Moral Suasion vs. Price Incentives for Conservation

Given the water drought in California, Ito, Ido and Tanaka have a timely paper comparing two methods of electricity conservation. The authors assigned 691 households in Japan to one of three groups a) a moral suasion group, b) an economic incentive group or c) a control group. The moral suasion group were told that electricity conservation was important and necessary on peak demand days and then over a year when the peak times hit they were sent day-ahead and same-day messages to please reduce electricity consumption at the peak times. The economic incentive group were told that their electricity prices would be higher during certain peak periods and over the year when the peak times hit they were sent day-ahead and same-day messages telling then when the prices would be higher. Prices were approximately 2-4 times higher during the peak times. Control groups had smart meters installed but were not sent messages.

Moral suasion worked but not nearly as well as economic incentives (in the figure, lower use is better).

Electricity1

In fact, as the author’s discuss, the figure significantly underestimates the gains from the economic incentive because moral suasion worked only for the first few treatment periods and then faded away. The economic incentive continued to work throughout the treatment period. Moreover, precisely because people continued to respond to the incentive they developed a conservation habit so the group facing economic incentives actually conserved more during non-treatment periods and even after the experiment ended.

Hat tip: John Whitehead at Environmental Economics.

Addendum: Here are previous MR posts on water.

Comments

To respond to economic incentives, consumers will need smartphone apps telling them how much they are consuming of utilities at any moment so they can experiment with different practices. For example, I have very little idea how much it costs me per minute to water my lawn.

Not if you know "water's expensive" as there's a strong possibility that elasticity goes from "meh" to -0.5 or better once prices rise above non-trivial...

Without knowing your specific water rates, five to ten cents per minute is a reasonable guess.

Well thanks to Obama we have that with electricity.

See Green Button.

Some places in the US have real time water meters.

Even with the capability, utilities seem relectant to put peak hour pricing into effect.

I have no idea what peak pricing would mean for water in California.

I've never lived anywhere in the 4 states thus far that didn't have "real time" water meters. It's just that almost no one wants to go look at the indicator.

"I’ve never lived anywhere in the 4 states thus far that didn’t have “real time” water meters. "

I'm not sure what this means. The vase majority of the US doesn't have "Real time" water meters.

You mean the meter doesn't actually meter? I'm used to watching the counters spin, personally.

Knowing where the water meter is another question - at least in the part of Northern Virginia I grew up in, the water meter was not in the house, but in a little shaft, a foot or two down, at the point where the water left the neighborhood pipe to the smaller pipe feeding a specific house - this also happened to be where a cut-off valve was found.

I'm pretty sure he means he can go look at his water meter and see either/both of a) how much he's using right now, or b) a total of how much he has used.

I don't think I can see it on my own meter, FWIW.

"You mean the meter doesn’t actually meter? I’m used to watching the counters spin, personally."

In that context, "real time" meter generally means a smart meter that communicates it's information directly to the Utility and may, in many cases, be available for the home owner to view through a website. The website would generally show accumulated amounts and a flow trend.

Ah, my mistake, I guess? I've always used the term "real time" to mean... real time. I would have assumed one would refer to a meter connected to a data collection system to be referred to as a smart meter in the same way it is recently common to buy a smart thermostat.

YOU WATER YOUR LAWN!!! Quelle horreur!

I'm guessing he doesn't live in California.

No, he is one of those people under the illusion that the good life is to be had in L.A.

He's obviously not getting the right price signals.

Leave the lawn to Phil Mickelson and plant a desert garden.

Glad to see this. I am doing an AMA on water mismanagement in California (and around the world) in a few hrs. Link here: http://www.aguanomics.com/2015/04/im-doing-ama-on-reddit-today.html

David, link to the subreddit?

Yes, please. I went looking for it and could not find it scheduled on /r/IAmA

Here ya go:
http://www.reddit.com/r/IAmA/comments/31zu3n/im_a_water_economist_ama_on_water_shortages_in/

Thanks! I didn't make it back in time :)

It never ceases to frustrate-fascinate me how comparisons such as this continue to perpetuate an endless culture of false dichotomies. Seek to overcome the Fallacy of Exhaustive Hypothesis. Ask not if one or the other is better, but what solves the problem. How about the Mild Sin Incentive? Allow a face-saving or status-rising benefit to come out of a community-wide problem. I think that we need a bit more psychology-sociology -to- economics cross-polination. In this case, provide the 691 households some type of recognized VIP status or perk for choosing an alternate time for using the electricity and then promote the perception of this new time as 'culturally superior' - it can also be referred to as the Beer Commercial Effect. This is also why the environmental/ climate change issue is so contentious and fraught with drama - it is always sold as a 'pick one of the two miseries you prefer less' agenda. Dumb. Luckily, Americans, such as they are (I am not) typically rebel against such moral imperatives, seeking the innovative (read: low effort, status-quo maintaining) path. I wonder how many 45kW solar panels you could sell if you throw in a free 30kW beer fridge (15kW benefit while still promoting perks - disregard the inconsistent power provision of the panels - stick with the underlying message). Pro-tip for Mild Sin Incentive: If you want to sell Electric cars, stop promoting saving the earth as a benefit and stop housing them in golf-cart type 'looks'. Push electric Mustangs, etc. Do good without knowing it or advertising it to others.

"In this case, provide the 691 households some type of recognized VIP status or perk for choosing an alternate time for using the electricity and then promote the perception of this new time as ‘culturally superior’"
Who is the subject of this sentence? Government, "society", Church? And what if said subject can't generate enough magic VIP status to convince people to forego economic advantage (doing what they want when they want and consuming a scarce common resource instead of saving it for sake of the common good)?

30kW beer fridge? And 300 square meters of solar panels?

30kW beer fridges are what you store your liter beers in

Or quite possibly your megaliter beers.

What's the implied elasticity for electricity?

Here is a link to some literature:

"The real-time price elasticity of electricity contains important information on the demand response of consumers to the volatility of peak prices. Despite the importance, empirical estimates of the real-time elasticity are hardly available. This paper provides a quantification of the real-time relationship between total peak demand and spot market prices. We find a low value for the real-time price elasticity, which may partly be explained from the fact that not all users observe the spot market price. If we correct for this phenomenon, we find the elasticity to be fairly low for consumers currently active in the spot market. If this conclusion applies to all users, this would imply a limited scope for government intervention in supply security issues."
http://www.sciencedirect.com/science/article/pii/S0140988306001010

In other words, Californians will not change their water consumption habits unless there's an economic incentive for them to do so, i.e. Raise the price of water to a level where it would force the individual to ask if watering their grass is really worth the $20 in their pocket. If it is than great but just like in the real world, if the demand outweighs the supply than prices will increase.

We should keep in mind several facts when interpreting this result:

1. The study changed consumer prices from 0.25$/kWh to 0.75 - 1.0$/kWh (lets call it a dP of 0.6 for simplicity, or dP/P = 2.4). From Tyler's link, we observe that price treatment consumers decreased consumption by about 15% on average (i.e. dQ/Q = -0.15). Thus the observed consumers have a price elasticity of -0.06. This low price elasticity of demand is consistent with the large existing (gray and white) literature on consumers' responses to changes in electricity price. For example, the California critical peak pricing experiment (http://sites.energetics.com/madri/toolbox/pdfs/pricing/cra_2005_impact_eval_ca_pricing_pilot.pdf), a review of pilot studies (http://www.hks.harvard.edu/hepg/Papers/2009/The%20Power%20of%20Experimentation%20_01-11-09_.pdf) and a more general literature review (Lijensen, M.G., 2007. The real time price elasticity of electricity. Energy Economics, 29 (2))

2. The study exposed consumers to prices that equate to 750 - 1,000$/MWh, relative to a base tariff of 250$/MWh. Even assuming that all of the base tariff goes to pay for fixed grid costs (e.g. transmission system, distribution system, grid operations), ratcheting prices up to 750 - 1,000$/MWh implies that wholesale energy prices are exceeding 500$/MWh. For many reasons, including rules such as reliability rules and operating reserves requirements, we very rarely see scarcity prices that reach these levels at all during the year (also see the work of Paul Joskow on capacity markets ). Thus the study exposed consumers to prices that are unlikely to come about given current market rules. Further, the dP/P will be diminished by the fact that the base tariff rate ($/kWh) includes a large number of fixed costs. That is, even for consumers on real time pricing, a 100% increase in wholesale market prices will not translate into a dP/P of 1 in the retail tariff.

Of course, Severin Borenstein has worked quite extensively in the area of electricity markets and continues to argue for the necessity of dynamic pricing.

Nate

A flaw I see in these is the length of time that the issue is studied. What are the loads? In a given house, you need a certain amount of energy per sq ft for lighting, heat or cooling. A kitchen needs a certain amount of energy, a hot water tank is a given amount of gallons and take a fixed amount of energy to heat. There are marginal gains that can be had with discipline or habit, lights of in unoccupied rooms, a schedule on the thermostat. Fewer or shorter showers, etc. But your refrigerator or other appliance is a 10-15 year lifespan, your air conditioner 20 years. A price change will harness marginal gains in the short run, but if power is expensive you build a smaller house, buy a convection oven, higher efficiency appliances and the like, reducing your base load. A study that doesn't take into account the life span of these decisions will be less useful.

A similar dynamic with water. It isn't a matter of watering less, it requires a different accepted landscape design.

If you were a surgeon, and someone did a survey on whether a pocketknife worked better than a butter knife, you would ask: what other alternative are you leaving out?

In this case, ask yourself: what other alternatives have been left out for comparison. Is this a case of two weak alternatives being compared?

If you ask that question: you might ask: What about disclosure of energy consumption when you buy an appliance? What is the effectiveness of Energy Star ratings? What is the effectiveness of lightbulb mandates, subsidies for LED lights, or, working from the supply side, asking how well does some other form of energy production, i.e., solar, work.

Ask yourself: What is the spot price elasticity of electricity on a summer day?

I suspect 'moral suasion' works a lot better in a shame culture like Japan where people tend to dislike standing out from the crowd.

Many years ago a French immigrant told me a story of watching Pres. Nixon on the television asking everyone to drive more slowly (and he was embarrassed the next day to discover that driving his usual Frenchman's way, he was passing everyone in sight at higher speeds than usual). He said if de Gaulle or Pompidou had ever done such a thing, "Everyone in France would be out on the road the next day driving a hundred miles an hour".

This waning of moral suasion until the effect disappears was also found in the water conservation context, but when the moral suasion was augmented with social comparisons (telling people how their water use compared to their "neighbors"), the impact of the message on water use did not disappear completely, even many years later. See:

http://link.springer.com/article/10.1007%2Fs10603-014-9266-0#page-1
[free penultimate working paper versions available through a google search]

what is great about the Ito et al. paper is that they compare non-pecuniary intervention to pecuniary intervention. We need more experimentation like that in the water context, as well as interventions that combine the two to see if they work against each other, are additive, or increase each others' marginal effects.
CA has a great opportunity to experiment, but will probably miss the opportunity like so many other drought-affected areas have.

It seems odd to compare moral suasion with economic incentives as if they are each a boolean variable. In reality, the domain of moral suasion techniques and economic incentives is large. This study looks at asking people via messages versus jacking their prices up 100-300%. What about asking people in person versus boosting prices 25-50%? Or how about asking people over the phone and letting them know there will be a follow up with their actual usage data after the treatment period (maybe only if they fail to reduce significantly), versus boosting prices 10-20%? Not suggesting that these are good or workable policy alternatives but this study seems like comparing Chevy to Ford by looking at the fuel efficiency of one car from each make, that may or may not be of the same class.

There's nothing odd about examining a small domain of a small number of variables in a small study.

From another angle, why don't we consider whether economic incentives or moral suasion is perceived to be more oppressive?
The default assumption seems to be that moral suasion is somehow nicer and fairer than jacking up prices. But would you really want to live in a community where people are constantly knocking on your door and nagging you about your water use? Would you really prefer that your excess water use be held up for public shaming, rather than just privately receive a large bill and decide how you want to respond to that?

Me, personally, I would much prefer the economic incentive. Maybe that's because, in my personal experience, social shaming methods are often far less equitable. Popular well liked people get a free pass, while social outcasts are singled out for extra shaming. By comparison, assuming everyone faces the same economic incentive, the consequences of excess water consumption are always proportional. The system is blind and cannot be predjudiced.

By the same token, rich people have an easier time paying higher rates than poor people do even when the rich and the poor spend/waste the same amount of water. Having said it, I agree that "moral suasion" can be unfair and even feel Orwellian ("the Department of Water Management is watching you").

Right. That seems to be the operating presumption against "economic incentives" when it comes to necessities and scarcity in general. I don't think moral suasion is much of an improvement though.
If you want to make sure that the poor can afford a minimal allotment of water, then apply the price hike above a threshold of basic water consumption.

I also wonder though, if there are some people who actually *prefer* societies where there is a lot of social pressure to behave "properly" on environmental/conservation or other similar issues. There certainly SEEM to be people who would actually prefer that, since they do it often enough. And I wonder because I want to know how their brains work and why they are so different from mine.

There many be many reasons. For instance, a) feeling better because people are doing the "right thing" due to virtue/altruism instead of self-interest or b) being emotionaly attached to communal/collectivist solutions(we are all together, the band of brothers, wearing our Mao suits).
"If you want to make sure that the poor can afford a minimal allotment of water, then apply the price hike above a threshold of basic water consumption."
It is a good idea because, otherwise, the steep rates needed to curb rich people's consumption ("fairness" issues aside, their consumption MAY be big enough to be an important component of a water crisis even if they are so few) could make a luxury out of water.

If you do something because it makes you feel better, you aren't being altruistic.

I happen to agree. But my father, who considers himself a staunch small-government conservative, once told me he thought strict rationing of carbon emissions was better than carbon pricing, because under carbon pricing rich people like Al Gore could just do whatever they want, and if it's really that important, we should all be in it together, like the draft.

Sometimes, I find it really difficult talking policy with my father.

Prices were 2-4 times higher during peak times.

On top of current Japanese electricity rates? Okay, that's worth a baseball bat of moral suasion.

At that point, households that are running pretty close to the edge go into crisis if they use electricity during peak hours.

The point about moral suasion is that it allows everyone to participate. Simply raising prices works, but it is generally the poor who make the sacrifices, and often have the fewest resources to fall back upon when such sacrifices seriously impact life. For essentials, that's often considered a downside.

When moral suasion appears for water conservation, it's very important to INCREASE your use as much as possible. Today's use, with voluntary cutbacks, are the baseline for tomorrow's mandatory rationing, and if you conserve now, you will face even greater restrictions later.

Water rights are a "use it or lose it" thing. Anyone who falls for the "moral" incentive is a fool.

In many parts of the country, water districts are having problems with reduced water. From <a href="http://www.washingtonpost.com/local/trafficandcommuting/water-utilities-charge-more-to-offset-low-flow-toilets-faucets-and-shower-heads/2014/08/03/b883a1ca-1804-11e4-9e3b-7f2f110c6265_story.html"Washington Post:

Federally mandated low-flow toilets, shower heads and faucets are taking a financial toll on the nation’s water utilities, leaving customers to make up the shortfall with higher water rates and new fees that have left many paying more for less.

Utility officials say they understand that charging more for water because demand has dropped might seem to violate a basic premise of Economics 101. But utilities that generally charge by the number of gallons used are beginning to feel the financial pinch of 20 years of environmentally friendly fixtures and appliances, as older bathrooms and kitchens have been remodeled, utility experts say.

[ . . . ]

David Hyder, vice president of Municipal & Financial Services Group, an Annapolis consulting firm for water and sewer agencies, said utilities nationwide are eyeing fixed fees as a more reliable income stream, immune to fluctuations in water consumption.

All our clients are asking, ‘How do we deal with our customers using less water, but our costs are going up?’ ” Hyder said.

His firm has recommended more fees for the Washington Suburban Sanitary Commission in the Maryland suburbs, where water consumption has remained flat since 1995 even while the utility added 71,000 new accounts from development and population growth.

[Another bit from the article.]

D.C. Water is feeling the crunch, too. Utility officials say the amount of water pumped, which follows demand, dropped from a daily average of 130 million gallons in 2004 to 95 million gallons in 2013.

“Our population keeps increasing, but the amount of water we’re moving into the District keeps going down,” said Chuck Sweeney, who oversees water pumping operations for D.C. Water.

The utility has kept up with inflation and mounting infrastructure costs — its pipes are a median 79 years old — by charging annual rate increases of 4.5 percent to 12.5 percent over the past seven years, officials said.

The sane way to do it is a flat charge based on the size of your pipe, to maintain the water network, and then charge you for the water used as a separate line item.

It would seem logical for Utilities to charge a fixed fee that largely covers their fixed costs and then add a variable cost that covers their variable costs.

Why the log units? ln(kWh) seems to make the difference appear larger, while simultaneously making the unit nonsensical in a tangible sense. For instance, the kWh for the economic incentive group is about 0.18kWh, while the control group is 0.22kWh. An 18% reduction, to be sure, but still you're only talking about 40Wh (roughly one single reading lamp, or LED driven TV, for one hour).

I imagine it makes the statistics easier, but it seems to really obscure the effect size.

PS: I'm not saying that the difference isn't meaningful, especially if a 20% reduction could be sustained across a city-size population, just that it seems odd to present it this way.

'Given the water drought in California'

Yep - neither economic incentives nor moral suasion will magically produce the currently missing snowpack. Reality tends to be like that, not that anyone at the GMU econ dept. shows any great interest in reality.

Water consumption will go down in California regardless - after all, you cannot just imagine a snowpack for this summer's water supply when discussing the best methods to redistribute something that is not coming out of the pipeline. And assuming this drought continues (at least a historically based assumption, though not a prediction), wait until next year. And the year afterwards - repeating until California returns to its longer term average. An average we currently consider abnormal, still subject to the awesome power of the market - at least in some people's view.

"Yep – neither economic incentives nor moral suasion will magically produce the currently missing snowpack. "

I'm curious, what's going to magically fix the German nuclear plant shutdown? Or is Germany just going to buy a lot more French nuclear power?

This is a really dumb post, in my opinion.
Sure, water consumption will go down, because there physically isn't the water to consume. But you don't necessarily want to literally run out of water to make that happen. There are all sorts of reasons why economic incentives (aka proper market pricing of water) would cause conservation of water before California literally runs out of it. Which would mean that society and the market could adapt in a rational way to the reality of water scarcity, and maybe reach a sustainable consumption pattern before the aquifers actually run dry.

Hazel, I don't think that p_a really cares about the subject. He gets his trollish euphoric high off of bashing America, the Mercatus Center, GMU, etc and pointing out the superiority of all things German. He's obviously a smart and well read individual, but he's completely caught up in his own emotional immaturity.

And honestly, I should avoid baiting him but I'm a victim of my own emotional immaturity. :)

Conservatives, in an attempt to fight government policy for social change have made pricing water as you suggest unconstitutional.

The price of drinking water for the working poor can not be lower than the price of water for a lush English/French garden of the 1% because pricing must be uniform for all water.

To argue that public policy should use pricing to accomplish a goal is thus illegal in California because conservatives won the day for liberty against government.

Only voluntary moral suasion is legal thanks to conservatives.

Did conservatives make it illegal for farmers to sell their water rights too?

"mulp - Conservatives, in an attempt to fight government policy for social change have made pricing water as you suggest unconstitutional."

Cite?

Note that while agriculture has had to cut water use, the primary reason for farmers selling water is they can break even selling to cities at 3 times the rates the cities normally pay, and they fear that refusing to sell would result in the total loss of water rights.

However, that's for low value export crops like rye grass shipped to Asia for cattle feed. For things like almonds, the break even is much higher rates because the export market for California almonds and similar crops is just so lucrative.

However, the California 1% will likely be willing to pay 10 times as much for water to keep their lush gardens green. Those gardens were a sign of wealth when water was plentiful by California standards, so money will never be the deciding factor in water use. And thanks to conservatives, the price for watering the 1% gardens can't be higher than the cost of drinking water for the working poor - its in the constitution.

mulp, could clarify that? Is there really something in the constitution that prevents water rates going up by volume?

"If you do something because it makes you feel better, you aren’t being altruistic."
I meant that some people favoring moral suasion probably feel better at the thought that other people/most people would be behaving in a altruistic/virtuous/civic-minded way (in fact, they would be bending to social pressure, but social conformity has a better reputation than "crass" materialism).

Moral suasion seems to work in cases where one feels pressure to appear morally correct to their peers, like in the case of voluntary recycling. Another interesting case is Germans voluntarily using so little water that it's causing problems with their sanitation systems. http://www.wsj.com/articles/theres-too-much-water-in-germany-but-that-wont-stop-people-from-sharing-bath-water-1411957801

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