This article is for those who want to understand the importance of timing: when is the right time to impose new standards and start/stop subsidies, to optimise the pathway to maximum efficiency? The light bulb transition of the last two decades is one of the successes of energy efficiency: from the old incandescents (15 lumens/watt) to halogen incandescents and CFLs, and then, finally, to LEDs (80 lumens/watt and prices falling 90% in ten years). Lucas Davis at the Haas School of Business reviews a study of the U.S. market that asks whether the early policy promotion of halogens and CFLs inadvertently crowded out a faster adoption of the LEDs coming down the pipe. Though early policy action delivered immediate benefits from the boost to the adoption of available efficient products, it seems to have crowded out the imminent adoption of an even better product. Households that bought the halogens and CFLs won’t buy new LEDs until the old bulbs have burnt out, explains Davis. As timing applied to light bulbs, so it surely applies to all new clean technology pathways.
Light bulbs were back in the news last month, with the Department of Energy announcing new tighter U.S. rules for energy efficiency. By July, manufacturers must stop making bulbs that produce less than 45 lumens per watt, effectively phasing out not only incandescents but also halogen incandescents.
These new rules accelerate a technological transition that has already been going on for more than a decade. New research by economist Sarah Armitage shines a bright light on the timing of this historic transition. In particular, Armitage asks whether early support for CFLs crowded out later adoption of LEDs. Her results are fascinating and imply that when it comes to environmental policies, it is important not only to choose the right tools, but also to get the timing right.
The light bulb transition is a valuable lesson
When we think about energy transitions we typically think of the growth of renewables, electrification of buildings and vehicles, and phasing out fossil fuels. But one of the most important recent energy transitions is the humble light bulb.
After being dominated by traditional incandescents for 100+ years, in the last two decades the light bulb market has transitioned to halogen incandescents and CFLs, and then, finally, LEDs, with the price of LEDs falling 90% over the last decade.
For me, it is helpful to think about these technologies in terms of lumens per watt. Like other measures of energy efficiency, this tells us how much is produced per unit of energy. The new U.S. energy efficiency rules require bulbs to produce 45 lumens per watt, and neither incandescents nor halogens can meet this standard.
Can we just take a minute and appreciate these energy-efficiency gains? Rarely does a new technology come along which does the same thing, but using a small fraction of the amount of energy. Going from an incandescent to an LED is like replacing a car that gets 25 miles-per-gallon with another one that gets 130 mpg!
Like stranded assets, light bulb lifetimes matter!
OK but the road from incandescents to LEDs has not been smooth or easy. Armitage’s research is aimed at understanding the timing of this transition, and the role played by standards and subsidies.
One of the key features of the analysis is that it takes durability seriously. In addition to being more energy-efficient, these new bulbs also have much longer lifetimes. Traditional incandescents burn out quickly, in part because they produce so much heat, but the later technologies last much longer.
This durability matters. Interestingly, Armitage documents a 40% decrease in U.S. light bulb shipments over the last decade. Are people sitting around in the dark? No! They are buying fewer light bulbs because their bulbs last longer.
Timing of standards and subsidies
Armitage estimates a dynamic model of residential lighting demand that takes this durability into account, and then uses the model to evaluate alternative timing for standards and subsidies.
The figure below shows U.S. market shares for general purpose light bulbs. Back in 2010, the market was dominated by incandescents and, to a lesser extent, CFLs. In part, this early market share for CFLs reflects widespread subsidies which CFLs received throughout the first half of this period.
Between 2012 and 2014, U.S. federal standards were implemented which effectively banned incandescents. As you can see in the figure, the market quickly transitioned. By far the biggest winner initially was the halogen incandescent, a bulb created to be just efficient enough for the U.S. standards. CFLs also increased market share in 2014 and 2015.
Poor timing crowded out LEDs
Armitage uses her model to show that these CFLs and halogens crowded out later adoption of LEDs. Why? It goes back to durability. Once you install a light bulb, it tends to be there for a long time. Halogens (about 2,000 hours) and CFLs (about 8,000 hours, depending on usage), in particular, tend to last a lot longer than incandescents (about 1,200 hours).
People tend not to replace light bulbs as long as they are still working. So these CFLs and halogens kept being used year after year. Even today, there are hundreds of millions of CFLs and halogens still working and still being used in U.S. sockets. Ask yourself, do you still have CFLs and halogens installed in your home? I know I do.
Armitage then uses her model to simulate policy counterfactuals. That is, she asks how the transition would have been different with alternative timing for subsidies and standards.
She finds that if the U.S. had delayed these federal standards until 2017 or 2018, we would have sold millions *more* LED bulbs. LEDs were cheap enough by that time that many households would have jumped all the way to LEDs rather than adopting one of the intermediate technologies. Ironically, these early energy efficiency standards actually slowed later adoption of an even more energy-efficient technology.
On the other hand, the standards did accelerate the retirement of traditional incandescents. Armitage finds that, to minimise energy consumption (and thus, environmental externalities) over this time period, you want to implement standards as early as possible and phase out CFL subsidies after 2014. This combination of policies gets the worst offenders out of the market quickly, while minimising crowd out from long-lasting CFLs.
The key takeaway from the research is that early policy action generates immediate environmental benefits from increased adoption of available efficient products, but may crowd out later adoption of even better products.
In the long run, LEDs are probably going to be the overwhelmingly dominant light bulb technology worldwide. They are so efficient, so durable, so versatile, that it seems hard to think otherwise. But Armitage’s research is an important reminder that the journey is just as important as the destination. If it takes another decade for LEDs to completely take over, that means a whole lot of additional carbon emissions in the meantime.
In future work, it will be interesting to study this next wave of federal standards. How quickly will halogens be phased out? How long will it take for the existing stock of CFLs and halogens to burn out? I wonder if it also might be worth thinking about a “cash for clunkers” style policy where we pay people for their old bulbs. There is sunk cost fallacy and other behavioural constraints at play here that might be ameliorated with a policy nudge.
Finally, I wonder about the rebound effect. Nobel laureate Bill Nordhaus showed that, as lighting has become cheaper, humans have massively increased their consumption, using thousands of times more lumens today than they did in previous centuries. Have we finally reached the saturation point, or is there more scope for increased usage?
Lucas Davis is the Jeffrey A. Jacobs Distinguished Professor in Business and Technology at the Haas School of Business at the University of California, Berkeley
This article is published with permission
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