National insulation for economic recovery: As second best as it gets

On Feb 8, Ministers Gormley and Ryan announced the National Insulation Programme for Economic Recovery. There is €100 mln on the table, so I will not comment on the last three words of the title. The press release is worth a close examination for those who study spin.

There are two components to the programme, each worth €50 mln.

The Home Energy Saving Scheme subsidises / co-finances investments in energy efficiency improvements for private owners of houses build before 2006. The energy efficiency of the average Irish house is indeed not great. Better efficiency would indeed lower energy bills and reduce emissions, and retrofitting buildings is indeed a labour intensive business. So, did the government find the ultimate win-win-win policy?

Not quite.  If Irish home owners do not sufficiently invest in their house, that is their business. There are externalities, such a carbon dioxide emissions, but these would better be addressed by a carbon tax. (A carbon tax is increasingly likely, and thus the prospect of double regulation.) A carbon tax has the advantage that it brings in revenue rather than increase government spending. Furthermore, it would affect office buildings too.

A carbon tax would also leave home owners the choice how best to improve the energy efficiency of their house. The government programme is heavily biased towards insulation. This is needed in many houses, but in many other houses it may be better to replace the heating system. There are subsidies for that too, but only for a very limited set of heaters that may not be appropriate for all houses.

There are many reasons why home owners do not invest in their houses. A prominent one, “can’t get a builder”, has disappeared but has probably been replaced with financial worries and constrained credit. It is not clear that homeowners will rush to avail of these subsidies.

The Home Energy Saving Scheme is clearly aimed at the middle class. The other component of the insulation programme, the Warmer Home Scheme, is aimed at the less well-to-do. Information is not easily accessible, but it is clear that the Warmer Home Scheme (1) is largely limited to insulation, (2) aims at “communities” rather than individuals, and (3) that eligibility criteria are negotiable. While it will take the sharp edges of “poverty” for some, chances are that these people would rather take the money and decide themselves whether to insulate the attic or not.

Will the insulation programme deliver? First, will it save money? Probably not. Assuming that transaction costs are zero and assuming that homeowners will not use the improved insulation to increase the comfort of their home, the payback period of the investments is 3-20 years (according to the always optimistic calculations of engineers). With more realistic assumptions and current interest rates, only some measures have a positive net present value.

Second, will it bring jobs? The government predicts “thousands of jobs”. If that means 10,000 jobs, then the cost per created job is €10,000; but if “thousands of jobs” means 1,000 jobs, then the cost per created job is €100,000. And, of course, the €100 mln in government funds and the $X mln in private funds is diverted money, not new money.

Third, will it reduce carbon dioxide emissions? Yes, if the subsidies are taken up. Direct emissions of carbon dioxide by households are some 7 million tonnes of carbon dioxide. Let us assume that 5 million tonnes of that are for home heating (too high), and that the insulation programming reduces the energy bill by half (too high) for one percent (too high) of houses. Then 25,000 tCO2 is saved this year, but this is an investment so let us multiply by 10. Saving 250,000 tCO2 for €100 mln is 400 €/tCO2. Last Friday, emission permits traded for 8.65 €/tCO2. The 400 €/tCO2 is conservative on the one hand, but it omits the benefits of warmer homes and lower energy bills. If the two cancel, the government overpays for CO2 emission reduction by a factor 50! (This factor is comparable to getting your hair cut in Florida rather than in Dublin.)

Will the national insulation programme do harm? I do not think so. But, it is a decidedly second best way of reducing emissions, creating jobs, or reducing povery.

15 thoughts on “National insulation for economic recovery: As second best as it gets”

  1. I agree wholeheartedly with Richard. Though I’m not sure the plan wouldn’t do harm. I’m very surprised to see this kind of thing from the government now. I suppose they’re going with the Keynesian aspect of the plan as the justification? I guess it also lets the greens save some face.
    If Richard’s calculations are right though, this seems very blunt as a Keynesian instrument. Incidentally, does anyone know where to find a good estimate of the multiplier for Ireland? I assume it’s extremely low by international standards?
    I’m all for carbon taxes and lowering emissions etc, but this seems like the worst possible moment to implement a tax on businesses or squander govt money…

  2. Local authorities are the biggest single owner of houses you would think – wouldn’t insulating every local authority house properly be the way to go? Yes, you don’t get private funding elements but the admin overhead should be lower than dealing with 10s of thousands of private owners (and therefore the number of civil servants required to oversee it at the national level).

    The attractive thing about this is you can expect contractors employed by LAs to have tax clearance certificates – not sure private owners could be expected to secure same from the guys they hire.

  3. I suspect that a lot of this scheme is actually oriented at local authorities and housing associations of various sorts, rather than individual householders. There is no way it would pay you to insulate an individual attic under the scheme, for instance, but the grant might seem pretty good if you were doing a whole housing estate at once.

    The thing about energy efficiency is that it is a bit like lean manufacturing – you can only realise what gains and improvements are possible when you actually seriously try the thing. The first pass only gets you the first set of improvements. Going back, you get further improvements.

    More importantly, your people learn the skills. They develop an appreciation for how things should actually be done.

    So is what the government doing more symbolic than practical? For sure. But that doesn’t mean it won’t do good.

  4. Antoin: The Warmer Home Scheme (€50 mln of the €100 mln) is indeed aimed at “communities” (local authorities and housing associations). I agree that one would get a much better return on investment if such projects are properly prioritised. I do not know whether that is a small if or a big one.

  5. The government predicts “thousands of jobs”. If that means 10,000 jobs, then the cost per created job is €10,000; but if “thousands of jobs” means 1,000 jobs, then the cost per created job is €100,000.

    Your numbers (the 1,000 employed ‘horror story’) make no sense, and assume that people can just roll up and demand the money up front from the State rather than clawed back. I refer you to the original press release:

    After registering with SEI, homeowners can immediately arrange for a BER assessment to be carried out, if they wish, without awaiting from grant approval. However, the grant for the BER will only be payable after upgrade measures and follow up BER are completed. Applicants must complete the formal application form and await written grant approval before having upgrade measures carried out.

    So, there have to be people employed to do this, who can be expected to only be able to do so much work per annum. So, more money only gets paid if more people are employed.

    Now, there is certainly an attempt at justifying this in stimulative terms (which econmists can argue over to their heart’s content, rightly or wrongly). But there’s also a policy imperative here in combating climate change, but this is a politcal decision, not an economic one (or at least one hopes, given the lessons on display from the late administration of the unlamented Bush the younger).

  6. EWI: Sorry for being unclear.

    This is what I meant:
    “Thousands of jobs” can mean anything between 1,000 and 10,000. If the actual number is closer to 1,000, then it would be cheaper to keep these people on the dole. If the number is closer to 10,000, this may be a smart labour policy. It is a bit worrying that the government’s impact assessment is so vague at so crucial a point.

    There is a policy imperative to reduce greenhouse gas emissions. There is no policy imperative to reduce greenhouse gas emissions by insulating houses.

  7. @ Richard

    I don’t believe it is confidential, it just hasn’t been published. I will email you a copy further to clarification with SEI that this is ok.

    While we are on the subject, I note from a previous post “If Irish home owners do not sufficiently invest in their house, that is their business”.

    Do you not believe that the market can fail?

    And:

    “Third, will it reduce carbon dioxide emissions? Yes, if the subsidies are taken up. Direct emissions of carbon dioxide by households are some 7 million tonnes of carbon dioxide.

    You forgot about about another 5Mt of emissions comes from energy use in homes.

    “Let us assume that 5 million tonnes of that are for home heating (too high)”

    No too low.

    “and that the insulation programming reduces the energy bill by half (too high)”

    depends on the intervention, but about right in many cases

    “for one percent (too high) of houses”.

    about 4%, but many will only choose one or two interventions which would reduce the energy savings

    “Then 25,000 tCO2 is saved this year, but this is an investment so let us multiply by 10. Saving 250,000 tCO2 for €100 mln is 400 €/tCO2. Last Friday, emission permits traded for 8.65 €/tCO2. The 400 €/tCO2 is conservative on the one hand, but it omits the benefits of warmer homes…”

    a positive with ancillary benefits on health and morbidity

    “…and lower energy bills”.

    If we accept your estimates, ie: half average bills (=€1000 on 2008 prices) on 1% of homes (175,000), that’s €17.5 million saved per annum, -20% comfort take up (this is where the health etc benefits come from) is €14 million p/a energy savings. That’s starting to look like money well spent all of a sudden!

    “If the two cancel…”

    That’s two positives. How can they cancel?!!

    “…..the government overpays for CO2 emission reduction by a factor 50! (This factor is comparable to getting your hair cut in Florida rather than in Dublin.)

    Clearly not.

    Am I missing something?

  8. @JC
    A preference not to maintain private property is not a market failure, unless that failure put others in harm’s way.

    Where did you get that direct household emissions are 12 MMTCO2? The ESRI Environmental Accounts have 7 MMTCO2, and they reproduce the UNFCCC reports.

    My estimate is that 250 TMTCO2 could be saved. What does the secret SEI report say?

  9. @RT

    I would disagree with you there on your first point. The market failure exists because efficient investments are not made due to informational deficits etc. Obviously can agree to disagree on this.

    In 2007 residential sector energy-related CO2 emissions were 11,186 kt CO2 (so you are right, not quite 12). HES scheme supports grants for interventions which affect both direct and non-direct emissions so that should be the starting point for calculations.

    NEEAP projections suggest CO2 savings for HES of 157KtCO2 http://www.dcenr.gov.ie/NR/rdonlyres/FC3D76AF-7FF1-483F-81CD-52DCB0C73097/0/NEEAP_full_launch_report.pdf.

  10. NEEAP: 160
    Tol: 250

    So, per tonne, NEEAP is even more expensive than my estimates.

    Where did you get 11 MMTCO2? Is the EPA report to the UNFCCC wrong?

  11. @ Richard

    But your numbers makes no sense considered in isolation from the substantial ancillary benefits. This is not a criteria for evaluating a policy unless a claim was made that “this policy is exclusively an emissions reduction strategy”. I would imagine that this policy was implemented to address several issues including energy savings, energy security, climate change, job creation, comfort and health benefits.

    You acknowledge these additional benefits but make the unsubstantiated claim that they can be cancelled out by your overestimation of the carbon savings number. That is clearly not true.

    The EPA report isn’t wrong, just categorizes emissions in a different way. Emissions from electricity used in buildings (eg: for heating and lighting) are excluded (counted in power generation).

    My number comes from here:

    http://www.sei.ie/Publications/Statistics_Publications/Energy_in_Ireland/Energy_in_Ireland_1990-2007.pdf

    p 79

  12. @JC
    Electricity is a subsidiary source of heating only.

    You may want to revise Tinbergen (1951). If you have multiple goals, you need multiple instruments. If you regulate properly, ancillary benefits by and large vanish. If you regulate improperly, the cost of improper regulation largely cancel the ancillary benefits.

  13. @ Richard

    Perhaps you might consider the broader ramifications of a policy initiative as to do otherwise is misleading and counterproductive.

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