Monday, May 26, 2014

What's wrong with energy conservation?

On the same day the Wall Street Journal was reporting on  a US court throwing out a conservation program, Ross McKitrick was writing an explanation of what's wrong with conservation policies.

What's wrong with energy conservation? | Ross McKitrick
A correspondent on Twitter has asked me to explain what is wrong with conservation policies, namely, if output stays the same but we use less energy, what’s the problem?

The answer has to do with the fact that firms don’t just use energy, they also use capital, labour and materials. If we enact policy to force down the firm’s use of one input, it can lead to waste in the use of the other inputs.

This is best illustrated with a numerical example...
... the overall point is to answer the question about why conservation policies are unsound. The answer has two components:
  1. Once firms have selected the cost-minimizing mix of inputs, forcing them to change that mix in order to reduce one particular input increases their overall costs, which means it is an inefficient use of society’s resources overall.
  2. If the problem is price signals are inaccurate, then we should fix the price signals. Conservation policies don’t do that. And once we have done it, then once again conservation policies can only lead to inefficient outcomes
Read the full "What's wrong with energy conservation?" with the numerical example, at

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