Among the avalanche of policies that has been enacted in the name of igniting a green economic revolution (taxes, subsidies, loan guarantees, tariffs, …) include mandates for use of particular technologies. Good economists will understand the basic problem with mandates (they are a classic input standard, which is theoretically and empirically inferior to output standard approaches), but let’s ignore those for the time being. Among the most famous mandates include fuel mileage mandates for automobile fleets, mandates for corn-based ethanol blending, mandates for cellulosic ethanol production, mandates for particular portions of the electric grid to be comprised of favored sources, and so on. Another mandate that has been tossed around is to mandate that public buildings (and bet your butt private buildings to follow) be “retrofitted” with energy efficiency technologies.
The typical argument for mandating such things is that without the “nudge” markets would not make the choice to use green tech because they would not receive all of its benefits or would bear too many of the costs. As sugar on top of this cookie, green jobs advocates also remind us that such mandates are good because they also will spur the creation of jobs for roofers, insulators, electricians and the like.
This is, of course, absurd for two reasons. First, if I mandated that all buildings be retrofitted with laser-etched images of Wintercow, that too would create many, many jobs for artists, masons, laser manufacturers, and so forth. Second, such an argument assumes that owners of property do not really want to take advantage of income increasing activities. It is just really hard to understand how that view prevails when every rotten caricature of landlords and private property owners is precisely the opposite – that they are so insanely obsessed with money and the bottom line in every aspect of their lives, including in terms of how much rent they extract from their witless tenants, all they do is figure out how to squeeze out a few more bucks for themselves.
In economic terms, aside from the consistency problem above, here are two problems with such a view.
- If retro-fitting is valuable, why would owners NOT make investments if they had positive returns? In a market, when property rights are reasonably secure, any value improving activity to a piece of property will be capitalized immediately into the value of the asset. Given that fact one cannot subsequently argue that private agents are too “short-sighted” to do such a thing. Even short-sighted owners would experience gains immediately upon completing the renovations.
- This second problem is self-inflicted – and kind of hilarious in a sad and sick kind of a way. The property tax structure in most cities would punish property owners for making just these energy efficient, value enhancing, environmentally friendly upgrades to their properties. If spending $100k to insulate my office building ends up adding $150,000 of value to my building, the tax assessors will quickly raise the assessment of the building, and we would see our annual property tax bill increase. Ignore whether this is just or unjust and focus on the incentives. Every dollar I spend to upgrade my property will end up costing me some amount in higher taxes – taxes which, I would note, rarely go down, and certainly are with you over the entire life of the property. This might also explain the strange phenomena I notice when checking out old homes – old decaying siding and roofs, worn out yards, … and beautiful master bathrooms and kitchens.
My wife and I had a company come out here to help us figure out what it would cost to replace doors, windows, install more insulation, etc. and if it would have made economic sense to do all of that we would have done it in a heartbeat. But it didn’t make sense, particularly as natural gas prices have remained low and we expect them to stay that way for a while.
BTW: for my loyal Pennsylvania readers, the tax problem I mention is being dealt with in some Pennsylvania communities which have adopted a “tw0-rate” property tax system, loosely modeled on the Land Economics of Henry George. It puts a high tax rate on the value of the land (the true source of rents, or so the Georgists argue) and then put a low or nonexistent tax on improvements to land. I believe Harrisburg has had some success with this. It’s certainly not going to change the world, but it would be nice to see some struggling municipalities give it a shot.