Our inability to predict policy outcomes was once again confirmed this week by the wildly popular Cash for Clunkers program. The program provides between $3,500 and $4,500 to anyone who trades in an older auto for a shiny new car that has better fuel efficiency. One billion dollars was originally allocated for the program, which was designed to sunset on November 1 or whenever the money ran out. Whoever designed the program figured it would last until sometime in the fall, but instead it lasted about a week. Obviously, in the land of the $800 billion stimulus and the half-trillion-dollar bank bailout, a billion dollars is just a drop in the bucket.
So what to do now that the money’s run out? This is so obvious, it’s almost absurd: Add a few billion dollars to the program. Do it now. On July 31, the White House agreed to continue the program and the House of Representatives took $2 billion from the stimulus fund to buy more clunkers. The goal is to get car owners to come into auto showrooms looking for new, more energy-efficient vehicles, but if we really want to juice up the economy, we need to start using this form of subsidy to encourage other forms of energy-efficient retrofits. Let’s do it for air-conditioners, for example, or any other higher-priced, energy-draining appliances with longer shelf lives. While some consumer habits might be wasteful and unnecessary, incentivizing more responsible, energy-conscious consumption patterns would benefit everyone.
Energy efficiency has enormous potential for growing our economy. While it’s important to develop renewable sources of energy, we can also work to reduce our carbon footprint through energy efficiency. Simply put, we can reduce the price of most goods and services by reducing the amount of energy it takes to produce those goods and services. Talk about an economic stimulus!
New York Times reporter Kate Galbraith recently wrote about a new energy-efficiency study from consulting firm McKinsey and Co. that reported: “An investment of $520 billion in improvements like sealing ducts and replacing inefficient appliances could produce $1.2 trillion in savings on energy bills through 2020. … Such a program, if carried out over the next decade, could cut the country’s projected energy use in 2020 by about 23 percent.”
So where to get that initial $520 billion investment? According to the McKinsey report, we now spend about $10 billion a year on energy efficiency, and the stimulus package added another $10 to $15 billion. Some of the extra funds could also become available once cap-and-trade carbon-dioxide regulation puts a price on carbon, allowing us to assign a dollar value to carbon-dioxide reduction. A dollar invested in energy reduction might net more than a dollar’s worth of carbon reduction, and companies may then see the benefits of investing their scarce capital in energy efficiency. Some of the $520 billion in funding could also come from energy-efficient building codes, such as those that have already been implemented in California. Those codes stimulate energy efficiency because builders can’t get certificates of occupancy without proving that they have complied with the codes, and over time the price of compliance for builders has come down as the market for energy-saving building materials has grown.
But we can also stimulate investments in energy efficiency by requiring greater energy efficiency in our appliances. Funds for energy-efficiency programs will need to come from creative public policies, such as an expanded Cash for Clunkers program, as well as tax laws that reward efficiency while punishing waste. Taxes on wasteful energy use will discourage inefficiency while also generating capital to be used toward the $520 billion called for in the McKinsey report.
Cash for Clunkers demonstrates that consumer behavior can be influenced by well-designed incentives. Let’s build on this success by copying it in other arenas besides automobiles. And the Senate should now follow the House’s lead and throw a few more billion dollars at those clunkers crowding our driveways and highways.
