From the folks who brought you Cash for Clunkers.
Here is the description of the program from the Energy Department (hat tip: King Banaian):
In late 2009 or early 2010, you may be eligible to receive rebates from your state or territory for the purchase of new ENERGY STAR-qualified appliances.
These rebates are being funded with $300 million from the American Recovery and Reinvestment Act of 2009. Under this program, eligible consumers can receive rebates to purchase new energy-efficient appliances when they replace used appliances.
Programs will differ in every state, and DOE anticipates that rebates will be available to consumers in most parts of the country by early 2010.
Banaian also leads us to the Council of Economic Advisors report on Cash for Clunkers, which explains that the macroeconomic stimulus from such measures comes from giving consumers an incentive to buy the product during the period of the rebate:
The Car Allowance Rebate System (CARS) is one of several stimulus programs whose purpose is to shift expenditures by households, businesses, and governments from the future to the present. (Other programs with the same motivation include support for bringing forward future infrastructure investments, and accelerated depreciation to bring forward business investment.) Such time-shifting is valuable in a recession, when the economy has an abundance of unemployed resources that can be put to work at low net economic cost.
In the case of the CARS program, the CEA report acknowledges that part of the extra spending in July and August came at the expense of a particularly dismal September. For the appliances sequel, the fact that the rebates may not come until the spring gives an incentive for customers not to buy in December or January. Peter Whoriskey writes in the Washington Post:
Now the home appliance manufacturers who celebrated the passage of the program worry that the delay in its implementation might actually depress sales at first, with consumers putting off purchases until the rebates begin.
“Our desire would be to see these programs rolled out as soon as funding is available,” said Jill Notini, a spokeswoman for the Association of Home Appliance Manufacturers. “Unfortunately, you may have people saying, ‘It’s kind of on the blink, but we’ll wait.’ We wish that the states would follow the intent, which is to stimulate the economy now.”
Even if the programs succeed in their mission of persuading Americans to abandon their old cars and appliances sooner than they otherwise would, I remain deeply skeptical that junking working capital in this fashion is the best way to grow Americans’ wealth.
As for the objective of improving energy efficiency, I would prefer to see a clearer identification from Washington of those tasks for which the government may be uniquely positioned to make a constructive difference. For example, a strong case can be made for facilitating greater use of our abundant natural gas supplies as a transportation fuel by encouraging the infrastructure investments that would make this possible. I applaud some of the initiatives announced in August by the DOE (hat tip: Green Car Congress):
Energy Secretary Steven Chu today announced the selection of 25 cost-share projects under the Clean Cities program that will be funded with nearly $300 million from the American Recovery and Reinvestment Act. These projects will speed the transformation of the nation’s vehicle fleet, putting more than 9,000 alternative fuel and energy efficient vehicles on the road, and establishing 542 refueling locations across the country. The Department of Energy also estimates they will help displace approximately 38 million gallons of petroleum per year….
The projects announced by Secretary Chu will support a combined total of more than 9,000 light, medium and heavy-duty vehicles and establish 542 refueling locations across the country. The vehicles and infrastructure being funded include the use of natural and renewable gas, propane, ethanol, biodiesel, electricity, and hybrid technologies.
Keynes wrote in his General Theory of Employment, Interest and Money:
If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.
Destroying durable goods in order to build new ones goes beyond even this colorful recommendation from Keynes. But I would at least endorse his qualifying remarks– far better to make sure we are using government expenditures wisely, than simply to spend money for the sake of economic stimulus.
I want to see a “Cash for Caulkers” program, subsidizing home efficiency improvements. We have huge unemployment in the construction sector and a huge stock of poorly insulated houses — some of the lowest-hanging fruit for both employment stimulation and GHG reductions. Compared to appliances (mostly imported, though I realize there’s still transportation and retail), blowing insulation and replacing windows directs a large fraction of stimulus dollars to non-outsourcable jobs for the sector (construction) hit hardest by the downturn. It’s also likely to be more “additional investment” rather than “accelerated investment that would have happened anyway”, since efficiency upgrades are not something that most people undertake on a regular basis.
The really annoying thing is Energy Star appliances and electrical equipment have been around since the 80s, and in our consumer choice driven mindset, the government has left it optional that you can buy the crappy energy wasting stuff. In many cases the payback eventually does make the capital free.
We had a similar thing with residential construction. There is a whole range of relatively inexpensive things to do when building a home, including energy efficient appliances, heat pumps, just in time water heaters, insulation, white roofs(or more arche pleasing high heat reflective colored roofing shingles), solar glass, programmable t’stats, and generally building them not as leaky.
Some people were trying to get regulations passed on the industry, but it was all shot down and builders were left to do what they pleased thru the largest building boom of all time.
lilnev- There are quite a few stimulus (ARRA)intiatives that are in the areas you’re mentioning. Particularly related to expanded payments to states for home weatherization and other kinds of energy efficiency upgrades. In particular, the energy efficiency upgrades increase the tax credits for homeowners and businesses for several types of investments.
Sure it pulls forward many purchases, but that’s why it’s called a STIMULUS, to give a short-term jump start to something that otherwise would not happen. And the Cash for Clunkers and home buying credits have worked very well when measured by that metric (leaving out the “we’ll have to pay for the deficit caused by these initiatives later” concerns).
I bet Keynes never heard of carbon sequestering. In this case, doing something silly will save $trillions, and arguably the entire planet.
Here’s a feasibility study by MIT on the subject. It’s long, but the conclusion is most coal fired power plants can be retrofited, the carbon captured and compressed to liquid, and then transported to underground storage sites. They point out that the government is probably the only one that could take the lead and develop potential sites. Then there may need to be rate relief or funding for utilities to afford retrofitting plants, but hey, its jobs, and that’s what we are after.
http://www.cfr.org/publication/14692/mit.html
The other reason besides jobs is right now almost 50% of our electricity comes from coal, and 35% of our carbon comes from coal power plants. The other carbon sources per the EPA are 35% is from cars and light trucks, the remaining 30% is everything else.
We have about 330GW of capacity in coal plants, and everyone should just assume there is not enough money in the world to replace it with wind and solar(if anyone disagrees, I want to see their savings account). We might get to 10% of total capacity by using wind and solar.
So here the government could orchestrate an explicit plan to meet objectives of reducing carbon by a large amount, preserving electric power for the citizens of America, and saving existing capital investment.
To me this sounds way better than starting up the Cap and Trade Casino wait for some unknown result.
Then there is nuclear. We started construction on 3 new 3rd gen design plants, but stopped the Yucca Mountain nuclear waste storage site. Old existing nuke plants are still patiently waiting for the government to tell them were they can store their waste. This deadlock must be resolved.
One path to zero carbon, zero oil transportation is plug-in hybrid and all elecrtic cars, but before that becomes practical in a large scale way we need power plants, nuke and carbon waste storage sites, robust electric grid, charging stations, and better/cheaper batteries. I think this is too big for industry to muddle thru on their own, and government has to be involved some other way besides simply taxing the slow route to failure that I’m sure we will see otherwise.
This will all take time, so in the interim it’s still important to improve mileage of cars and trucks, go with more conventional hybrids, and use more clean diesel and nat gas engines.
Let’s not forget our most prolific program for junking working capital, endless wars on Muslim countries. We are spending $2 trillion on the longest uninterrupted period of warfare in the country’s history. We have spent billions of capital on weapons that we quite literally set on fire or blow up. It makes cash for clunkers look like a rounding error.
In addition we rip the limbs off of the youngest, most productive members of society and will spend hundreds of billions more manufacturing new prosthetic limbs for them and hiring health care givers for veterans for a lifetime. It is the stimulus gift that keeps on giving. Cash for appliances pales in comparison.
Congress: For the love of God. Please stop.
Maybe instead of legislating for the next few weeks, they should form up into study groups and read the collected works of Bastiat.
The next Obama scheme will be ‘Cash for Grandma’, a pilot program for socialized medicine.
Families can get $20,000 by sending Grandma in to be Euthanized. If Grandpa is also alive, the payout is $50,000 in a two-fer deal.
It will make healthcare costs affordable in the US, and also save social security. Plus, it remains true to Obama’s devotion to communism.
I replaced my refrigerator, washer, and dryer while using California energy rebates/bounties. I chose models that all use half the energy (and less water) than their predecessors. Of course, it’s a bigger win for everyone when a $30-50 spiff gets me off the stick, rather than something larger.
“JUNKING WORKING CAPITAL” I’m really getting sick of hearing this from economists. I understand having to explain to a grandma who grew up in the depression why “use-it-up and wear-it-out,” while often an admirable economic strategy, is not invariably one’s best option from a cost-benefit standpoint. I don’t understand the seeming inability of Econ PhD’s to grant the same point.
The average residential retail price of electricity in the U.S. was 11.6 cents per kwh for the 12months ended in August, 2009. A 100W incandescent light bulb thus costs 1.16cent per hour to operate. Over a 1000 hour lifetime it costs $11.60 to operate the 40 cent bulb for an average price of 1.2cents per hour of light. A 23W CFL that costs $2 initially and lasted the same 1000hours (to simplify analysis while being VERY conservative since expected life is roughly 10,000 hours), would use
BTW Mr. Regula (who comments that Energy Star has been around since the 80’s, but that it’s been optional). Energy Star started in 1992. The mandatory standards for many different types of appliances have increased several times since since the 80’s. Energy Star is not a fixed level of efficiency for a given item, instead it signifies that the item does better than the current minimum standard by a certain percentage (i.e. 20% for refrigerators, currently). Thus an Energy Star item from the distant past probably doesn’t pass the minimum standard now, and certainly doesn’t qualify for Energy Star anymore.
Darn! Now you tell me. I just bought a new washer and dryer in November. If I had known it would have been easy for me to wait until after the first of the year.
Re: benamery21
But, the choice isn’t between buying a new refrigerator and buying a pre-93 energy hog. It’s between shelling out a lot of money now on a new fridge and spending nothing upfront to use my old one. So given the “sunk cost” nature of the existing inefficient capital stock, the difference is the present value of the energy savings LESS the cost of the new refrigerator. This is not clearly something that is positive NPV.
You know what frustrates me. If we would just outlaw all appliances in homes just imagine the energy we would save. The problem is not energy efficiency, anyone can get that by making a wise purchase, it is using the appliance that actually wastes the energy.
We could do the same thing with automobiles, bring back horses. I mean sure there might be problems with methane emmissions from horses but we could always mix equine Beano with their food. Sure beats the smelly emission systems on cars.
People may pretend but we just really are not very enviromentally responsible.
In the case of the “Cash for Clunkers” auto program, it seemed apparent that a reasonable idea was undermined by program parameters that were way off – i.e. too much cash for too loose a definition of “clunker”. So where are the economics blogs explaining to Econ 101 C-level students in Congress how to go about calculating the right parameters?
Further desperate acts by a desperate government that is incapable of long range planning past 2 years or the next election cycle, whichever comes first.
Benamery21:
If your old refrigerator uses three times as much electricity as a new one would, that implies that 2/3 rds of the electricity it consumers is transformed into heat. If you live in a climate where you heat your home more often than you cool it, at least part of this excess heat is helping to heat your home. It’s not as efficient at doing that as a good heat pump would be, but it’s not a total waste, either. Of course, if you live in a warm climate and run the air conditioning a lot, then your inefficient refrigerator is working at cross purposes with your cooling system, and this is even worse than just a waste.
KevinT,
Thanks for making such an obvious point in rebuttal to benamery21. But you know what is alarming. Just this morning on the Wall Street Journal This Morning radio program I heard the host Gordon Deal make the same argument as benamery21 made only about the Cash-for-Clunkers program. He simply could not understand why people who saved $4K would postpone the purchase of other products. He even pointed out that if you bought a Chrysler you might same $8K.
What he totally missed is that an $8K savings on a $20K car still puts you $12K in debt. Duh! Of course we get this kind of logic in advertising all the time. “Come on in and save 40% by only spending $12,000 dollars!”
benamery21
Energy Star started in the early 80s in industrial products like electric motors and industrial lighting and we built them. The standards were arrived at by consultation with industry on what kind of efficiency levels could be reached with current technology and a small increase in cost so that the cost differential would have a reletively short payback, typically 1-3 years.
As you point out, it was expanded into consumer products later.
Stellar Keynes quote.
The description says some appliances will simply be “hauled away”, but recycling of the old appliances is “strongly encouraged”.
If recycling truly does happen, I think that could be the big diffence that makes this program actually economically beneficial. It was the destruction of capital that really made C4C such a tragedy.
The other main drawback is that, contrary to the concern mentioned in the post of delayed funding, it shifts purchases too much from the future. It will cause people to buy technology now instead of a couple years later when it will be much cheaper and even more efficient and higher quality.
Here’s another way to couch benamery21’s replacemnt problem. ( I think I have it right, but edit as needed.)
Assume I have an old fridge that will have to be replaced in 3 years. My choice is to buy a new $800 fridge today with a $100 rebate, or wait 3 years at which point my fridge breaks down and I have to buy a new $900 fridge that will produce the same energy savings as the new fridge I buy today.
What is the net annual saving I need to get to breakeven NPV = 0? Assume I can earn 3% on my money so I use a 3% discount rate. The annual savings for 3 years is an annuity with constant annual cash flow defined as ‘net energy bill savings’ S.
0 = -800 + S*(1-1/(1.03)^5)/.03 + 900/(1.03)^3 and S = -$8.35 per year.
The new fridge could actually be less efficient to the tune of $8.35 per year and I would still come out ahead. Or, I would pay the government $8.35/year for this opportunity.
(The +900/(1.03)^3 captures the the PV of not incurring a $900 cash outflow in 3 years.
If there is a trade-in value then I get the trade-in today, but forego the trade-in in 3 years. I ignored trade-in because it’s an old fridge by assumption.
If you donate the old fridge to a charitable organization then you get a tax break, increase social welfare, but reduce aggegate energy efficiency compared to scrapping it.
benamery21, have you used a CFL? The extra .9 operating cost is well worth it for incandecent. The buzzing noise CFLs make alone make them not worth it. Outdoor use is horrible due the necessary warm up. Same for bathrooms, just not useful.
I use them in the kitchen, where noise isn’t an issue and I tend to leave the light on, in the laundry room where I like to leave the light on so I don’t have to search for the pull string, and in one hallway where it is enclosed in a heavy lead-glass fixture.
The only places they are useful is where the light is needed for long periods of time and there is already background noise that will drown out the buzz (ie, they’re good for public places, but not the home).
Plus, the failure rate on CFL doesn’t seem to be nearly as advertized. I tolerated the buzzing and warmup in some rooms for a while, but was very happy to switch back to incandencant when several of the CFLs failed.
Jeff, if you’re builing a new home, the heat from the fridge/freezer could simply be vented outside by building it into an exterior wall. A simple structure that can easily be set up and taken down (or opened and closed) could be used to trap heat in one season and vent it in another.
tj, I took recycling of turned in appliances to mean that as many appliances as possible will be restored and resold or given to charities.
tj,
I think this assumption is not correct:
“wait 3 years … buy a new $900 fridge that will produce the same energy savings…”
In three years I expect it will be more efficient and less expensive.
Also your calculations ignore that your next new refrigerator will need to be replaced three (or more) years earlier; and your next one; and your next one.
Also, you need to account for the (credit card) interest rate on the $800. What is the probability that someone with an 18-year old refrigerator does not pay the full balance every month?
To various:
Glad to actually stir some comment.
On a personal note: I have been using CFL’s since the 80’s (when they were much more “expensive” and rudimentary), I do have incandescents in vanity applications for brief use as when someone is applying makeup.
My argument made a lot more sense when it included the 2nd half of the 2nd paragraph continuing from “use” Unfortunately, I didn’t save the comment text for posterity, but it made the point that JUNKING THE WORKING CAPITAL of a BRAND NEW incandescent light bulb was the correct economic decision (evaluating lumens strictly as lumens without respect to quality arguments) despite the sunk cost of the light bulb.
The 23W CFL uses $2.67 electricity in 1000hours, the lamp cost $2 and the throw-away incandescent cost 40 cents for a total of $5.07 cents for 1000 hours light compared to $11.60 for 1000 hours from the “free” brand new lightbulb. I have removed the lifetime advantages from the CFL to make the argument clearer. Thus you save $6.53 by “JUNKING WORKING CAPITAL.”
While the analysis for junking a working refrigerator is “not clearly positive NPV” as Kevin T. quite fairly puts it, the light bulb example CLEARLY shows that the knee-jerk horror many of us have of throwing away something which “ain’t broke” and the constant invocation of “broken windows” or “JUNKING WORKING CAPITAL” is unfair, as replacement of working but obsolescent equipment with more cost-efficient equipment is clearly NOT broken windows, just because both pieces of equipment happen to be termed “refrigerators.”
The specifics of cost-benefit analysis clearly matter, and in many cases it does not make economic sense to replace a working refrigerator. However, if you run the numbers, many of you will be surprised to find that for MOST people with pre-1993 refrigerators this is a good investment, even absent incentives, and that for some people with 1993-2001 refrigerators this is still positive NPV. It matters what you pay for the new fridge, it matters what you pay for electricity, it matters whether waste heat offsets your heating bill, it matters what the size and efficiency of the two fridges are; BUT, as a good rule of thumb if you have a pre-1993 fridge plugged in (as do 20% of households) you are wasting money and would be better served to JUNK IT.
The bulk of folks who are operating 16+ y.o. refrigerators are not price-insensitive, a replacement large, modern top-freezer model costs about $400 new (you can of course pay as much as you want for additional consumer embellishments). The typical savings of replacing a large pre-1993 unit with an Energy Star top-freezer unit of the same size is roughly $100 per year. This investment thus pays a typical tax-free 25% return before incentives. Don’t talk to me about the time value of delaying your replacement purchase or borrowing the money, with a 25% tax-free return (it just isn’t going to change the sign of the NPV for the vast majority of folks). Waiting for the next better model isn’t going to be a big deal until 2014, when the next increase in the standard efficiency is scheduled, and even then we run into diminishing returns since we’ve already saved 2/3rds of our electric bill and have only about $50 a year left in energy cost.
The waste heat argument has some merit, I have lived in the Sonoran and Mojave deserts for 97% of my life and it isn’t a big issue for folks here (JDH’s blog IS based in San Diego). I’ll run the numbers to see about how much difference it makes to the typical scenario.
Why then do we need incentives if this is such a no-brainer? The incentives serve three purposes. One, people react to “free money” differently than to mutterings about cost-benefit analysis. It gets people who are wasting money off the dime. Two, What does a typical cheapskate do with his old fridge? He sells it on Craigslist or in the local Pennysaver, or gifts it to a relative. The rest of us keep right on eating its externalities, and the society as a whole keeps throwing money into that money pit. The incentive gives a skinflint like me a reason to JUNK, rather than peddle, the WASTER of CAPITAL. The 3rd purpose (at THIS time) is the direct stimulus of giving money away, and the indirect stimulus of pulling purchases forward into a recession, WHILE promoting a positive NPV investment.
BTW, for actually poor folks (or those that might have to put this purchase on their credit-card while carrying a balance)–20% of the population of SoCal was eligible by income for a FREE refrigerator BEFORE this latest incentive, if they had a pre-1993 model trade-in. If you carry a balance on your credit card and AREN’T without an income below 200% of poverty, I can’t help you, against stupidity the gods themselves contend in vain. I should point out though that these incentives are in ADDITION to existing utility rebates, so we are talking a pretty low entry cost here.
Waste heat:
Assume that you live in REAL cold parts and thus 3/4’s of your refrigerator’s annual waste heat is a direct subtraction from your heating bill.
If you have electric resistive heat, and don’t laugh because this is not unknown even in the COLD parts of our country, AND do not have time-of-use electric rates, or a programmable thermostat to confuse the issue, then those losses are directly offsetting your electric bill and replacing your refrigerator will not be as good an investment (UNTIL you install a rational heating source for your place). Even then there will be SOME savings unless you live somewhere where you run the heat 24 hours a day, 365 days a year, but it COULD easily limit the savings to a level where the NPV was negative or at least reduced to the point that better investment options abound.
However, assuming you heat with natural gas like the majority of the country (53% of households with heat), or that you could save money by shifting to natural gas heat like much of the remainder (43% of whom live in a neighborhood with natural gas, most of whom are using electricity or fuel oil for heating, half of them despite actually having gas IN the house), I will present relative cost savings minus the additional gas use. We assumed savings of $100 in electricity per year at $0.116 per kwh or
862kwh. I will generously grant 3/4ths of this displaces heating demand(I assume heat is not run for part of the year), or 647kwh … call it 650kwh/yr. There are 3412 BTU per kwh, so we need 2.2million BTU of heat. An old natural gas furnace has an efficiency of ~65% (97% available today), so we might need 3.4 million btu of gas if our furnace is as old as our fridge. The average U.S. residential price of natural gas for calendar 2008 (a slightly higher-priced period than the 12mos that yielded our 11.6cent kwh), was $13.68 per 1000 cu/ft at a nominal heat value of 1045 BTU per cu.ft. This equates to $13.09 per million BTU. Our heating bill would increase by ~$44.67 per year, given the conservative assumptions we made. I’d stress that for most folks this is an overestimate, since they don’t run the furnace 3/4ths of the year, and the run time of the refrigerator is disproportionately during the warmer hours of the year (assuming that indoor heated thermostat setting is lower than indoor cooled thermostat setting).
Pecuniary externalities of electricity usage:
If you live in a state with a largely regulated retail electricity market (like most of us) and increasing marginal cost of electricity (like most of us), and you are not on a time-of-use electricity rate, then you pay something like the average cost of electricity for your purchases, but the marginal cost is higher than the average. This means it costs you more for electricity when your neighbor uses more. This means it is worth money to you to pay your neighbor to use less electricity. This is one justification for utility incentives to do things like replace refrigerators.
Note that regulated retail electricity markets are not free markets, and ignoring pecuniary externalities is not appropriate to the analysis.
Recycling is distinct from re-using. Recycling means keeping refrigerators out of landfills (by reusing the constituent materials) It does NOT mean keeping them plugged into someone else’s electrical outlet. The whole point of the pre-existing appliance rebates (pre-stimulus) is to JUNK the capital-wasting energy hog, which has a negative societal value.
Regula– thanks. I did a lot of electronic ballast changeouts and relamping with T-8s (in my early teens working for my Dad’s electrical sole proprietorship) even before EPACT 1992 stopped the production of F40’s. We did a lot of metal halide and HPS hi-bay installations back when those weren’t in every warehouse and industrial shop, too.
RicardoZ: Never bought a new car for personal use (or a used one on credit) in my life and don’t propose to start as long as new cars depreciate as they do. That’s a sucker bet with or without stimulus. Of course, if everyone thought that way the depreciation structure would change significantly.
I look forward to seeing what happens with this program. i don’t expect perfection, but i think it will help reduce a lot of energy consumption (and might help push the growing smart-grid technology forward).