Practical Pieces of the Energy Puzzle
Energy Security for American Families
Helping moderate-income households invest in energy-efficient cars, appliances, and home retrofits would benefit financially struggling families as well as the U.S. economy.
In July 2008, Americans were paying $4.11 per gallon of gasoline—nearly three times the price six years earlier, according to the Energy Information Administration. Most people have felt the pinch of higher energy prices, but those hurt the most have been moderate-income families who struggle to buy gas for their cars and to heat and cool their homes. Although prices have now fallen because of the current global economic problems, the longer-term trend of rising energy prices will continue. Many of the 70 million U.S. households making less than $60,000 a year will find it increasingly difficult to cope.
The United States needs a strategy to help moderate-income households adjust to the new reality of higher energy prices. A proposal I call the Energy Security for American Families (ESAF) initiative would give moderate-income households the power to control their long-term energy costs, largely by improving household energy efficiency. Specifically, the initiative would offer a combination of vouchers, low-interest loans, and market-based incentives to help families invest in energy-efficient cars, homes, and commutes. These investments would allow workers to save money, year after year, gaining economic security.
Energy costs are a drain on the economy, leading to increases in prices and unemployment, and most of the money spent on oil leaves the U.S. economy. Channeling money toward investments in energy efficiency will not only help families cut costs but also create jobs and reduce energy demand, pollution, and greenhouse gases. The ESAF initiative represents a long-term investment in the health and resilience of the U.S. economy.
After enjoying more than two decades of relatively cheap energy, U.S. consumers have struggled to pay monthly gasoline bills that rose (in constant dollars) from $21 billion in July 2003 to $50 billion in July 2008, according to the Oil Price Information Service. Increased energy prices have hurt the economy as a whole, squeezing the credit and housing markets, depressing auto sales, and raising unemployment. They have had a negative multiplier effect on the economy, increasing inflationary pressures and shifting spending, so that money once spent on consumer goods is now going to pay mostly non-U.S.-based oil producers. Growing global demand for energy, coupled with a cramped supply infrastructure, means that volatile energy prices are here to stay, and they require a thoughtful policy response.
Hit hardest by high energy prices are U.S. households making less than $60,000 a year. These people spend a higher percentage of their income on energy than do wealthier Americans, and a lack of capital limits their ability to reduce the amount of energy they consume. Transportation, including vehicle costs, eats up about a fifth of household budgets for all U.S. households, but for those making $20,000 to $50,000 a year, the total cost of transportation may top 30%, according to a 2006 study of 28 metropolitan areas by the Center for Neighborhood Technology. Part of the reason for this disparity is that many moderate-income people find cheaper housing in exurban areas far from their workplaces.
The rapid increase in gasoline prices hit this group disproportionately hard. In 2006, households making $15,000-$40,000 a year spent 9% of their income on gasoline (double the national average of 4%); by the summer of 2008, they were spending between 10 and 14% of their income on gasoline alone, according to the Bureau of Labor Statistics’ Consumer Expenditure Survey and price figures from the EIA. For rural families, who drive nearly 10,000 miles a year more than do urban households, the cost is even higher.
On the home front, low-and moderate-income families are again at an energy disadvantage. Poor insulation and old equipment cause lower-income families to spend more per square foot to heat their homes than middle-income families, according to the EIA. In the 7% of U.S. homes heated with oil, moderate-income families can be at a disadvantage when purchasing fuel. Higher-income families are often able to hedge their spending on heating oil by locking in prices in advance, whereas struggling families are at the mercy of the market, buying when their tanks are empty.
Higher fuel prices are reducing the standard of living for these U.S. families. A 2008 survey by the National Energy Assistance Directors Association (NEADA) found that 70% of low-and moderate-income families said that energy prices had caused them to change their food-buying habits, and another 30% said that they had cut back on medicine. Utilities have recently become more aggressive in collecting unpaid bills. Between May 2007 and May 2008, an unprecedented 8% of U.S. households had their utilities cut off for nonpayment, according to NEADA.
Increasingly, moderate-income families find themselves in a Catch-22: Despite being squeezed by high energy costs, they are unable to reduce the amount of energy they use. Often living paycheck to paycheck, they lack the capital to invest in a more efficient vehicle or furnace, or in a home closer to their work, even when they know it would ease their monthly budget.
The credit crisis has added to their troubles by further limiting their ability to borrow money. For example, the sub-prime auto lending market is now experiencing the highest foreclosure rates in 19 years, and lenders are cutting back on auto loans. People who can’t qualify for loans are increasingly resorting to buying cars at “buy here, pay here” lots, where some 10,000 dealers nationwide charge interest of 25% or more and may impose additional finance charges that push the total much higher.
Another component of the crisis is the change in the pricing of fuel-efficient vehicles. In the past, used economy cars were relatively inexpensive. But the increasing size of U.S. vehicles during the past decade, combined with high gasoline prices, has changed the used car market. Used fuel-efficient cars are now relatively expensive compared to gas guzzlers, which may be the most affordable cars for lower-income buyers. The National Association of Automobile Dealers estimates that every $1 increase in the price of gas deflates the resale value of large pickups by $2,200 and increases the resale value of smaller cars by $980. This cruel trick of the market means that lower-income families, unable to spend much on their vehicles, may be forced to spend even more of their income on gasoline. Although economically rational decisions regarding the purchase of an automobile, commute length, and home energy efficiency may be options for those in higher-income brackets, moderate-income households do not have the same range of choices or access to capital.
For most, going without a car is not an option. Nine out of ten U.S. workers have cars, but for low-wage workers, owning a car may seal their fate. Owning a reliable vehicle has been shown to be more important for high school dropouts than earning a GED in getting and keeping a job, and on average, those with cars made $1,100 more per month than those without, according to a 2003 study by Kerry Sullivan for the National Center for the Study of Adult Learning and Literacy.
The problem with conventional fixes
The energy crisis facing moderate-income families has three components: These families are more dependent on energy than are wealthier families; increased energy costs eat up a higher percentage of their income; and high energy costs threaten their economic stability and standard of living. Market forces have exacerbated the first two problems, neither of which the government has addressed. The government has attempted to address the third problem through direct or indirect emergency energy payments, but existing government programs are stretched beyond their capacity to deliver emergency funding.
The Low Income Home Energy Assistance Program is the main federal program providing emergency funds for heating for low-income families. It has been funded at $5.1 billion for FY 2009, but this will not be enough to meet all requests. Around the country, needs have risen dramatically with rising energy prices and the economic downturn. In Nevada, for example, applications for assistance were up 79% in 2007.
Proposed solutions to alleviate the pain of high energy costs have fallen short. Republicans have suggested gas tax holidays, whereas Democrats have favored $1,000 subsidy checks. Neither addresses the underlying problems facing the families disproportionately affected by volatile energy prices. Gas tax holidays encourage more gasoline use and have been shown to create larger profits for gasoline marketers and minimal price reductions for buyers. Stimulus checks temporarily ease family finances, but they don’t help families change their consumption or spending habits. Early studies of how families spent the $600 tax rebate in 2008 reveal that they spent more than half on gasoline, food, and paying down credit card debt. These short-term measures also strike many voters as gimmicky, election-year ploys. At the very least, they are effectively government overrides of market forces that may actually delay the kind of investment and behavioral changes necessary to cope with higher energy costs in the long run.
The only way to overcome the unique energy disadvantages moderate-income families face is to help them invest in energy-efficient cars, appliances, and home retrofits. Reducing energy consumption pays for itself in energy savings and by making homes more comfortable. For about $2,800, the Department of Energy’s (DOE’s) Weatherization Assistance Program seals air leaks, adds insulation, and tunes and repairs heating and cooling equipment to reduce household heating energy consumption by an average of 23%, for a savings of $413 in heating and cooling costs the first year. Despite the program’s success, it has been poorly funded during its 30-year lifetime, reaching about 5 million homes out of the 35 million the DOE estimates are eligible. Of these, DOE estimates that 15 million homes owned by low-income families would benefit from this retrofit.
Investing in more efficient appliances offers further savings. For example, a programmable thermostat, which costs about $150, has a payback period of less than a year. A $900 flame-retention burner saves about $300 per year. Replacing a pre-1980 refrigerator with an Energy Star model can save more than $200 in electricity annually. Nationwide, pilot energy-efficiency programs have decades of experience, reducing energy bills by more than 20%. In California and New York, efficiency programs save families an average of $1,000 and $600 a year, respectively. These savings act like a stimulus program, year in and year out.
Whereas energy spending is a drain on the economy, yielding fewer jobs than other types of spending, every dollar spent on energy efficiency returns two dollars in benefits to the state, according to the California Public Utilities Commission. According to estimates by the DOE’s weath-erization program, every dollar invested produces $2.72 in savings and benefits, and every $1 million invested creates 52 direct jobs and 23 indirect jobs. Residents also see other, less-tangible returns, including cleaner air and less demand on the power grid, leading to fewer brownouts.
Helping working families reduce their dependence on fossil fuels is a good investment strategy for the United States. Moreover, moderate-income families appear to be willing to adopt energy-efficient and energy-saving habits: They take public transit at two to four times the rate of more affluent families. They also report closing off parts of their homes and keeping their living spaces either hotter or cooler than they feel is safe, according to a survey by NEADA. Thus, targeting this group of households for energy-efficiency investment may yield large financial and social dividends, as well as immediate and significant reductions in energy use and carbon dioxide emissions.
The centerpiece of the ESAF initiative is a federal government-guaranteed loan program that would enable qualified lenders to make low-interest loans to moderate-income families for the purchase of energy-efficient autos, appliances, and home renovations. In addition, a system of vouchers and state-based incentives would be used to influence purchasing decisions. To create flexible transportation options beyond private cars, the initiative would reward those who don’t drive their cars to work with a yearly voucher and would provide seed money to the public and private sectors to develop alternative transit programs.
The target of these programs should be families or multiple-person households earning $60,000 per year or less. However, in the interests of geographic fairness, because the costs of living are higher in some parts of the country than others, the cutoff point could be raised to $75,000. Vouchers and state-based “nudges” could be tailored to reach certain income levels such as households of two or more people earning less than $60,000.
Automobile vouchers and loans. Private cars and trucks consume 18% of the energy used in the United States and the majority of the petroleum that is burned. The average fuel economy for new cars and trucks is now just 20 miles per gallon (mpg). The fastest and easiest way to reduce the consumption of petroleum right now is to remove the vehicles with the worst gas mileage from the road and replace them with more efficient cars. Toward that end, the ESAF initiative would offer a $1,000 voucher, low-interest auto loans, and state-run “clunker credit” programs to help families buy a car that achieves 30 mpg or more. This sort of government investment in private cars is far from unprecedented. The $3,150 tax rebates offered to buyers of Toyota Prius hybrids were essentially rewards to well-off buyers, many with incomes of $100,000 or above.
The cornerstone of the proposed auto program is very low-interest loans, backed by a government guarantee but provided by private lenders, for cars that achieve 30 mpg or more. Loans would be similar to the Small Business Administration’s 7A loans, with the federal government offering a guarantee on most of the value of the loan, thus reducing the risk to authorized lenders. Funds could be directed to favored lenders, such as credit unions, which have a track record of making auto loans to moderate-income car buyers. At least 8 million low-and moderate-income households already receive auto loans yearly, according to an Aspen Institute study, but most pay far higher interest rates. The standard auto loan rate is about 6%, but the sub-prime rate that is often the only option for less-affluent borrowers is usually above 17%. Because loans in the program would be guaranteed by the federal government, interest rates could be as low as 2% APR for a loan of up to $15,000.
Qualifying for a loan would be easy. Buyers could apply for the loans online and receive a notice of financing from a local bank or credit union as well as a list of cars eligible for purchase or trusted dealers in their area. Some of the country’s 8,500 credit unions already offer similar services that could be expanded. The loans would include clear rules to discourage predatory lending or sales. For example, used cars would not be financed at more than Blue Book value. The easy availability of low-cost capital may in itself discourage some predatory lending.
The ESAF initiative would also offer money to states to administer clunker-credit programs. Many states, including Texas and California, already operate such programs, which pay owners of old cars to turn them in to salvage yards, where they are dismantled. Texas has successfully offered payments of up to $3,500 per car as part of a pollution-abatement program, and similar programs are in place in Virginia, Colorado, Delaware, and Illinois. Combined with the low-interest loan program, a clunker-credit program would be an effective way of removing less-efficient and dirtier cars from the road and leading buyers to make a leap up in fuel efficiency. The advantage of state implementation is that the states would be able to adjust to local market conditions and be creative in finding the best mix of carrots and sticks.
A new car can dramatically improve the finances and lives of working families. The Bonnie CLAC (Car Loans and Counseling) auto loan program in New Hampshire has helped a thousand drivers obtain lower-interest loans for new cars, reducing their auto payments and maintenance costs. For some households, the savings in fuel have been enormous: One couple made a daily 130-mile commute in a 1998 Ford Explorer with a fuel efficiency of 10 mpg. The higher-mileage Honda Civic they bought to replace it reduced their monthly spending on gasoline from $800 to $200.
Relatively small shifts in market behavior could have a profound effect on U.S. energy consumption. For example, the scrap rate for light trucks, sport utility vehicles, and vans is now around 5% a year. Bumping that to 8% and encouraging 75% of those 8 million households to buy a 30-mpg vehicle would reduce U.S. gasoline consumption by 3.33 billion gallons a year. On a macro level, the U.S. economy would avoid spending $10 billion on fuel (at a gasoline price of $3 a gallon). The program would also assure automakers that there would be long-term demand for fuel-efficient vehicles, creating a market incentive for them to create more vehicles with higher fuel economy than current standards require.
Home efficiency vouchers and loans. U.S. homes consume 21% of the energy used in the United States. The average household spends nearly $2,000 on energy and produces twice the greenhouse gases of an average car. Modest investments in energy efficiency could reduce home energy bills, and emissions, by a fifth.
Toward that end, the ESAF initiative would offer a $1,000 voucher to eligible households to spend on immediate weatherization or appliance upgrades; underwrite a home equity loan program offering low-cost loans for energy-fefficiency renovations and efficient appliances; and support a state-run incentive program to encourage cooperation between utilities and homeowners.
The voucher could be issued in the form of an electronic debit card that could be used to buy energy-saving supplies, appliances, and weatherization retrofits that have been approved as cost effective by the EPA’s Energy Star program. Obviously, certain measures would need to be put in place to prevent fraud and waste, but ideally state regulators, utilities, contractors, and appliance dealers would offer packages combining energy audits, approved appliances, and cost-effective retrofits.
The ESAF initiative would require Fannie Mae or a comparable institution to provide low-interest home equity loans and mortgages for energy-efficient home improvements. In the 1990s, Fannie Mae had an effective energy-efficiency mortgage program that proved that investing in efficiency improved families’ ability to pay back their loans by lowering their bills. This time around, Fannie Mae should renew that program and make it accessible to all moderate-income borrowers. If Congress approves a mortgage rescue plan to help with the current financial crisis, energy-efficiency investments should be included in renegotiated mortgages and new ones as well. Like the auto loan program, the home efficiency loan would be backed by a government guarantee. In addition, owners of rental properties could be offered loans to upgrade the efficiency of their properties. This could be a requirement for Section 8 housing, which receives government subsidies.
As with the auto program, applying for a loan should be easy and fast. Families could initiate the process by applying online and having their request routed to nearby banks or credit unions to follow up. Once given a loan, families could purchase Energy Star appliances from approved dealers or contract with a bonded contractor to do construction work on their homes.
Utility companies are in an ideal position to help homeowners perform energy audits and make decisions about efficiency purchases. Utilities have data on all homes in the area they serve, knowledge of energy-demand patterns, and in some states already collaborate with households to reduce energy use. When proper incentives are in place, utilities profit by helping to reduce energy demand because they can avoid investing in power plants and transmission lines. The ESAF initiative would require state regulators to create incentives and rules to encourage utilities to help reduce energy demand. Ideally, utilities would establish partnerships with ratepayers, helping them figure out how to reduce energy demand by 20% and rewarding households that met the reduction targets by lowering their rates.
Innovative transit. Three-quarters of Americans commute to work alone in their cars, 5% take public transit, and 15% commute by car pool, in van pools, by bicycle, by telecommuting, and on foot. If just 3 million more Americans left their cars in the garage, the nation would have net savings of at least a billion gallons of gasoline a year. And the $3 billion those drivers would have spent on gasoline would be directed toward more productive spending. The United States needs to develop alternatives to private cars and mass transit for commuters.
Toward that end, all workers who don’t drive themselves to work would be given a $750 tax rebate every year to offset their transit costs. Drivers are already offered tax breaks of nearly $1,000 a year to offset the cost of parking, but by leaving their cars at home, non-car commuters do society several favors. They reduce road congestion and therefore commute times for everyone else, reduce pollution and greenhouse gas emissions, and reduce petroleum demand, which may make gasoline cheaper for other drivers. A recent study of the San Francisco Bay Area’s 9,000 “casual carpoolers,” who share rides during the morning commute, found that they directly and indirectly save 900,000 gallons of gasoline a year.
The transit subsidy, which could be delivered to recipients’ bank accounts as a tax refund or as a debit card, would reward non-drivers for making a decision that benefits everyone. It would replace the $1,380 tax break the federal government already offers on employer reimbursements for carpooling, a benefit rarely claimed because the rules and paperwork requirements are so cumbersome. Fraudulent claims could be discouraged by requiring written assurances from employers or other proof that applicants commuted by transit.
To encourage new ways of traveling to work, startup funds would be provided to local governments, businesses, and nonprofits to help them design innovative, self-supporting, “mini-transit” programs. Such flexible transit programs might include neighborhood car sharing, casual carpool programs, employer-based carpool programs, van pools, and jitneys. Ride sharing can be made easy, convenient, and safe through the use of mobile phones, GPS devices, and transportation affinity networks—a Facebook for carpoolers. It is even possible to pay drivers by using cell phones to transfer funds, as the program goloco.org already does with its 10,000 members. With nurturing, these programs could fill in the considerable gaps in the mass transit system.
Some city buses, which sometimes travel with only a few passengers, may actually use 25% more energy per passenger mile than a private car, according to Oak Ridge National Laboratory. A van pool, in which seats are much more likely to be filled, removes between 6 and 13 cars from the road, according to the EPA. Large employers of moderate-income workers, such as Wal-Mart, could work with other employers and local governments to create van pools to carry their workers to and from work, eliminating the need for employee parking spaces and easing scheduling problems caused by workers with transportation problems. Cities would benefit from reduced congestion, more readily accessible jobs, and less pollution. Workers would benefit because they would not need to shoulder the cost of owning a car and might be able to count on more regular working hours. Many commuters who use van pools say that they make their day less stressful. The market for these services could be significant. A 2003 study in the Puget Sound area of Washington State found that the existing fleet of 1,200 vanpools, which accounted for 1.4% of the commuter trip market, could be expanded up to six-fold with more aggressive incentives.
Making efficiency pay for itself
The ESAF initiative could assist most moderate-income households if it were funded at $45 billion a year for three years. The bulk of the funding would go toward transit tax rebates and vouchers for autos and home efficiency improvements; the low-interest loan program would cost far less. The initiative would provide 20 million transit riders with $750 rebates and offer vouchers for 6 million autos and 10 million home-efficiency projects. Over three years, the program could reach close to 70 million households by helping to upgrade 30 million homes, purchase 18 million cars, and subsidize 20 million commuters a year. The cost of these vouchers would be $31 billion per year.
The auto purchases and home-energy retrofits would be made possible by a $300-billion loan-guarantee program, which would cost approximately $3 billion over five years. Another $9 billion a year would be distributed to states to create incentives and flexible transit.
A typical household taking advantage of both the auto and home efficiency programs could reap annual savings of $1,235 on gasoline and nearly $400 on home energy costs. Some would save much more, either in energy costs or on auto or home financing. Members of a household commuting to work by carpool or vanpool would save at least 187 gallons of gasoline a year and receive a $750 voucher in addition.
At the end of three years, the auto program would have reduced U.S. gasoline consumption by 6.35 billion gallons, or 4.5% of total consumption. Likewise, by the third year of the home-efficiency program, 30 million homes would be saving more than $12 billion in energy costs.
The ESAF initiative could be funded as part of a federal stimulus program aimed at the auto and construction industries, through a carbon tax or auction, or by a windfall profits tax on energy companies. Although the public often opposes taxes on gasoline, ESAF could also be funded by a modest tax on imported oil. The United States imports 13.6 million barrels of oil a day, and Americans might be induced to tax those imports as part of a package to send a message to foreign oil producers. A tax of $6 a barrel would yield a fund of nearly $30 billion the first year, at a cost to drivers of just 9 cents a gallon. During the course of a year, the average U.S. family would pay less than $100 toward the tax, an amount that could be entirely offset by a decline in gasoline prices.
The primary purpose of the tax would be to provide a stable source of funds for energy-efficiency investments, but it would have several other important effects as well. First, it would signal to the oil market and oil producers that the United States intends to overcome domestic political inertia and begin aggressively decreasing oil demand. An initiative of this scale would also send a signal to other oil-consuming countries that the United States no longer intends to support cheap-by-any-means-necessary gasoline and is moving toward containing demand through market measures. The tax would also provide an opportunity to educate the public about the loan programs and other ways to reduce gasoline consumption. Driving habits and auto maintenance influence vehicle fuel efficiency by as much as 15%. Printing notices of the tax and tips for reducing fuel consumption on gas receipts has the potential to significantly increase driver awareness and reduce demand, as previous government education projects have reduced demand for tobacco, alcohol, and even water during droughts.
The ESAF initiative represents a long-term investment in the well-being of U.S. families as the nation heads into an era of real uncertainty about energy security and climate change. By shifting spending from energy bills to investment, the initiative will stimulate the economy and encourage businesses that provide smart energy solutions. The relatively low cost will not only reduce household bills but also yield big dividends in greenhouse gas emissions reduction. This is particularly important because a number of studies indicate that carbon cap-and-trade schemes will disproportionately burden lower-income households, rural households, and those living in coal-dependent states in the south and Midwest. The advantage of this initiative is that it addresses this burden directly by enabling moderate-income families to take control of their finances and emissions. What’s more, the net effect to society could be large: If 60 million families take advantage of the program to lower their energy consumption by just 10%, the total reduction of 132 million tons of carbon dioxide would be the equivalent of the emissions of Oregon, South Dakota, Vermont, Maine, Idaho, Delaware, Washington, D.C., and Maine combined. Empowering moderate-income households to be active agents in ensuring the nation’s energy security will strengthen the overall economy and assure a greener, more prosperous future.
Lisa Margonelli ([email protected]) is a California-based Irvine Fellow with the New America Foundation and the author of Oil on the Brain: Petroleum’s Long Strange Trip to Your Tank (Broadway Books, 2008).