Energy Accounting vs. the Market

The concept of energy accounting, which is now enjoying something of a vogue, challenges the adequacy of the usual economic forces and economic criteria to impel desirable energy conservation measures. Its proponents argue that rational energy conservation measures can only be pursued in the framework of explicit and quantitatively detailed knowledge of the energy implications of contemplated courses of action. In this view, for example, the choice between a bus system and a rapid-rail transit would be decisively governed by which mode promises to deliver the most passenger miles per unit of energy required. Any other cost questions would be secondary. In its extreme form, such an approach would accord to an "energy standard of value" a status parallel to the conventional monetary basis of decision making. Indeed, some legislators have sought to impose a requirement for energy impact statements on contemplated governmental actions.

One of the concepts spawned by energy accounting is that of "net energy," which refers to the fact that it takes energy to produce energy. While this is obviously true, it is less obvious that energy input—output measures are the only way to avoid the dangers of putting more energy in than is gotten out.

The dissatisfaction the proponents of energy accounting feel toward market forces has arisen for obvious reasons. It is easy to observe that people often prefer to drive their cars to work, even when public transportation is cheaper and readily available. Manufacturers may be reluctant to switch from an existing production process to another, more expensive but less energy-wasteful, mode. People with frost-free refrigerators are willing to pay not only for the more expensive appliance, but the higher electricity bills as well. Clearly neither cost saving nor energy conservation ideals are the prime considerations of the commuting car drivers and the frost-free refrigerator owners. And the manufacturer in the example is actually rewarded for his energy-intensiveness.

It would be incorrect, however, to assume that these observable behavior patterns are an argument against using cost and price measures for energy conservation. Rather, they are an argument for remedying a defect in market pricing, which has failed to exact full payment for social harm. For example, no payment has been exacted for environmental damage caused by automobiles. A manufacturer's energy use might so pollute the environment that, were he charged for the damaging emissions, his inducement to shift away from energy-intensive processes might rise. Those using energy-wasting appliances have chosen to pay higher energy costs to avoid drudgery—but here, too, costs might, in time, rise to a point that would discourage all but the most luxury-loving. In the last analysis, choices to conserve energy can be influenced by higher costs, but cannot be dictated by them because energy consumption is only one element in a much wider range of human activity. Consequently, the energy accounting approach, by focusing solely on energy, may result in misguided policy emphasis.

An example of this can be shown in land use policy. Cities, with their high-rise apartments, compact shopping districts, and public transport, are much more energy-efficient than suburbs, with their heavy use of private auto transport, dispersed shopping facilities, and single-family dwellings that are considerably heavier energy users per square foot of living space than multifamily units. But, clearly, energy consumption is only one of many social concerns in land use; before choosing to increase the number and density of cities, one would wish to consider such things as esthetics, recreation, open space, conserving resources other than energy, less air pollution, less crime, and so forth. The costs of these amenities include some degree of increased energy use, but the advantage of the market pricing system, when it works properly, is that it takes all costs—not just energy—into account.

This does not deny, however, the existence of imperfections in market pricing processes and institutions, as well as gaps in information, which do interfere substantially with desirable shifts toward energy-conserving behavior. To remedy these defects, a number of measures to improve the market pricing approach could be considered.

For energy users to be able to respond knowledgeably to market conditions, government policies designed to guide consumption practices along a more informed path are clearly desirable. Examples include mandatory information on energy efficiency and costs in the heating and cooling of newly constructed buildings; in the operation of automobiles; or in the use of room air conditioners.

Governmental policies designed to shape market outcomes through explicit action to influence prices could also be brought into play. For example, a governmental horsepower or weight tax would help sway owners towards smaller cars. Gasoline taxes would do the same and might encourage much more carpooling. The expansion of public transport—particularly bus transit systems, which are less burdensome than is the case with the enormous capital commitment of rapid-rail service—is badly needed. In housing, compulsory insulation standards and—conceivably—some changes in home financing arrangements supportive of energy conservation practices suggest themselves.

In the past, governmental action may have had an effect detrimental to conservation. For example, many people believe that the government's control over interstate natural gas prices—which are set far below market clearing levels—have artificially encouraged consumption of the scarce and desirable resource and deterred supply expansion.

In summary, the potential for significantly diminished levels and growth rates in energy demand undoubtedly exist, but the feasibility of such savings must be measured by an economic yardstick. The virtues of the price system, with all its weaknesses, is that all costs—not just energy costs—are accounted for. Only through the medium of the price system can we measure the benefits gained or foregone by altering a consumption habit or a production process involving direct or indirect energy inputs. Rising energy costs can and probably will curb demand (there is also the possibility that some part of the public will meet rising energy costs by curtailing expenditures in other areas). Public policy can do much more in fostering conservation through information and demonstration programs and through tax and price measures that expose the energy consumer to the full cost of his consumption.