Are Energy Efficiency Standards Justified?

Resources for the Future Discussion Paper No. 10-59

45 Pages Posted: 24 Nov 2010

See all articles by Ian W. H. Parry

Ian W. H. Parry

Resources for the Future

David A. Evans

U.S. Environmental Protection Agency (EPA) - National Center for Environmental Economics

Wallace E. Oates

University of Maryland - Department of Economics; Resources for the Future

Date Written: November 23, 2010

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 externalizes 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.

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

JEL Classification: Q48, Q58, H21, R48

Suggested Citation

Parry, Ian W. H. and Evans, David A. and Oates, Wallace, Are Energy Efficiency Standards Justified? (November 23, 2010). Resources for the Future Discussion Paper No. 10-59, Available at SSRN: https://ssrn.com/abstract=1713991 or http://dx.doi.org/10.2139/ssrn.1713991

Ian W. H. Parry (Contact Author)

Resources for the Future ( email )

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HOME PAGE: http://www.rff.org/~parry

David A. Evans

U.S. Environmental Protection Agency (EPA) - National Center for Environmental Economics ( email )

Washington, DC 20460
United States

Wallace Oates

University of Maryland - Department of Economics ( email )

Tydings Hall
College Park, MD 20742
United States
301 405-3496 (Phone)

Resources for the Future

1616 P Street, NW
Washington, DC 20036
United States

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