The new energy bill contains many provisions to encourage Americans to conserve energy. Some observers say such encouragement can’t come too soon. The United States consumes far more energy per person than any other country. Critics say this is proof we waste energy. Additionally, improvements in gas efficiency have ground to a halt as vehicle buyers have shifted to trucks and SUVs. So, supporters of the new conservation enticements say both American businesses and consumers need a nudge—indeed, maybe a strong shove—to get back to rationally using energy.
There is another view, however, a view that says we have been behaving rationally when it comes to energy use. This view says businesses and consumers clearly respond to incentives when it comes to energy use, and the best way to encourage conservation is to let the price of energy reflect its total costs.
So who’s correct? Let’s start with some facts. It is true the United States consumes the largest amount of energy per person in the world. However, this is primarily because the United States has, by far, the largest economy in the world. The U.S. economy, in terms of its production of goods and services, is 70 percent larger than any other national economy.
When energy use is expressed per dollar of output in the country, the United States is actually a more frugal user of energy than many other countries. For example, it takes one-fourth the amount of energy to produce a dollar of output in the United States as it does in China, and one-third the amount as in India.
An argument can also be made that American consumers have behaved rationally with energy use when energy prices are considered. Take the example of vehicle size. Through the first 70 years of the 20th century, vehicles became larger and more powerful as the real (inflation-adjusted) price of gasoline fell by almost half. Then, after the spike in gas prices in the late 1970s and early ‘80s, fuel-efficient compact cars became the rage.
However, the downward trend in gasoline prices resumed after 1985, and real gas prices hit a century low in the late 1990s. Since it was now cheaper to run big, powerful vehicles, it shouldn’t be surprising that SUVs and trucks increased in popularity and fuel efficiency fell. Now, with real gas prices up more than 80 percent in eight years, there are waiting lists for the modern version of the compact car—hybrids.
Since most energy prices are now higher, economists think that even without the energy bill, energy conservation will naturally come back in vogue. The conservation will come in many forms. Certainly it will come from buying more fuel-efficient cars and appliances. But it will also come from driving less fuel-efficient cars fewer miles. And it will come from people moving closer to their work and shopping sites.
Indeed, this illustrates one issue with government efforts to promote energy conservation. Regulations and tax incentives promote only a limited number of ways to save energy. Yet there are numerous ways to conserve fuel, and consumers will respond differently to the main motivation for doing so—higher prices. Ultimately, the market rules!
Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar with the John Locke Foundation.