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.