Tuesday, May 26, 2009

An Idea for Reducing Energy Usage and Subsidies

I had a thought while driving home after softball today and listening to an NPR report about the complex issues involved in developing a multilateral coordinated response to the problem of climate change, something that will be addressed head-on at climate change talks in December of 2009 in Copenhagen.

Here's my idea. Once Google PowerMeter and/or similar services becomes ubiquitous, each homeowner's energy use could be compared to all the other homeowners in the same city or county. Utilities would include a homeowner's energy usage percentile rank (lower is better) on each month's bill (or paperless statement, if the homeowner so chooses) so they could see how/whether their changes in behavior are affecting their rating and private companies (such as DIY KYOTO) could provide devices that deliver feedback on energy usage in real time.

So, nothing too revolutionary with the above paragraph (see pages 195-196 of Nudge). But to really incentivize people to strive for the best ranking possible, what if receipt of the home ownership subsidy (more commonly known as the mortgage interest tax deduction) were subject to a homeowner attaining a ranking below the median homeowner. That is, as long as a homeowner's energy usage is in the lower 50th percentile of their peers (across a given municipality), they receive the full subsidy (just like they already do today). But homeowners with energy usage in the upper 50th percentile receive no subsidy.

The program could be phased in over time, so that in Year 1 no subsidies are withheld from homeowners but those who are in the upper 50% would be notified that next year, they will not receive the full subsidy. In each subsequent year, the subsidy offered to energy-intensive households would decrease (e.g. 75% in Year 2, 50% in Year 3, etc.) such that eventually only homeowners with energy usage in the lower 50th percentile would receive the full home ownership subsidy. And maybe over time the 50th percentile threshold could change or become multiple thresholds, so that homeowners not near the 50th percentile mark will still have an incentive to save energy (after all, if you're already in the 90th percentile, it may be unrealistic to think that you'll ever be below the 50th percentile, so you might just give up). The gist of the idea is to tie receipt of the home ownership subsidy to some level of energy conservation.

Not only does this chip away at the market-distorting home ownership subsidy, it also offers a progressive (as opposed to regressive) nudge to homeowners, since wealthier homeowners are more likely to use more energy. As discussed in the book Nudge, often people (Humans, not Econs, in the terminology of authors Richard Thaler and Cass Sunstein) will respond more readily to incentives with high salience than those with low salience, even if the value of the behavior changed by the incentive isn't directly proportional to the value of the incentive. The threat of losing a generous subsidy for not reducing energy usage may in fact be a more salient incentive than a utility bill that is $10 higher in a given month.

One final point: it's important to reframe the concept of the home mortgage interest deduction as a home ownership subsidy, since (1) that's what it is and (2) a tax "deduction" sounds like something to which you're entitled but a "subsidy" sounds like something that has been granted onto you and is subject to removal.

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