Common Tragedies

Thoughts on Environmental Economics

Renters and energy conservation

Posted by Evan Herrnstadt on September 22, 2007

I returned home from work yesterday evening to a brand-new refrigerator. Ours had some issues, and the landlady (as per the lease) purchased a new one. My first move was that of any good climate researcher–I looked for the Energyguide tag. After poking around a bit I found it. Think about the incentives my landlady was operating under, and the general relation between energy efficiency and appliance price. What do you think I discovered? (Thrilling conclusion below the fold)

Well, the tag gives a range of average usage of similar products in kWh/year. Ours came in 1 kWh/year below the upper bound. This got me to thinking about disconnects in incentives for energy conservation. The situation in which one party is renting property from another is an interesting problem.

Consider the impact of a carbon tax in such a scenario. Now say the fridge breaks. The landlord is going to be responsible for replacing it. However, they will want to purchase the cheapest appliance possible, all quality and longevity issues equal. This is almost invariably going to lead to the purchase of an inefficient appliance. The carbon tax provides an incentive to reduce electricity use (and emissions) by increasing the marginal cost of a unit of electricity. However, this incentive is only seen by those paying the bills, i.e. the tenants.

For the tenants, the marginal cost of electricity use suggests that they reduce their electricity consumption, but the marginal benefit — not dying of food poisoning — remains far higher (presumably, salt pork will not be trendy any time soon). The tenants will run the refrigerator for a fixed amount of time each year. The only way to reduce usage is to purchase a unit that uses less energy during a given period of time. Thus, there is a major disconnect between the price signal and the consumption of electricity for refrigeration.

This is not small potatoes — according to the EIA, 14% of 2001 household electricity consumption went to refrigeration (according to my yellow tag, my new fridge uses about 33% more electricity than a high-efficiency model). So this means about 3.5% of my household electricity consumption/carbon emissions is intractable until electricity price surpasses my valuation of not eating spoiled meat. One solution would be for my housemates and I to compensate our landlady for the extra cost of purchasing a more efficient model. Unfortunately, the chance of recouping even a majority of the difference in the next year or two (we actually move out in February) is questionable; presumably, we wouldn’t be able to take the remaining value with us when we move out in a couple of years.

Another disconnect arises when rental properties bundle utilities with rent. Tenants pay a fixed amount for electricity and gas each month, no matter the level of use. Thus, the tendency was to be quite profligate with energy. In the case of a carbon price, the landlord would surely see the market signal, but not be able to do anything about it until the end of the lease. He could raise the rent at that time, but if the tenants move out this new price would apply to the new renters. The new tenants would take the price as given and, assuming they plan to move out at the end of their year-long lease like their predecessors, the landlord is again stuck. No matter what happens, the marginal cost of electricity for the tenants is zero; they will always use the same amount, no matter what the market is telling them to do.

3 Responses to “Renters and energy conservation”

  1. greg claxton said

    Addressing the first disconnect: A strong utility incentive program could work, though I don’t think most utilities see themselves in the kind of outreach business that would be required. Alternately, you could probably legislate that the choice of new appliance has to get tenant approval. That sort of would work best in the pretend world where landlords and tenants all have good relationships.

    The second disconnect sounds bad, but with prices right could give motivated landlords the incentive to take stronger steps for improving the efficiency of their units. What looks like a problem in one way maybe starts to look like revenue decoupling from another perspective?

    What’s interesting is that the first disconnect focuses on what tenants have no control over, while the second focuses on what they do have control over. Maybe understanding better how those two areas stack up could provide guidance.

  2. […] times in building management the use of energy is troubled by principal-agent problems. A classic example is a landlord and tenant: the landlord has access to capital but lacks a day-to-day incentive to […]

  3. Ed Darrell said

    The energy efficient models tend to come with a few added features, I recall from a stroll down the refrigerator aisle at a local store.

    A more circumspect landlord might make a point of advertising efforts to conserve energy to hold down the costs of energy, thereby appealing to a different class or cut of tenant, that group that shares the ethic of conserving energy and protecting the environment.

    Such a program assumes that some consumers do occasionally pay attention to issues and the information available. I think that’s still assumed in most economic theories.

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