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Are Energy Efficiency Standards Justified?

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  • Parry, Ian W.H.

    () (Resources for the Future)

  • Evans, David A.
  • Oates, Wallace E.

Abstract

This paper develops and parameterizes an overarching analytical framework to estimate the welfare effects of energy efficiency standards applied to automobiles and electricity-using durables. We also compare standards with sectoral and economywide pricing policies. The model captures a wide range of externalities and preexisting energy policies, and it allows for possible “misperceptions”—market failures that cause underinvestment in energy efficiency.Automobile fuel economy standards are not part of the first-best policy to reduce gasoline: fuel taxes are always superior because they reduce the externalities related to vehicle miles traveled. For the power sector, potential welfare gains from supplementing pricing instruments with efficiency standards are small at best. If pricing instruments are not feasible, a large misperceptions failure is required to justify efficiency standards, and even in this case the optimal reductions in fuel and electricity use are relatively modest. Reducing economywide carbon dioxide emissions through regulatory packages (combining efficiency and emissions standards) involves much higher costs than pricing instruments.

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Bibliographic Info

Paper provided by Resources For the Future in its series Discussion Papers with number dp-10-59.

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Date of creation: 23 Nov 2010
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Handle: RePEc:rff:dpaper:dp-10-59

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Related research

Keywords: standards; energy taxes; market failure; climate; power sector; gasoline;

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References

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  1. Kenneth Gillingham & Richard G. Newell & Karen Palmer, 2009. "Energy Efficiency Economics and Policy," NBER Working Papers 15031, National Bureau of Economic Research, Inc.
  2. Austin, David & Dinan, Terry, 2005. "Clearing the air: The costs and consequences of higher CAFE standards and increased gasoline taxes," Journal of Environmental Economics and Management, Elsevier, vol. 50(3), pages 562-582, November.
  3. Burtraw, Dallas & Parry, Ian & Goulder, Lawrence & Williams III, Roberton, 1998. "The Cost-Effectiveness of Alternative Instruments for Environmental Protection in a Second-Best Setting," Discussion Papers dp-98-22, Resources For the Future.
  4. Geoffrey Heal, 2009. "Climate Economics: A Meta-Review and Some Suggestions for Future Research," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 3(1), pages 4-21, Winter.
  5. Parry, Ian & Fischer, Carolyn & Harrington, Winston, 2004. "Should Corporate Average Fuel Economy (CAFE) Standards Be Tightened?," Discussion Papers dp-04-53, Resources For the Future.
  6. B. Howarth, Richard & Haddad, Brent M. & Paton, Bruce, 2000. "The economics of energy efficiency: insights from voluntary participation programs," Energy Policy, Elsevier, vol. 28(6-7), pages 477-486, June.
  7. Brown, Stephen P.A. & Huntington, Hillard G., 2010. "Reassessing the Oil Security Premium," Discussion Papers dp-10-05, Resources For the Future.
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Citations

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Cited by:
  1. Tsvetan Tsvetanov & Kathleen Segerson, 2011. "Re-Evaluating the Role of Energy Efficiency Standards: A Time-Consistent Behavioral Economics Approach," Working papers 2011-24, University of Connecticut, Department of Economics.
  2. Hunt Allcott & Michael Greenstone, 2012. "Is There an Energy Efficiency Gap?," NBER Working Papers 17766, National Bureau of Economic Research, Inc.
  3. Klier, Thomas & Linn, Joshua, 2011. "Fuel Prices and New Vehicle Fuel Economy in Europe," Discussion Papers dp-11-37, Resources For the Future.
  4. Ian W.H. Parry & John Norregaard & Dirk Heine, 2012. "Environmental Tax Reform: Principles from Theory and Practice to Date," IMF Working Papers 12/180, International Monetary Fund.

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