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Tuesday, February 7, 2012

Not all costs and benefits are monetary: Going solar edition

In discussing incentives or cost-benefit analysis, any good Principles textbook will mention that not all costs and benefits are monetary, and a whole lot of the behavioral economics field is built around the fact that people respond to incentives other than money.  But we economists (and an awful lot of non-economists) still seem to have a strong tendency to only count those costs and benefits that we can, well, count. Case in point: I recently installed solar panels on my house and as I was researching options, a big focus of everything I read was whether going solar would be 'cost-effective'. But what 'cost-effective' generally seemed to mean was that the monthly payment to cover the panels would be offset by the drop in the monthly electric bill; the prevailing opinion seems to be that if it's not, then you shouldn't bother switching (in fact, one company would not even give me a quote for a system because once I gave them my consumption information, they said, "With your level of usage, it would not be cost effective for you to convert to solar"). Of course I understand that for most people, that's an important comparison but what I find interesting is the reaction I get from people when I say that for me, my monthly payment is going to go UP (at least in the short run). Many people react to that with confusion and something along the lines of, "Then why are you doing it? Are you that much of an environmentalist?"

To a certain extent, the simple answer is, yes, apparently I *am* that much of an environmentalist. The benefit I get from a kilowatt of electricity produced by conventional power plants is reduced by the knowledge that such production is also destroying the planet. Or to put it in economics parlance, my individual demand for clean energy is higher than for dirty energy. So even if my quantity consumed doesn't change at all, I would be willing to pay a little bit more for that quantity when produced with solar rather than with conventional technology.

But the answer is also a little more complicated than that. Because my demand for clean energy is higher, not only am I willing to pay more for the same quantity of clean electricity, but if the price per kilowatt is the same for both clean and dirty technologies (which, on the margin, it is, given the way solar interacts with the electric company's grid), I will buy more of the clean energy. In my case, I have resisted installing central heat and air conditioning in my house almost entirely because I don't want to use that much more electricity (with the corresponding pollution) but with solar, I don't have that concern so once the panels are in, central air is the next item on the list. I thought of this when I read a Digitopoly post drawing a parallel between cheaper solar energy and cheaper computing power - rather than trying to conserve, the falling cost means people can actually consume more.

All of this is to say that a simple comparison of the cost of my current monthly electric bill to the cost of my monthly payment for solar ignores the fact that my benefits with conventional electricity are not the same as my benefits with solar energy. By switching to solar, I not only get to stop contributing to environmental damage but I can actually be a lot more comfortable in my home - and maybe I'll even stop obsessively turning off the lights every time I leave a room...

1 comment:

  1. Jevons had a brilliant point, though the Jevons effect usually involves efficiency technologies. The effect seems to be the same here.

    ReplyDelete

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