Appliance Standards: Comparing Predicted and Observed Prices

When appliance standards are revised, the Department of Energy (DOE) looks at the estimated benefits of standards relative to the estimated costs and only sets standards that it finds are cost-effective to consumers. This study compares the projected and actual costs of nine appliance and equipment efficiency standards, finding that across the nine rulemakings, DOE estimated an average increase in manufacturer’s selling price of $148. On average the actual change in price was adecrease in manufacturer’s selling price of $12. Looking at the midpoint (median) change, DOE estimated $108 across the nine rulemakings and the actual midpoint cost was an increase of only $10. All of the nine products’ actual costs were less than what DOE estimated. Looked at another way, DOE estimated that the new standards would increase product prices by an average of 35% but average actual prices did not change after adjusting for inflation. Several alternative analysis approaches were also used and found similar results.
These findings raise the question of why this is the case. Further product-specific investigations and analysis will be needed to find causes but one hypothesis is that as manufacturers redesign products and production lines to meet standards, they discover new lower cost ways to meet the standard than DOE examined.
This paper discusses several steps that DOE has taken to improve its cost estimates and finds that these steps have improved the accuracy of DOE price estimates some but that prices are still substantially overestimated. The authors recommend that DOE conduct additional research on ways to model innovation when making price estimates, and that in the meantime DOE include sensitivity analysis in their calculations to look at the cost-effectiveness of standards if past inaccuracies in DOE price estimates continue.