By Matt Chester, Chester Energy and Policy
While recently traveling, I was cozy and tucked in bed under full sheets and comforter with the thermostat set to 65 degrees when a pang of guilt about this unnecessary energy usage hit me. I grumpily got out of bed to adjust the temperature when it hit me. As an advocate for energy-efficiency and climate-change efforts, I never would have set the thermostat so low if I was at home, so why did I act differently while in a hotel room in a different city?
The obvious difference relates to who’s paying the power bills. That experience led me to wonder about the disconnect when the costs and benefits of reducing energy use fall to different parties, known as split incentives. Further, these instances of split incentives on an individual scale led to questions of how split incentives and their solutions could apply to energy and climate change issues on the larger scale.
Examples of Individual-Scale Split-Incentives
Hotel Energy Use
The issue: Hotels have long established the expectation that guests will not be required to pay for their energy use. This setup is ingrained in the culture of hotels, and as such, most people can relate to the feeling of checking into a hotel after a long day of travel and cranking up the thermostat more freely than they might have at home, leaving the lights on out of laziness, or permitting themselves a luxurious extra-long hot shower. Considering those mini-vacations from energy concerns, the fact that hotels use 36% more energy per square foot than residential properties is unsurprising. While many factors obviously feed into that difference, the disconnect between using and paying for power is certainly one at play.
The solutions: Hotels don’t install energy meters in each room, and the cost to do so would immense. More fundamentally, though, who would want to stay at the hotel that nickels and dimes you for using the air conditioner on a summer day? Given these constraints, a few solutions are available.
- Some hotels already use energy saver keycard switches that require a guest’s hotel keycard to be inserted to power the room’s lighting, heating and cooling, and other power usages, preventing the wasting of energy when the room is unoccupied.
- While no hotel would be mad enough to increase rates for guests who use too much energy, energy-conscious hotels could offer rebates or future discounts for guests who took energy-saving actions, such as forgoing new towels each day, keeping the thermostat within a predesignated temperature range, or limiting time running the shower (some green hotels already install five-minute hourglasses in the showers to nudge guests to take shorter showers).
The issue: The traditional example split incentives is with long-term rental properties. When a tenant is paying the power bill, the building owner has minimal incentive to install energy efficiency measures (e.g., insulation, more efficient appliances, or even rooftop solar) because they would not receive cost savings to pay back their capital investment. On the other hand, when tenants are charged a flat fee that includes utilities, regardless of how much power was used (affording tenants predictability in monthly bills, while preventing the need of landlords to install energy monitors in each unit), the tenant has no financial incentive to conserve energy, resulting again in more liberal use of the thermostat and leaving appliances on when not in use (not to mention how this arrangement also leads to higher rent prices as landlords increase rates to pay for increasing power bills).
The solutions: Rental property split incentives have been tackled through many solution types, including the following:
- For buildings without them, installing energy meters in each individual unit can be a first step. Landlords that only have a single reading from a building have limited options, all of which suffer from split-incentive downsides. Unfortunately, energy monitors are costly to install and thus might be ignored by landlords without recognizing savings that would otherwise be possible.
- Green leases are a potential solution, allowing for the costs and benefits of energy-efficient improvements to be split between the owners and tenants. For example, say a landlord wants to install energy-efficient windows, which are expected to save $50/month on the energy bills. If the utilities are paid by the tenant, a green lease would allow the landlord to increase rent by $40/month to recoup investment costs, but the tenant realizes a $10 per month net savings. Similar mechanisms to allow tenants to receive the benefits of energy upgrades include on-bill financing programs or community-funded solar installations.
- A radical proposal to make both tenant and landlord invested in saving energy is having utilities work more like cell phone plans. The landlord would allow for a certain limit of energy use each month, similar to the limit on minutes allowed in a cell phone plan, and if the tenant exceeds that limit, the landlord collects ‘overage charges’. In this way, landlords would pay most tenants’ power bills and be motivated to install energy-saving measures, but tenants remain mindful of not using unnecessarily excessive energy.
- While politicians tend to shy away from such sweeping regulations, lighting standards that pushed Americans from incandescent light bulbs to CFLs and LEDs are an example of a successful implementation of government-mandated efficiency requirements, now saving everyone energy and money. Specific to split incentives, Boulder, Colorado, implemented the nation’s first energy code specific to rental properties, successfully saving tenants $361/year on average while reducing greenhouse gas emissions by almost 30% at those properties.
Global Energy and Climate Accounting Issues
Unfortunately, renewable energy penetration and CO2 emission reductions largely only matter to countries, states, and organizations when they can be counted and credited, comparable to how energy use only ends up mattering to those paying the energy bill. Such tendencies are the natural consequence of a world that is increasingly over-concerned with the progress that can be measured by metrics.
Shipping Emissions Across Borders
The issue: Common criticism of policies addressing greenhouse gas emissions from U.S. industry is that such actions simply result in the affected companies moving their operations overseas to avoid regulation. In these instances, global emissions remain constant—perhaps even worse because those products now must be transported back stateside. Regardless, the accounting of emissions for U.S. industry looks improved and the policy deemed effective because the CO2 associated with those products are shifted into another country’s emissions log. This trend also applies to the transport of electricity across borders. For example, keen-eyed observers note that both California and British Columbia meet emissions targets with their higher proportion of electricity production coming from renewable sources, while simultaneously importing coal-based electricity. Worth noting, however, is that this type of disconnect can work in the opposite way as well, such as the Northeast United States getting renewably-powered electricity from Canada.
The solutions: The issue here is localized emissions regulations only address a piece of the puzzle, but global cooperation is the critical solution. Among the main impediments to such actions are the implementation costs. But if countries were able to see global climate cooperation as something for which they’d be rewarded rather than a cost, perhaps more progress would be made. Similar to how hotel guests would reject any hotel charging for power but would love rebates for energy savings, international climate agreements might have more luck in practice if there were financial rewards to nations for reducing emissions. Of course, that money would have to come from somewhere, but the general idea is that leaders would be more easily able to agree to cooperation that shows potential gain rather than a loss.
Companies Making Hollow Energy & Climate Commitments
The issue: Many corporations have begun taking responsibility by setting emissions targets and/or sourcing their power from renewable energy. Google and Apple both boast about powering global operations by 100% renewable energy. However, in each of these instances, the claims that all electricity fueling either tech giant is renewably sourced are not accurate. While these companies are funding solar and wind projects, such renewable sources are variable, but the companies’ energy demand is not. As such, at certain times the energy being used by Google and Apple comes from dispatchable (and non-renewable) sources like coal and gas, and power generated from renewable sources gets curtailed and wasted. The reality of these commitments is more of a practice in accounting than actual power delivery.
In the end, these companies may be delivering PR moves with more bark than Earth-saving bite. Further, some argue that these actions are even hollower for the climate than they seem, as they simply take credit for clean energy that was being created with or without those corporations.
The solutions: An applicable lesson for more transparently controlling for future company emissions might take a lesson from the cell phone plan approach to rental properties. Companies can be given a certain monthly allotment of emissions, as is required due to the variability of renewable sources. If they exceed that allowance, they can be charged (not that different from cap-and-trade). Such a plan would incentivize energy efficiency and a shift to cleaner fuels.
The issue: A recently published report made waves by calling into question whether the commonly accepted emissions associated with natural gas, an energy source heralded as cleaner than coal and a potential bridge fuel of the energy transition. This study underscores how if the underlying assumptions in accounting for emissions is off then the actions being taken might not actually be making a difference in the climate change fight, but rather creating a perverse incentive to control for the accepted statistics rather than reality.
Beyond that, debate even persists regarding what constitutes renewable and/or carbon-neutral energy. Biomass is technically renewable in that comes from trees that can be replanted, but environmentalists and the biomass industry have been in a tug of war about whether it should count as a renewable energy. Ethanol is a fuel that emits CO2, but because it comes from corn and sugarcane it is considered carbon-neutral. Even hydropower, the world’s oldest and most prominent renewable energy, has been shown to contribute a significant amount of methane from its standing water.
The solutions: Accepted statistics for emissions from some energy sources do not necessarily line up with reality. Again, though, the reality is what’s actually affecting the climate, whether or not we know exactly how to account for emissions.
The only real solution for this issue is to invest in the science and technology to get as close to the truth as possible. While installing individual power meters in hotel rooms or apartments may be too costly, doing so is the only way to accurately assess the situation. Similarly, the only real way to properly address the emissions coming from the energy sector is to ensure that we have the right data. Those emissions are happening and affecting the climate regardless, so the beginning to any solution is being able to properly assess the problem. Otherwise, the reality will never reflect the potential emissions savings that are possible.
What’s most important to realize is CO2 emissions and climate change are a global, not local, problem– so whether or not you are paying for the energy bill and whether or not the emissions count toward your country’s or organization’s cheat sheet, the end result is the same. Numbers are useful as a benchmark, but these metrics we marry ourselves to should not be considered gospel– the only true way to know we are making progress: reduce energy use, reduce personal carbon footprints, and switch to carbon-neutral energy technologies.
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