ENERGY EFFICIENCY BUILDING CODES AND CONNECTICUT– AN UNSURPRISING WHIMPER OF A BANG FOR OUR BUCK
A carefully constructed regulation can accomplish all kinds of anticompetitive goals ( ), while giving the citizenry the impression that the only goal is to serve the public interest.
Bruce Yandle (1983)
Professor Bishwa Koirala came to campus this past week. He gave a talk based on his recent research. His paper addressed a simple question – and the resulting answer proved surprising - perhaps because it is counterintuitive. Professor Koirala (and coauthors) looked to see if the mandated energy-efficiency regulations into existing building code regulations was worthwhile.1 He examined massive amounts of data – using the most recent energy-efficient building codes (IECC 2003 through IECC 2006) for the US at large – and for Connecticut as well.
Increased regulatory requirements designed to enhance the efficient use of energy in our homes would assuredly increase the front-end costs of construction. The costs would be passed along resulting in higher housing and building prices and higher rents. But not to worry: we were told that we would get our money back because our energy bill would be lower as a result of the enhanced building efficiency and thus the added cost would be fully offset or recovered. But was this true back then when we were mulling it over? Have the higher cost of regulations delivered the promised bang for the buck? This last question is the one posed by Professor Koirala. And the answer regrettably, is no, - not even close.
Surprisingly, the adoption of these building codes – back then - were not based on empirical work, nor on actual data. According to Koirala, government studies by the Department of Energy, the Environmental Protection Agency, and various private sector studies (including one by McKinsey and Company) concluded that energy regulations were desirable because the increased cost of requiring energy efficiency building codes would be fully offset by reductions in household monthly energy expenditures. But all these studies were based on theoretical assumptions - not on actual, hard data.
Koirala and co-authors find that energy efficiency regulations in building codes, once capitalized, are estimated to increase housing rents by 23.35 percent. The offset in reduced monthly energy expenditures only amounts to 6.47 percent. In dollar terms – the codes cost $163.19 per month and only save us $7.71. That’s for the entire US! As expected, it varies by region (and energy type and rent gradient.) I asked Professor Koirala to calculate the comparable numbers for Connecticut – which are not in the original paper. He kindly complied. In Connecticut, having the energy efficiency regulations embedded into building codes is costing us $164.07 per month. And they save us all of $8.08. Now about that (covered) bridge...
But notwithstanding the insightfulness of Professor Koirala's results - as is the case in these studies – it begs the question: why do we do this to ourselves? As individuals we would never purchase a car for $10,000 whose blue book value is $5,000. So why do we do we find ourselves on the wrong side of this energy cost trade-off thing - or, more accurately, stand by while Hartford and Washington do it to us?
Koirala does not go into the why – but the answer is not altogether that perplexing. The "Bootleggers and Baptists" metaphor that Professor Bruce Yandle used in his now classic paper of the same name helps understand the reason why.2 He has explained the metaphor: "durable social regulation evolves when it is demanded by both of two distinctly different groups: 'Baptists' point to the moral high ground and give vital and vocal endorsements of laudable public benefits promised by a desired regulation."3 In our case - in Connecticut, we have the green, sustainability and global-warming choirs and cheerleaders taking the moral high ground where everything is justified - and even vaguely critical voices pummeled into submission - in the name of abating or reducing global warming - cost-benefits be damned.
To continue: “the ‘Bootleggers’ expected to profit from the very regulatory restrictions and requirements desired by the Baptists (…) and so eagerly greased the political machinery with some of their expected proceeds.” Who could our Connecticut Bootleggers be? The manufacturers of bulbs, electrical equipment, windows, doors, heating and cooling systems and sundry home construction materials folks and so on - those who stand to benefit from the additional requirements embedded in the code of products that only they can provide and the more expensive components only a few make. Eliminating or handicapping rivals is always good for the bottom line.
Professor Yandle has wryly noted that regulatory reform can hardly be gained easily because it is the result of a costly political exchange. Alas, he also spoke of a special place for the creative application of economic logic – a place where individuals like Professor Koirala, who gain special satisfaction from calling attention to the ways in which we can improve economic efficiency, can do so. We’d like to think UNH’s Department of Economics is such a place. People and their ideas make a difference.
February 09, 2014
1 Koirala, Bishwa S., Alok K. Bohara, and Robert P. Berrens, “Estimating the Net Implicit Price of Energy Efficient Building Codes on U.S. Households,” (2014). Please email me at email@example.com if you would like a copy of the paper.
2 Yandle,Bruce, “Bootleggers and Baptists” the Education of a Regulatory Economist,”Regulation Volume 7, No. 3 (1983) 12-16.