American Enterprise Institute endorses tax credits for super-efficient, furnace-free homes 5

If the American Enterprise Institute starts acknowledging that residential energy efficiency has a “positive rate of return”—and advocating federal support to capture the full energy savings possible—perhaps the world is changing.

Then again, it may just be temporary institutional schizophrenia, since others in AEI continue to assert (without any supporting evidence), “No matter what you’ve been told, the technology to significantly reduce emissions is decades away and extremely costly.”

Kevin Hassett, AEI’s director of economic-policy studies, has a Bloomberg News column that I excerpt below, because of its surprising degree of common sense—and because he cites actual research:

President-elect Barack Obama has pledged to commit billions of dollars to providing America with a greener future. A big part of that agenda will be an effort to reduce the amount of energy that is consumed heating and cooling our houses.


Public policy generally proceeds in two steps. First, identify the objective. Then, craft policies to achieve it.


In the sphere of green building, the first step is easy. German engineers have identified and produced successful models of energy Nirvana. The question for policy makers is, how can we bring Nirvana to Newark? Given Obama’s strong commitment to a greener future, I expect we will see an answer soon.


Energy Nirvana is what Germans call the Passivhaus, or passive house. It accomplishes the almost unthinkable: During cold months, it maintains an acceptable temperature without relying on a traditional furnace. During hot months, it cools itself without relying on air conditioning.   


How have German engineers done this? The basic design principle is that passive houses are airtight and very well- insulated. Because of this, they effectively retain energy from sunlight, large appliances and body heat.


Year-Round Comfort


Passive houses also use a mechanical ventilation system, coupled with a heat exchanger, to regulate the air temperature and provide fresh air. The system can both heat and cool the air, making a house comfortable year-round.


It is estimated that passive houses in the U.S. would be about 10 percent more expensive than less-efficient buildings.


Proponents say passive houses use, conservatively, about 60 percent less energy than normal buildings. Let’s say every residential building in the U.S. had achieved that gain in 2008. According to my calculations, that would have meant 496.8 million fewer metric tons of carbon dioxide emitted—a reduction of 8.4 percent, the equivalent of using 1.56 billion fewer barrels of crude oil. Such gains are not available overnight, of course, but they do provide a glimpse of the scale of the opportunity.


Conservatives often argue that the free market should be left to itself in cases like this; if passive houses are such a good idea, then people will buy them. There is no reason, the argument goes, for government to intervene.


Laissez-Faire Exception


This is one of those rare cases where the laissez-faire approach is incorrect. Policies to encourage the adoption of these technologies are justified, even within free-market orthodoxy.


Take the case of simple insulation. More than a decade ago, Gilbert Metcalf of Tufts University and I set out to study the rate of return [PDF] that homeowners receive on energy conservation investments. The study was published in the Harvard University- edited Review of Economics and Statistics.


We obtained data that provided intricate details about thousands of houses that allowed us to identify which ones had made home-improvement investments, such as putting so-called Pink Panther insulation in the attic. We also tracked weather conditions and utility bills to estimate the reduction in heating costs associated with the improvements.


Our findings suggested that the positive rate of return of these investments wasn’t much different from the returns available on other assets. That is, investing in energy savings provides a solid, though not extraordinary, net profit.


Walls and Windows


The returns we found were smaller than we, and activists in the green community, expected. One reason: The energy improvements in old houses often turn out to depend on multiple, confounding factors. If you replace windows with more thermally efficient ones—but stick them in walls that were built in the 1920s—then the heat loss through the walls reduces the impact of the windows.


Still, our research provides strong support for home-improvement subsidies. Here’s why: Individuals might invest up to the point where they get a reasonable return, but if they stop there, they aren’t doing enough. That’s because the reduction of energy consumption also has benefits to society, through reduced pollution. A typical homeowner will not take society’s benefit into account when deciding how much to conserve.


The research also supports having government pursue dramatic targets such as the passive house. The fact is, you can save a little bit of energy by tinkering with your house, but really reducing your heating and cooling costs will, in many cases, require a massive overhaul.


We need to avoid spending too much time weather-stripping around thermally inefficient windows. Big achievements will be possible only if new construction is encouraged to veer significantly in the direction of the passive house.


To date, Obama’s environmental agenda has shown an impressive attention to rational economic details. He argues, correctly, that any cap-and-trade system should auction off 100 percent [PDF] of the carbon permits rather than give some away to companies that will be hardest-hit by mandatory reductions. Tax subsidies for passive houses deserve a spot in that agenda.

I agree that “Obama’s environmental agenda has shown an impressive attention to rational economic details,” though I wonder if AEI realizes that Obama has pledged to return U.S. greenhouse gas emissions to 1990 levels by 2020 and then to cut them another 80 percent by 2050.

I suspect AEI’s honeymoon with Obama won’t last long, but for now we should enjoy the champagne and caviar.

This post was created for ClimateProgress.org, a project of the Center for American Progress Action Fund.

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