Ch 4: On the Question of Individual Freedom Versus State Control in Climate Policy

Chapter 4 On the question of individual freedom versus state control in climate policy: a study of the diffusion and regulation of CFLs in Germany

4.1 Introduction

The technological diffusion of compact fluorescent lamps (CFLs) is now progressing at a rapid pace worldwide. Introduced around 130 years ago, conventional incandescent lamps convert only around 5 to 10% of the energy they consume into light, the remainder being emitted as heat, and are far more inefficient than virtually every other lamp on the market.

For the consumer, lighting may represent up to a fifth of household electricity consumption. Although CFLs are costly up front, they can last up to 12 times longer using a fraction of the electricity compared to an incandescent lamp. The most common concerns with switching over is their higher purchase price and perceptions of the aesthetic appeal of CFL light. However, this can reduce the average household’s total electricity consumption by up to 10-15% and save around €50 each year, assuming 20 traditional lamps in the household are switched over to CFLs and taking into account the higher CFL purchase price (European Commission, 2009).

With climate change concerns and the economic benefits of these efficiencies in mind, after years of limited success with demand-side management programs involving information and subsidy schemes, many countries including the United States, the European Union, Russia, Brazil, Argentina, Canada and Australia are implementing phased bans of incandescent lamps. The European Commission (EC) estimates that by 2012 its regulatory ban will save around 40 TWh, or roughly the electricity consumption of 11 million households, reduce CO2 emissions by 15 million tonnes per year and contribute €5 to 10 billion into the economy (EUROPA, 2009). In contrast, the EC estimated that to achieve the equivalent behavioural change through the price mechanism, it would have had to institute a ten-fold increase in taxation on incandescent lights.

However, the use of a regulatory ban has been heavily criticised by some as restricting consumers’ basic freedom to choose and of forcing an immature technology onto the market which does not meet consumer needs. For example, German MEP Holger Krahmer of the FDP party criticised the move as ‘light-bulb socialism’, and in the United States a @Light Bulb Freedom of Choice Act’ has been proposed in response to the ban.

This suggests the use of the incandescent lamp ban has created a powerful flashpoint in the debate between ‘market-based’ versus ‘command and control’ policy mechanisms. Using theoretical insights drawn from evolutionary, institutional and behavioural economics, this paper interrogates this debate and uses the diffusion of CFLs in Germany as a case study.

To position this paper’s contribution to the wider climate change literature, the mainstream economic approach to climate policy is considered alongside an evolutionary and institutional approach which highlights how systematic behavioural ‘anomalies’ can impede the functioning of the perfect market. This is considered alongside a review of the main barriers and incentives to CFL diffusion. This leads onto a discussion of how different institutional forces and modes of decision-making can interplay along a spectrum with imposed structure (‘command-and-control’) on the one hand and individual agency (‘market-based’) on the other. A purely marketbased approach implicitly assumes that consumers have complete information and are free from self-defeating behavioural biases. In recognition of the problems with this, a more structured approach shifts decision-making to more collective processes.

These ideas are followed by a case study set in Germany involving the analysis of consumption data of different lamp types, complemented by a survey of 1711 households. This survey evaluated CFL ownership, awareness, purchasing behaviour and perceptions as to the barriers to CFL market success. It was conducted over the internet in September 2009 by Grass Roots, an international market research company using their representative database across Germany.

The empirical findings suggest that after years of little growth, a significant upswing in CFL sales and drop off in incandescent sales corresponded with announcements related to the phased ban of incandescent lamps. This begins with the surge of global media attention on CFLs following the Australian government’s decision to ban incandescent lamps in February 2007. This is followed by surges in attention (as reflected in historical Googletrends search volume data integrated with news reports) related to the European Commission’s announcement of the phased EU ban in June 2008 and the lead up to its implementation in September 2009 and 2010. From this data, it seems that the ban has been effective at changing behaviour in advance, of its implementation, lending support to the notion that it has acted as powerful framing device on the CFL purchase decision. One interesting observation which tempers this positive result is that while CFL sales steadily rise over this period, sales of incandescent bulbs have temporarily picked up in the lead up to the ban’s actual implementation showing evidence of hording behaviour, known as ‘glühbirne hamstern‘ (light bulb hamsters).

In conclusion, it is argued that the tensions highlighted in this paper should be viewed not as idealistic dualisms – for example, as ‘markets’ versus the ‘state’ or ‘liberty’ versus ‘control’ – but as instances where society has evolved institutions to help achieve ‘good outcomes’ – especially in areas where our stated intentions differ from our actions, or where public goods and externalities are present. Acknowledging that this is, in some part at least, a normative process – a caveat should be given that to help avoid authoritarian abuses, the formation of these institutions is best played out with transparent review, evaluation and public discussion through accessible, accountable political structures.

It is not the purpose of this paper to offer such a normative prescription on the ‘correct balance’ between command-and-control structure and market-based individual choice. Rather, it is the more modest aim to show how applying the heterodox insights taken from institutional, evolutionary and behavioural economics can be useful in interrogating the interrelationships between individual choice, public policy and technological change and open important avenues of investigation not easily accessed with more mainstream neo-classical ‘market-based’ based economic analysis.

4.2 Freedom versus the state and the drive for greater energy efficiency

The ‘revolution in energy efficiency’ began in the 1970s stemming from the fear of fuel shortages following the first oil crisis. In the United States, President Jimmy Carter appeared on television symbolically wearing a sweater indoors, declaring that the energy crisis was the moral equivalent of war. Public unease around energy security led to aggressive policies in areas such as product standards, building codes and renewable energy subsidies. However, through the 1980s and into the 1990s as the perception of shortage lessened, so too did the imperative for strong interventionist government action. Combined with the general move to liberalise energy markets, the focus shifted to the demand management – informing and supporting the decisions of consumers, rather than supply-side solutions involving manufacturers and retailers (Blumstein, Goldstone and Lutzenhiser, 2000). More recently, the imperative for energy efficiency has been renewed in response to climate change concerns and the need to reduce energy use from fossil fuels.

In the energy efficiency literature there has been a long tradition of research on the cost effectiveness of demand side management tools (see Gillingham, 2000; and the MURE database1 for reviews in the context of the United States and European Union, respectively). The case for energy efficiency is powerful: if cost effective investments are available to reduce energy and save money, then the market should provide the incentives necessary to facilitate this, especially in the context of rising fossil fuel related energy prices. However, numerous barriers exist which discourage these investments, suggesting some form of government intervention may be necessary.

For example, Howarth and Anderson (1993) and Howarth and Sanstad (1995) investigated how consumers have employed discount rates of between 20% and 200% in making energy efficiency decisions when buying appliances. This work exposed the shortcomings of the rational model: faced with product selection decisions a rational individual with complete information would not pass up an efficiency investment which could yield up to a 200% return. Furthermore, higher discount rates were observed particularly among the poor who a priori would have the most to gain from paying less on the life cycle costs of appliances. Applied across a wide range of energy efficient investments, such empirical observations have given rise to the so-called ‘energy efficiency paradox’ – the systematic existence of unexploited opportunities for improving energy efficiency (DeCanio, 1998).

This paradox is underplayed in the mainstream economic analysis of climate change which is grounded in the welfare economics of A. C. Pigou (1912). This has focused on establishing the costs and benefits of an emissions target or level of pollution and the optimal or most cost effective way to achieve it: usually through the comparison of the merits of either a system of tradable quotas (emissions trading); or through taxation of carbon intensive goods (e.g. Nordhaus, 2007; Weitzman, 1974; Delbeke, et al. 2010). Once targets are set and carbon pricing put in place, in typical neoclassical models of competitive markets perfectly informed consumers weigh up the costs and benefits of alternative products when making their purchases. Having ‘internalised the externality of pollution’ through such ‘market mechanisms’, the 224 problem of energy policy is thus reduced to ensuring that energy prices reflect the full social costs of energy production and utilization.

Market-mechanisms also have the advantage of providing incentives for continuous improvement, whereas firms are seen to generally have no incentive to exceed the environmental mark set by a regulatory standard (Baumol, 1972). Conversely, the so called ‘command-and-control’ approach traditionally takes the form of legal regulations such as the special zoning of polluting activities, quantitative limits on the physical volumes of pollution, technology standards and so on. These are often criticised as not being dynamic and not providing incentives for further innovation beyond the standard. These alternative views of environmental management is often characterised as an ideological debate between ‘freedom’ and ‘the state’ politicising the means technological change is promoted in the economy (for a review see Brohé et al., 2009: 24-57).

Within the climate change and environmental literature, this mainstream economic approach has been criticised for paying too little attention to the historical, geographical, legal, cultural and political context of pollution abatement decisions (IPCC, 2007; Stern, 2006; Williams and Baumert, 2003; Victor, 2007, Carraro, 2007) and also of sidestepping the problems of path dependency (e.g. Grübler, 1998).

Michael Porter and Claas Van der Linde’s (1995) work has also played an important role in challenging this mainstream approach by highlighting the positive role environmental regulations can play in promoting environmentally beneficial innovation and supporting economic competitiveness at the firm, sector and nationstate level (Palmer, Oates and Portney, 1995). That tighter environmental standards can not only reduce costs directly, but also spur further cost reducing innovation, boosting competitiveness – the so called Porter hypothesis – has inspired a large body of supportive empirical studies (e.g. Lanoie et al. 2008; Horbach, 2007; Costantini, and Crespi, 2007; and Kriechel and Ziesemer, 2009).

However, many economists have rejected this case-study based approach by arguing such examples are special cases and that across the economy it is just as likely environmental regulations come at a net cost, as well as embodying a significant opportunity cost. For example, Jorgenson and Wilcoxen (1990) and Hazilla and Kopp (1990) use a dynamic general equilibrium model to show environmental regulations are necessarily cost adding because of the manner in which they depress other “productive” investment.

Other empirical research has shown that so-called ‘behavioural anomalies’ are systematic and strongly ingrained with human behaviour, suggesting we often act against our own self-interest giving rise to ‘behavioural failure’ (Shogren and Taylor, 2008). Led by Kahneman and Tversky (1979) these empirical insights have had far reaching implications for economics and how we understand individual decisionmaking (Baron, 2008).

In a review article on energy efficiency Tom Teitenberg (2010) highlights how viewing energy efficiency through the lens of behavioral failure sheds important light on the energy efficiency paradox and why policy instruments such as information strategies and monetary incentives frequently prove insufficient to promote even the most privately cost-effective outcomes. These ‘errors of judgement’ are profound in that they derive from human cognition. At stake is the capacity of people whatever their circumstances, roles and responsibilities to take action in the rational manner assumed by typical neoclassical models (Kruger and Funder, 2004:317). Taking this a step forward, Table 4.1 summarizes a selection of the main behavioural biases which may have a bearing on the diffusion of CFLs. This is positioned next to Table 4.2 which draws on the empirical literature to highlight the main incentives and barriers to the diffusion of CFLs that have been identified.

Table 4.1: Major behavioural anomalies of the rational actor model

Major behavioural anomalies of the rational actor model

Despite awareness of the life-cycle benefits of CFLs consumers many consumers still do not adopt them due to their high up-front cost relative to incandescent lamps (Palmer and Boardman, 1998). Indeed, even in the era of high consumer awareness, where in 2009 87% of people cited the longer life expectancy of CFLs as a major advantage and 60% were also aware of the 12 month payback period to compensate for the higher up-front price, 89% still stated the high upfront price of CFLs as a significant disadvantage (Grass Roots, 2009). This result would seem to support the message from previous energy efficiency studies that people tend to employ an ‘irrationally’ high discount rate when making lamp purchase decisions.

Table 4.2: The incentives and barriers to the diffusion of CFL technology

The incentives and barriers to the diffusion of CFL technology

That is, even though they are aware CFLs are cheaper once operating costs are factored in, they place an over-emphasis on the upfront cost of the lamp in their purchase decision-making.

In this area, conservation psychology offers helpful empirical insights into the links between policy intervention, individual action and technological change (see for example: Geller 2002; Kaiser, Midden and Cervinka, 2008; Frantz and Mayer, 2009; Clayton and Brook, 2005; Van Lange and Joireman, 2008).

Writing in the Journal of Environmental Psychology Linda Steg and Charles Vlek (2009) review the wide ranging environmental agenda psychologists have engaged with. Regarding energy use, some studies have suggested that policies are more acceptable when they are perceived to fair and when they do not seriously affect an individual’s sense of freedom (Steg and Gifford, 2005). Policies also tend to be more acceptable to people who are highly aware of the problem and who feel a moral obligation to address it, suggesting consumer awareness is a critical ingredient of market transformation.

In the area of feedback strategies, Corinna Fischer (2008) has shown that people are also more likely to save energy when they understand their bills and know how individual appliances effect the total amount of energy consumed, highlighting the importance of providing good information. Some studies have also suggested that policies which aim at increasing the attractiveness of pro-environmental activities are more effective than those aimed at penalising environmentally harmful activities (Geller, 2002); however, other studies show other circumstances where penalties are effective (Midden and Ham, 2009).

There is also a well-established discrepancy in social psychological research between how people think about issues (their attitude) and how they behave towards the issue. While some have argued that actions are the best indicator of attitudes (Campell, 1963; Kaiser, Hartig and Byrka, 2009) others place the emphasis on evaluative verbal statements (Eagly and Chaiken, 1993; Stern, 2000; Vining and Ebreo, 2002). This inconsistency between thoughts and actions offers an important insight into how individuals can pursue a plurality of values which repeatedly come into conflict – for example, one might want to contribute to reducing the effects of anthropogenic climate change but also want the cheapest energy possible. Many of these conflicts are difficult to transform into a common value to enable a coherent calculus of cost and benefit as assumed takes place the mainstream economic model. This may help explain why people may vote in favour of a regulation that restricts their actions, for example drink driving or smoking laws, and in our case electric lamp purchases, despite the fact they could simply choose to alter their behaviour directly.

Despite these reservations towards the mainstream economic approach, a strong narrative exists in policy circles that the world is far too complex for politicians to ‘select optimal policies’ and, aside from providing some informational support or changing relative prices to correct for any externalities, it is best to leave people ‘free to choose’ and let ‘the market decide’ as much as possible. Market mechanisms fit comfortably within the rubric of neoclassical equilibrium analysis, where consumers select products in a way that maximise their own welfare, and by extension, best promotes the interests of society at large. On the other hand, as warned against by Mancur Olsen (1965), collective action through regulations are often cast as ‘political interventions’ easily corrupted by the special interests of a small powerful minority, thus working against society at large as represented by the consumer.

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