DIAGNOSIS: Conserving energy and improving energy efficiency are good things insofar as they contribute to economic efficiency. But I am concerned that much of the public-policy debate is about pursuing energy conservation and efficiency measures that go far beyond any economic benefits. In reaction to the OPEC oil embargoes of the early 1970s, Japan became the most energy-efficient economy in the world, but at much too high a cost, which contributed to Japan's economic stagnation. As for the indirect benefit of reducing greenhouse gas emissions, increasing energy efficiency almost always leads in the long term to higher energy consumption.
- Congress and state legislatures should repeal all energy-efficiency mandates and subsidies. Mandates and subsidies cause people and companies to do things that are otherwise uneconomic. This misallocation of resources in the long term leads to less economic activity, which slows down the rate of technological innovation and thereby leads to less progress in using energy more efficiently. Energy efficiency is increasing at a faster rate in the U.S. than in the European Union largely because of faster economic growth and more technological innovation.
- Government should replace the tax-depreciation schedule for investments in new capital stock with immediate expensing. New equipment is almost always more energy-efficient than old. Changing the tax structure so that new investments could be written off immediately would make it profitable to replace old with new equipment at a much quicker pace. This simple change could do more to increase energy efficiency throughout the economy than all the current mandates and subsidies.
- People and businesses should oppose all energy-rationing policies, such as cap-and-trade schemes to reduce greenhouse-gas emissions. Energy rationing forces people to pay more for energy and therefore to use less of it. Enacting cap-and-trade legislation would force some conservation and efficiency gains, but would also lower economic growth and thereby lower the rate of technological innovation.