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What are the most promising opportunities to promote greater residential energy efficiency? Is there a role for the federal government?

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By Mark Calabria

The average household spends over $3,600 annually on utilities, fuels and other public services, including telephone service, amounting to just over 7 percent of all annual expenditures (see BLS’ consumer expenditure survey). Not surprisingly these costs are higher for homeowners than renters. While these costs do increase with income, for instance electricity expenditures are twice as high for the top quintile of earners as for the bottom, their burden as a percent of income falls with income. Reducing energy costs offers some potential for reducing cost burdens for all families.

Unlike housing costs, which many seem to applaud only when prices rise, most of us outside of oil producing regions recognize that falling energy prices are likely to increase consumer welfare. The important question is what the best avenue for doing so is. Looking at the experience with Green Building standards in commercial building would suggest some skepticism. Oberlin College Professor John Scofield has examined the science behind green building ratings systems and has found them wanting; concluding that “that LEED buildings consume about the same amount of primary energy as to comparable, non-LEED buildings.” While we shouldn’t outright reject private sector attempts to standardize green building, we should be a lot more modest about what they can accomplish.

We should be wary of too much micromanagement and extensive federal subsidies. We don’t need an “ethanol” style subsidy for residential fuel efficiency where the subsidy ends up costing more energy than it saves. Nor should we create the housing equivalent of Solyndra, where subsidies are thrown at politically favored companies with little real prospect of success. Attempts have also been made to encourage energy efficiency via our mortgage finance system. Since these attempts have uniformly been packaged as reductions in underwriting criteria, such as allowing LTVs in excess of 100 percent, they should be rejected on that approach alone. Questionable attempts at energy efficiency should not come at the expense of loan quality.

Ultimately increasing efficiency depends upon incentives. The White House’s National Science and Technology Council has proposed the sub-metering of electricity usage as an avenue for better decision-making by consumers. While the evidence is mixed on the extent to which residents change behavior in the face of additional information and/or incentives, this route likely offers the greatest rewards with the least costs. We must also be wary of energy efficiency initiatives that raise the price of housing. Too much exclusionary zoning and building codes come to pass under the cover of environmental quality or energy efficiency, with the greatest burdens falling upon those least able to bear them.

Mark A. Calabria is director of financial regulation studies at the Cato Institute

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