Perverse economic incentives and energy conservation

The purpose of this paper is to survey the salient economic and institutional incentives which provide perverse economic signals to energy consumers, thereby causing national energy consumption to be excessive relative to what it would be in the absense of these perverse incentives. Salient examples of these perverse incentives include artificially low energy prices due to regulated natural gas and oil prices and only partially internalized energy related external costs, non-cost justified declining block rate structures and many other subsidies. Numerous regulatory requirements such as those imposed by the Interstate Commerce Commission, also exist which promote wasteful patterns of energy use. The main argument presented in this paper is that historically the U.S. energy consumers have responded to many sets of incorrect price and non-price signals. This has led to the emergence of a wasteful energy use pattern. The best course to encourage energy conservation, therefore, is to remove these root causes of excessive use. The policy of providing off-setting financial incentives tantamounts to fighting effects rather than curing causes and is therefore unlikely to be too effective in the long-run.