Saturday, April 14, 2007

Upfront Cost Disclosure

Greetings, homeowners.

If you're a regular reader, you'll already know that I have both an environmental and a capitalist streak in me. I don't think these two need be in eternal conflict; in fact today's post is going to outline a way in which we can encourage the adoption of green technologies without messing around with the marketplace.

Good Policy Assumes Laziness

First of all, let me fire a diffuse attack at all of the legislated incentives to get people to adopt new green technology. While legislated incentives can be better than nothing, often the incentives are not proportional to the environmental good done (e.g. giving a fixed tax rebate to cars purchased with better than a certain mileage - there's just a threshold and no proportionality), and almost always these bills can't and shouldn't be passed when the technology has only limited applicability. However, I think that there are potentially many diverse opportunities for incremental improvements that just can't be addressed by legislated incentives. Good policy should automatically reward where it should; good policy is lazy and future-proof.

Virtue should be Its Own Reward

In this post I'm going to outline a way to promote environmental benefits in a natural, non-legislative way. Specifically, we should require that the advertised price of goods reflect the total cost of ownership, and not just the sale price. For example, when buying a house, the only price you would be allowed to advertise should be the sum of the sale price and the forecast cost of 20 years of utilities in the house. This way, houses with the same listed price would be equally affordable, and there would be incentives to build houses that were greener. Let me slow down a bit to unpack all of these comments so that they make a little more sense.

I'm Lazy Too

How many of you have bought a house or rented an apartment without first calculating the expected utility bills? I have never requested past utility statements for any property I've rented, and I certainly haven't done any thorough analysis of properties I'm only marginally interested in. I think I'm pretty typical in my laziness too: while I might try to factor in energy efficiency, I don't have a clear idea as to how much a given setup will affect my bottom line.

Modern economists acknowledge that humans make decision (and big ones too) with imperfect information, which results in less-than-optimal buying decisions. The most common numeric piece of information people take into account when looking to buy a house or rent an apartment is its price; my idea is to fold utility costs into the price from the outset so that people can make a lazy but correct decision as to how much they would like to spend on a heated domicile.


If I ruled the world, the list price for all houses would have to be the sale price plus 20 years of expected utilities costs, based on prior use records. (Aside: 20 years is a round figure on the order of the inflation-adjusted doubling time of money at prime rates, so if you were to invest this sum at the time of sale its simple interest could pay utilities from the interest essentially for ever. Perhaps 20 years is a little on the short side.) The sale price would be allowed to be advertised only as a line item in conjunction with the utilities cost and the total list price. Lying would be considered fraud.

Guessing the efficiency of a new building might be difficult, but it should be possible to use statistics to fine any construction company which consistently lowball's the heating estimates of the buildings they make.

The same idea could be applied to automobiles: add the cost of driving 50 000 city and 50 000 highway miles before getting the list price. (Aside: this will come out to around $10 000: enough to perhaps convince many people to buy newer, more fuel-efficient cars. Who would want a clunker when the list price is $11 200? We might be able to persuade car manufacturers to lobby for this idea since it would boost new car sales.)

Perhaps major appliances and computers should have a similar addition to advertised price, maybe also including the mean time until failure. At some point gizmos become too small for these advertising restrictions cease to make sense, but I don't know if this transition happens at the "toaster" level or the "microwave" level.

Lazily Greener Incentives

Consider the implications of my idea on builders and house maintainers. If you build a house that's more energy-efficient, its value to the seller will automatically be higher, since it competes with houses of the same list price. The 20-year cost of heating a poorly-insulated house in a cold climate can top $100 000*, so energy-efficient designs and materials could give a significant edge on the open market.

Moreover, if home buyers were to display a fraction of the eco-chic that Prius-cravers show, perhaps small 20-year heating cost stats would carry the same caché as slim cellphones. In any case, energy efficiency could be reducible to a dollar value, which is great for putting things into perspective.


Let me recap a few of the reasons why I think we should add use cost to sale price to determine the list price of automobiles, houses etc.
  • It's the duty of the government to protect consumers from false advertising.
  • Markets are more efficient when more information is used.
  • It's easier to perform cost analyses once per item sold than once per potential sale.
  • Green policy should provide continuous incentives to make better products, and these incentives should be proportional to the environmental good done.
  • Legislated incentives are rigid, slow-to-implement, and fiscally inefficient.
In summary, let's get our policy into the adaptive 21st century by making the cost advertised closer to what the consumer is really going to pay.

*Friends of mine in Toronto rented a house with typical winter heating bills of $2000 per month, even though some of them opted to turn the heat down and sleep in arctic sleeping bags. I'm sure that if this heating were advertised in the listed rent they would have rented elsewhere. The 20-year heating cost for this Victorian behemoth would have been over a quarter-million bucks: a significant warning to any prospective home-buyer, and a burning incentive for the current owner to insulate better to protect the house's retail and rental value.


Anonymous said...

I think this is a great idea! But I have a question: do utility bills really reflect the costs (financial and environmental) of owning a house? For instance, what if there were 10 people living in a house about to be bought for two? Wouldn't those 10 use a TON of hot water? More than the 2 would ever use? On the other hand, maybe the house has really efficient appliances, but the couple who lived there liked to take REALLY LONG showers (wink wink). Is there any way to correct for these kinds of discrepancies between issues of usage and the problem of environmental impact? I guess what I'm really asking is: do utility bills really describe environmental costs, or only usage based financial ones?

LeDopore said...

Hello again Anonymous,

You've brought up two great points: that different people have different energy usage habits, and that financial costs aren't perfectly aligned with environmental damage.

Regarding the first issue, I agree with you that historical usage is not a good predictor of future usage, but it still may be helpful for four reasons.

First, it's a good "first cut" approximation to the total energy usage in some circumstances. The local power company annually rewards people who cut their consumption by 20% over the previous year, suggesting that fluctuations in consumption of about 20% are larger than typical (and consequently, historical usages will predict future usages with roughly 80% accuracy).

Second, if wasting energy brings down the seller's value of the house (even if not by very much), it could scare people into being more energy-efficient, which I consider to be an overall good thing.

Third, if there were extenuating circumstances which boosted up the historical usage above what the buyer should expect, the seller could always add a disclaimer to the list price saying so, perhaps with evidence. (Photos of the aforementioned two-person marathon showers could be posted alongside the house ad, for example.) The onus however would be on the seller (where it belongs) to try to convince the buyer that the house is not intrinsically wasteful.

Fourth, it's vital that systems like this not be too complicated, so that there's no wiggle room for people to eke out smaller official intrinsic usages. If there were some complicated per-capita scheme, you'd have to provide proof that X number of people used laundry & showers for Y years; it just becomes a bookkeeping nightmare. Historical usage, on the other hand, can be made totally immune to record-tampering, as long as the utility meters aren't bypassed. (The financial incentive to do so is actually pretty small, especially compared to running a grow-op, so I don't foresee prudent homeowners bypassing meters just to get their historical usage down.)

On to question #2: how proportional is energy cost to environmental impact? That's a tough question, and it's as much a matter of local policy as anything. I like the idea of true cost economics, and I think future-proof policy is going to have to factor in per-kWh environmental damage into utility rates. As these rates approach their true cost, the difference between the list price and the sale price of homes should swell until making the best financial decision will be no different from making the best environmental decision.