The Economics of Conservation

Conservation may be a sign of personal virtue, but it is not a sufficient basis all by itself for a sound, comprehensive energy policy.
Vice President Dick Cheney, 2001 April 30

This quote is from a speech that Cheney gave before the Associated Press in Toronto, Ontario. In context, it doesn't have quite the edge of contempt for "personal virtue" that it carried when the national media picked it up as a sound bite. Still, I found it disheartening.

In the large, Cheney is utterly wrong. Conservation is simply the act of conserving—keeping—the planet that we live on, as opposed to taking everything of value and laying waste to the rest. Conservation is a perfectly good basis for an energy policy. What's more, a policy of conservation must ultimately be grounded in the desire of each of us to conserve: our collective virtue is nothing more than the aggregate of our personal virtues.

But Cheney wasn't talking about conservation in the large. He was referring specifically to small, individual acts of conservation:

We all remember the energy crisis of the 1970s, when people in positions of responsibility complained that Americans just used too much energy. Well, it is a good thing to conserve energy in our daily lives and we certainly want to do that, and probably all of us can think of ways to do so.
On this level, Cheney is right. Turning out the lights when you leave the room does not an energy policy make. Reducing consumption could be an important component of an energy policy, but relying on individuals to voluntarily conserve energy doesn't work.

The problem isn't just that we can't rely on everyone to be sufficiently virtuous, or that the resulting savings are generally small. The problem is more fundamental than that. The problem is economic.

Turning the lights out

Suppose you make a conscientious effort to turn that light out when you don't need it. Suppose you keep it off for an extra hour each day. After a month, you've saved about 3 KW-hours of energy. This is good.

The problem is that you've also reduced your electric bill: at today's prices, by about $0.25. So you have an extra quarter in your pocket that you didn't spend on electricity. And there are really only two things you can do with that quarter

If you spend it, it goes right back into the economy, buying things that require energy to If you save it, it eventually ends up in a bank, and we all know what banks do with money: they lend it to people, who use it to buy things—things that require...well, you've heard this before.

Keeping the lights out

If conserving energy results in people having more money, then it doesn't actually reduce energy consumption: it just moves the consumption around. In order to reduce aggregate consumption, people have to use less energy but still pay the same amount for it: energy has to cost more.

One way to make energy cost more is to wait until we run out of fossil fuels. This is simple and effective, but is somewhat like slowing your fall by waiting until you hit the ground: it works, but you may not like the results.

Another way to make energy cost more is to tax it. Taxing energy is attractive from an economic standpoint, because it

An energy tax is also attractive from an accounting standpoint, because it is (or ought to be) easy to collect. Energy comes from These are big, stationary sources. We know where they are. We can make a list of them and send out the tax bills. It isn't like trying to collect a sales tax from every retailer in the country, or a value added tax from every business in the country.

Finally, if you object to raising taxes, you can return the money to the taxpayer by increasing the zero-bracket level of the income tax. That way, total government revenue stays the same.

The politics of conservation

Bill Clinton tried to institute an energy tax—a carbon tax, actually—early in his first term. It was opposed by Clinton's carbon tax was DOA, but we can learn from the political maneuvering that surrounded it. While some parties were entirely opposed to it, many others began wheedling for special adjustments, allowances, exceptions, exemptions, rules, and treatments.

For example, the coal producers wanted the tax to be collected from consumers, rather than at the mine entrance. Their stated concern was a fear that if the tax were collected directly from them, they wouldn't be able to raise prices enough to pass it on to consumers. Vice President Al Gore allowed that collecting the tax from the consumer wasn't a bad idea, since the consumer must ultimately bear the cost of the tax if we are to achieve any conservation.

BZZZZTTT!!!

This is wrong, and betrays a profound ignorance of economics. Observe:
"Hey, Charlie! What's with this $1.10/gallon? It used to be $1.00"

"It's the new energy tax, Mr. Sims. Everything's gone up 10%"

"Well, I've got to have my 10 gallons. Here's $11.00. And check the oil, too."

"Right away, Mr. Sims!"

See? If the consumer pays the tax, you get no conservation.

The coal producers were wrong too. The market automatically apportions taxes between producers and consumers according to the slopes of the supply and demand curves. Changing the collection point may change nominal prices, but does not affect who actually pays the tax.

Fools or liars?

The coal producers had no illusions that they could push the tax onto consumers by moving the collection point downstream. The reason they wanted to do this is doubtless that they saw greater opportunities to play political games with a tax that was collected in 50 states and 435 congressional districts than with one that was collected in just a few.

Unless you have studied economics, it is difficult to appreciate how wrong Gore's statement is. It constitutes a fundamental conceptual error, like the child who thinks that the bank teller is rich because she has all that cash. He just doesn't get it.

Of course, I don't know whether Gore is really as ignorant of economics as he appears, or whether he had some hidden reason for supporting the coal producers in their duplicity and used a bogus economic argument for cover. Either way, it's not a pretty picture.

Potatoe

The real problem in all this isn't that we had a vice president who appears not to know the first thing about economics. After all, Dan Quayle was vice president, and he couldn't spell "potato".

The real problem is that the rest of us don't know anything about economics, either. When Quayle added that final "e" on television, everyone laughed, but when Gore made comparably silly statements about the economics of conservation, no one batted an eyelash.

Personal virtue

A policy of energy conservation must ultimately be grounded in personal virtue. However, the virtue that we need isn't turning out the lights when we leave the room. The virtue that we need is supporting our elected representatives when they make hard policy decisions, like taxing energy to reduce consumption.

I don't think that the American people are specially lacking in virtue. But without some understanding of economics, we won't understand the costs, benefits, and choices involved in conservation. We won't be able to evaluate the effects of different energy policies. We won't be able to apply our virtue in support of conservation.

Without some understanding of economics, we will be at the mercy of fools and liars.


NOTES

context
In context, it seems more calculated to distance Cheney from Jimmy Carter's National Malaise speech than to denigrate those who actually practice conservation.
generally small
The energy consumption of the United States is something over 3TW, or about 12KW per capita. Turning off a 100W light bulb is less than a 1% savings.
$0.25
more, if you live in California
reduce energy consumption
Actually, conservation could reduce aggregate energy consumption, if the things that people choose to spend their money on are less energy-intensive than the things that they choose not to spend their money on. But that isn't a foregone conclusion: there is energy in everything.
price signals
Raising the price of something can turn up all kinds of efficiencies. If energy cost more, people might The issue isn't just that consumers probably wouldn't think of these things on their own, but that without price signals, there isn't any way to know which—if any—would actually save energy.
early in his first term
Clinton was attempting both to
wrong
"Wrong," said Renner.

"The tactful way," Rod said quietly, "the polite way to disagree with the Senator would be to say, 'That turns out not to be the case.'"

The market automatically apportions taxes between producers and consumers
This is a standard result in introductory economics. See, for example
Fools or liars?
At INCIDENTS FROM MY CAREER, economist Paul Krugman offers this account of decision making in government:
The fact is that most senior officials have no idea what they are talking about: discussion at high-level meetings is startlingly primitive. (For example, the distinction between nominal and real interest rates tends to be regarded as a complex and useless bit of academic nitpicking).
This suggests that Gore's statement came from ignorance rather than duplicity.

Steven W. McDougall / resume / swmcd@world.std.com / 2002 May 24