Making Costs Explicit
Kevin Drum writes about Google’s PowerMeter project, a nifty web application that will tell San Diego Gas & Electric customers (and in the future, presumably customers of more firms) exactly how much electricity they’re using. Kevin observes that “The simple act of making people aware of their electricity usage can probably generate a surprising amount of conservation.” I tend to agree, and I think it’s something the behavior economics lovers in the White House should find appealing. Here’s another idea of Kevin’s:
And relatively speaking, it’s cheap. This kind of thing could help in other areas too. Here’s a cheap and simple idea, for example: place the estimated 5-year cost of gasoline on the sticker of every new car. EPA could easily come up with a formula based on average car use and recent gasoline prices, and it would almost certainly make fuel-efficient cars more attractive if people saw the savings of buying one right in front of their faces when they were comparing cars. More like this, please.
I have a related idea, that’s smart but politically toxic. It would be a good idea for the federal government to set an explicit target for gasoline prices over a ten-year period. The idea would be to have gasoline prices slope gently upward. When market prices deviate from the gentle upward slope, federal gas taxes would automatically adjust—going either up or down to compensate. That way a whole range of economic actors—homebuilders, city planners, car companies, retailers, customers, etc.—could plan sensibly. It would also make it easier to do the kind of EPA estimates Kevin is talking about. What we do right now—where on Monday and Wednesday politicians call for more fuel efficient vehicles and then on Tuesday and Thursday they call for cheaper gas—is confusing and counterproductive.
33 Responses to “Making Costs Explicit”
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May 22nd, 2009 at 9:25 am
Here’s another such idea: require fast food places (all restaurants, if you’d like) to itemize and total calories on the receipt. My suspicion is that people would eat fewer Happy Meals (or whatever they’re called) if they were confronted with a number like 2000 calories each time they did it.
May 22nd, 2009 at 9:31 am
So what happens if the market price of gasoline, even with a zero tax, would exceed the target price?
May 22nd, 2009 at 9:38 am
It seems like people can already find out how much electricity they’re using by looking at their existing meter. Plus monthly bills provide information. I think seeing a high monthly bill would cause people reduce consumption more than an expensive meter and access to a web display of realtime consumption would.
I’m not sure Kevin’s idea is a huge improvement since cars seem already display MPG ratings. Obviously, the actual monthly gasoline cost would vary greatly depending on how much the owner drives the car. I guess the idea is that $250/month might be a bigger red flag than 12 mpg city/15 hwy.
I agree the idea of setting rising gas price goals would be politically toxic.
May 22nd, 2009 at 9:39 am
1) Thank you for finally fixing the autoplay!
2) I’m all for the car sticker. You forgot to mention (or cite from Drum) the fact that some home appliances have the sticker mandated already, like water heaters and refrigerators. I suspect that people would be irrational about it: they would put too much value on relatively small annual gas savings vs. differential initial car cost, much as people were too quick to sell their Explorers at a huge loss and but Priuses at no discount last year. But that’s an irrationality that helps the policy goal, so let’s play it for all it’s (irrationally) worth.
May 22nd, 2009 at 9:41 am
S.P. Gass,
A lot of these ideas are being driven by research showing that the way in which information is presented to people can make a big difference in their behavior.
May 22nd, 2009 at 9:48 am
I do find it strange that the monthly bill is not already incentive enough to use less electricity, but humans are strange creatures.
It might also be that in an entire household, not everyone sees, pays, and analyzes the monthly bill. The website allowing you to check your electricity usage allows everyone in the household to see what’s going on and have a stake in it.
Back when I was in college, I was known as the guy whose room was always really, really warm. I couldn’t stand the cold. Of course, I didn’t pay for my own heat. The year after graduating, I moved to an apartment where I had to pay for my own utilities, and suddenly wearing a sweater inside and using an extra blanket in my bed didn’t seem like much of an extra burden, anymore.
May 22nd, 2009 at 9:48 am
Your gas price target plan has a potential liability. You will be removing the price sensitivity demand side on a worldwide limited resource. I think if the US did this, oil prices would get a lot more erratic since it would take much larger price swing to bring demand in line with supply. There is already very little short term price sensitivity in supply.
May 22nd, 2009 at 9:51 am
I think the gas price targets would have implementation problems as well as being politically toxic. If gas companies know that that taxes will go up depending on what price they set, it seems like they will quickly raise the price of gas to the target to capture all the profit they can. Collusion between these companies wouldn’t exactly be shocking.
On a related note, I don’t know if we (i.e. progressives concerned about carbon levels) should really want to reduce gas price volatility. My hunch is that consumers remember a price spike for a much longer time than a price drop, since people tend to notice a decrease in happiness more than an increase. If the price is volatile, I think consumers would tend to aim for a more fuel efficient car than they would buy if the price sat at a constant level at the same average price (because they would remember the price spikes). It seems like the response of consumers to the oil shocks in the 70’s would be a good test of this hypothesis, but I am not familiar with what the data is there. My recollection of the 80’s is that small, fuel efficient cars were more popular than in the 90’s even though the price of gas was fairly low in each decade, so a long memory of the 70’s price spikes could explain the difference.
May 22nd, 2009 at 9:53 am
There is always talk about a gas tax that adjusts so that a certain market price is reached. What this fails to realize, it seems to me, is that if the government has set a fixed price for gas and will collect tax to ensure that price, why the hell would anyone set the price lower than that?
If the target price is, say $3, why would gas stations not charge $3 for gas? There would be no revenue for the government.
May 22nd, 2009 at 9:53 am
l e o beat me to it, and more eloquently.
May 22nd, 2009 at 9:56 am
My recollection of the 80’s is that small, fuel efficient cars were more popular than in the 90’s even though the price of gas was fairly low in each decade, so a long memory of the 70’s price spikes could explain the difference.
Overall fuel efficiency for cars remained level throughout this period, probably thanks to CAFE standards. Of course starting in the 1990s, people started exploiting a loophole in CAFE by driving truck-based vehicles instead of cars.
Anyway, as I recall studies have shown most of the demand-side effects of an increase in gasoline prices show up within a few years (call it three or so). So I think you are right to some extent, but not for periods on the scale of decades.
May 22nd, 2009 at 9:57 am
leo and lfv have it right.
Gas companies would simply raise the price to maximize profit and eliminate their tax liability. It’s effectively a government subsidy of their bottom line. Your’s is a tax plan Republicans would love.
May 22nd, 2009 at 9:58 am
If the target price is, say $3, why would gas stations not charge $3 for gas?
Indeed, why not charge $4, and see if the government will give you a subsidy?
By the way, we are really just rehashing all the basic problems with price controls. They generally aren’t a good idea.
May 22nd, 2009 at 10:11 am
My electric company recently updated their website to provide a graph of hourly electricity usage. After looking at a few of these, I noticed there our usage spiked every day at 7 AM.
It turns out that the largest consumer of electricity in our house is the blower fan on our gas furnace. Since we don’t have an exhaust fan in our main bathroom, we turn on the furnace fan after our showers every morning to dissipate the humid air. If it hadn’t been for the hourly data, I never would have imagined that the furnace fan used more electricity than everything else in the house combined. I’m now much more conscientious about turning it off as soon as possible.
May 22nd, 2009 at 10:18 am
S. P. Gass, a month-long average might tell me I should reduce my power usage, but it doesn’t do much towards telling me how to go about that. Do I need to be better at turning of lights when I leave the room? Run the AC less? Get a new fridge? Google’s technology doesn’t quite get you there, but it’s a step in the right direction when you can see spikes in usage and then figure out what caused them.
May 22nd, 2009 at 10:38 am
There were several credible electricity-demand studies on real-time pricing conducted in the late 1970s and early 1980s. They showed that short-run demand was more elastic that one might think. We also have the California energy crisis of 2001. Long-run demand, which would be influenced by monthly bills, ought and is more elastic still.
But people do adjust in real time.
May 22nd, 2009 at 10:51 am
Some cars have real-time miles per gallon meters on the instrument panel so you can see exactly what speeding, rapid acceleration, etc, do to your fuel consumption.
Why not require all autos to have one?
May 22nd, 2009 at 11:09 am
“I have a related idea, that’s smart but politically toxic. It would be a good idea for the federal government to set an explicit target for gasoline prices…..”
I agree. This is a good idea. But why is it politically toxic? Because (as usual) the sheeple only care about global warming if SOMEBODY ELSE has to do the heavy lifting required to solve the problem. Which is why it’s not going to be solved.
May 22nd, 2009 at 11:11 am
Some cars have real-time miles per gallon meters on the instrument panel so you can see exactly what speeding, rapid acceleration, etc, do to your fuel consumption.
Why not require all autos to have one?
This is also a really good idea. I recently noticed my mileage jump by almost 10 mpg after I inflated my tires. So (1) I should have listened to Obama last summer and (2) without the readout I might not have even noticed the change (I drive pretty lightly, so I can go more than a month between refills).
May 22nd, 2009 at 11:11 am
Electricity prices also vary with time of day. People might make a more conserted effort at reducing their consumption at peak usage if they can see the dollars going by in real time.
Most supplementary power is generated by gas burning power plants. Any reductions in peak usage directly reduce CO2 emissions, while reductions in off peak usage have lesser, indirect effects.
May 22nd, 2009 at 11:18 am
The idea of putting five year gas consumption on car windows is a good one, particularly as it avoids the confusion caused by the current rating system. Most people, without much thought, assume that trading a 20 mpg vehicle for a 30 mpg vehicle saves about as much fuel as trading a 10mpg vehicle for a 20 mpg vehicle. However, a 10 mpg vehicle uses 10 gallons of fuel to go 100 miles – changing to 20mpg saves five gallons of fuel for the same trip. A 30 mpg vehicle requires 3.33 gallons to go 100 miles so changing from 20mpg to 30 mpg only saves 1.66 gallons of fuel for that trip.
In other words as MPG goes down linearly, gas consumption goes up exponentially. The Europeans rate vehicles by the number of liters of fuel need to go 100 kilometers, a much more sensible standard. The five year fuel consumption gets to the same benefit. It forces us to pay attention to the fact that the bigger engine option that drops MPG from 20 to 15 involves a 25% reductionin MPG but a 33.33% increase in fuel consumption.
May 22nd, 2009 at 11:45 am
I’m sorry but a lot of the criticisms of the plan here demonstrates why I can’t ultimately call myself a liberal. Multiple people say, “ZOMG!!! If you set a ramping-up price target, oil companies will just immediately boost prices by the difference between the present price and the target!!!11!!1!” Well, yeah, and so? The point of the target is reduce people’s gas consumption. If the oil companies immediately crank prices up to the target, it’ll simply accomplish the reduction in gas consumption that much faster. You’re so blinded by hatred of somebody, somewhere, making a profit that you would prefer not to accomplish the supposedly critical goal of reducing gasoline consumption if, as a by-product, oil companies will enjoy increased profits for some period of time (which are subject to corporate and dividend taxes anyway, so the increased profits are partially captured by the government anyway).
May 22nd, 2009 at 12:08 pm
With Cass Sunstein, author of Nudge, in the White House, it’s easy to see this becoming a national pitch.
May 22nd, 2009 at 12:25 pm
For all but a handful of residential customers, electric prices do not vary by the hour. Coming soon from a surprisingly large number of electric utilities, however, are meters that will record a residential customer’s usage on an hourly basis. These utilities will also offer some form of hourly pricing. When hourly pricing is combined with Google’s or some other provider’s hourly consumption software, people will have the opportunity to move their heavy consumption uses (the dryer in that graph, for example) to less expensive times.
May 22nd, 2009 at 12:37 pm
I would be against the price targeting part of what you propose; while I think that using taxes for price stability is a very good idea. It would actually provide a social utility to otherwise regressive, but necessary, taxes.
May 22nd, 2009 at 12:49 pm
Make current supply explicit with proportional price. Then the consumer can check the price before they do a load of laundry.
May 22nd, 2009 at 1:05 pm
There are a lot of things to consider with that gas tax idea.
The tax would set the minimum price gas stations charge – no actual tax will be collected. Some stations will charge more because they are in convenient locations. They know that the guy in the inconvenient location will sell it for the fixed price.
Refiners will charge more because they know what the final selling price is. Oil will sell to refiners for more because they know the refiners can afford it. The US is a large enough consumer, that most oil will wind up selling near this inflated price. Without further action, the windfall goes to those with the rights to the oil. While this can be partially recouped with the collection of corporate income taxes, we can’t tax Saudi Arabia for oil it sells to our importers in Saudi Arabia.
A better step would be to buy the least efficient refineries and scrap them. We import very little gasoline, so cutting down domestic refinery capacity would restrict consumption. There is a lot of refining capacity that is very inefficient, which could be bought cheap. The price on those refineries would drop further if it was widely perceived that other measures were being taken to reduce demand for gas.
You could even have the government buy an option for shut down. They pay $x for the option up front. At any time, they can exercise an option to shut down the refinery for a contractully specified period of time at a previously agreed upon price.
May 22nd, 2009 at 1:07 pm
Hyperbolically, not exponentially – though the idea is the same.
May 22nd, 2009 at 1:13 pm
So let’s see, in the future we’ll all do our laundry, blow dry our hair, and turn on our lights at 2AM, while running our heat only when it’s warm and our air conditioners only when its cold, all in order to save electricity? Makes sense to me.
May 22nd, 2009 at 5:47 pm
The problem with that is that it is pro-cyclical. During steap economic downturnss government would be increasing taxes and during booms it would be lowering them.
May 22nd, 2009 at 6:29 pm
There’s a place some people might have heard of, it’s called Europe, where for several decades taxes have made gas four to five times as expensive as it is in the US. And yes, even when that amounts to $10 a gallon or more.
And guess what? For these same several decades these places have consumed far, far less gas per capita and had much higher rates of public transportation use.
The most interesting thing to me is that pretty much every elected official and economist in the entire US except for Ralph Nader (slight hyperbole here) predicted – again, over the last several decades – that $4/gallon gas would destroy the entire US economy forever.
Which of course didn’t happen and I believe all these people knew damn well it wouldn’t.
May 22nd, 2009 at 11:24 pm
There are different degrees of “smartness” in smart meters and they have to be understood in conjunction with how electricity is priced and billed by the utility.
1. Current “dumb” meters measure energy on a continuous, additive basis and might be read once of month. Subtract this month’s aggregate number from last month’s number and you have the total kwh used this month. But you don’t know when you used how much or how much it cost when you used it. All you know is your monthly total.
2. An “interval” meter measures energy each hour, and that data can then be retrieved by your utility and by you. The interval might be hourly, or every 5 to 15 minutes. You would want to know this because it tells you which hours or fractions thereof you use more, and which less. Then, if you also knew the price in each hour, that information would be even more valuable. The SDG&E meters Kevin is discussion are at least this sophisticated, but the linkage with price isn’t stated.
3. The next step would be an interval meter plus a pulse signal sent to your home that tells you what the cost/price of electricity is during each interval. You would then discover that the marginal cost of energy is, say, about 2 cents/kwh in the pre-dawn hours, when only the cheapest power plants are running, but rises to 4 cents, then 6, then 8 cents/kwh as demand increases during the day. On very hot, peak demand summer hours, the price might be 15 cents/kwh or more. This is the key piece of information consumers don’t have now but need to make the best conservation/efficiency decisions. How much am I using, and what does it cost when I use it?
SDG&E would like to do that, but they need permission from the State PUC, which regulates how retail rates are set, and so far, the PUC has not approved broad applications of a rate structure that tells you how much it costs in each time interval. The State is about 10 years behind; other states are already starting to do this back East.
4. Finally, there are two-way smart meters, which you would use if you had your own generation — solar, etc — and you wanted to be paid for that energy when it exceeds the amount you’re using and you’re supplying energy back to the grid. The meter runs in either direction. This requires interval metering that runs in both directions, plus real-time pricing by the utility, with approval of the PUC. There are experiments/pilots/individual applications (very expensive), but few of them. We need more.
A good source for information is the California Energy Commission, which encourges these developments.
May 23rd, 2009 at 1:53 pm
Couldn’t agree more.
That’s really a good move.