The California Public Utilities Commission and also the CEC are now working with China to sort of exchange information on the DSM because China is interested in applying a similar program in its country. You say it won't work widespread in the U.S., do you see it working in China?
Thomas Tanton: Well, the people that live in China live under a different social compact with their government. I'm not sure most folks in the United States would want to live under that sort of regime, although many in California seem to like it. There are problems with that. I'm sure the Chinese can do a lot of things to reduce the growth in their demand, both for electricity and other energy sources. There are some programs in California that would be useful for the Chinese. I'm not saying that the whole panoply of things they do is bad. They need to be more selective.
Monica Trauzzi: All right. We will end it there on that now. Thanks for coming on the show.
Thomas Tanton: Thank you so much.
Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.
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