Hearing Kermit the Frog say, “It’s not easy being green,” Mexican environmentalists might agree.
Since March 2009, Mexican households have been offered cash payments or subsidized loans for replacing refrigerators and air-conditioners that were more than 10 years old with new energy efficient appliances. The goal was to diminish electricity usage and carbon dioxide emissions. So far, 1.5 million households have participated.
Surprisingly, refrigerator savings were less than expected and air-conditioner use increased. Researchers believe that newer refrigerator models were larger and had extra features like ice makers that somewhat offset their energy savings. For air-conditioners, people just used them much more.
Energy savings programs are tough to design and evaluate. As with refrigerators and air-conditioners, changing incentives can have unpredictable consequences. In addition, even if an energy savings program does not save energy, it still could provide considerable benefits far beyond its costs because of better refrigeration and cooler homes. And finally, we should always remember the “rebound” effect. Explained by William Jevons in an 1865 book called The Coal Question, the “rebound” effect resulted when the energy efficiency created by the steam engine encouraged more energy use rather than less. Jevons said, “It is wholly a confusion of ideas to suppose that the economical use of fuel is equivalent to a diminished consumption. The very contrary is truth.”
Maybe Kermit was right.
This NBER paper fully describes the Mexican cash for coolers program and if you want to read more about the rebound effect, I suggest this fascinating New Yorker article. For a more academic study, this Congressional Research Service (CRS) report explains that the “rebound” effect is most evident in a developing economy because slack demand can lead to considerable increase in energy use. In a mature market, the “rebound” effect is less pronounced.
Posted by: adminEcon
Tags: air-conditioners, American Recovery and Reinvestment Act of 2009, carbon dioxide emissions, cash for clunkers, cash for coolers, cost/benefit, developed nation, developing economy, emerging market, energy efficiency, environment, green, Mexico, negative externalities, price elasticity of demand, rebound effect, refrigerators, stimulus
With the price of gas marching skyward, more of us might become eco-drivers. Based on a report from the University of Michigan Transportation Research Institute (UMTRI), here are some (slightly irreverent but accurate) rules for eco-driving:
- During warm weather, don’t use the air conditioner and don’t open the windows. At certain speeds, the wind is a drag that uses up more fuel.
- Occupy every seat with short skinny people. Weight and occupancy make a big difference.
- Avoid hills.
- Only drive on highways, preferably at 50 mph. Sort of like the porridge from Goldilocks and the Three Bears, driving too slowly and too fast use more fuel while a medium speed is just right.
- Don’t drive aggressively.
- Keep an eye on your oxygen sensor, your tires and your engine oil.
However, even if you violate every suggestion, by driving one of the most fuel efficient cars you will still receive a higher eco-driver rating than being eco-observant in the least fuel efficient cars.
So, what really counts? The car.
And this takes us to where economists always go: Incentive. Is price enough of an incentive to affect how and what we drive?
The Economic Lesson
Economists hypothesize that at more than $4.00 a gallon, we are close to a gasoline price that provides the incentive to conserve more and drive less. When buyers have a considerable response to a price change, economists say that their response is elastic. Our minimal reaction to the rising gasoline price indicates that thus far, our quantity demanded has been inelastic.
An Economic Question: If, in 1923, average mpg were 14.0, why has gas mileage not improved substantially since then?
Is it $4.11?
Although gasoline prices are rising, consumers have not altered their driving habits. Economist James Hamilton suggests that the tipping point tends to be when prices exceed the highest point during the past 3 years. That number is $4.11 or $4.27 if we account for inflation.
Currently, the average price per gallon of regular in the U.S. is $3.72 while Wyoming has the cheapest gas at $3.16 and California has the most expensive at $4.33.
Looking beyond our borders, though, $4.33 can seem pretty low. For these countries, fuel taxes elevated prices. (March 2011 data)
- U.S.: $3.59
- Istanbul, Turkey: $9.63
- Oslo, Norway: $9.27
- Athens, Greece: $8.50
- Amsterdam, Netherlands: $8.01
On the other hand, subsidies can make the price per gallon of gasoline pretty low:
- Caracas, Venezuela: $.06
- Riyadh, Saudi Arabia: $.45
- Doha, Qatar, $.88
For 170 countries, these graphs are ideal except that the data is for 2010.
Finally, where are we historically? Going way back to 1919 when the price of gas was close to 25 cents–the equivalent today of $3.35–this graph provides a fascinating picture of where gas prices have been. At all time highs now, real prices were slightly lower when they peaked during 1981 and 2008.
The Economic Lesson
Observing the impact of gasoline price swings on consumer purchases, economists cite our elasticity. If price changes a lot and the quantity we buy remains almost the same, as with medication, then our demand is inelastic. By contrast, if price changes have a big impact on buying, then our response is elastic.
An Economic Question: If, at $4.11 per gallon, we start to buy a lot less gasoline, then how might you use elasticity to describe the change in our buying decisions?