For energy (and water) conservation, moral suasion is no substitute for getting the prices right

My office light switch recently acquired a little sticker that politely reminds me to turn it off when I leave:

switch

Over the past year, an edgy Lawn dude  and an amicable  Bear  have been urging Californians to cut back on water use in order to meet our drought-stricken state’s water restrictions (which have to date relied on public spiritedness versus serious enforcement):

dude

The use of moral suasion to encourage conservation is not unique to California. Public appeals for reductions in energy and water use are ubiquitous. And it is easy to see why. For political and jurisdictional reasons, it is often easier to mount a conservation campaign than raise energy or water prices in times of scarcity. But what impact do these interventions actually have on energy and water consumption?

Prices versus moral suasion

A new E2e working paper explores this question in the context of electricity. More than a year after the Fukishima earthquake, several of Japan’s nuclear power plants were still out of commission and electricity supply was tight. Policy makers were looking for ways to reduce electricity consumption during critical peak times.

Koichiro Ito and his co-authors set out to test the relative effectiveness of an increase in critical peak electricity prices versus “moral suasion”:  a polite request for voluntary reductions in consumption. Customers who volunteered to be part of the study were randomly assigned to one of three groups:

  • A price treatment: Higher electricity prices during critical peak hours. Customers were charged prices ranging from $0.65/kWh – $1/kWh (up from a base rate of approximately $0.25/kWh).
  • A “moral suasion” treatment: Courteous day-ahead and same-day requests for electricity demand reductions during critical peak days.
  • Control group: No notification of/price increases during critical peak events.

The figure below summarizes the average impacts of the two treatments on household electricity consumption during critical peak hours (relative to the control group). Effects are summarized by treatment “cycles”.  Each cycle consists of three non-consecutive critical peak event days, so the graph helps to illustrate how the effect of the treatments persist (or not) across repeated critical peak days throughout the season.

Average effect of treatment on peak electricity consumption

graph

It probably will not shock you to learn that the price treatment had a much larger impact on consumption as compared to moral suasion.  The courteous appeal for voluntary reductions measurably reduced consumption during the initial events, although the effect peters out quickly. In contrast, the response to the price treatment persists throughout the duration of the experiment.

Of course, these quantitative findings may not generalize beyond this set of Japanese electricity customers. But key qualitative findings are consistent with other studies. During the California electricity crisis, for example, researchers similarly found that demand response to public appeals for voluntary conservation was significantly smaller than response to price increases (although the effects of moral suasion were found to be somewhat more persistent).

Can public appeals for conservation hold water in California?

These qualitative results are compelling – and pertinent to a crisis we are currently facing here in California.

140219-california-drought

Source: Bakersfieldnow.com

We are in the midst of the most severe drought on record. Last year, the Governor issued a voluntary reduction order, asking Californians to please cut back on water use by 20 percent. In the latter part of last year, customers in my district cut back a non-trivial 13 percent in monthly year-over-year comparisons. But we are off to a slow start this year, conserving just 4 percent in January and February.

Absent divine intervention (e.g. torrents of rain in the coming dry season), we need more than benign intervention (e.g. public appeals for voluntary conservation). An executive order issued last week signals a move in this direction.  The order  imposes mandatory water restrictions designed to achieve a 25 percent reduction in potable water use by urban residents.

Hitting this conservation target will be difficult – if not impossible – to achieve with only public appeals and hard-to-enforce restrictions. So, to echo arguments that have been made again and again on this blog (we are a persistent bunch), the time is ripe for water prices that reflect the true cost of water use.  This would not only help incentivize sustained conservation, but also help to cover operating and infrastructure costs that currently exceed revenues (see this report for a sobering look at water sector finances).

As far as I can tell, the state does not have the ability to directly control how local water agencies set their rates.  But a perfect storm of rising infrastructure costs and water scarcity could force the issue. We are already seeing water price increases and conservation pricing proposals.

If the current crisis does lead to substantive and widespread water rate reform, there will still be plenty of work for Lawn Dude and friends. In water, like electricity, lack of salience, hassle costs, and other factors can stand in the way of cost- efficient investments in efficiency.  We should put public campaigns in their rightful place: useful complements to – but not substitutes for – efficient price signals.

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11 Responses to For energy (and water) conservation, moral suasion is no substitute for getting the prices right

  1. Paco D'Exponere says:

    With age comes many changes, some positive, some negative. Leave it to others to determine where a growing acceptance of behavioral economics lies in the slate of age related changes. Perhaps it is prompted by a building (lifetime) frustration from reviewing analytic results which seem to conflict with the messaging coming from Becker Friedman (now Saieh Hall). Perhaps it is more than coincidence that this building was the former home of the Chicago Theological Seminary (some would claim that it remains so).

    In public debate, a key challenge to dynamic pricing (uber cynical) seems to reside in the interest that most have to free ride off the efforts of others. However, and in spite of the work of Gneezy, et al, (JEP, 2011), it is time that policy-makers look at all incentives, directly financial and non-monetary. It is time for economics to recognize this as well. As the essay states in its close, Non-monetary programs (public campaigns) are complements to and not substitutes for efficient pricing. So too, the reverse holds.

  2. Jack Ellis, Tahoe City, CA says:

    While I agree that moral suasion alone is insufficient, there’s more than just getting the prices right. Consumers need some education so they understand why prices need to be higher (or in the case of electricity, sometimes lower to sop up excess production). The argument that consumers will save money has largely worn off as people realize that lower volumes due to conservation efforts have to be offset by higher prices so that providers can earn enough revenue to cover costs. In fact, prices might well be even higher without conservation, though that can be a hard concept to sell.

    One of the big challenges in pricing services like water and energy is that politicians have multiple objectives that are often inconsistent, and they often lack the courage to make the case for a rational course of action, even if it isn’t popular. We should have had time-based electricity pricing in California long ago. Instead, CPUC Commissioners and elected officials have caved into so-called consumer advocates and avoided making a politically unpopular but in my opinion very necessary decision.

  3. Ira Leifer (UCSB) says:

    Moral suasion also is perhaps ineffective when 80% of the water use is exempted (agricultural and fracking). I have no idea how widespread the actual water usage in the state of California is, but the effect of the Italian disease is quite well documented.

    • Cynthia Wooten says:

      Yes, in particular I agree that it is OUTRAGEOUS that at the minimum there is not a moratorium on fracking. The industry argues, ‘oh its not that much water’. Apparently every drop of water counts-why are they being protected? Agriculture needs massive structural change and they now receive much less water because there is no federal allocation so it all comes from wells/ground water. And other industrial-high water usage food manufacturers,beverage manufacturers, other commercial entities?

  4. Gigio Sakota says:

    The real challenge here are the water rights, some older than any of us here. Some folks in CA simply get free water, others can pump at will, while the rest of us have to pay for it. We would need enough political will in Sacramento to tackle this issue and I simply don’t see it (yet).

  5. During the last drought, Los Angeles Mayors Bradley and Riordan appointed Blue Ribbon Committees to recommend rate designs getting the prices right for urban water use, and I had the interesting fortune to serve on both committees, You can find out what we did in these references:
    1. Darwin C. Hall, 2009, “A Note from the Author,” Contemporary Economic Policy, Published Online: Oct 23 2009 1:56AM, DOI: 10.1111/j.1465-7287.2009.00184.x Vol. 27, No. 4, October 2009, p. 538.
    2. Darwin C. Hall, 2009, “Politically Feasible, Revenue Sufficient, and Economically Efficient Municipal Water Rates,” Contemporary Economic Policy. Published Online: Jun 22 2009 9:42AM
    DOI: 10.1111/j.1465-7287.2009.00164.x, Vol. 27, No. 4, October 2009, pp. 539-554.
    3. Darwin C. Hall, 2009, “Prescriptive Public Choice: Application to Residential Water Rate Reform,” Contemporary Economic Policy. Published Online: Jun 3 2009 10:34PM; DOI: 10.1111/j.1465-7287.2009.00163.x, Vol. 27, No. 4, October 2009, pp. 555-565.

    Darwin C. Hall, Ph.D., M.A., M.S.
    Professor Emeritus of Economics
    Founding Director of Environmental Science and Policy
    California State University Long Beach
    http://www.csulb.edu/~dhall/

  6. Mark S. Martinez says:

    Interesting that you are comparing the conservation messaging for the current drought to the early messaging that was done for the California energy crisis over a decade ago. While both are examples of trying to deal with shortages of utility services, the immediate lack of electricity via rotating outages was a rather more dramatic consequence that got people’s attention. The drought is more of a slow moving emergency – the lawns are still green, and the water still comes out of the tap. When the shortages finally make their way into peoples homes, when we lose water pressure, that is probably is when then the moral suasion will turn into a call for survival (price elasticity not withstanding). Water is still cheap, but it’s hard to do without it. Like electricity – cheap, but essential.

  7. dzetland says:

    Excellent post. Ira and Gigio miss that this post is about urban water, which is not managed in the same way as ag water. I’ll reply to Jack (and perhaps add to Darwin) with my simplified rate design for fiscal and environmental stability: http://www.aguanomics.com/2014/07/pricing-tap-water-for-efficiency-and.html

  8. Jkinnear says:

    Proposition 218 severely restricts how publicly owned water utilities (a very large percentage of the distribution water utilities in California) can modify rates. Many believe that inclining block structures for conservation violate that proposition. How do utilities go about incenting conservation in such an environment?

  9. Pingback: interesting reads #11 | ingmar schumacher

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