Thought Experiment - Family 2

In our second case, the family again has a combined gross income of $50,233 per year (the national median income), and we'll ignore inflation and changes in income for this exercise. With no changes to any family's behavior, the take home pay is roughly $36,675, of which, $12,659 pays for their house and property taxes (10 percent smaller than the 28% or gross income often recommended). Electric, gas, and water utilities account for another $2,840, savings $5,000, and $3,059 for gas for two cars, leaving $13,117 for food, insurance, car payments, and discretionary spending. (Utility and gasoline expenses estimated from the EPA's average values, assuming $2.50 for a gallon of gas. $210/month for electric and gas utilities, split evenly between gas and electric; $320 annually on water; 240 miles per week in a 20.4 mpg car)

Now we consider our second family, who does things with government incentives. This will likely get them to do the following things - buy EnergyStar conditioning systems and appliances, use compact fluorescent lights in the house in the major cases, and drive a hybrid car. Appliances save approximately $178 per year (refrigerator ~ $60, washer ~$46, dishwasher ~$52, 2 TVs ~$10 each), although they cost an extra $209 (refrigerator ~$180, washer ~$129, dishwasher ~$0, TVs ~$0) up front. With a government policy in place to pay, we'll say $200 in this case, they only put up $9. An EnergyStar air conditioning unit will save them roughly $165 per year for an additional $556 up front, and an energy star furnace will save $280 for an extra investment of $320. Again, with incentives, we'll estimate they can get the government to pay $500 of this cost, leaving $376 for them. All told, they spent an extra $385 the first year to save $623 per year after that. Because we're assuming the government is providing this benefit to everyone, the tax money comes from their taxes, which will be amortized over ten years, raising their tax payments $70 per year, reducing their savings to $553 per year.

Lights are pretty simple - assume they spend 9% (EIA average) of their electric bill on lighting, and they can save 2/3 of that by switching to compact fluorescent lights. That would result in a $76 annual savings for an investment of roughly $100 to change out all the lights in the house. These are getting to be fairly common, so we'll assume no incentives are required here.

Their one hybrid car (assume they only upgrade one car) will be only slightly more complicated because it, like many cars, is assumed to be financed. A Prius starts at $22,000, as compared to a Camry, that start at $15,350. Assume the Prius gets a $3,000 tax credit, effectively reducing its price to $19,000. Over a 5-year, no-money down, purchase agreement with 5.99% APR, this family would spend $478 instead of $387, or $91 more per month, plus an extra $300 in taxes each year ($1,392 more per year) to save ($2.5 x 240 x 52 x (1/20.4 - 1/50) = $905) on gas in a year.

In the first year, this family would spend an extra $343, leaving $12,774 (97% of their original budget, remember our first family had 88% here.) for their food, etc. Each of the next four years, they would have $142 of net savings, leaving $13,259 (101% of the original budget, last time this was 97%) for those extra expenses. For years 6-10, they would save $1,534 per year from the gas and utility budgets, expanding their discretionary spending to $14,651 (111.7% of the original budget, this was just over 112% last time).

More likely than cutting into something like food, this family would save less in the first year, and would try to make up for it with the final five years. At 6% interest, only $51 of their surplus would be required each year to make up for the extra expenses in the first year. All told, then, this family breaks even, with four years of a surplus of $91, followed by five years of $1,483 per year at the end. This scenario poses little risk, as their savings are depleted for only one year, and they end up with a surplus of $7,779 (as compared to a net surplus of $3,815 with no incentives).

Environmentally, this family would save 28% of their energy costs (utilities and gasoline), which roughly correspond to source energy content. This would correspond to a reduction of 17,430 pounds of CO2 per year, based on the EPA estimate of 62,250 pounds per family of 3.

In the end, this is a greater net benefit to the family, who gains surplus income over a ten-year period, and a benefit to the environment due to reduced fossil fuel emissions. The overall economy is benefitted from the extra expense spent on the new equipment up front, and the utility providers reduce their distribution stresses - although this would result in a decrease in infrastructure maintenance and utility income, which would have an overall balancing effect. The economic impact would be to transfer financing from utility infrastructure and fossil fuels to innovation and manufacturing (Energy Star equipment) and production of other consumer goods and services (accounting for the $7,000-plus surplus).

Extrapolating this to the entire country taking part, we can come up with some large-scale impacts. Assuming the EnergyStar equipment takes no more energy than the non-EnergyStar appliances to produce, the expenditures of this family would increase by 12% in other areas during the final five years, which would increase corporate and other industrial production (and energy use) by 12%. The net effect on the environment would be a 28% reduction in residential and transportation use for 10 years (roughly 36% of national use) and a 12% increase in commercial and industrial use for 5 years (roughly 64% of national use), or the equivalent of a 6% overall reduction over the full 10 years.

Essentially, this scenario works because the government acts as a low or no-interest financing agent. A small low-interest bank loan to cover the up-front costs would have a similar impact on the end consumer and the economy as a whole. Because of the simplified scenario here, it makes little difference how the tax is imposed - if it is a direct tax, a utility tax, a cap-and-trade fee, etc. In any case, the funds are ultimately passed down to the consumer, although the more direct the tax is, the less hands are likely to take a piece of margin on top along the way. Hence, the least politically palpable is also the least costly.