A Commitment Device for Energy Conservation

There’s lots of evidence that commitment contracts can help people change behavior with regard to all kinds of things (like savings and smoking cessation). But since participation is voluntary, a huge question is whether you can get people to sign up. This is more than an academic question for me, since the answer will help determine the success of stickK.com, a commitment store that I co-founded earlier this year.

One theory is that the demand will be limited to people who have a willpower problem and are self-aware enough to know they have a willpower problem.

In a post on voting commitments, I argued that even people without willpower problems might enter into commitment contracts as a way to credibly signal their commitment to others.

I just published an article in Forbes with Barry Nalebuff that extends this signaling idea to conservation commitments:

The Chicago Climate Exchange is an unusual free market experiment in which companies that want to demonstrate a true commitment to reducing their greenhouse emissions pledge to lower them by 1 percent a year. If they surpass that goal, they end up with permits they can sell to others. If they fail, they are penalized by having to buy permits.

What is unusual is that no one forces anyone to join the exchange. Participation is voluntary. But once a business has signed up, it is contractually obligated to buy or sell permits based on its performance. A company that beats the 1 percent goal gets both good publicity and a financial reward, and the specter of the potential penalty helps it reach that goal.

Why not offer the same opportunity to individuals? You could contract to reduce your home energy consumption by 1 percent a year for each of the next ten years. When you beat that target, you’d get permits to sell. When you miss, you’d pay a penalty by buying unused permits from others. As a result, your incremental price of fuel would go up. Every extra Btu you use would mean fewer permits to sell or more to buy.

People might volunteer for effective tax increases because they want to signal to their neighbors that they’re really green. They might also want to change their incentives and strengthen their willpower to conserve.

But others might do it for the most traditional economic rationale of all — to make money by selling excess credits to those who fail to meet their goal.


Ben D

I don't get it. Won't this framework self-select people/companies that have a decent chance of meeting the goal? If everyone meets the goal that they sign up for, who pays the bonuses?

Hunter

Bravo, Ben D!

This artificial market, much like the artificial secondary mortgage market, depends on people being woefully uninformed about the "goods" they are buying and selling. Honestly, how many people know how many kWh or MCF they use each month?

How many even know what those are?

Bobby G

Yeah, what happens if everyone who signs up happens to be people who are planning on doing that anyway, and the people that aren't as interested in reducing energy consumption don't sign up? Won't there be excess supply of those permits, making a lot of them worthless? A solution like this needs to reduce marginal energy consumption, i.e. have an effect on people who would otherwise not reduce their energy consumption. Rewarding people who would do it anyways is a waste of resources, since there is no incentive change. As a result, I would be hesitant to endorse a program whose most impactful incentive change is a cited "signal to... neighbors." Unquantifiable and, in mind, probably not that effective anyway.

It's just like the carpool lane, which I think should be limited to carpools of licensed drivers... that way there is an incentive to increase carpools, not just reward people who are driving their kids around or who are driving other unlicensed drivers... those people would carpool anyway.

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Corban

If everyone meets the goal, then the pot is divided amongst them all. However, Ben brings up a good point: everyone might gravitate towards making small but reachable goals, but the small payoff may make this a short-term endeavor.

MikeM

This would be fine for individuals if they lead stable lives, but what happens when you have a kid, or buy your first house - two things that I plan to do in the next couple years for the first time. Those two events will probably kill my energy consumption goals, so no thank you.

Ben C

Seems to me that monitoring individuals is going to be a heck of a lot harder than companies... and shirking a whole lot easier.

chappy

Seems like this "commitment" device is really just marketing. I also don't understand why most people would need an energy commitment device. I already get that device delivered to me from the gas, electric, & water companies each month in the form of a bill. (I should probably also include the gas pump which reflects my car's mileage and the food I eat to walk/ride my bike to transport myself).

arriving

Although I am all for 'permissions trading', my guess is that the big problem for individuals when it comes to trying to reduce energy consumption is lack of information, not lack of commitment (since this program would be voluntary, presumably the people who join aren't completely unconcerned). An affordable energy-monitoring device that reveals your consumption in real-time might have a much greater impact, if it could help people understand which activities and household devices increase their consumption.

Ed Haines

There are two basic ways in which one can change performance. One is leadership and the other is by modifying the environment.

Leadership in energy conservation means that community and societal leaders establish standards to which they adhere and expect that others will also adhere. This means that use of inefficient transportation (limosines, private jets, oversized vehicles, etc) is decreased by government leaders. Leadership is a difficult to define concept but must include leading by example and expectation that those being led can and will perform.

Changing the environment means that our government and manufacturers increase efficiency and cleanliness of tools, engines, and other accoutrements of daily living. Examples are the CAFE standard, tax benefits for efficient machines, assistance in implementing alternative energy sources and so forth. Some of this has been done but has been influenced by political power groups far too much (i.e., ethanol subsidies)

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Kevin Pierce

Some companies join the CCE because they think it's the right thing to do, and will generate positive PR as a result. Some see it as part of their strategy for reducing their carbon emissions – they believe in many cases that mandatory cap and trade will arrive soon. Understanding what it will take to comply is a potential competitive advantage. And the smartest ones, in my view, understand that carbon is a waste that represents an inefficient operation. Cut that waste cost effectively and they can reap the rewards.. plus all the other benefits besides.

Ian

Our last stimulus package cost 168 BILLION. It didn't do a thing to improve our economy. Not enough credit is being given to the role the record breaking cost of gas played in the downward spiral of our economy. The average family broke the budget filling up the car alone. Then to add insult to injury, every consumer product cost us more due to increased production and shipping costs. Food, clothing, everything imaginable now cost more as well. So, we cut back and this sadly results in even more jobs being lost! OPEC responds to our lowered consumption by cutting production and they continue to cut and will do so until they get the price per barrel back up. We have so much available to us in the way of FREE energy sources such as wind and solar. We have modern technologies such as hybrid and electric plug in cars. Why don't we invest in America becoming energy independent. 168 billion would go a LONG way towards getting some of these things set up plus would create millions of badly needed new jobs. We are using oil at the rate of 2x faster than new oil is being discovered. World demand is rising as 3rd world countries become more modernized and populations explode. Jeff Wilson has a new book out called The Manhattan Project of 2009 Energy Independence NOW. I highly recommend this book for anyone worried about our economy and our dependence on foreign oil.

www.themanhattanprojectof2009.com

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William

Here's the problems with this system: overuse permits will either be dirt cheap or equal in price to a breach of contract.

If there are more credits than people need, the price will be close to zero, as anyone with excess credits will be able to sell by undercutting everyone else. It'll be like carbon credits in Europe all over again.

But, if the credits are too scarce, they'll be as expensive as a breach of contract. The only way to avoid breach of contract will be to outbid the person next to you, forcing them to breach contract.

Christopher Strom

I think that approaches that rely at all on altruism (or the related "for the good of the environment" approach), while potentially successful among some subgroups, are likely to fail in the aggregate population. Additionally, financial incentives will be especially challenging to implement due to the twin obstacles of tight state budgets and the law of unintended consequences. As others have noted, voluntary programs that offer financial incentives are far likely to reward existing behaviors rather than change them in the desired fashion.

However, this selfsame problem of encouraging energy conservation among the general public was tackled quite successfully in a 1973 psychology study in Iowa (Pallak, Cook and Sullivan, 1980):

The study requested households to participate in an energy conservation program in which an interviewer would visit theme in their home and give them energy-conservation tips. The program was to last one month (in the winter), at the end of which results would be shared with the participating households. Households were randomly assigned to one of two groups. Households in the first group were asked to give a verbal commitment to conserve energy. Households in the second group were asked for the same verbal commitment, but were also told that their names would be publicized in newspaper articles as public-spirited, fuel-conserving citizens.

At the end of the month, households in the first group showed no significant drop in gas consumption compared to either the year before or to their neighbors who were not part of the program, while households in the second group showed an average 12.2% drop in gas consumption.

After a letter was sent to the households in the second group explaining that due to budget problems, their names would not be publicized after all, gas consumption of these households was monitored for the next year. For the remaining winter months, these households actually reduced their gas consumption by 15.5% - more than when they thought they would be publicly celebrated for it!

A frequent problem with free-market solutions is that such solutions depend on the free flow of information between utterly rational, self-interested actors. Unfortunately, many people work tirelessly to hoard information for advantage, and people are so rarely rational in their decision-making (although remarkably skilled at rationalizing their own behavior).

Never underestimate the power of public commitment over private commitment, as well as our need to maintain consistent behavior.

(Robert Cialdini outlines this and other studies in his book "Influence: The Psychology of Persuasion")

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RethinkHEAT

We at RethinkHEAT feel that if everyone changed over to infrared heating, this whole energy conservation (at least in residential areas) would be put to an end. The most efficient way to heat is infared, and infrared is now.