Net Impact Prep: U.S. Energy Efficiency Legislation Promoting Social Enterpise

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By Alex Marino, Staff Writer

Who is responsible for our ecological footprint, how does new legislation impact your business, and why should you care? Energy efficiency legislation is pushing new products and innovative ideas to the marketplace to drive a global economic and psychological campaign to reduce environmental impact and increase consumer consciousness regarding sustainability. The campaign establishes a new business model in which social impact is combined with profitability when evaluating a company’s cost-benefit analysis. Consequently, growing social attention combined with private sector and government incentive programs for consumers and businesses are redefining the nature of market value. For example, the pool industry exemplifies a player in this market because it supplies energy-consuming products to homeowners and could potentially be in a unique position, considering expertise and manufacturing, to make a splash in the social impact sector as a third-party regulator for environmental sanitation standards. Thus, it is essential for major players to acknowledge this new “green” consumer market, as well as the energy efficiency standards of products it supplies and promotes. 

Now, as we gear up for next week’s Net Impact Conference, let’s review the potentialities and shortcomings of participation or lack thereof from consumers, industry leaders, and investors, while also considering implications of empirical data claiming that “consumers and firms are failing to exploit a massive amount of profitable investment opportunities in energy efficiency” (Allcott 15).

Energy efficient products and legislation are not new to the global scene. However, concerns regarding the human environmental footprint have taken center stage over the last 20 years because of scientific data revealing startling climate and consumption impact. A recent article titled “Global Energy Policy Perspectives” by Richard Simmons and Eugene Coyle shares this sentiment, advocating that “energy is at the nexus of people, environment, and economic development.” The article provides concerning statistics regarding fossil fuel exertion into the atmosphere as combustion related greenhouse gas emissions. Emissions from 1971 to 2012 increased from fourteen to thirty-one GtCO2e (billion metric tonnes of Carbon Dioxide equivalent), and is anticipated to increase an additional 100% by 2035 at the current global rate of emission release (Simmons 30). The new Sustainable Development Goals (SDGs), which replaced the Millennium Development Goals (MDGs) in 2015, call for the global community to “ensure access to affordable, reliable, sustainable and modern energy for all.” Providing an inspiring framework to achieve that lofty task, the article referenced lays out a goal to “create a sustainable balance between the supply of energy, its environmental impact, and the prevailing pursuit of economic prosperity and growth” through “energy security, U.S. domestic energy production, and institutionalize[d] efficiency and conservation measures” (Simmons 35). This information is important to social enterprises because it’s important to consumers, legislators, and investors, all which control profitability, access to finance, and incentive programs.

Courtesy of: http://countries.diplomatie.belgium.be/en/binaries/SDGs_tcm426-270993.png
Photo Courtesy of: http://countries.diplomatie.belgium.be/en/binaries/SDGs_tcm426-270993.png
Photo courtesy of: /static.independent.co.uk
Photo courtesy of: /static.independent.co.uk

A significant amount of energy efficiency and environmental legislation was passed over the last 20 or so years. Most recently, the Obama Administration proposed the “Blueprint for a Secure Energy Future” (2011) and the “President’s Climate Action Plan” (2013), both aimed at ensuring a “clean energy future” for the United States. These programs incentivize companies and consumers, most notably homeowners and manufacturers, to adopt clean energy practices. A primary driver of current U.S. legislation is the concern over water sanitation because of hydraulic fracking to extract natural gas from domestic pools. To combat market vulnerability and bargaining power with the OPEC bloc, the U.S. industry is attempting to increase domestic shale gas extraction from 5% to 45% by 2020 (Simmons 36). It is worthwhile to consider that the pool industry could be in a unique position based on expertise, product development, and vertical integration capabilities to act as a third party regulatory commission committed to a watchdog status over natural gas extraction industries. Other legislation addressing energy efficiency are the American Reinvestment and Recovery Act (AARA), UN Sustainability for All Campaign (established at the Rio+20 Summit in 2013), International Energy Conservation Code (IECC), American Society of Heating, Refrigerating, and Air Conditioning Engineers 90.1 (ASHRAE), and Residential Energy Services Network (RESNET). Let’s shift our focus on the primary issues blocking the effectiveness of legislation and limiting the incentive for investment in energy efficient products.

How does a homeowner or business owner justify investing in energy-efficient products that lack sufficient data supporting long-term positive cost-benefit returns? This question is at the forefront of the economic debate around transitioning commodity chains and consumer purchases to energy-efficient products. To justify a transition, companies and consumers need data supporting long-term profitability and return on investment. However, many experts argue that there is an “energy efficiency gap” resulting from “imperfect information” and “uninternalized energy use externalities” (Allcott 9). Per this theory, consumers and firms are unable to justify transitioning to energy efficient products because inaccurate and inconsistent data supporting investment profitability causes “investment inefficiencies.”

Imperfect information reveals that anticipated cost reductions from product transitions is difficult to realize because of external factors that potentially skew savings. For example, the government recently instituted a “Weatherization Assistance Program” in which subsidies and standards are provided to “weatherize” homes with energy-efficient insulation and ultimately reduce the cost of heating and air conditioning. Although some data supports decreases in annual costs, consumers still incur an unaccounted opportunity cost because they must pay for pre-screening analysis to qualify for the program. Additionally, current data is insufficient as it lacks long-term analysis of program participants’ cost-benefit ratios. Behavioral Economist Hunt Allcott describes the gap as the “wedge between the cost-minimizing level of energy efficiency and level actually realized.” Whether investments are made from a “profit maximizing firm” or incurred through a “utility maximizing consumer,” a transition is not justified without a sufficient implied discount rate ensuring an equal balance of profitability and social cost.

Proponents of energy efficiency legislation create a “win-win argument” around the issue because they believe cost-benefit analysis reveals a “social optimum” (Allcott 11). The “social optimum” advocates that both companies and consumers have a responsibility to invest in efficient and innovative products that contribute a social impact in the environmental sphere. However, because the field currently lacks sufficient empirical data to support investment, the government programs aim to incentivize industries and consumers to begin the transition. For example, products such as refrigerators, dishwashers, light bulbs, air conditioners, and washing machines can receive an “Energy Star” product rating if they exceed IECC standards by at least 30%. The rating is used primarily to incentivize homeowners to invest in energy efficient products.

Per freelance writer Charles W. Schmidt’s article “Room to Grow: Incentives Boost Energy-Efficient Homebuilding,” government and private industries are promoting incentive packages for residential builders and investors that include tax credits, utility rebates, expedited permitting for new construction, and coupons for energy-efficient products. Various green organizations such as RESNET and ASHRAE are used to evaluate the energy efficiency level of residential and commercial buildings, and their reports indicate whether participants qualify for incentive perks. These new “demand-side management” energy conservation programs are potentially changing the individual consumer or investor mindset when considering energy-efficient products (Allcott 16). Per Schmidt, “Energy Star credits combined could conceivably cover half the ‘green premium’ of a sustainably built 2,000 square-foot home.”

Photo courtesy of: insanesuperman.files.wordpress.com
Ecological Footprint                                                            (Photo courtesy of: insanesuperman.files.wordpress.com)

 

To make a significant transition to environmental energy efficiency and reduce consumption we must take a collectivist approach. There is no clear-cut path to achieve the daunting tasks set forth in the Sustainable Development Goals, but all the small contributions provided a clearer vision to the end goal. Shifting our business mentality away from cost restrictions and towards cost-benefit analysis paves a clearer path for social investors and entrepreneurs looking to make a sustainable impact, and it ultimately leads to shared financial risk as proponents rally around a common and measurable value. Regardless of how you define your role in society, we all have a human responsibility to contribute to the communal effort that interlinks profitability and social impact into a developmental framework that reduces our ecological footprint.

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