Archive for Policy

The Rebounding Rebound Effect & How to Dodge Jevons’ Paradox

There’s a new paper from the Victoria Transportation Policy Institute looking into the price elasticity of both miles driven and fuel use. The author, Todd Litman, has done an in-depth literature survey which will be of interest to readers who liked my recent look into Jevons’ Paradox.

Jevons’ Paradox, also known as the rebound effect, states that increasing efficiency can lead to increased use of a resource, because the resource is now cheaper. I pointed out that this is only true in elastic markets, where the use of a resource is sensitive to price. In inelastic markets, it makes sense to mandate efficiency, because efficiency will not greatly increase use. In elastic markets, the best policy avenue is to increase the marginal price of usage.

One great example of this is the potential benefits of smart metering. While the early results of smart metering trials were very positive, seeming to show that average people would reduce their energy use by 10-15% when given good data, more recent and broader trials have shown that the actual effect is much smaller. The difference is that the early trials tended to be focused on particularly price-sensitive populations, such as people who had trouble paying their electricity bills who reduced their energy use for Woodstock Hydro. More recent trials have shown much lower reductions in bills because they have been serving the general populace, not just a particularly price sensitive subgroup, like the poor or people who volunteer to have smart meters installed.

Litman’s survey of price sensitivities reaches several interesting conclusions:

1) While the price sensitivity of driving is quite elastic, the price sensitivity to fuel cost is much less elastic because fuel only accounts for about a quarter of the cost of driving.
2) Price sensitivities were temporarily depressed over the last 25 years due to various demographic changes, and now seem to be rebounding. As a result, many policies meant to reduce fuel use (such as higher CAFE standards) are likely to be less effective than expected due to the rebound effect. Better policies would work to increase the marginal cost of driving without increasing the total cost. Such policies include Pay as you drive car insurance and registration.

There’s much more. I highly recommend it or anyone interested in policies to reduce our dependence on foreign oil. Blurb follows:

Changing Vehicle Travel Price Sensitivities, The Rebounding Rebound Effect ( ).

There is growing interest in various transportation pricing reforms to help reduce traffic congestion, accidents, energy consumption and pollution emissions. Their effectiveness is affected by the price sensitivity of transport, that is, the degree that travelers respond to price changes, measured as elasticities (the percentage change in vehicle travel caused by a percentage change in price). Lower elasticities (price changes have relatively little impact on vehicle travel) imply that pricing reforms are not very effective at achieving objectives; that higher prices significantly harm consumers; and rebound effects (additional vehicle travel that results from increased fuel efficiency) are small so strategies such as fuel economy mandates are relatively effective at conserving fuel and reducing emissions. Higher elasticities imply that price reforms are relatively effective, consumers are able to reduce vehicle travel, and rebound effects are relatively large. Some studies found that price elasticities declined during the last quarter of the Twentieth Century, but recent evidence described indicates that transport is becoming more price sensitive. This report discusses the concepts of price elasticities and rebound effects, reviews information on vehicle travel and fuel price elasticities, examines evidence of changes in price elasticity values, and discusses policy implications.


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Competition may just be the key to getting normal people to adopt energy efficiency. Keeping up with the Joneses is a lot more important to most people than saving money (otherwise, we’d never buy an expensive car to impress the neighbors.)

That’s why I’m excited to hear about JouleBug, a social App/game for the iPhone (and soon Android) that turns saving energy into a reality-based friendly competition.

Players compete to earn badges from various energy-saving activities

JouleBug launched today at the South by Southwest Trade show. Press release follows. Read the rest of this entry »

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New Light Rail Stations May Not Increase Transit Ridership

A report (pdf) by the Kitty and Michael Dukakis Center for Urban and Regional Policy at Northeastern University found that new rail stations and transit-oriented development often fail to increase transit ridership.

New stations can sometimes lead to gentrification that prices out renters and low-income households. Since such households are core users of transit services, the new station may have the perverse effect of actually causing local ridership to decrease.

The study did not look at system-wide effects of such stations; I would expect new stations to lead to an increase in system-wide ridership over time, since the displaced renters and low-income households will most likely continue using transit in their new neighborhood, and many of the new higher-income residents will use transit for some trips that they would not have before they lived in a neighborhood with easily accessible transit.

Here are some highlights from the report compiled by Andrew Nusca at SmartPlanet:

* For 64 percent of the neighborhoods around the new rail stations in the study (that’s 27 of 42 total), population grew more quickly than the rest of the metro area.
* 55 percent of those neighborhoods showed a “dramatic” increase in housing production.
* 62 percent of those neighborhoods showed a faster increase in owner-occupied units than the rest of the metro area.
* 50 percent of those neighborhoods showed an increase in the proportion of non-Hispanic white households relative to the rest of the metro area. (The other half showed no change or a decrease.)
* 62 percent of those neighborhoods showed an increase in median household income; 60 percent showed a boost in the proportion of households with incomes of more than $100,000.
* Perhaps most tellingly, 74 percent of the neighborhoods showed rents that increased faster than the rest of the metro area. A full 88 percent had a relative boost in median housing values, too.
* In 40 percent of the new transit neighborhoods, public transit use declined relative to the rest of the metro area.
* In 71 percent of the neighborhoods, ownership of a vehicle increased; in 57 percent, ownership of two or more cars increased.

The report was published with a “Toolkit for Equitable Neighborhood Change in Transit Rich Neighborhoods” with several sensible suggestions for moderating the adverse effects (mainly on renters and low income households) of a new rail transit station, mostly related to planning and zoning.

Of course, a transit agency primarily concerned about increasing ridership and equity at the same time might simply consider adding more and better bus service in a neighborhood, something which can be done at much lower cost than adding a new rail station. In my mind, the ideal option would be to do some of both, with new rail stations complemented by frequent bus routes that bring riders to the station from surrounding areas.

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Net Benefits of CAFE stadards

I just frittered away an hour poking holes in a 2002 paper from the American Enterprise Institute and the Brooking Institution that purports to show a net cost to society from higher CAFE standards. Even using the paper’s questionable results, my calculation show an a posteriori net benefit had CAFE standards been raised at the time the paper was written.

Here are links to the original article on Knowledge Problem that spurred me to defend CAFE standards, a link to the AEI/Brookings paper, and my comments on the weaknesses in the paper’s analysis.

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Who’s Afraid of the Big Bad Price Gouger?

Until I started reading Micheal Giberson’s posts on price gouging, I had not given the subject of price gouging much thought.

The main question of debate is “Is it moral for a retailer to charge more for a product when demand surges due to outside circumstances?” A classic example is charging for snow shovels in a snowstorm. In a recent post, Micheal poses the question:

Consider two hardware stores: one prices snow shovels at $15 when there is no snow and at $20 when there is snow; the other maintains a fixed price for snow shovels under both no-snow and snow conditions. In equilibrium, the second store will carry a smaller inventory than the first and offer it a price between $15 and $20. Which pricing policy is more moral?

I have to say that I don’t have a ready answer. I’m tempted to think that both store owners are acting morally, and that morality rests not with the store owner, but with the snow shovel customer.

If the customer plans ahead and receives the low “no snowstorm” price, there is no reason to complain. After all, who ever complains about a sale?

If the customer does not plan ahead, and is forced to buy the $20 shovel from the first store because the second store has run out, whose fault is it? I place the fault squarely on the customer who did not plan ahead for a snowstorm, and if that customer subsequently complains about price gouging, that complaint seems immoral in my eyes.

I think it’s everyone’s right to not plan for disaster if the consequences fall only on themselves. But if they then complain because they are being taken advantage of in the vulnerable position they’ve put themselves in, I have no sympathy. Buyer morality grid

Put simply, the store owners are planning for the snowstorm, and willing to accept the consequences of their actions. Buyers may or may not plan ahead, but it’s only when they are not willing to accept the consequences of their actions that I consider them immoral.

The only circumstance in which I’d place any moral onus on the store owner is when the disaster could not be foreseen. In this case, neither store owner will have snow shovels on hand because there will have been no market for snow shovels before the storm, so the whole question is moot anyway.

On the other hand, if the disaster can be be foreseen, but the consequences of not planning fall on society as a whole, then those who oppose preparing for the disaster are immoral because they are forcing others to share in the consequences of their decision.

If you read this blog regularly, you can probably figure out which coming disaster I have in mind. Are you advocating preparation, or opposing it?

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Drivers’ Rising Price Elasticity

A recent paper from Todd Litman at the Victoria Transport Policy Institute shows that drivers have become more sensitive to changes in the price of driving (and gasoline) in recent years.

Recent estimates of the long-run elasticity of driving are between -0.4 and -0.6, meaning that a 10% increase in the cost of driving should decrease miles driven by 4-6% over time.

There are several policy implications of rising elasticity:

1. People are more able to adjust their driving habits in response to changing prices, so pricing measures such as gas taxes, parking fees, and Pay-as-you-drive pricing are becoming more effective, and they are also more fair to the poor, who are likely to reducing driving more with an increase in price.

2. Vehicle efficiency standards will be less effective at cutting gasoline consumption due to the rebound effect: as the cost of driving drops with increased vehicle efficiency, people will drive more, partly offsetting the gasoline savings.

You can read the full paper here:

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Will PACE Financing Damage the Mortgage Market?

The Federal Housing Finance Agency (FHFA), which oversees the government agencies Fannie Mae and Freddie Mac, is now joining them in saying that Property Assessed Clean Energy (PACE) financing “could damage the mortgage market.”

PACE financing is an important program that addresses multiple barriers to energy efficiency. First, it addresses upfront cost: although energy efficiency measures usually pay for themselves, most require an up-front investment which many people have trouble making. PACE financing also helps address split incentives. Because efficiency improvements can take several years to pay back, and most Americans move every few years, the benefits of efficiency don’t always accrue to the people who invest in them. With PACE, the loan used to make the improvement is assessed on the property, so the person who is saving money in energy costs is always the same person who is paying for the energy improvements.

Jonathan Hiskes at Grist makes the counter-argument that PACE financing is not really something new, as the FHFA and the mortgage giants claim, and I agree with him, but there are several stronger arguments against the mortgage regulator’s position that I have not yet seen made.

The FHFA is worried that the “lending is not based on the homeowner’s ability to pay, it bypasses consumer protections such as the Truth-in-Lending Act, and it may not lead to meaningful reductions in energy consumption.” I’ll address each of these points in turn:

Ability to pay. The lending does not need to be based on the borrower’s ability to pay, because the energy improvements improve that ability to pay. For example, Boulder Colorado’s now canceled PACE program required that the homeowner first get an energy audit, which is then used to estimate the cost savings of possible energy improvements. If the homeowner is able to pay for his or her current mortgage (which, supposedly, is based on his ability to pay), then after the energy improvements and the PACE loan, he or she should have better cash flow, and be better able to pay. In other words, PACE should improve the owner’s ability to pay, and actually strengthen the mortgage market.

Consumer protections Unlike complex mortgages, the most important thing about a PACE loan is that the monthly payment be less than the monthly savings, so they are inherently easier for consumers to understand. But if consumer protections are necessary, there’s no reason they could not be added to PACE lending programs without canceling the whole program, as the FHFA seems to want.

May not lead to meaningful reductions in energy consumption. Quite simply put, this is an attempt to throw the baby out with the bathwater. A good PACE program requires an energy audit and professional installation in order to ensure energy savings. It’s important to design PACE programs carefully, but that’s true for any lending program, or any program whatsoever.

Rather than putting a stop to all PACE lending, as has happened, good programs (such as Boulder’s) that do provide some assurance that energy savings will be achieved should continue, since they strengthen borrower’s ability to pay rather than weakening it.

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